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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 331-iii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE ENVIRONMENTAL AUDIT COMMITTEE
the VOLUNTARY CARBON OFFSET MARKET
Tuesday 6 March 2007 MR ERIC BETTELHEIM and PROFESSOR IAN SWINGLAND OBE MR LAWRENCE HUNT and MR BARRY HUMPHREYS Evidence heard in Public Questions 146 - 266
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Environmental Audit Committee on Tuesday 6 March 2007 Members present Mr Tim Yeo, in the Chair Mr Martin Caton Colin Challen Mr David Chaytor Tim Farron David Howarth Mr Nick Hurd Mr Graham Stuart Joan Walley ________________ Memorandum submitted by Sustainable Forestry Management Ltd Examination of Witnesses
Witnesses: Mr Eric Bettelheim, Chairman and Professor Ian Swingland OBE, Chief Science Officer, Sustainable Forestry Management Ltd, gave evidence. Q146 Chairman: Gentlemen, good morning and welcome to the Committee. Thank you very much for attending. This is an inquiry which is attracting a lot of interest and we are grateful to you. If I could just kick off with a fairly general question. The voluntary offset market is clearly growing. Defra in the memorandum they have sent us suggested that it could go up from £60 million last year to as much as £250 million in three years' time. What role do you think forestry is going to play in the expansion of the market? Mr Bettelheim: Chairman, first may I thank the Committee for giving us the opportunity to give evidence. My colleague, Professor Swingland, and I have been working together for over seven years in developing a business focussed on carbon forestry as we put it in general terms, and I hope we can be of assistance to you. In response to your question, I wonder if I might refer the Committee to a document, which I think has been handed up to you by the kind permission of MacKinsey's recent quarterly report, which we are able to provide to you. On page 41 of that report, and it may be on page 7 of the bundle provided to you, there is exhibit 3, as they call it, a bar chart which illustrates the role that forestry, that is all forms of forestry but particularly forestry in the tropics and subtropics, can play in dealing with climate change over the next 25 years or so, that is, between now and 2030. As you will see from that forestry is by far the largest sector that can contribute to climate change mitigation in that period. In other words, forestry is available now, and forestry is essential to dealing with climate change over the near to medium-term. However mankind decides to deal with climate change in the long-term, what this illustrates is that if we are to stabilise carbon dioxide concentrations in the atmosphere at a level of between 450 and 650ppm - that is limit temperature rise to something of the order of 2˚C which is what most scientists, certainly the IPCC, indicate is the limit beyond which we start to experience what might be referred to as significant quantitative change in the atmosphere and significant qualitative change in climate - if that is the goal, that by 2030 we are to try and mitigate climate change to the point where we can manage it without dramatic changes in our lifestyle and the lifestyle of all of mankind as well as to our environment, forestry must play not only a role but the leading role in doing so. I wonder if it might be helpful, Chairman, if I give a concrete example of what a forestry project really is, as opposed to many of the theoretical discussions that have permeated the debate about forestry both under the Kyoto process and up to today. At the end of last year in December we signed a deal, the first of its kind, with the Maori people in the North Island of New Zealand. The Maori people have agreed with us that we can lease their land for 20 years. This is land which has been completely degraded; it has essentially turned to pasture, but once was a natural forest which, over the last couple of hundred years, has vanished. We will pay them a lease payment for their land for 20 years, in exchange for the assignment to us of the carbon that we sequester on that land by planting trees. We will share in the profits, if there are any, of the carbon sales from that sequestration during that period in addition to the lease payments. At the end of that period the Maori will have their land back but they will no longer have a lessee, and they will have a new forest that they can keep perpetually. Indeed the legislation under which this is progressing in New Zealand is called a "Permanent Forest Sink Initiative", very innovative legislation which the Government has adopted in an effort to meet its Kyoto compliance obligations. In other words, within 20 years we will have re-established, managed and turned back to its owners a forest which will have sequestered carbon sufficient for us to justify an investment of (I think it is fair to say) very expensive money from the private sector. We have to achieve private equity levels of return, that is we take the highest and most speculative types of investment from institutions, like hedge funds, and we have to prove to them and even on their acquittal rates, that is the rates of investment that they need, we can achieve that in very limited periods of time. Many people have become concerned that forestry only matters a hundred years from now - it is not true. As both the Stern Report makes clear and the MacKinsey Report makes clear, to which I have just referred the Committee, forestry is the tool of today. It takes no technological innovation; it is available anywhere in the world; people can become involved in forestry, can restore their habitats and improve their lives as well as achieve significant benefits for the climate without additional skills. There is not a peasant farmer in the world who cannot maintain a forest, providing he has the capital and he has management skills provided to him so that he can successfully do so. This is the critical issue for the next 20-25 years. Can we harness the ability of the world to regenerate naturally, both in terms of afforestation and reforestation, but also in terms of avoided deforestation? In other words, earth can recover and we can help it recover and we can stabilise the climate if we focus on forestry as the leading element of what, of necessity, must be a portfolio of initiatives, including significant efforts at developing and distributing new technology, which is the only way that we will achieve climate stabilisation at anything like a reasonable cost over the near-term. Q147 Chairman: I like your concrete example of a forestry project. That is a very bullish answer, but forestry is not without its controversial aspects, as you have acknowledged. Why do you think, for example, an organisation like Future Forests, who through an offset election campaign in 2005, decided to change its name to get away from forests? We are looking specifically at the voluntary offset market now. What is going to make it possible for the people who believe, as you do, to actually ensure that target quoted in the MacKinsey Report is actually achieved? Mr Bettelheim: Chairman, without referring to any specific company, I think one of the difficulties that has been faced has been the companies that have sought to offset carbon emissions with forestry have not really had the resources to do so. Forestry is not an easy business. If you are to do it on a significant scale it has to be professionally managed and requires very large amounts of capital. To give you an example: our experience over the last seven years (in which we have invested over $40 million, and by the end of this year we will have invested over $100 million in these kinds of projects) is that a project of any scale (and what I mean by that is something in excess of 10,000 hectares anywhere in the developing world, the tropics or the subtropics) at a minimum costs a million dollars to take from an opportunity to a bankable proposition - that is something that can be financed and implemented. This is a year-long process in most cases, sometimes longer. To actually implement forestry projects which are verifiable, which have environmental integrity in all the dimensions of that word not just in terms of climate mitigation, is a very complex, time-consumptive and capital-consumptive and, most importantly, expertise-consumptive activity. I think many people began to approach forestry offsets because they are inherently attractive. It is inherently attractive (to put it in my generation's terms) to save the rainforest; it is inherently attractive to help indigenous people; it is inherently attractive to help endangered species survive; but to actually do it is far more complex and far more expensive than I think many of the early pioneers (if I may put it that way) had in mind. If they did not have the resources to understand this, if they did not have the forestry expertise, scientific expertise and the management expertise, then inevitably they ran into difficulty. We believe that we have structured both internally and externally the resources necessary to implement projects on a large scale which will in fact meet all of the standards; indeed, our goal is to exceed all of the standards that are now established both by the voluntary sector and by mandatory markets. Chairman, I understand that well-meaning people made mistakes; I can understand also that there is a learning curve, and I think this is very important to the question before this Committee of what kind of regulation may be appropriate. The voluntary market is the only market today that allows forestry grants. The mandatory markets, both the Kyoto market so far and the European Union Emissions Trading Scheme so far, have not been able or not been willing to recognise the importance of forestry; nor have they created incentives for it. In the absence of those incentives from the mandatory markets then it is essential that the voluntary market be allowed to learn, to learn by doing. I am afraid markets are inherently a process of trial and error. They do work very efficiently that way; they learn very quickly. We have learnt a great deal by the failures of others. We are certainly going to learn and have learnt from our mistakes. If you want to develop appropriate standards for forestry, if you want forestry to thrive as I believe the leading authorities now indicate it must if we are to manage climate change over the next 20-30 years, then learning by doing is essential and that is what private sector businesses are very good at. I think it is fair to say there has been market failure by the mandatory systems thus far with, I may point out, one important exception to that, which is the mandatory market in Australia New South Wales; which, by the way, is the first mandatory market to start in the world (it started before the EU ETS) and they have rigorous rules about forestry projects and how they are accounted for, verified and how the credits are registered, accounted for and transacted. There are models in at least one mandatory market; and there are models from the IPCC which has a code of good practice for forestry and agricultural land use projects. It is not as though a great deal of thought has not been given to this by these organisations but, unfortunately, thus far that learning has not been adopted into the major mandatory markets of the European Union and Kyoto. Q148 Joan Walley: I just want to come in and press you on one aspect of this. I very much agree with your stated philosophy that it should be all about learning by doing, but you are coming at it from the point of view of voluntary markets and the compulsory market and everything that comes out of Kyoto; but parallel to that there is the whole debate that is going on in respect of forestry and the move to get legal and sustainable timber in terms of the whole supply chain, and in terms of properly managed forests. Where you are at the starting point, which is all to do with the carbon sequestration and so on, I just wonder how much that it is linked to the debate going on in Europe and elsewhere about the drive for legally and sustainably procured timber so that those two aspects become joined-up in terms of timber forest policy? Mr Bettelheim: May I begin with your last phrase. One of the fundamental difficulties about the debate on forestry and the way in which it has been dealt with thus far in regulatory terms is that the thinking has not been joined-up. People talk about illegal logging in one context; they talk about afforestation and reforestation in another; they talk about avoided deforestation in the third; they talk about poverty alleviation in another; they talk about biodiversity preservation and protection in another; it also includes weapons issues; it also includes climate issues; and the fascinating thing to me, and I think to most people, is that forests somehow are the intersection of so many different environmental values. It is essential for example in our forestry projects that we meet FSC certification, because we do deliver timber on a sustainable basis to the market; and the market increasingly requires, and we frankly require of ourselves, that what we do is independently verified in every respect: in the respect of timber production; in respect of carbon sequestration; in respect of biodiversity and so on. These debates in my view, which I think are critical, are needed in a single forum, if you like. Oddly enough, in the voluntary sector people who are interested in offsetting their carbon emissions or their carbon footprint, whether they are companies or whether they are individuals, inherently know this - they know there are all these different aspects and that is what they are searching for; they are searching for opportunities, not only to offset the impact that they have on the planet, but to do some good and it is necessary, in order to do good, that you deal with all of these dimensions of forestry in an integrated way. This is what I meant when I said earlier that it takes a very long time, and a considerable amount of money, to get all of those elements, including independent certification of the sustainability, the audit trail and so on necessary for the particular issue you raise, but this is required for all of these dimensions simultaneously if you are to truly have a sustainable project which will accomplish the goals, not just the climate goals but including the climate goals, that we all want to see achieved. It