Memorandum submitted by Air Travel—Greener
by Design Group, Royal Aeronautical Society (Cit 50)
EXECUTIVE SUMMARY
To echo the Secretary of State, green taxes
are only worth imposing if they influence environmental performance.
Paying to cover costs where there is no link to a reduction in
the polluter's (or another polluter's) impacts is no more than
an empty benefit to the Exchequer (paras 2-3).
It is important to assess the likely effectiveness
of green taxes sector by sector, not on the basis of broad economic
theory. No evidence has yet been produced by Governmental, parliamentary
committee, NGO or even expert body advocates of green taxes or
charges that the imposition of a financial penalty would make
a material difference to aviation's climate change impacts (7).
Ahead of next generation technologies coming
on stream, if green taxes were to stimulate an improvement in
environmental performance they would have to prompt a reduction
in demand to the extent that load factors would fall to a level
at which services would be consolidated or cut. The reverse has
occurred. While this may be an inconvenient truth to advocates
of green taxes on aviation, market evidence suggests that Government's
elasticity assumptions have been over-optimistic and that the
sector has been highly resistant to classical economic signals
in the face of significant cost increases—akin to taxes
and charges and that such instruments would be unlikely to pass
the Secretary of State's test. A tax imposing a burden at even
the high level experienced by the market over the past two years
would not be sufficient to cap or reverse emission growth. It
would have to be levied at a very high rate—perhaps upwards
of 150% on fuel—in order to prompt a demand reduction sufficient
to cut load factors to a level where flights become uneconomic
and are consolidated or cancelled (8-15).
The November 2006 DfT review of Continuous Descent
(so-called "clean flying") and the introduction of the
EU Single Sky system will, in our assessment, do more than any
tax to reduce fuel burn (18).
It is possible that for journeys of under 400km
where rail and bus alternatives are available, increasing the
cost of air travel might be effective in encouraging a shift to
lower-emission transport modes (22).
Offsets, while not influencing aviation's performance,
are an example of beneficial green taxation provided the efficiency
of the funded projects is properly assessed (23).
There may be a role for hypothecated charges
in order to accelerate improved efficiency; but taxes and charges
are unlikely to persuade manufacturers to accelerate development
of step-change technologies because the opportunity costs of not
optimising revenues from current and planned aircraft models are
so high. An approach focusing on regulation and incentives is
needed (24).
BASIS OF
SUBMISSION AND
STATUS OF
RESPONDENT
1. This submission, covering the relationship
between green taxes and aviation's environmental performance,
responds to the Committee's extension of its inquiry to include
the issue of the extent to which "green taxation" is
an effective driver of behavioural change. It is made by the Air
Travel—Greener By Design Group ("GBD"), a DTI-funded
advisory body that seeks to establish and promote technological,
operational and market-based options to address aviation's climate
change impacts. GBD is administered by the Royal Aeronautical
Society and although its advisory group covers Government Departments,
air traffic managers, the airport, airline, and manufacturing
sectors and the research and academic communities, its executive
function is independent of any industry or NGO interest.
THE OBJECTIVE
OF GREEN
TAXES
2. The Committee's question echoes David
Miliband's recent statement that green taxes are only worth imposing
if they influence behaviour. In the case of aviation, the behaviour
to be influenced is
— Direct—with the objective of
stimulating a reduction in flight or airport climate change impacts.
— Indirect—with the objective
of stimulating passenger action that influences direct behaviour.
3. On the Miliband basis, it is not enough
to impose taxes to cover external costs or to satisfy the Polluter
Pays principle if they only raise revenue without affecting impacts.
The principles of Polluter Pays or the covering of external costs
work best where there is a clear relationship between payment
and remedy—for example, where a factory pays a levy or fine
for riparian discharge, with the revenue funding restocking or
cleanup. Paying to cover costs where there is no link to a reduction
in the polluter's (or another polluter's) impacts is no more than
an empty benefit to the Exchequer. If, for various reasons, it
is not possible for an aviation polluter's payments to remedy
its impacts, the two principles are inappropriate for that sector.
4. In the case of aviation, although there
is still uncertainty over the extent (and possibly the nature)
of impacts, mitigation of impacts can be achieved through
(i) technological development and application—optimising
combustion and airframe design;
(ii) operational measures—for example,
avoiding areas of cold air in which cirrus cloud is most likely
to be stimulated; and reducing energy use at stands, in taxiing
and on approach to land;
(iii) optimising Air Traffic Control to reduce
delay or diversion-related fuel burn;
(iv) replacement of inefficient aircraft
with more efficient types; and/or
(v) consolidation of or reduction in services;
and indirectly through
(vi) (indirectly) offset schemes that take
into account non-CO2 climate effects of aviation.
5. The options for reducing CO2, NOx and
contrails and cirrus cloud are different in kind and call for
different technical and different regulatory or legislative measures. Our
work suggests that the impact of non-CO2 emissions can best be
reduced by regulatory action, ultimately at ICAO level but possibly
at EU level in the first instance (on the basis that regulatory
action by an important destination such as Europe will lead to
the introduction of the appropriate technologies and operational
practices that can be expected, in due course, to be adopted globally).
