House of Commons - Environmental Audit

Select Committee on Environmental Audit Written Evidence

Memorandum submitted by the Aviation Environment Federation

The Aviation Environment Federation welcomes the Environmental Audit Committee's Inquiry into the Government's Pre-budget Report 2006 and submits its views on the three key areas of interest to us as follows:

1. How the recommendations and implications of the Stern Review have been—or should be—translated into Treasury policy

"The scientific evidence is now overwhelming: climate change presents very serious global risks, and it demands an urgent global response."

"Stabilising at or below 550ppm CO2e would require global emissions to peak in the next 10—20 years, and then fall at a rate of at least 1 to 3% per year. The range of paths is illustrated in Figure 3. By 2050, global emissions would need to be around 25% below current levels. These cuts will have to be made in the context of a world economy in 2050 that may be three to four times larger than today—so emissions per unit of GDP would need to be just one quarter of current levels by 2050.

To stabilise at 450ppm CO2e, without overshooting, global emissions would need to peak in the next 10 years and then fall at more than 5% per year, reaching 70% below current levels by 2050."

"The second approach adopted by the Review was based comparisons of a broad range of macro-economic model estimates (such as that presented in Figure 4 below). This comparison found that the costs for stabilisation at 500-550ppm CO2e were centred on 1% of GDP by 2050, with a range of -2% to +5% of GDP. The range reflects a number of factors, including the pace of technological innovation and the efficiency with which policy is applied across the globe: the faster the innovation and the greater the efficiency, the lower the cost. These factors can be influenced by policy."

We endorse the strategic overview outlined in the Stern Review, in particular the urgent necessity to include realistic costs of carbon in the price of fossil fuels and Stern's estimates of the costs of tackling climate change but would point out in our view, almost mirrored by Stern (see below) that a stabilisation target of 450 ppm CO2e is frankly unobtainable, however desirable.

"The current level or stock of greenhouse gases in the atmosphere is equivalent to around 430 parts per million (ppm) CO2 1, compared with only 280ppm before the Industrial Revolution. These concentrations have already caused the world to warm by more than half a degree Celsius and will lead to at least a further half degree warming over the next few decades, because of the inertia in the climate system.

Even if the annual flow of emissions did not increase beyond today's rate, the stock of greenhouse gases in the atmosphere would reach double pre-industrial levels by 2050—that is 550ppm CO2e—and would continue growing thereafter.

But the annual flow of emissions is accelerating, as fast-growing economies invest in high carbon infrastructure and as demand for energy and transport increases around the world. The level of 550ppm CO2e could be reached as early as 2035. At this level there is at least a 77% chance—and perhaps up to a 99% chance, depending on the climate model used—of a global average temperature rise exceeding 2°C.

Stabilisation at 450ppm CO2e is already almost out of reach, given that we are likely to reach this level within 10 years and that there are real difficulties of making the sharp reductions required with current and foreseeable technologies. Costs rise significantly as mitigation efforts become more ambitious or sudden. Efforts to reduce emissions rapidly are likely to be very costly."

Quotes from Stern Review: The Economics of Climate Change Executive Summary long version:

http://www.hm-treasury.gov.uk/media/8AC/F7/Executive—Summary.pdf

There is a slight paradox at the heart of Stern's commentary—urgent action is necessary but will be costly and one target is already out of reach in our view. Our analysis of Stern and other reports and commentaries leads us to say that a stabilisation target of 450ppm CO2e is unfortunately not now going to be reached.

We should aim for a clear pathway to a 550ppm CO2e stabilisation target, or less if at all possible, between now and 2035 as an unequivocal 28 year time frame for putting all the carbon reduction policies in place to ensure this target is hit. We feel strongly that this is an acceptable cost benefit versus time framework.

All Government policies should be measured solely by what they achieve in absolute CO2e reductions. Benchmark policies for an overall UK—and by extension EU-wide—energy policy would be to combine the Stern Review with the June 2000 Royal Commission on Environmental Pollution's 22nd Report "Energy—The Changing Climate" analysis and suggestions. The carbon reduction programmes outlined in the RCEP Report backed up by Stern's econometric analysis should form the backbone of the UK's future energy policy which would achieve the 550ppm CO2e stabilisation target in both a timely, economically viable and politically acceptable manner.