is that complexity of forestry that has caused a great deal of confusion. There have been many ideological arguments about it; but the fundamentals are (and this is what I hope our company makes manifest to the Committee) you can do it. It is difficult, it is time-consuming and is costly and takes a great deal of expertise but when you assemble those resources, human as well a financial, you can do this. I think that the public and the marketplace indicate this repeatedly, not only by wishing to invest in forestry, but if you look at the advertisements in the major magazines, The Economist and others, big companies, oil companies, energy companies and utilities, when they want to illustrate to the public that they are green, that they are doing the right thing, invariably there is a picture of a tree. It is astonishing that you find the symbols all human beings understand as the right thing to do is to plant trees. There seems to be no other way of communicating in visual terms, in succinct terms, the importance of forests and the importance that they have for all of us, whether we are tourists to such forests as most urban people are, or we are someone who depends on that forest for their livelihood as over a billion people do on the planet today. Q149 Mr Hurd: In relation to the drivers of the money you are investing specifically in relation to New Zealand, are these people who are looking to offset their carbon or are these people who are taking part of the carbon? Mr Bettelheim: The investors we have are fundamentally institutional investors. They are looking at this as a financial opportunity. They are not greening themselves. Indeed, it is almost a principle with us that we do not take money from organisations of any kind, or individuals for that matter, who want to do that. We are not in the green-washing business. We are not in the public relations or marketing business. They may use their investments in that way; that is a matter for them. The reason they invest in us is because we put to them a compelling business case that investment in this sector suits their portfolio and that the returns over the medium to long-term are satisfactory from their own investment criteria. Q150 Mr Hurd: Are those returns around possible trends in the carbon price or are there other attempts from timber sales? Mr Bettelheim: I think it certainly includes a speculation, if you like, on the appreciating value of carbon; but our business model, which is what we have found is persuasive after a great deal of experimentation (trial and error, if I can put it that way), is that we have to show them a base return without carbon of between nine and 12 per cent per annum. If we can show them that from the other activities of the forest, particularly sustainable timber operations, then they are confident that they will not lose capital and that they will get at least a modest return. These days nine to 12 per cent is not too bad in comparison to other investments; and, of course, they have the possibility of significant additional return from carbon if that market materialises. Q151 Mr Hurd: Is that a tough pitch in this marketplace, or are you detecting growing institutional demand for that sort of opportunity? Mr Bettelheim: If you had asked me that question nine months ago I would have said it was extremely tough. It was very, very hard. I think there has been a sea-change. I think we have reached a point where now institutional money is looking for this kind of opportunity, albeit that they have felt some of the chilling effects of press reports and speculative science reports and so on that had questioned the integrity of forestry. By the way, some of the world's largest non-governmental organisations have been attracted to doing business with us because they are confident we will deliver credits that bear real scrutiny and that are really laudable in every respect. I think it would be very hard to replicate in the near-term a company, the personnel we have and the track record we have for sticking to our knitting. We have not deviated to renewable energy or other aspects of the carbon or climate change marketplace. We have stuck to forests because we think from the outset that they are essential to the welfare of mankind and to the welfare of the planet. Q152 Mr Stuart: You have given a strong advertisement for your own company's particular strengths and weaknesses and pointed out the weaknesses of many others and their failures. I am struggling to understand what is scalable about this; if it is a unique set of skills that you have. I am also not clear - you have said that without carbon you can be returning nine to 12 per cent. It should not be a particularly uphill task to sell that if it is credible and with carbon thrown in as well. I just wondered if you could briefly give us the financial picture again as if we were the investors because I do not quite understand it. It is ten per cent pretty well guaranteed on basic business as usual, with a huge upside for carbon price thrown in as a bonus. Tell me where the forms are, I want to apply! Mr Bettelheim: I have the forms in my attaché case! Q153 Mr Stuart: I bet you do! Mr Bettelheim: I wish it was that simple. There are two critical hurdles to investors' interests in our business market. The first is the uncertainty about the future of the carbon market. There is enormous political uncertainty about this. To put it bluntly, right now to a investment institution the carbon market ends in 2012, and the only credits that count in that period are Kyoto compliant credits; and there is no Kyoto compliant commercial forestry possible; nor is there any under the EU ETS because they banned it. If you are an institution and you are being given the pitch such as I illustrated today, you are not going to invest in a forestry project which is going to yield its highest returns ten or 20 years from now on the basis of a carbon market that may cease to exist well before that time. You may be convinced (I am convinced) that there is now the political will in the world to create a post-2012 regime of some sort. Q154 Mr Stuart: You have said on basic business as usual, investing well with a proper skill base you can get a ten per cent return. That is not difficult. Mr Bettelheim: I am sorry I said there were two points to my response to your question. The second is our focus is on the developing world. We are asking people, institutions, not only to invest in some of the poorest countries in the planet which have significant problems of governance, let alone other kinds of risks such as political risk, we are also asking them not to invest in the stock markets of the emerging world; we are asking them to invest in the rural areas of the developing world. We believe that we can manage those risks successfully. It takes a strong investor to accept that anyone can do it. The history of investment in the rural parts of the developing world is not particularly happy, except in some limited circumstances such as mining and the energy sector. We are proposing, with a relatively small initial balance sheet, to manage those risks on a relatively large scale; so it is a difficult sell for both those reasons. That is what has made it difficult, at least up until very recently. I think now there is increasing acceptance that forestry will ultimately be included in the mandatory carbon regimes. The question now really in most informed investors' minds is when. That affects your investment return significantly. When you discount that nine to 12 per cent for emerging market risk and emerging market rural risk, and emerging market rural risk over ten to 20 years, you find that people are not quite so confident that you can beat the US Treasury market. Q155 Mr Stuart: The way you have put it, you should be putting in a $25 million bonus simply by applying to the Virgin Earth Prize! Mr Bettelheim: It did occur to us but it does seem to be focussed on technological solutions as opposed to a natural one. Q156 Mr Stuart: You have said there is a need for a quick stabilisation of 450ppm. Straightforwardly, how do you square the need for that quick action with a slow return on reforestation/afforestation? Mr Bettelheim: As I tried to illustrate from our example, in fact the return over the next ten to 20 years, which I think is the crucial period for climate stabilisation to reach that target, is sufficient in terms of forest sequestration and that is what is illustrated in the MacKinsey Report; that over the period from now to 2030 (that is what this bar chart refers to) you can achieve something like 6.5 gigatonnes of climate abatement and mitigation through forestry. We are not talking about the long-term ---- Q157 Mr Stuart: Is that reforestation, afforestation or are we talking about stopping deforestation? Mr Bettelheim: All three. Q158 Mr Stuart: The issue we are trying to get at here is, stopping current forests being lost is one thing, and one can see the immediate return on that and if you maintain a forest you can measure its carbon impact, but it is the slowness of reforestation and afforestation to deliver benefit? Mr Bettelheim: The analysis is based upon the following separation between the two: you achieve about 3.2 gigatonnes over that period from avoided deforestation and the balance of about 3.4/3.5 from afforestation and reforestation. I think the reason is probably pretty obvious, that trees grow faster in their earlier periods of establishment, and mature forests do continue to absorb carbon and continue to hold carbon but they do not absorb it as quickly or at the rate that the new forest or a young forest does. It is about a 50:50 split between the two if you want to achieve that goal. You need both; you cannot do one without the other. Q159 Mr Stuart: One of our biggest problems with offset is, of course, it is all future-based and depends on the model sold at the beginning being delivered all through the life of the project. You have said any peasant can do it but you then suggested they needed capital, they needed training and they needed to make sure they did not have a better offer as time went on. Can you tell us how much money you think is needed in order to ensure that a tree is maintained and managed over the life of a project? Mr Bettelheim: Forestry, if I may put it at its simplest, is a real estate business, and real estate various enormously from location to location. For example, the cost of reforestation in New Zealand is significantly higher than it is in, say, Brazil. You have to try and analyse in detail the actual cost curves and all the costs of the inputs both human and otherwise in order to come up with an answer. There is no single answer to your question. What I can say is that we are operating in 15 countries throughout the tropics which range from New Zealand and Australia at the expensive end, if I can put it that way, to Guinea in West Africa which I would put at the lower cost end. Q160 Mr Stuart: Can you give us some idea of the difference, because as it is all about confidence in the market then the more expensive the project the more likely it is, especially when it is backed up by a western government, some Permanent Forest Sinks legislation, to be delivered? What are the price differences? Mr Bettelheim: As I said, the spread is very large. If you think about poor tropical countries around the equator, if I can put it in land terms, the land acquisition cost is about $50 and that includes legal costs and so on. The comparable figure in a place like New Zealand is $3,000 and there are steps all the way through that curve in terms of acquisition costs. Generally speaking, the inputs necessary to manage the forest over the next ten or 20 years until it is fully established or protected during that period are relatively modest after you have made the initial acquisition and investment, because the human inputs are relatively limited. Q161 Mr Stuart: How are long-term guarantees to be enforced? Mr Bettelheim: It depends what you mean by "long-term". Certainly there is insurance available for forestry. One thing that is interesting about managed forestry, that is professionally managed forestry of the kind we are involved in, almost all large timber companies self-insure because the rate of loss is so small; it is less than half of one per cent per year. It almost does not pay usually to buy insurance. In our case it probably does because of the places in which we operate. We do need to have insurance against nationalisation risk, against natural disaster and so on, but Lloyd's covers somewhere between 1.5 and 1.7 per cent of the project's cost. It is not that expensive to ensure that the credits will be delivered and that the forests will remain in tact. There are, of course, natural disasters; there is human encroachment; these things do happen and you have to be in a position either through insurance or, as we prefer rather than paying our money over to the insurance market, to create buffer zones which are not counted as part of the return on investment, or not counted as the credits. Generally speaking, there is in standard use in the voluntary market the Chicago Climate Exchange. About 20 per cent of the available land is put into a buffer that is not counted for these purposes to ensure that if there is a loss in the area that is counted the project area includes the offset for that. Q162 Mr Stuart: Do you think it matters to consumers that the offset actually is in the future? Do you think they realise that? Mr Bettelheim: I think it varies enormously from project to project. Forests, whether they are new forests or existing forests, store carbon constantly so there is a curve of carbon sequestration. It is not that you put a tree in the ground today and you harvest the carbon 20 years from now. The tree stores carbon every single year it grows. If you include avoided deforestation, which I think is essential to this, you are talking about carbon that is already stored. It is not a matter of waiting for it to be stored; you are trying to maintain the carbon store that exists. There is everything between that and taking a piece of pastureland and planting new saplings in it. Typically we invest in integrated patterns of forestry; so there is some young forestry, some middle-aged and some mature. If you look at forestry as an integrated business you need to have revenue throughout the period. It is not putting money in today and waiting for a return 20 years from now. Nobody will invest in that. We have to have revenue literally from the get-go in these projects. Q163 Mr Stuart: One of the problems is that it is very hard to prove causation of that - perhaps philosophically impossible. When it comes to stopping deforestation the economic incentives are to create a sense of deforestation going to happen that is not going to happen and then take money for it. Would you agree with those who say that proper offsetting in forestry should consistent of new projects where at least you can see there are not trees there now and you plant them? You cannot share with someone else, especially if you can get a nine to 12 per cent return without any carbon price. Leaving that to one side, at least you can make it robust by insisting that you plant new trees where there were not any, and you deliver the carbon savings only when you have independent certification. Are you allowed to sell that in the market, because at the moment we have a market which if the consumer knew the truth about it the bottom might fall out of it? Mr Bettelheim: It is interesting, I am not sure that it is a consumer issue particularly; I think it is an issue of integrity for the entire marketplace. Do bear in mind that even under Kyoto, under its rules for afforestation and reforestation, you have to build a scenario to a project which is essentially a projection over the lifetime of the project, measured in decades, of what is likely to happen. I do not think there is any difficulty really, no intellectual difficulty, in projecting such a scenario for deforestation. The patterns of deforestation in countries which are suffering from it are pretty well established and very well known. We know what happens when you drive a logging road into a tropical forest. We know the rate at which the landscape starts to deteriorate as migrants move into it. There are historical rates of deforestation available from all major countries. Yes, there is some scientific uncertainty at the margin. In some areas it is difficult to measure; some areas are very remote. The fact of the matter is that we have a very small margin of effort for knowing what the rate of deforestation is. It is sometimes the view that deforestation occurs because of logging. It can be started by logging but the real damage is done by people at the margin; by people who are subsistence farmers; by people who have no other way of living. We, for example, have been doing a great deal of study of the charcoal market in Africa. Charcoal is the leading source of deforestation in Africa; it is not illegal logging. Illegal logging is an issue. We are of the view that appropriate economic incentives, not to mention increased enforcement, can reduce illegal logging; but when you look at the hundreds of millions of poor people who are dependent on charcoal for their fuel you have to consider what is their alternative. We know how fast they need the fuel. We know the rate of deforestation in areas in Uganda, Tanzania and elsewhere in Africa; so it is not that difficult to project, given population growth and given consumption by individuals of that kind of fuel, what the pattern is going to be. It is startling to know, but in Tanzania, for example, over 90 per cent of the fuel used is charcoal. They do not have fossil fuel plants. They are not driving cars built by Mercedes - except a very few of them. The vast majority of these people have to have either themselves or have to have others go into the native forest, cut the trees down, burn them into charcoal and transport that charcoal to where they live so that they can eat. It is that simple. The charcoal business if it were changed from a native forest harvest to a reforestation process that is managed plantations (I know "plantation" is a dirty word to many people - I think wrongly), if you substitute plantations on a professionally managed basis that are sustainably harvested and provide the source, you will stop the deforestation. I do not think that quantifying this is really that difficult, and is no different in principle, in theory, from a scenario of a reforestation project. In fact, very often the two are intimately linked. One of the problems of lack of joined-up thinking is that everyone is in favour of avoided deforestation because it saves the rainforest, but what that means is you are going to reduce the harvest of native forests. If you do that, it does not change the supply and demand requirements of mankind; mankind still needs the timber and the human population is growing pretty quickly, so where are you going to get what you are not taking out of the native forest now? You have got to encourage substantial reforestation and afforestation efforts to provide that supply. This is one of my concerns, that the Kyoto regulatory debate is going on stimulated by the rainforests coalition into coming up with a new currency for avoided deforestation, and I applaud that if it materialises, but they are not taking a similar step of creating rules for afforestation and reforestation which would allow significant commercial investment to offset the loss of timber products that is inherent in avoided deforestation. Chairman: The level of carbon emissions per capita in Tanzania is one per cent of those in the United States so if we attack the charcoal problem it falls even lower per capita. Q164 Colin Challen: I think you said earlier on it was cheaper to do projects in developing countries than New Zealand, say. Is that because they are simply poorer and, therefore, have less income to pay them? Mr Bettelheim: Everything is cheaper. The land is cheaper; the labour is cheaper; inputs are typically cheaper. Look at it the other way round: from my perspective the developing world has an enormous competitive advantage over the developed world, and that competitive advantage is that it can grow carbon cheaper than the developed world. To give you an example, in terms of carbon sequestration alone, in the United States or in Northern Europe you can sequester approximately one tonne of carbon per hectare per year in typical pine or other type of plantation forest. The comparable figure in the tropics and subtropics is between 12 and 15 tonnes and the costs are significantly lower. That means, if the developing world could export stored carbon from its forests and its restored forests to the north, there would be a huge inflow of capital into the rural areas of these places, which is unheard of historically, and in a sustainable way provided it is appropriately structured and regulated. Q165 Colin Challen: What I wanted to get to was when you described this business as "real estate". If your income goes up then the value of your mortgage proportionately tends to go down. I am just wondering how effective these sorts of projects are in actually being able to lift people out of poverty and create genuine sustainable development. Presumably you are pricing everything at today's prices and if the price of carbon goes up in, say, 50 years' time to then times what it is today your projects that are launched today will not pay them ten times? Mr Bettelheim: You would be surprised how sophisticated these people are when it comes to bargaining. In every transaction we do we provide a mechanism, a formula, which is negotiated by which they participate in the projected rise of carbon prices. In other words, every year we report to them what we have achieved by selling their carbon and they get a share of it. We are absolutely transparent about this. Just because people are poor does not mean they do not understand markets and they do not understand the resource. Q166 Colin Challen: So the price goes up over time? Mr Bettelheim: Yes, and they get more money. Q167 Colin Challen: How can I offset a fixed price today when this is a one-off project? You say you have got flexibility of long-term price, but today if I am paying you in the euro markets about three euros a tonne at the moment (and I do not know what your price would be) I do not quite understand the relationship between what I do today and the flexibility you are building into it in 50 years' time? Mr Bettelheim: The benefits to local people are immediate in that we employ them. Usually these places are of significantly high unemployment. We have in our budget the necessary elements for infrastructure improvements that they may need; and that includes everything from clinics, to schools, to roads and other kinds of transport they need and the tools they need to harvest the product. We think our investments from the very beginning benefit them, even before any carbon is realised, because we are investors first. We have to spend money first to get these projects developed. As I say, it takes at least a year of investment, including local investment, to generate and take an idea to a point where it is investable; then there are several years of capital-intensive investment in which we are paying local people for the use of their land and for their labour and for the other values they can put into the projects. They benefit from the beginning even if there is no carbon. It is our speculation that the carbon will be valuable. Q168 Colin Challen: This is the point, is it not? Really when we are tackling the scepticism that surrounds this concept of future forests (and I know it used to be a brand name) does that not add to the scepticism? You might be doing something that is worthwhile in itself, but to say that you can offset somebody's activities today - particularly in this climate of urgency when we are told that everything that has to be done should be done in the next five or ten years to really stop that growth in temperature - does that not lead to scepticism? Mr Bettelheim: I do not see why it should. How is that different from saying we are going to build a wind farm? A wind farm does not necessarily produce offsets. It takes time to construct; there has to be ----- Q169 Colin Challen: A lot less time. Mr Bettelheim: On the contrary, I can get a reforestation project up and running from beginning of idea to start of implementation in 12 months. I do not know if a wind farm can do that. By the same token, any other kinds of investment in other forms of climate abatement all take some measure of time to implement. As I was trying to make clear with the New Zealand example, and the balance of my testimony, we are not talking about reaping rewards of climate change 50 years from now; we are talking about doing it in the next ten to 20 years. In most cases, as I say, when we have integrated forest projects we are acquiring the carbon rights to trees that are already growing; so there is carbon sequestration from the minute we have become involved. How we account for how we sell it, when we sell it and at what price, these are variants. There should be less scepticism about forestry than about other technologies because we know that forestry works. Q170 Colin Challen: I am sure it does over time. It is not just me being a little sceptical, the Advertising Standards Authority rapped the knuckles of the Scottish and Southern Energy Group for the claims that they were making. The ASA was saying it was very difficult to match the number of trees planted with the exact amount of emissions offset. You have to have some form of exact issue because you are saying to somebody, "You're on a flight to New York. Four tonnes of CO2 emitted, that's going to cost you £40, or whatever". That is a very exact thing to sell and they are saying of course you cannot match it so you cannot say it. Mr Bettelheim: This comes up as one of the core subjects of the Committee which I have tried to address in my written evidence, and let me address here. I think it is very important that there are independent verifiers, that there are independent standards which these projects have to meet, including our own. I think it is important to deal with that scepticism and to also illustrate the reality of carbon sequestration through forestry. This is very important, and I think it has to be understood by any purchaser, whether it is a corporation or an individual. What is actually going to happen? What is the curve of sequestration on that project? It does not tell any particular buyer exactly when his CO2 emission is going to be sequestered from the atmosphere. What it does say is, by putting money into this project, over this time horizon this much carbon will in fact be stored. If, as I think, it is important to focus on the next 20 to 30 years (by consensus most people believe it is essential) that is the relevant period for at least the voluntary market; because I think by that time, or I hope well before that time, the mandatory markets of the world will have developed standards for forestry, and integrated forestry completely in all of its aspects into those marketplaces. Q171 Colin Challen: We know we will be locked into a temperature increase of 1.5˚, so it is likely to get to 2˚ and beyond that. Stern illustrates the impacts on agriculture even at 2˚. It seems we will exceed that. What impact will that have on the projects you are developing now? Say, in 20, 30 or 50 years' time are you likely to lose the potency, if you like, of this form of carbon sequestration? Mr Bettelheim: First of all, let me make the admission that I am not a climate change expert, but even at those levels it is a gradual change to 2˚C in warming. What we are likely to see is a kind of general movement northward. It will vary from area to area and from location to location, and we may actually experience in some projects lower yields than we expected. For example, if we had expected to sequester 100 million tonnes in a project and because of climate change the rate of growth of the trees is less than we expected, it may be we will only sequester 80 million tonnes instead of 100 million tonnes from the project. What we have to ensure in those cases is that we have adequate buffers against that anticipated change and that we have insured against that risk; and that our portfolio as a whole accommodates that risk. I have one of the world's leading scientists sitting next to me and perhaps he can help, but I think it would be a brave scientist who would say today, "We know what the effect of climate change is going to be on the rate of reforestation". Q172 Colin Challen: On projects now you are already building this buffer into the system, so if some customer comes along and says, "I'm 100 per cent emissions offsetting", you will say to yourselves, "Okay, because of the dangers in the future we'll