Our assumption here is that the current Chancellor, and potential future Prime Minister, is capable of ensuring that these decisions are taken as we would wish them to be. The Treasury should take the lead in driving these policies forward across the UK Government and Europe urgently.

Note: Our analysis of the Stern Review shows that the cost of carbon calculation used is higher than current DEFRA/Treasury estimates. This is what the present analysis is:

"The most sophisticated of the published studies reviewed here produces an estimate of marginal damage figure of approximately £70/tC (2000 prices) for carbon emissions in 2000. This increases by approximately £1/tC per year in real terms for each subsequent year to account for the increasing damage costs over time. The parameter values used in deriving this estimate seem to be among those enjoying the greatest support in the literature. This figure is subject to significant levels of uncertainty. Furthermore, this figure excludes any consideration of the probability of .climate catastrophes. (ie melting of the West Antarctic ice sheet) and socially contingent impacts of climate change that could, potentially increase the size of damages considerably. Existing studies that have attempted to integrate uncertainty into their analysis have produced a distribution for marginal damages which is positively skewed (ie there is a higher probability of an extremely disastrous outcome than of a much more minor one). As such, a pragmatic approach could be to employ the £70/tC as an illustrative point estimate of marginal damages, but to also employ an upper value of £140/tC (ie 2 £70/tC) and a lower value of £35/tC (ie 0.5 £70/tC) (all 2000 prices) to perform sensitivity analyses. This approach does not take into account the full uncertainty associated with estimating the social cost of carbon emissions, but it does provide a useful sensitivity analysis to reflect the disproportionate upside risk associated with climate change damages."

Source:

Stern however has a BAU figure of $85 per tonne of carbon dioxide at year 2000 prices with the figure of £238 per tonne of carbon at year 2000 prices emerging from the conversion factors on page 288 of the Stern Review. This is confusing because the year 2000 exchange rate conversion doesn't enable these two numbers to be reconciled.

The apparent inconsistency in the conversion factors stemmed from the need to take account of the 1995 exchange rate as well as the 2000 exchange rate and to adjust 2000 to 1995 using an appropriate US deflator. So if we start off with £238 per tonne of carbon at year 2000 prices and add an appropriate RPI escalator, we get to £281 per tonne of carbon for 2006 or £76.70 per tonne of CO2.

In view of the fact that Stern says that aviation causes between two and four times the climate change damage of its CO2 emissions alone, we can deduce that the Stern estimate of the climate change impact of aviation is currently between £5.9 billion and £11.8 billion in 2006—in round terms, £6 billion—£12 billion. It should be noted that this range of for UK air transport's CO2 equivalent costs alone is significantly higher than the total external costs we discuss in the following section!!

2. Taxation of aviation, including its VAT status

We would like to start this section of our submission by giving our thoughts on the VAT status of aviation. In terms of applying VAT to air tickets we reproduce below an extract from the recent "Predict and Decide: Aviation, Climate Change and UK Policy" report from the Environmental Change Institute at Oxford University, the conclusion of which we endorse except we would say VAT "should" rather than "could" be added to all domestic air tickets urgently:

"9.5 Imposing VAT on air tickets

Summary:

Value Added Tax (VAT) is a tax on consumer spending and is generally applied to all types of expenditure in Europe with exemptions reserved for more essential goods and services. Introduced to the UK in 1973, on joining the European Community, it is governed by the 6th VAT Directive. It has been argued that charging VAT on domestic air tickets offers a relatively straightforward mechanism to start implementing the polluter pays principle for air travel (Sewill, 2005). Since air travel can hardly be seen as a necessity, charging VAT on air tickets would also be consistent with wider VAT policy. Many of the existing exemptions to VAT are designed to help in achieving social and environmental objectives. For example, there is a reduced rate of VAT on the installation of energy saving materials such as loft insulation. In contrast, there is not a good rationale for the lack of VAT on air tickets since air travel is primarily a luxury purchase. (Since a chocolate biscuit attracts VAT on this basis, it is hard to see why a flight to the Algarve should not!) The UK is currently out of step with much of Europe in not applying VAT to tickets for its domestic passenger flights, which are subject to VAT in all but four Member States (the others not charging being Ireland, Denmark and Malta) (CEC, 2005c). By contrast, EU states do not, at present, charge VAT on international air passenger transport nor, with the exception of Slovakia, on non-domestic flights within the EU (CEC, 2005d). However, under the 6th Directive, the exemption of international air passenger transport from VAT is an optional one: member states can, if they wish, renounce the exemption (though having done so, they would not be free to reverse the decision).

Without the exemption, under an Article in the Directive, it appears that VAT could be charged on an international air ticket in respect of the portion of the flight that takes place in the airspace of the Member State. In 2004, the German government came close to such action, with a decision to put VAT on air tickets to and from all other EU countries (for the portion of flights over German airspace), though the plan was subsequently defeated by the opposition (Sewill,2005).

For international tickets, then, the need to allocate the tax in proportion to the part of the journey that takes place in UK airspace presents a serious difficulty in that it adds a good deal of administrative complexity, while substantially reducing the resulting price increase and any consequent demand reduction. Another criticism of VAT is that it does not include any mechanism to directly encourage the aviation industry to reduce emissions through technological improvement or greater efficiency.

Hence, it would need to be part of a package of measures. However, as an instrument to influence demand, VAT is entirely appropriate. It is, after all, a direct tax on consumption, influencing purchases at point of sale. In short, adding VAT to international tickets appears logistically complex. In contrast, the addition of VAT to domestic tickets is likely to be more straightforward and would bring the UK into line with other EU countries. Although using VAT to reduce demand for domestic flights would only go a small way towards tackling the wider problem of aviation emissions, it would help to discourage the growth of a domestic culture of air dependence, and help to increase the relative attractiveness of other modes such as rail."

Quoted from "Predict and Decide: Aviation, Climate Change and UK Policy" report from the Environmental Change Institute at Oxford University:

http://www.eci.ox.ac.uk/research/energy/downloads/predictanddecide.pdf

We would point out that tax and VAT exemptions apply to these areas of air transport's commercial operations as well:

— Airport airside fuel is tax and VAT free for vehicles, plant and equipment

— Aircraft sales are VAT exempt or zero rated

— Aircraft servicing is VAT exempt or zero rated

— Aircraft fuel is largely tax and VAT exempt worldwide

These exemptions should all be ended as a matter of urgency.

Our current view of how best to include air transport's external costs in ticket prices, taking into account the legal complexities, an environmental target for the sector in terms of greenhouse gas reductions, and the industry's likely supply-side performance, ie fuel efficiency gains from aircraft, aero-engines and improved operations is to use the UK Air Passenger Duty tax regime as the appropriate vehicle and make it a simple, straightforward per passenger kilometre charge that reflects all external costs.

Charging passenger and freight full external costs is both UK and EU policy but implementation, let alone agreement on the true cost of externalities for any sector is a difficult policy area. It is we believe the best way to begin to control and reduce air transport's growing environmental impacts in an equitable fashion that captures worthwhile economic benefits whilst controlling and reducing, not merely "mitigating" the sectors negative environmental impacts but in a way entirely consistent with the Stern Review's direction.

As a comparison, congestion zone charging for road users in city centres and the recent more general UK discussion over more widespread road charging policies are welcomed. What we want to see is a "congestion charge" of the skies applied to air passengers and air freight.

The best study of transport externalities to date is the INFRAS/IWW "External Costs of Transport Update Study, October 2004, as publicised and endorsed by the European Environment Agency. This puts UK air transport externalities at for the year 2000:

— €52.5/£35.32 per 1000 passenger kilometres

— €271.3/£182.50 per 1000 freight tonne kilometres

The cost of carbon in these figures is based on €140/£94.17 per tonne of CO2 from a range of between €70-200 per tonne CO2. The figure for aviation is multiplied by 2.5 to take the non-CO2 climate change impacts of aviation into account, consistent with UN IPCC 1999. The short version of the INFRAS/IWW study is attached to this submission.