plant 120 per cent". That is what you are doing now? Mr Bettelheim: That is exactly what we do. Q173 David Howarth: There are a number of scientific problems which have been raised about forestry and Mr Bettelheim has dealt with one or two of them. One of the things that has been said to us by Carbon Trade Watch is that it is fundamentally a waste of time to attempt forestry projects outside the tropics; that in the tropics it might work in a thin band around the equator but outside that forests tend to trap more heat than they save by taking carbon out. There are other studies about the abedo effect that seem to confirm that. How do you react to that? Is temperate zone forestry worth it at all in carbon terms? Professor Swingland: The answer is yes. There is work done by a man from the Carnegie Institute called Ken Caldiera. He published a paper using modelling and some of the more sophisticated remote technologies to achieve what he did. On 15 December last year The Guardian produced an article which said something along the lines of "planting trees is a waste of time". In early January Ken Caldiera published an article saying he was aghast at the misrepresentation of his data and everything else, and so it has gone on since then. The basic point is this: if you stand stark naked in the Arctic and the sun hits you, you will warm up a little bit. It is called the "albedo effect". If you painted yourself black you would heat up a little more. The scientific argument is that trees are fairly absorbent and, therefore, they absorb heat and that this overwhelms the beneficial effect of the sequestration of carbon that they can achieve in such colder climes. That is effectively the argument and that everything is the other way around in the tropics. That is basically the argument, so we are quite clear. The answer basically is that temperate trees do sequester carbon dioxide. Yes, there is an albedo effect. It is a marginal gain, I would suspect, in terms of climate change and essentially reducing the warming of the planet for temperate forests. Certainly in the tropics it is a major gain. He himself, when he wrote the article which says, "I'm absolutely aghast at the misrepresentation of my work", went on to say that not only would he vehemently defend the business of growing trees in the tropics, but that he would also defend the whole business of actually conserving those forests in such places. From my point of view, looking at what has happened, because I went to the climate change conference in Nairobi, I was absolutely aghast, having not really paid attention for the last 20 years, at the fact that we have got every incentive to grow a tree and protect a tree in the temperate areas, and no incentive whatsoever to keep any trees in the tropics. That is what we have managed to achieve through the Kyoto discussions which is counterintuitive and, frankly, scientifically not helpful. Q174 David Howarth: Just quickly on the underlying science, is it the case that the relationship can reverse in a temperate zone forest between saving and creating heat? Professor Swingland: Yes. Q175 David Howarth: So there is a problem with temperate zone forestry? Professor Swingland: There is the fact that the balance between the two is probably about equal. If the climate actually gets warmer I am afraid temperate forests are going to do increasingly better in terms of carbon dioxide sequestration. Q176 Mr Hurd: The British Government's proposals in relation to accreditation, your submission seemed to argue that we should keep the voluntary and the compliance markets separate. Is there a risk if we went down that track and the voluntary market continued to grow, that the NGO-backed CDM Gold Standards would rise in that process, which I understand does not allow forestry projects? Are you concerned that even the voluntary schemes might force forestry projects out of the voluntary market? Mr Bettelheim: Yes, I am very concerned with the initial recommendation of preferred alternative of Defra, which is that the voluntary market should restrict itself to Kyoto and EU ETS credits; that excludes forestry in its entirety virtually by definition. That I think is a bad thing for all the reasons I have illustrated, not least of all the essential role forestry has to play in dealing with climate change. As a student of some years of financial markets (and I think in many respects carbon needs to be understood as a financial market; it is a kind of commodity market or a kind of financial instrument market) there is a great deal of benefit in regulatory competition; that if you just try to create one system, a global system which some people are talking about, you will find that it will invariably have flaws and it will be very difficult to correct those flaws. I think the Kyoto process has demonstrated that, not least in the forestry sector but also elsewhere in the CDM. I am in favour of different regulatory systems and voluntary systems developing side by side and interacting with each other, because each one learns from the other. Right now the learning which has gone from forestry is going on in the voluntary sector, and I think that needs to develop further. As I referred in my written evidence, CCVA is probably the best standard in the world - better than Kyoto, better than certainly anything under the EU ETS. We try not only to meet those standards but to exceed them in terms of quality. I think the interaction between the voluntary sector and regulated markets and competition between regulated markets, for example the regulated market that is going to emerge in the United States, I have a feeling will lead to improvements in earlier stage regulated markets, like Kyoto, EU ETS, because they learn. We are all learning. This is an early-stage market and in forestry, in particular, there are a number of complexities which we have touched on, so the way to improve the product for the public and for the planet is for that kind of competition and learning by different approaches, some of which will fail, I have no doubt, and certainly the Kyoto system has failed as far as forestry is concerned and certainly the EU ETS system has failed as far as forestry is concerned. If it is accepted that forestry has to fit somewhere, at least allow it to grow in the voluntary sector and give examples ultimately for regulatory change in the mandatory markets as well as always being a pioneer because there are always going to be some things outside the regulation, and that is the nature of regulation, that it excludes. There will be other innovations in land-use, in technology and so on which regulated markets will need to catch up to, but which voluntary markets will stimulate, and I think that is a very important and very healthy process for what is, after all, a very urgent problem. Q177 Mr Hurd: The specific question was that, as I understand it, the NGO-backed Gold Standard does not include forestry at the moment. Mr Bettelheim: I think when you talk about "the NGO-backed", that is only one of them. The CCVA standard is an NGO and is backed by Conservation International, among others, and it has been the subject of widespread consultation in the NGO community and it is specifically focused on the issues of forestry, looking at the impacts on communities and on biodiversity as well as climate. That is a very useful development. Other standards have really been focused on the renewable energy sector and I think one of the startling results of recent work, particularly the Stern Report and the Mackinsey Report, is that it shows that the power and energy sector which has been the focus of so much attention and even the manufacturing and transportation sectors which have been enormous focuses do not, any of them, contribute or have the potential to contribute as much to climate vapour mitigation as forests. Q178 Mr Hurd: In your business planning, have you given up on the prospects of forestry being included in the compliance market? Mr Bettelheim: On the contrary. Because of the underlying science and because of the underlying economics, I think it is inevitable that it will. Indeed, we founded our business in 1999 on that premise, that ultimately, whatever the debates, whatever the ideological fixations of people, forestry had to be included if mankind was serious about dealing with climate change. Q179 Mr Hurd: What view do you think the future US Administration might take to this? Mr Bettelheim: I recently spent some time in Washington and I think there has been a sea change in the politics not least of all because of the change in control of Congress, but also not least because the individuals, through the voluntary sector, are making their wishes known, they are pushing their governors to deal with climate change and they are buying credits in CCS which is a voluntary marketplace. It is a grassroots rebellion, if you like, against established Administration policy and I think the consensus is, by informed observers of the Washington scene, that a national cap-in-trade emissions system will be signed into law no later than 2009. Q180 Mr Hurd: I meant specifically in relation to forestry. Mr Bettelheim: It will certainly include all aspects of forestry and agricultural sequestration. Q181 Chairman: I think we are running up against our deadline today, so thank you very much. You referred to your project with the Maoris in New Zealand and I wonder if you can send us a note about the details. It sounds extremely interesting and, if we could get the different dimensions to it, it would be very helpful. Mr Bettelheim: I would be delighted to, and on any of the other topics, if we can help the Committee, we would be very happy to. Q182 Chairman: Thank you very much indeed. Mr Bettelheim: My pleasure. Thank you all for your time. Memorandum submitted by Silverjet Examination of Witnesses Witnesses: Mr Barry Humphreys, Director of External Affairs and Route Development, Virgin Atlantic; and Mr Lawrence Hunt, Chief Executive Officer, Silverjet, gave evidence. Q183 Chairman: Thank you very much for coming. Aviation and voluntary offsets, or perhaps in due course mandatory, are clearly potentially one of the biggest contributors to this market. Do you think at the moment that the airlines are doing enough to facilitate voluntary offsets by their customers? Mr Hunt: I think we are. First of all, and I do not want to spend a lot of time on this, but I think the reality of how much contribution the airline industry makes to global warming is in some doubt, as you probably know. I am not going to sit here and pretend, like Mr O'Leary does, that we do not pollute the environment; we do. We produce 123.5 tonnes of carbon every time we fly with our aircraft and with you guys, Barry, it is similar and more dependent on the aircraft type, the engine type, the age of the aircraft, the number of passengers on board and so on. I think we have to get over the fact that we do pollute the environment and we have to do something about it and I think the airline industry, frankly, has been pathetic in its response to this over the last four or five years. IATA have done nothing and I think there have been moves by certain airlines, but overall those were all terminated before Christmas when the Chancellor put up APD, so the airlines that were going to do something all withdrew their programmes because of the increase in APD. Notwithstanding that, I think the airline industry has been fairly competent in the way it has dealt with this issue. Mr Humphreys: I am afraid I cannot fully agree with that. As an airline, we have been around slightly longer than Silverjet and I think we have done a lot. From Virgin Atlantic's point of view in terms of offsetting, we see offsetting as a useful contribution, but not the answer to global warming, and we have been working on our own programme to be introduced. What we wanted to do was we wanted to get it right rather than rush in and potentially make a mistake. I think we have seen another airline do precisely that, and I do not normally like to criticise competitors, but, since it is British Airways, we thought the British Airways' scheme was very unfortunate. I am sure they have the best intentions, but it had the appearance of a PR exercise. Q184 Chairman: That is something Virgin never do of course! Mr Humphreys: Never! Well, when we do it, we get it right. We did not think it was very well thought through, it was hidden on the website and, not surprisingly, the take-up was rather poor, and that was exactly the road we did not want to go down, so we are working very hard at it and will be coming up with a proposal very soon and, for commercial reasons, I would rather not go into details of that, if you do not mind. Q185 Chairman: Well, we look forward to it certainly and I hope it does have a greater take-up than the BA scheme, and we will be seeing BA next week. Just going back to the point that perhaps you were making when, Mr Hunt, you said there was a debate about the contribution from aviation to climate change, what is clear is that aviation is a growing industry ---- Mr Hunt: Sure. Q186 Chairman: ---- and it does have emissions. Even the moves, which we strongly support, for airlines to become more efficient, and clearly there is commercial pressure on any airline to be more energy efficient, but, despite all that, if the growth continues on anything like the sort of business-as-usual scenarios, emissions are going to grow from this industry. Against that background, do you think, therefore, that actually it should be quite a high priority to at least facilitate offsetting by your customers because, for the foreseeable future, there is going to be a continued growth in total emissions from flying? Mr Hunt: I think there are three solutions and the reason there are three solutions is because they all have different time-frames, and it was interesting, the point you were making earlier about the longevity of forestation projects and so on. I think long term we need better technology and that is 20 to 30 years, and that is fuel technology, it is aircraft engine technology, it is composite technology and so on and, if you spend a lot of time with the aircraft manufacturers and the engine manufacturers, they are all doing things around that and I would say Britain needs to do something about that. It needs to invest in its aerospace industry in developing new technologies and, with the kind of skills that we have in this country in aerospace and with the most recent moves by Airbus