We estimate that adding this level of external costs to ticket prices would result in a 50% reduction in future passenger growth from 3-4% pa. to 1-2% p.a.—this would bring growth in line with the 1-2% p.a. airframe/engine/operational efficiency gains the aviation industry claims to be able to make each year through to 2030. We have covered the whole question of air transport's tax treatment and demand management in the AEF publication "Fly now, grieve later"—go to: http://www.aef.org.uk/publications/detail.php?art—id=152

CAA statistics tell us that UK air passengers flew 287 billion kilometres in 2005. At 3.6 pence per kilometre to cover external costs that amounts to £10.3 billion. APD is expected to raise just £2 billion

We would therefore respectfully ask the Committee to consider endorsing our view that:

— APD should become a distance-related charge per passenger kilometre

— Air freight should have a similar per tonne kilometre levy applied

— Rates should reflect those detailed in the authoritative INFRAS/IWW study, updated for inflation since 2000

— Future rates should reflect the need for both an inbuilt inflation escalator and regular external cost reviews that take inot account any future studies that might increase/decrease the amount and scale of air transport's externalities

— These rates should be introduced over a 5 year period starting 2007

— Demand management should be allied to a specific greenhouse gas emissions reduction target for the UK/European air transport sector

— Aviation's eventual inclusion in the European ETS and the subsequent price paid for permits should be recognised within a distance-related APD regime so as to avoid double charging

— We recognise the small contribution that aviation's inclusion in an ETS may bring about to covering an element of its carbon costs but feel it is only a partial solution

— However, we strongly feel that all airlines should be charged for all CO2 equivalent climate change emissions to the atmosphere, plus all other externalities, via the distance-related APD as we have described—we simply don't believe that grandfathering free allowances fits the "polluter pays" principle

During the late summer 2006, we commissioned an opinion poll from IPSOS Mori to gauge public views, the headline results are as follows

— When told about climate change dangers, the public favour slowing down the growth in air travel, with support outweighing opposition by three to one.

— A policy aimed at slowing down the growth in air travel attracts more support than opposition among men, women, all age groups, all socio-economic groups, among supporters of all political Parties and across the North, Midlands and South of Britain—and that is true whether or not people are told facts about climate change.

— In a ratio of six to one the public think that protecting the environment should be given priority over economic growth in the air travel industry—the exact opposite of the emphasis in the Air Transport White Paper.

— The government's reluctance to raise air passenger duty is widely thought to be based on a belief that to do so would be unpopular. That belief is shown to be false. On balance the public support doubling the air passenger duty and, when told about climate change, the ratio is over two to one. Doubling the tax has greater support than opposition among men and women, among all age groups, all socio-economic groups and across the North, Midlands and South of Britain. Even among those who fly frequently more support doubling the tax than oppose it.

— The idea of a big tax increase, putting £20 on a flight to Paris and £200 on a flight to Australia, would be considered by most politicians to be a guaranteed vote loser. This survey shows that—if a government could demonstrate that all the money raised were to be spent on the environment, or on better health and education—a clear majority of the public (at least three to one) would accept these large tax rises.

The results from this poll can be found here:

http://www.aef.org.uk/downloads/moriq.doc

We recognise, however, that there can be a gap between opinion poll results and future real life acceptance of the imposition of tax increases for any purpose. The issue of the Government ensuring that taxes for environmental reasons are subsequently clearly linked in the public's mind to spending on environmental protection in what ever appropriate form, is vital to gain initial and continuing support for green taxation. We hope this is a point the Committee will feel able to stress on our behalf.