and so on, actually I think there should be a programme to look at, in this country, investing in new aircraft technologies. We are in negotiations with Boeing at the moment about new aircraft which will reduce our emissions by 45 per cent and that is a massive reduction. Sitting here at the moment as a little, start-up airline, we cannot afford to invest hundreds of millions in those technologies at this stage, but it is something I would encourage the Government and you guys to look at, and certainly Richard Branson's announcements about Virgin fuels and so on, I think, should be welcomed because he is actually putting his money where his mouth is, whereas other airlines are not, and investing in new forms of aircraft technology. That is the long-term solution, but we cannot sit around and wait for that. Then we have the Emissions Trading Scheme and we are promised the date of 2012, but we all know we will not hit that because Brussels is involved. Q187 Chairman: I am glad you say that. We cannot get British Airways to admit that! Mr Hunt: It is not going to happen, or it will happen, but probably not in my lifetime. That is to be welcomed and we should push that, and you guys should push that as hard as you can because that is clearly a good interim solution, but, until such time as that happens, then I think the airline sector needs to address the short-term issue and the only way to address that is with offsets, and then we get into this ridiculous debate about CERs and VERs and all of that stuff. What we have done, as you know, is every fare includes a mandatory offset charge and we had the Edinburgh Centre for Carbon Management set our aircraft, our engines, our tow trucks and all of that, and at the end of each month we do a reconciliation with them, and then, with the Carbon Neutral company, and we chose out of 12 companies, we went to tender last year and, and 12 of those carbon-neutral companies, we felt, had the most verifiable projects and where the most amount of our money was going to go into actual projects and achieving short-term benefit for the environment. Q188 Mr Hurd: How transparent is that for your customers in terms of the costs and some of the underlying dynamics and so on? Mr Hunt: Extremely. When you book with us, you have the bit that goes into the Chancellor's black hole and then you have the bit that goes into the carbon offset projects and what we are doing is going one stage further and we are engaging Marks & Spencer, BP, HSBC and various other companies and what we are doing is issuing customers with carbon points, so we do not do frequent flier miles, and there are a number of reasons for that. What we do do, and we have had fantastic reaction from the media and customers on this, is that we issue them with carbon points, so, when you fly with us, you earn those carbon points and then you can use those points to invest in projects that sort of get you excited. For example, we have chosen a project in the USA because we have a lot of American passengers and the Americans like to invest in their own patch, if you like, so we have created a project specifically for them, but we have a project in New Zealand and we have a project in Jamaica, so we are trying to engage the consumer. At the moment, the consumer, frankly, is frustrated by the Government, is frustrated by the media, they do not understand it, and people like British Airways make it incredibly difficult for ---- Q189 Mr Hurd: But, at the end of that journey, do I know how much carbon I have been responsible for, do I know how much I have paid to offset it, do I know where that money has gone and do I have a choice as to where the money goes? Mr Hunt: We will either allocate it for you if you cannot be bothered and, if you want to engage with it, the MORI survey which was commissioned by Friends of the Earth showed that 67 per cent of consumers would pay more for their flight to offset it. Let us get some facts into this. It is 90p per hour every time you fly to offset your flight. From Easyjet's point of view and Ryanair's point of view, the Chancellor puts ADP up by £5 and, on an average fare of £40, that is a big issue for them. For us, it is less of an issue because we are long-haul and our fares are higher and so on. It is still a problem, but it has not helped and that was a retrograde step on behalf of the Government and we were extremely annoyed about it. First Choice have pulled their entire carbon offset programme on the back of that. Another very major UK low-cost airline, which I cannot actually mention because they told me in confidence, were about to announce in January their offset programme and they called it off because of the APD increase. Mr Humphreys: I think the APD increase was very unfortunate, especially the timing of it in a period when the Office of Climate Change were about to launch their own offset proposal. The increase was over £1 billion of extra taxation and, whilst Silverjet might criticise it, they actually get effectively a £40 per passenger subsidy because of the stupid way the APD is calculated. It is not widely known and it is not their fault, it is just the Treasury way of doing things, but their business-class passengers pay £40 APD tax less than ours do. Mr Hunt: The whole APD system has actually been called into question as to whether it is legal under the Chicago Convention 1949 and I think it is another stealth tax, it is a tax designed to disguise a carbon emissions reduction programme that does not even exist. Q190 Chairman: Well, all that may be true or it may not, but I do not think the airline industry can complain about being over-taxed, given the effective subsidy it gets on fuel, so we will not shed too many tears. Mr Hunt: We do not get any subsidy on fuel. Q191 Chairman: Well, compared to motorists, you virtually get it tax-free, do you not? Mr Hunt: We do not pay VAT on fuel, but we cannot because we fill up in all sorts of weird and wonderful places around the world and you cannot get consistency, so you cannot solve that problem. Q192 Chairman: Even with APD? Mr Hunt: At the end of the day, if it is not convenient, it is reality. At the end of the day, consumers have to travel, business people have to travel and, the less they pay, the more they will travel, which is clearly not a great thing in climate terms unless we can invest in the technology, but, as we have seen from the low-cost airlines, the lower the fare, the more people travel and the faster the economy grows and, if you believe in economic growth and creating jobs and those things, people have to be able to travel. Q193 Joan Walley: If I can just follow that up to try and find out from Virgin where we are in respect of offsetting, you said earlier on that you do not want to rush into things. Mr Humphreys: Yes. Q194 Joan Walley: In terms of your offsetting website, it is not there at the moment, is it? Mr Humphreys: No. Q195 Joan Walley: But it is expected soon? Mr Humphreys: Yes. Q196 Joan Walley: Do you know when it is likely to be launched? Mr Humphreys: It is difficult to be precise, but it will be quite soon, I can assure you. We are working very hard and we are in discussions with various companies about that. Q197 Joan Walley: In view of what has just been said by Silverjet, do you expect that every airline will need to have an offsetting arrangement which customers can book directly with? Mr Humphreys: We expect more and more airlines to enter into this area. I do not think all of them will, but overwhelmingly. Q198 Joan Walley: So you would see that as an extra that would perhaps make it easier for people to be wanting to support the way Virgin are tackling emissions and so on? Mr Humphreys: Yes, and I think it is important to understand the role of offsetting. We see it as a way of engaging the travelling public's attention so that they can participate in identifying their own carbon footprint, but it does not solve the fundamental problem. We are not going to save the globe by offsetting. That will come in aviation primarily from technical advances, and there are enormous technical advances that have already taken place and will take place in the next ten years or so, and, secondly, from emissions trading which we see as a far better way of addressing climate change than crude taxation. Q199 Joan Walley: You say, "we say", so is that based on customer research that you have done and are you under pressure from customers to have your own direct website for offsetting? Mr Humphreys: Yes, we are under some pressure from customers, corporate customers and the general travelling public. We are also under pressure from our own staff. We do regular surveys of our staff and in the last one, despite everything we do in terms of corporate social responsibility and the environment, there was a very clear message from our staff that they wanted us to do more and to be seen to be doing more as well and that came out very, very strongly. I think carbon offsetting, in a way, ticks all the right boxes. Q200 Colin Challen: On the airport passenger duty, the Chancellor has actually calculated what he thinks the net reductions in CO2 emissions from aviation will be. Coming to this 90p an hour figure, what kind of calculations substantiate that conclusion, that it is only 90p an hour? Mr Hunt: I can only talk about our own assessment that we did. We used the Edinburgh Centre for Carbon Management, which is part of Edinburgh University, to do a bottom-up assessment of every aspect of our business down to the engine type, weather conditions on the north Atlantic, all of that stuff, so it was pretty vigorous and actually quite painful for us, but we got the result we wanted. If you look at the general industry figures, if you go on to the website of a number of the carbon offset companies now, most of them now have a calculator, so you can put in where you are travelling from to what the aircraft type is and they will give you a broad assessment of your journey. If you talk to those companies, as we spent a lot of time doing last year, they will tell you that it is about 90p an hour, on average. Now, it varies, as I said, on the type of engine, the number of engines you have, so four engines is worse than two, the load you have, the cargo load and the passenger load, et cetera, et cetera, so of course there are variations. We are slightly higher than that because we fly fewer passengers because we are business class only, so each airline has to take account of that which is why the assessment demands that we do a reconciliation for the Edinburgh Centre and of Carbon Neutral to make sure that we have assessed exactly how much fuel we have burnt. On Friday night, we had a passenger with a nose bleed and we had to turn back because he was losing so much blood, so we burned a lot more fuel, and that will go into the calculation and we will have to pay more this month as a result of a passenger having a nose bleed, but it is practical, it is simple, it is easily measurable and it is easy for us to calculate and independently verify that we are offsetting every single flight in that month. Q201 Colin Challen: So you will be able to monitor it in real time and perhaps we will see that figure change? Mr Hunt: Sure. Q202 Colin Challen: Who should take the lead in selling offsetting, if you like? Who should promote it the most? Should it be the airlines or should the customer take responsibility? Should it be the Government that does it, do you think? Mr Humphreys: I think everyone should take responsibility. I think people will approach offsetting in different ways and have their own criteria. The Government has a role, the airlines have a role and individuals have a role as well. We do not believe that passengers should be dictated to, that there is only one approach; there are a variety of approaches which suit different people in different ways. Mr Hunt: I fundamentally disagree with that. I think the proposal we would have is that the Government sets up a regulator, a bit like the FSA, and they authorise and verify carbon offset companies, so they make sure they go through rigorous protocol checks and process checks to make sure they are setting up schemes. Then you have regulated carbon offset companies that the Government authorises and the airlines can then choose which offset companies they work with, providing that they are accredited by the Government, much in the same way as, as a public company, we have to have a nominated stockbroker to work with the Stock Exchange who is licensed by the Financial Services Authority. That works really well, which is partly why Britain has become one of the leading centres for finance because the regulatory framework works most of the time, though clearly there are examples where it does not, but most of the time, because it is a light-touch regulatory environment. I think the Government has to show some leadership on this and at the moment my perception is that it is confused, it has different departments doing different things and the airline industry has not got its act together. IATA could play a role in this, although we are not all members of IATA if they were to come up with something, but I do not think they will because of the type of organisation they are. Therefore, I think the Government should take the lead on this, should make it light touch and simple for us, as airlines, to offset and make it easy for the customers to offset until emissions trading comes in, but not go down the path it has gone down to say that the Government kitemark and CERs is the way to go because, as Barry says, there is not one type of project that is necessarily right for every consumer. Q203 Colin Challen: You may have heard that Defra is looking at another policy, personal carbon allowances, which would be annually issued, personal carbon allowances with a cap and tradeable, so that makes it more flexible, but that will put the onus on the customer and take it off your shoulders, perhaps even take it out of the ETS or not even have to go into it, not in your lifetime anyway, but would you think that would be a good approach, to put the responsibility on the consumer? Mr Hunt: No, I think we need to make it simple for the consumer and the way that is going is that at the end of January every year we have to submit a carbon statement into the Department for the Environment and we will have all sorts of advisers and people getting involved to help people fill out forms, et cetera, et cetera, and I think it would be incredibly