3. The Committee asked for views on Companies' environmental reporting requirements, following the abolition of the proposed Operating and Financial Reviews last year

Environmental reporting should be both comprehensive and mandatory, covering key output performance indicators, that cover all environmental and occupational health impacts as well as all control and reduction strategies a company may have in place, whether voluntary or as required by legislation. Voluntary CSR reporting is often unhelpful and in some cases wilfully and deliberately opaque. Mandatory reporting requirements should also be independently verified and audited by external contracts with appropriate professional qualifications. Industry sectors should aim to have agreed consistent reporting values that aid understanding and comparison both between companies and sectors.

We give below 2 examples of voluntary CSR/Environmental reporting from the sector we work in.

Virgin Atlantic publish a CSR report on the web here:

http://www.virgin-atlantic.com/tridion/images/csr2004to2005—tcm5-13537.pdf

The report uses several different metrics on the pages where it purports to discuss emissions performance in terms of efficiency—the reader could be forgiven for not clearly understanding what Virgin are saying. We believe they are trying to say that their environmental efficiency in respect of emissions per passenger is improving. However, there is no context as Virgin Atlantic do not report the airline's fuel consumption, kerosene volumes or total CO2 emissions to the atmosphere

The report does say that current estimated CO2 per Revenue Passenger Kilometres is 0.130kg.

The CAA's airline statistics for the latest available year show that Virgin had 32,078,697,000 used seat kilometres. We think used seat kilometres and RPK's must be similar if not identical, therefore Virgin emits around 4.17 million tonnes of CO2 per annum currently.

We are unable to work backwards without more information but this is a significant amount of CO2 which should be reported clearly and with an historical time line for comparison—efficiency gains are often used to mask rising overall emissions. We believe this is what Virgin Atlantic are attempting to do here.

Easyjet also produce a less than clear voluntary CSR report, published on the web here:

http://www.easyjet.com/EN/News/easyjet—environmental—strategy.html

Their CSR charter claims to report easyJet's environmental impacts. The measure EasyJet choose to "report" their greenhouse gas emissions, in particular CO2, is emissions per passenger kilometre:

" ... for easyJet, the most appropriate measures of environmental efficiency with regard to CO2 emissions are: grammes per passenger kilometre and kilogrammes per passenger flight. In 2006, easyJet flights produced an average CO2 emission of 95.7g per passenger kilometre and 91.8 kg per passenger flight."

We have trawled through EasyJet's CSR report and have managed to convert their efficiency figures into real annual tonnes of CO2, figures they've tried their best to disguise and hide. This is how we did it—bear with us please:

— We know EasyJet produced 95.7 grammes of CO2 per passenger kilometre flown in 2006—they've told us this!

— Their report also contains a chart (yes, it's in shades of orange!) with a ratio of 1 for the year 2000 through to 0.824 for 2006 outlining how emissions per passenger kilometre have fallen

— Some maths now—if 2006 was .824 expressed as a ratio and also 95.7 grammes in reality, then the starting ratio of 1 in the year 2000 is 116.14 grammes

— Easyjet flew 4,730 million passenger seat kilometres in 2000 emitting 116.14 g CO2 per p/km which is .55 Million tonnes of CO2

— Easyjet flew 31,621 million passenger seat kilometres in 2006 emitting 95.7g per p/km which is 3.03 Million tonnes of CO2

551%

Easyjet's CSR report is big on efficiency claims—no-one doubts that new aircraft use less fuel per passenger, just like swapping an old car for a newer more efficient model. But nowhere are they honest enough to tell us what their total emissions are and that they have risen significantly.

CSR reporting is supposedly all about transparency The atmosphere cannot tell the difference between an "efficient" molecule of CO2 and an ordinary one—unless of course EasyJet's carbon dioxide is orange! All airlines should do what proper companies do—hire an independent company to undertake a serious, open and honest environmental audit, not make it up themselves.

Although we might not always agree with all the written opinions and conclusions they reach, legacy carriers such as British Airways and Lufthansa do manage to produce informative CSR/Environment reports that report emissions to the atmosphere accurately and they also subject their CSR/Environment reporting process to independent audit.

Jeffrey Gazzard

Board Member

Aviation Environment Federation, Knutsford & London, 2007

March 2007



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