hard to police it, to say, "This is your allowable footprint", but how do you then measure an individual's footprint? It is more complicated than measuring a person's tax situation which is already, as you know, incredibly complicated and enormously bureaucratic. Q204 Colin Challen: But, if you have already said that you can calculate very accurately this 90p figure, that has to measured in real time ---- Mr Hunt: Sure. Q205 Colin Challen: ---- so I do not see that it is very complicated at all. Mr Hunt: Well, how do you make sure the consumer reports to the Government every time they fly? Q206 Colin Challen: They do not have to report to the Government; the annual allowance is an efficient, self-policing thing in many ways. Mr Hunt: But you are saying you would make it mandatory or not? Q207 Colin Challen: This system would have to be mandatory, so, when a potential customer came to you, you would tell them the likely carbon footprint of that flight and they would have to decide themselves whether they wanted to take it. Mr Humphreys: I thought the idea, first of all, of a carbon footprint was to cover all of your emissions, not just aviation. You are quite right in terms of a flight, that it is relatively easy to calculate, but whether it is as easy for the whole of your activity is another matter, and these ideas are so far off, at the very early stage that, to be honest, we do not understand them and, certainly from Virgin's point of view, we do not understand how they can be calculated. If there is a nice, simple way, then that is fine, but it is far too early really to jump to conclusions, I would say. Mr Hunt: I would say for aviation specifically, if the Government were to say that it was the responsibility of the airlines to collect the carbon offset and to verify that they were collecting those offsets and it was under a lightly regulated scheme, then we would absolutely support that because at the moment, frankly, we have got enough to do without worrying about this particular issue. The amount of work we have had to put in to get our solution in place, for us as a small airline, is a big investment on our part, but actually, if the Government were to take the lead on it and say, "This is your flight, so this is how much you have to pay and the airline will collect it", we would actively support that, providing that as close to 100p in the pound went into the offset project and not into government coffers or into some bureaucracy, which is my worry with this and, secondly, that it was a level playing field for all airlines. Q208 Tim Farron: Knowing what you do about your customers, what do you perceive over the next decade in terms of the increase in the number of offsets purchased to compensate for carbon emissions caused by flights? Will it be a significant increase over the next decade? Mr Humphreys: Yes, I think there will, but, as ever, it is quite difficult to look far ahead in these matters; there are a number of different pressures. For example, if emissions trading comes in, how will individuals react to that? We have mentioned APD already and there was clearly a reaction on the part of the public against the doubling of APD, the feeling being that we are more than paying through taxation for our emissions, so why should we pay more, not by everybody, but by some, so it is quite difficult to forecast ahead how people will react, but I think there will be certainly more take-up as people are becoming more and more aware of the environmental issue. Mr Hunt: I think there is demand for it amongst consumers, and I mentioned the MORI poll. I think the problem we have got is that the APD issue has really killed any offset work that was going on in the industry, limited as it was. More importantly, I think that the airline business and the Government have to make it easy for people and simple for them to understand and engage the consumer, and the reason the BA project has not been successful is partly because it is completely lost on their website and it is very difficult actually to work out how you make this contribution, whereas, with us, it is very simple because we just build it into the fare and there is a little button next to the fare which says to click it and you will find out more what your carbon contribution is. It is actually a relatively simple problem to fix and, if we keep going down this road of increasing airline taxation and then introducing all these things, whether it is CERs, VERs or whatever, we are just going to switch the consumer off, which is what has happened. Q209 Tim Farron: Your complaint about APD earlier on, is that because it is a lot more money or is it because it is not directly linked to environmental goods? Mr Hunt: The low-cost airlines typically charge £40 for a flight, that is the average, so, if you stick £5 on top of that, that is a massive increase, it is four years' worth of inflation in one hit, and that is what the consumer sees. They do not care where it is going, they are just looking at the cost of their flight, so, if there are four people going on a business trip to Brussels or there is a family going on holiday to Spain, whatever it is, suddenly they have got to pay an extra £20 and that is the way they see it. The short-haul market is incredibly price-sensitive; it has a demand elasticity coefficient close to 1.0, so Easyjet sit around worrying about 75p increases on their fares and the effect that is going to have on demand. From the consumers' point of view, they are thinking, "Well, I'm paying £41 plus £5, so I'm paying £46 for my flight, but then, if I've got to pay £1.35", or whatever it is per passenger for carbon, suddenly maybe that flight has become marginal and, "I won't take that trip". Mr Humphreys: Our fundamental objection to APD is slightly different. We were surprised at the doubling, I have to admit, but we think, and government ministers have admitted this publicly, that it is a very poor environmental tax; it does not achieve the objectives you would want an environmental tax to do. For example, the money is not used for any environmental purpose, but it goes into the general Treasury coffers, it provides no incentive at all to airlines to reduce their emissions and a passenger travelling on the dirtiest, noisiest, most polluting aircraft around pays exactly the same tax as a passenger travelling on a modern aircraft, so it is a poor tax from that point of view. Q210 Tim Farron: I accept that, but would you accept, and the Government has not been very clear about this, that essentially offsetting is the last resort and that is all it is really? It is a bit like recycling, that we only do it when we realise that we have an unavoidable flight, for example, to take. If the Government's stated objective was actually to reduce demand for flights, and that in itself would of course reduce emissions far greater than any offsetting we go into, would you be happier? Mr Humphreys: No, very unhappy because I do not believe the objective should be to reduce travel; the objective should be to reduce emissions. If we can achieve reducing emissions and allowing the economic and social benefits of air transport to remain, that surely has to be the best way forward. For us, offsetting is just a part of the total picture. We are working hard with industry to cut the pollution that aviation creates, and I think we are making substantial progress on that and we are also working hard as a company. You may have read in the press of various initiatives that we, as Virgin, have undertaken, such as the idea of towing the aircraft at airports rather than allowing them to travel under their own engines ---- Mr Hunt: Which would reduce fuel by about 0.12 per cent. Mr Humphreys: I am sorry, but emissions at airports is a major problem and aircraft at Heathrow can sit on the tarmac for 30 minutes with their engines running and at Kennedy Airport in New York, it is very common to sit for 90 minutes. That is a lot of fuel, a lot of emissions. If we can avoid that, then the pollution around the airport will be greatly reduced. That is a Virgin initiative, we are working hard on that, we are putting a lot of resources into it, and it may not work, but at least we are trying to do something. We are working with air traffic control to introduce a continuous descent, but also governments have to do their bit as well. Just to give you one example, it has been estimated that, if the governments could sort out the air traffic control systems around the world so that airlines fly in a direct line instead of circuitously, 12 per cent of all aviation emissions could be avoided. Now, that is a lot of emissions, a lot of fuel wasted, but that is not in our hands, there is nothing we can do about that; that is in the governments' hands. Q211 Tim Farron: If offsets have a role to play in the short to medium term while we wait for the Emissions Trading Scheme, it has been put to this Committee that they should be made mandatory, possibly with an opt-out. Does either of you have any view on the merits of that proposal? Mr Humphreys: From Virgin's perspective, we are against a mandatory proposal because there are a variety of schemes and people approach this subject from different perspectives. We think it is too early to talk about mandatory schemes. Let us introduce the schemes, get them up and running and see how they work. There is a risk of multiple-setting, in a way, because individual companies might have their own schemes, the individual might do his own thing, the airline might do its own thing and so on. It gets extremely complicated, so, from our perspective, let us see how it works out first. Q212 Tim Farron: And from yours, you are doing it, are you not? Mr Hunt: I think the Government should make it mandatory and I think, providing that it is sensible, that we offer consumers choice in where those offsets get invested and that it is a level playing field, then I would absolutely and totally support the mandatory offsets. Q213 Tim Farron: You are losing business because of your scheme? Mr Hunt: We are gaining, I would say, from the feedback we have had. We have BA Gold Cardholders who say, "Fantastic, I'll give up my airmiles. Can I convert my airmiles into carbon points?" That is not everybody clearly, there are a lot of people who are addicted to their airmiles, I do not quite understand why, but they are, but, from the feedback we have been getting, we have certainly picked up a lot of business as a result of being carbon neutral. Mr Humphreys: We do not yet have a scheme, as I mentioned before, but we have just been found by a survey to be regarded by the public as the greenest airline. There may not be a lot of competition there, but we were the greenest airline. Mr Hunt: Hang on! We are carbon neutral and you are not! I think what you should do is convert all your customers' miles into carbon points and offer that and BA should do the same. Q214 Mr Caton: Can we return to the perceived impact of the APD announcement in the Pre-Budget Report on offsetting. One consequence of course was that at that time the airline industry was in negotiations with Defra about possible offsetting. Was what you were talking about along the lines of what has come out in Defra's consultation paper now or is it substantially different? Mr Hunt: I think the issue we had with Defra, and we were very vociferous and so were Carbon Neutral who were our advisers on this, as were one or two other people we were working with, that certified emissions are not the best, the optimum. I understand the Committee's concerns about verifiable emissions and the opportunities for fraud and all that stuff and that is why I have proposed a regulator to make sure these things are done properly, but the problem I had with the Defra proposal, and, as usual, they would not even listen and we wrote to the Environment Minister, the Chancellor and the Prime Minister on this, is that certified emissions take out, on average, about 50p in the pound which goes into bureaucracy, it goes to the Government and to the UN to administer in order to prevent fraudulent schemes, like the forestation projects where the money does not actually go into forestation, it goes somewhere else. We have to protect against that, but at what cost? I think 50p in the pound is just ridiculous, frankly, whereas in a lot of cases 100 per cent of our investment, based on the projects we pick, goes straight into the projects that we are offering to our consumers to invest their carbon points in. The principle of having a government scheme, I support, I think it should be mandatory for the airlines and I think it should be phased in because airlines need to be able to react and assess the impact over a 12- to 18-month period, but I think it should be based on voluntary emissions which are far more efficient, albeit that needs to be policed. Mr Humphreys: The Office of Climate Change did consult extensively and we talked to them several times. I think we were a little disappointed with their approach. They were very enthusiastic, but, as Lawrence has said, they had almost a fixation on what they thought was the right approach, whereas we wanted a more flexible approach, so that was the key reason why we felt we were unable to sign up and I think, even without the APD increase, we probably would not have signed up. Mr Hunt: I think what we are seeing is Tesco's going it alone, we are seeing Marks & Spencer's going it alone, BP, HSBC, all these businesses are now doing their own thing because the government scheme has failed and I think the Government need to wake up to that and realise they have made a mistake. They have been badly advised, I think. I have met various people who have consulted to Defra and I think it is a misguided policy initiative. Just can it and start again. That, I understand, is politically a very difficult thing to do for the Government, but there is no industry support. The only interest that I had was a phone call from the Minister's office, asking if I would turn up to a photo-shoot, having just written to him, saying that I was not supporting what they are doing. Q215 Mr Stuart: Do you think Defra are going to go ahead with their proposals and are aiming to? Mr Hunt: Well, they have. They have announced that is what they are doing. I think you guys have got to turn them around, and I am very happy to help with that. Q216 Mr Stuart: Obviously Silverjet's response got a lot of publicity, but your views were less well known. I do not know whether you would like to expand on that. Mr Hunt: Excuse me, but Richard got far more airtime than I did! Mr Humphreys: I agree with what has just been said. As I explained, we were not very happy with the way that it was handled. Q217 Mr Chaytor: Could I just ask you, Mr Humphreys, to clarify what you said a minute ago, which is that, disregarding the APD increase, the airlines would not have signed up to the scheme. Mr Humphreys: Well, I can only speak for Virgin and, as I said, we were in extensive discussions with the Office of Climate Change. We made it clear to them that we did not agree with their general approach, their focus on CERs to the exclusion of VERs, so we were not at that moment inclined either to sign up or to appear at photo-shoots. Q218 Mr Chaytor: Mr Hunt, would you have signed up to the scheme or not? Mr Hunt: I would have done if they had gone with the VER approach, yes, but let us look at some bigger airlines that have more influence than we do, and First Choice has probably been the leading airline in terms of its whole approach to eco-tourism, to carbon-emission reduction, to offset management and all of that. They have been, I think, the leading light on the subject and they killed their entire programme on the back of the APD increase and Defra's announcement. They came out publicly. Q219 Mr Chaytor: What we have got is different airlines giving different reasons for why they did not sign up to the scheme, so is the APD increase not a smokescreen? If I can put it another way, you are trying to create the impression that there was this massive consumer uprising against the APD increase. Now, I represent 72,000 people, thousands of them fly every year, thousands write to me every year and two of them contacted me over the APD increase. One complained that it was outrageous that his business-class flight to Australia would now cost more and the other complained that the rise was insufficient because it would not serve any purpose, so my question is: why should our respective perceptions of the public response to the APD increase be so different? Mr Hunt: I did not say anything about the public response to the APD increase; I said what the airlines' responses to the APD increase were. The consumer will reach a point where the increase in tax becomes so great that they will not travel. Q220 Mr Chaytor: Is there any evidence that that point has been reached yet? Mr Hunt: No, I do not think there is. Q221 Mr Chaytor: Otherwise, you would not be in business surely? Presumably you made a judgment that the level of taxation has not yet reached that point, otherwise, you would not have established your business? Mr Hunt: We are not in such a price-sensitive business, but, if you look at Easyjet and Ryanair, who have created huge economic wealth and development and allowed lots of small businesses and people to travel who would not otherwise have been able to do so, it is going to hit them hard and we have not seen the evidence yet because this has just come in. It only came in in February, as you know, but I do not think consumer reaction to the APD increase was what we were talking about. I was talking about the airline reaction to it, but please take the fact that First Choice was prepared to do something about its environmental footprint and is now not, partly because of the Defra announcement with CERs which they do not support, they were going down the voluntary route, and the second impact was the APD. You have to take those things together because it shows a lack of government joined-up thinking on the issue. Q222 Mr Chaytor: So there is one airline that uses APD as the reason, but there is another major airline that would not have signed up without the APD. Mr Humphreys: Can I clarify what I meant about the public's reaction. I think it is a question of timing and certainly our feedback, which was not scientific feedback, but there was some feedback, was that the announcement of the offsetting proposal and the doubling of APD created confusion in the public's mind and a feeling with some that we are more than paying for our emissions through the increase in APD, so why should we join an offsetting scheme. Now, that was a temporary issue and it has probably already passed and that is why we are going ahead with offsetting now, but there was some kickback from it. Q223 Mr Chaytor: Is there any evidence that the number of people flying has reduced since the increase in APD? Mr Humphreys: If you increase the price, there will always be a reduction in demand. Q224 Mr Chaytor: Is there any evidence that the numbers have increased? Mr Hunt: No, because it only came in on 1 February and we have not got February passenger stats yet. Actually, that is not true. The BA statement came out yesterday and showed a significant fall, but we do not know whether that, in the last quarter, is in Europe as well as long haul, but that may have been because they keep cocking up the baggage handling and all of that, but the reality is that you will see a reduction. Easyjet are livid about this and they know, because they understand their morals far better than I do or you do, it is a different business from my business, Easyjet, but they are livid about it because it will significantly impact their demand and they are trying to invest in this country and grow their own demand. Q225 Mr Chaytor: But if Easyjet and Ryanair are selling seats virtually for free, how can they argue that a minor increase in APD is going to stop people flying? Mr Hunt: How many people have actually been on a Ryanair flight and paid zero for it? The average is £40 we are talking, that is the economic data, and the way the model works is that you start low and you build your price and you pay more, so some Ryanair passengers pay £200. Q226 Mr Chaytor: So it is a small percentage of the actual cost of the flight. Mr Hunt: Let us not return to people flying for free. Q227 Mr Chaytor: But if your argument is that some of them are paying £200, then the rise in APD is a small percentage increase. My argument is that there will be some people who are flying for next to nothing and, therefore, how can they object, if they have got a free seat, to paying a slight increase in tax? Mr Hunt: Because the average is £40 and it is a 12 per cent increase which is four years' worth of inflation in one hit. Q228 Mr Chaytor: Can I ask both of you the general question: what do you consider to be a reasonable system of taxation on airlines? As to the point about APD being a fixed rate, would it be preferable if it were a percentage? Mr Humphreys: Taxation to take account of emissions or general taxation? Q229 Mr Chaytor: Largely to take account of emissions. Mr Humphreys: We very strongly support emissions trading. Q230 Mr Chaytor: That is not taxation. What I am trying to get to is: do you think there is a role for taxation at all? Is it the structure of APD, is it the question of VAT on fuel? Leaving aside emissions trading, do you think there is a role for taxation in addition to emissions trading and the technological improvements that we are all looking for? Mr Humphreys: Airlines should pay for their emissions, there is no doubt about that; it is a question of how you pay for it. If you pay for it through emissions trading, then I would argue that there is no justification for additional taxation. If you do not pay for it through emissions trading, then alternative means should be looked at, but the APD is actually, as we have mentioned, a very poor environmental tax. Q231 Mr Chaytor: Is there a way to make APD a better environmental tax? Mr Humphreys: Yes, you could charge Mr Hunt more, for a start! Mr Hunt: On top of my offset balance! You can give me a credit for that! Mr Humphreys: However, it is quite complicated and it would need looking into, but, without a shadow of a doubt, there is a much better way of doing it. Q232 Mr Chaytor: Have you made a submission to the Treasury as to how it could be improved as an environmental tax? Mr Humphreys: No. Q233 Mr Chaytor: Would it be a good idea if you did? Mr Hunt: They do not listen. Mr Humphreys: Well, the Treasury are listening to us at the moment on a different subject about APD and reforming it in other ways, but we have not addressed that particular point. Q234 Mr Chaytor: From Silverjet's point of view, you are completely opposed to any kind of taxation and you think it should be your own offset scheme or emissions trading? Mr Hunt: No, I think that, when it comes to emissions, the Government should take the lead. I think they should implement a mandatory offset charge based on a proper assessment and through a light-touch regulated scheme, as I have said, and I would completely support that. We also pay corporation tax, we pay National Insurance for all our staff, we pay obviously employment tax for all our people, we pay tax on all of our input costs, except fuel, et cetera, et cetera, so I am not in any way opposed to tax as a general principle, but I want to make sure it is efficient and it is fair. Q235 Mr Chaytor: Yes, but, in terms of the environmental impact, are you saying that a mandatory offset scheme should be the only government measure to impact on emissions or is there a role for a form of taxation, an environmental tax? Mr Hunt: What is the difference? Q236 Mr Chaytor: That is the question I am putting to you. Is there scope for something else? Mr Hunt: Ultimately, when you fly, your 90p an hour should go into a verifiable offset project, and that is what I want to see until emissions trading comes in. It is not difficult. That, we would actively support. Q237 Mr Chaytor: You have made an issue of the overhead costs of the Treasury or of any state bureaucracy as one of your reasons for objecting to taxation. What are the average overhead costs of the carbon offset schemes that you support? Mr Hunt: Minimal, one to two per cent. Depending on the project, one to two per cent is what Carbon Neutral cost and that is one of the reasons we chose them, so almost 100 pence in the pound when I invest in order to offset my flights goes into the projects, and that is what we should all make sure happens. Q238 Mr Chaytor: Given that you are trying to position yourself as a green airline ---- Mr Hunt: Silver actually! Q239 Mr Chaytor: ---- should you not be taking on Michael O'Leary a little bit more aggressively? Mr Hunt: I am not interested in taking on Michael O'Leary. I think it is great what he has done and the way he is running around telling people they should shoot cows, I do not think you can have really have debates with somebody with that mentality! I would much rather engage with you, with the Treasury, with Defra and the Environment Minister to talk about what my proposal is which is to implement the system of carbon points, light-touch regulation, and 90p per hour. Q240 Chairman: You have made a point about the extent to which you, as a business, do pay tax. Can you name another business in the transport industry which does not pay tax on one of its three largest input costs? Mr Hunt: Well, the global shipping industry, as you know, has the same situation as us in that they can fill up their fuel tanks wherever they want. Q241 Chairman: Yes, we are going to have an answer out of them soon! Mr Hunt: So the answer is yes. There are some more statistics flying around that the global shipping industry actually contributes twice as much as the aviation business. I would love to know what the hotel business contributes. There is a huge, grey market in the hotel industry, as you know, it is a cash business, and I would love to know. We have got lots of friends in the hotel business obviously, but I would love you guys to have a look at the hotel business and see how many emissions they produce because buildings are the biggest contributor. Q242 Chairman: We have buildings in our sights too! Mr Humphreys: Perhaps I may point out that aviation also pays for all of its infrastructure which many other modes of transport do not of course, so you cannot just look at the taxation element. Q243 Chairman: Coming back to Virgin's enthusiasm for emissions trading as the best way to, as it were, tax the industry, do I assume from that that you, therefore, would support auctioning all the allowances for aviation because, otherwise, it would not be a tax at all? If they are going to be presented to you, we may be in a position we were with some of the power generators, that actually they made a profit out of the national grid(?), which is hardly a tax. Mr Humphreys: The fundamental point is that aviation should be treated the same as other industries. A tonne of carbon saved is a tonne of carbon saved, no matter where it comes from, so the same system which applies to power generation, et cetera, should apply to us. There may be a role for auctioning. We will accept whatever system is introduced, but we do insist on being treated the same. Q244 Chairman: You have obviously had quite a lot of contact with the Office of Climate Change and Defra in the last few months. Mr Hunt: Not since January. Q245 Chairman: No, prior to that. Was it your impression that the Office of Climate Change was aware that APD was about to double or not? Mr Humphreys: I do not think they were. I do not think anyone else in Whitehall, including the Department for Transport, was aware. They seemed to be very surprised. That was my impression. Mr Hunt: I think I had an email from someone in Defra and I pretty much concluded that they had no idea and they were very disappointed. Chairman: Well, that is an interesting insight into the ways of Whitehall! Q246 David Howarth: I have just one more point on what has happened. It is interesting that Virgin decided, despite what happened with APD and so on, that you were going to go ahead with your offsetting scheme which presumably is of benefit both from the point of view of customers and from the point of view of staff, which you mentioned, so what do you think is going to happen with the other airlines? Are they going to give way to customer pressure and pressure from staff or are we going to end up with a bifurcated airline industry where all the staff and the customers who are concerned about climate change end up with some airlines and the ones who do not care end up with other airlines? Mr Humphreys: I am not sure. I think the trend is for airlines to introduce these schemes. There will always be some, and I suspect a certain Irish airline which has been mentioned will be one of them which will not, but I think the overwhelming majority will eventually do this. Q247 David Howarth: So the long-term effect of this disagreement is not likely to be very great? Mr Humphreys: I do not know that it is a disagreement, it is just that we have different approaches. In a way, it is good if you are a consumer, you can choose which airline you want to travel with, so this might be a factor in that choice. Mr Hunt: I think the bigger debate is that, if an airline is based in Dublin, it does not have an offset charge and an airline based in Luton and which is orange does have an offset charge. We have got the same, both Virgin and ourselves, with American Airlines, United Airlines, Delta and so on and clearly the US Government is far more supportive of their airline industry than ours is, and I think it unlikely, in fact I know it is because we met various senior people in the US Administration, they have no intention of regulating the US airline business at the moment because the poor US airline business never makes any money anyway, so they will see this as a negative. Mr Humphreys: I think I slightly disagree with that to the extent that I think the policy in America could well change over the next couple of years or so and we might see a dramatically different approach. Mr Hunt: But, as we know and as you know to your cost, the aviation industry in the US always manages to wriggle itself out of, and is usually the biggest beneficiary of, any sort of tax change. Q248 Mr Hurd: Is your fundamental objection to the CER route around cost or, more specifically, how much will a Silverjet ticket to New York have to rise in order to accommodate the Government's recommendations here? Mr Hunt: Depending on the weight of the aircraft ---- Q249 Mr Hurd: I understand the point in principle, but for commercial travel it is about cost, is it? Mr Hunt: No, if I am paying £11 for every passenger I fly into an offset scheme, I want to see £11 going into the project. I do not want to see £5.50 going to a bunch of inspectors walking around with forms. Q250 Mr Hurd: But, if you are paying £11 now, what do you expect to have to pay if the threshold is raised? Mr Hunt: Sorry, what threshold? Q251 Mr Hurd: If the Defra recommendation becomes the policy? Mr Hunt: It is another 50p in the pound, so, instead of paying £11, it will be £16, but the point is that that additional £5.50 goes into something completely worthless, a bunch of bureaucrats. Q252 Mr Hurd: But, if it is about another £5, it is another £5 or £6 in your pocket, but that is not a big deal for you in terms of your market? Mr Hunt: Well, then you have got APD increases on top of it, et cetera, et cetera, and it does become a big deal, it has become a big deal and it made us think, "Do we really want to go down this route if we keep getting all these extra costs?" Mr Humphreys: I think our issue with CERs is not only cost, it is also the type of project they undertake and the geographical areas they invest in, so there is a multitude of issues. Q253 Mr Hurd: It is not just cost? Mr Humphreys: No. Q254 Chairman: Is there not some administrative or audit cost built into the voluntary offsets? Mr Hunt: Sure. Q255 Chairman: So there is an acceptable percentage? Mr Hunt: Sure. As we said earlier, we have to police these schemes to prevent fraud and so on, and I absolutely support that, but I would encourage you to look at the way the FSA works. No, it has not always got it right and there have been some disasters with pensions and so on and that is not comfortable for anybody, but in general the FSA works very well and it is well regarded by its industry participants, it is pretty well regarded by the consumer and I think, interactive with the Treasury, it has been successful, and why we cannot replicate that for this kind of thing, I do not know. The other point I would make is that long term the emissions trading schemes and so on are all great, but actually what I really want this Government to do is to help us to invest in new technology because ultimately that is the answer. Boeing are talking about 75-80 per cent reductions in emissions if they can develop certain engine and wing technology, composite technology and so on. In Britain, we have this huge skills base, particularly in wing production, which is going to disappear with the Airbus restructuring and we are going to lose another skills base in this country which we all know is a massive problem and we will lose a lot of jobs. There is a huge opportunity here actually for the Government to get behind the new technology projects and create breaks for people like BAE to invest in these new technologies, which is what is happening in the US. The US Government is actively participating in the development of new, lower-emission technologies. Mr Humphreys: I would not disagree with those points at all, but I think it is important that we do not lose sight of the fact that the industry is doing an awful lot in this area. We are a member of Sustainable Aviation which is a group of manufactures, airlines, airports, et cetera, and we have entered into committed undertakings to improve fuel efficiency by 50 per cent, reduce NOx emissions by 80 per cent and to reduce perceived external noise by 50 per cent by 2020 compared with 2000. Those are very big increases and we are committed to those as an industry. Q256 Joan Walley: You implied earlier on that there has not been any joined-up thinking between the Treasury and Defra over the APD and the Defra consultation. You also said it would perhaps be unlikely to get an EU ETS by 2012, but nonetheless we could have, so where would that put each of you in terms of Silverjet wanting to be carbon neutral? Will you have an ETS and stay carbon neutral on your own things as well? Mr Hunt: If you could find a way of accelerating the implementation of the ETS for our industry, fantastic. Q257 Joan Walley: Well, that might be one of the recommendations that we are likely to make actually. Mr Hunt: Yes, but in the meantime let us look at the history of the EU implementing these kinds of things and actually I think you are going to find the European aviation industry much more opposed and not as open as perhaps Virgin and First Choice are and so on. Mr Humphreys: We have been very active in lobbying our fellow airlines in Europe and we have had a lot of success. It has not been universal, but there has been a sea change in approach on the Continent. I personally am not as pessimistic about the chances of introducing the ETS by 2011. I think it is less likely that we would have the wider ETS scheme by 2012 which is the proposal, but for intra-EU air services, I think there is a good chance of having it. Q258 Joan Walley: Certainly when we were out in Europe, we got the distinct impression that EU officials felt that there was leadership from the UK in terms of taking that whole agenda forward, so I think the pressure is clearly not there, but how does that leave you in terms of the offsetting that Virgin wants or is intending to do within a very short space of time to those already very committed policies that you are going to have for offsetting? Will that sit side by side with the ETS when it comes in or will it be an additional thing that you will be doing, or will you carry on doing it in the same way so that you have a double bite at the cherry, as it were? Mr Humphreys: That is one of the reasons why we favour a more voluntary approach because, if we have the ETS and it works efficiently, then that should cover all of the airlines' emissions. If individuals want to do something on top of that, then why not, but we do not think they should be forced to because that would be double counting. Q259 Joan Walley: What about Silverjet, will you be wanting to keep your carbon neutral ---Mr Hunt: Well, by definition, the ETS will make us carbon neutral, so our strategy is to be carbon neutral and there is no ETS system that we can subscribe to at the moment that works for us. Q260 Joan Walley: So you just transfer it to another heading, as it were? Mr Hunt: Well, it is another system rather than a heading and it is a better system. Emissions trading is a much easier, much more efficient system, without doubt. Investing in these projects is all wholesome and so on, but actually it is not as efficient as we would like it to be. Mr Humphreys: The big question for us, I think, is: will the Chancellor give up APD if the ETS comes in? Q261 Joan Walley: So you want the joined-up thinking between APD and the ETS? Mr Humphreys: Yes. Mr Hunt: Yes, if the Government is serious about reducing carbon emissions, it has to do more to help us, and it is not right now. Q262 Mr Caton: Can we talk about the criteria that you use, and are going to use, for designing your offset scheme. Mr Hunt, can you tell us how you came to decide on the Carbon Neutral company? Was it their reputation that sold them, was it the quality of their projects, and do you invest in particular projects or do you just go with the portfolio? Mr Hunt: We went to 12 companies in total, some of whom are carbon trading companies, some of whom are just consultants. We have a couple of sustainable investors in our business who know a lot about the system and actually employ scientists, so we talked to them, we talked to the Edinburgh Centre for Carbon Management, et cetera, and we talked to several bodies in the United States about the subject. We had a number of criteria: the quality of the project; the efficiency with which our money is invested; the cost in its own right because, as you know, the cost of carbon emissions and offsets varies quite considerably; clearly getting maximum offset for every pound we invest; and also the creativity of their approach to this in terms of trying to engage the consumer. We think that engaging the consumer is as important as engaging the Government or anybody else in this, so we have actually got to get the consumer excited about this and that is the thing which will have the biggest impact. We went to 12 companies, we shortlisted down to seven, we got proposals from five and then we selected Carbon Neutral, so it was a six- to seven-month process. To answer your point about the projects, we allow Carbon Neutral to recommend projects. We ask them for a diverse range of projects because for our consumers, this is Barry's point earlier, let us have some flexibility and choice here and, if you want to engage the consumer, 50 per cent of our passengers are American and they are much more likely to get excited and interested in this if there is an American project they can invest in, whereas, if we go down purely the Third World route, which is one of the suggestions that we had, we may switch certain people off. I was talking to a passenger the other day who said he absolutely hated wind farms. He said that they are an eyesore and that, if we had anything to do with wind farms, he would never fly with us again, but we do have a wind farm project in our portfolio, but maybe he does not want to invest in that. Mr Humphreys: We have similar criteria. There is no shortage of companies with whom one can work in this area. Q263 Mr Caton: Something which has not reared its head yet is radiative forcing. When you chose TCNC, did you take into account the different values of RF used by different companies, which I understand vary bifold? Mr Hunt: Again we use the Edinburgh Centre for Carbon Management to verify the protocols and the processes that they implement in the selection and they got one of the highest scores, so again we had that independently, so we had, "We are the best at this, this and this", but we had it. Q264 Mr Caton: Particularly with airlines and radiative forcing, do you think there should be some sort of regulation so that we can get a level playing field? Mr Hunt: Sure. Mr Humphreys: There is a lack of clarity, I think, scientific clarity about radiative forcing where you can have different numbers from different so-called experts. I think the Stern Report suggested a figure of 1.9, but you have other figures up to four and so forth. We are not scientists, we are not experts in this area, so we rely on the scientific community to come to a consensus view of the figure to be used, but I think at the moment that consensus view is not there unfortunately. Mr Hunt: I think what the Office of Climate Change and Defra should be doing is setting themselves up as a regulator in this area, being advised properly and creating this level playing field, which Barry is talking about, to make sure that the science is right. We had to do that ourselves and it is very expensive. In fact, we are now advising, I am personally advising one of the aircraft manufacturers on this whole issue because the cost involved of actually going through the process of verifying this is complex, so there is no point in each of us, as airlines, going through that process ourselves, which is what is happening right now. Q265 Mr Caton: Is not the danger at the moment, especially for companies and offset providers who give an RF value of one, that they are actually undervaluing the carbon emissions? You make an estimate of 90p per hour per year, but that might well not be appropriate if the real RF value, as I agree we do need to establish through science, is considerably higher than that, as seems likely. Mr Humphreys: There is a risk, but equally, if you take a figure of four, you could probably overestimate the figure, so you come back to the lack of clarity. Mr Hunt: The 90p is an average, it is based on discussions with a large number of companies and it is not the lowest figures, there are lower figures and there are higher figures. Do not forget, my measure is per hour and the RF is a percentage of the overall, so they are different measures. The average flight in Europe is one and a half hours, the average long-haul flight is five and three-quarter hours, so it will vary, but I think Defra and the Office of Climate Change should be saying to the industry, "Right, we've employed these people to work it out. This is what it is. Take it as read that that is right and then we are going to audit the carbon management companies to make sure they comply with that". Q266 Chairman: So, if the science comes up with a figure such as 1.9, that would be accepted? Mr Hunt: Sure, if that is what the science says, we will accept it. Chairman: Well, thank you very much. It has been a very useful session from our point of view and we are very grateful to you both for coming in.
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