Progress in this area must await further advance in the atmospheric
science relating to these impacts. The main incentive to reduce
fuel burn, and thus CO2 emission, is likely to be financial.
6. Bearing in mind that it requires a global
reduction in aviation emissions to reduce the climate impact of
aviation significantly, that almost half the world fuel burn by
aircraft is on flights originating in the USA and that the Far
East is expected to be the region of most rapid growth in air
travel over the coming decades, we must ask what UK or European
measures can be expected to have a significant impact on the bullet
points above. In particular, what influence can we expect green
taxes to have?
THE OBSERVED
AND LIKELY
IMPACT OF
GREEN TAXES
7. To date, no evidence has been produced
by Governmental, parliamentary committee, NGO or even expert body
(Royal Commission on Environmental Pollution, Sustainable Development
Commission, Commission for Integrated Transport, Stern) advocates
of green taxes or charges that the imposition of a financial penalty
would make a material difference to aviation's climate change
impacts. Air Passenger Duty, categorised as a green tax by the
Treasury, may have reduced the rate of growth in air travel but
there is no way to prove it; and we note that while the Pre Budget
Report claimed that the doubling of APD would reduce air transport
emissions by 0.2-0.5mtc by 2010-11 (PBR Chapter 7, p.179), no
methodology was published to support this claim and the National
Audit Office's Audit of Assumptions did not examine APD. There
is no evidence, as far as we are aware, that it has achieved or
encouraged (i)-(v) above. It is a deficiency of the Regulatory
Impact Assessment process that tax announcements are excluded
from the requirement to publish an assessment of impacts and to
undertake a proportionality test. It is questionable as to whether
the PBR's APD increase would have satisfied such an assessment.
8. It was suggested by the Liberal Democrat
Environment spokesman in a recent letter to The Independent
(2 November 2006) that "On flights, there is well-established
evidence on responsiveness of air travel to price changes. This
suggests a 1% change in price leads to a little more than 1% change
in travel, assuming other factors—such as incomes—do
not change." It could be claimed by advocates of green taxation
that this would support an assumption that Air Passenger Duty
or other aviation-related taxes and charges would beneficially
influence behaviour and satisfy the Miliband test. In fact, although
elasticity assumptions ranging from 0.5 for business passengers
to up to 2.5 or even 3 for leisure travellers have at different
times been advanced by the industry, the Department for Transport
and the Treasury, there is little practical evidence to support
them. On the contrary, recent market experience suggests that
aviation is highly unresponsive to external drivers akin to taxes
and charges and that such instruments would be unlikely to pass
the Secretary of State's test. If taxes or other cost increases
are to influence performance they must either
— reduce demand to a level at which
load factors would fall to a point at which airlines would either
abandon or consolidate services or, if available in their fleet,
switch to smaller aircraft. At current average load factors, it
may require a fall of 8-10% in passenger numbers for a service
to be considered marginal;
— stimulate replacement of existing
aircraft with more efficient types; or
Would taxes or charges cut demand?
9. At this stage, it is important to understand
that it is not passengers who pollute but flights. The critical
indicators of performance are not therefore passenger numbers
but the number of movements and emissions per movement. The Institute
for Fiscal Studies recently endorsed this distinction in relation
to the claimed impact of APD:
"The IFS said there was a risk the doubling
of air passenger duty to between £10 for European economy
class and £80 for long-haul business class flights would
be ineffective in reducing emissions from aircraft.
Mr Leicester cited evidence that people responded
to higher fares by flying less. But if that resulted in planes
flying with fewer passengers rather than fewer flights, the environmental
benefits would be minimal".[85]
Because, as load factors increase, demand is
rising significantly faster than the number of flights, it is
misleading to seek—as have several NGOs and research bodies—to
match passenger growth forecasts pari passu to projected
emissions.
10. The Air Transport White Paper modeled
the impact of a fuel tax. It assumed a 10% tax in 2006, increasing
by 10 percentage points every year until it reached 100% in 2015. It
also assumed that the tax would be introduced globally and entirely
passed through to passengers. Fuel was assumed to account for
10% of total costs. The result of this, DfT projected, would be
a reduction in 2015 demand of 10%, or a cut in growth of 0.7%
a year (Source: The Future of Air Transport, 2003, p.150).
11. What has actually happened? Between
June 2004 and June 2006, the price of aviation fuel rose by 94.5%
(Source: IATA), a much steeper rise over time than modeled
by DfT and which, unlike a steady annual increment, gave the industry
no time to adapt. Fuel comprised not 10% but 12 to 20% (IATA)
of operating costs before this rapid increase. The industry imposed
surcharges but much of the fuel price rise was absorbed for competitive
reasons.
12. Standard economic analysis would assume
that the upshot of the fuel price movement—essentially a
94.5% fuel tax (reduced by price hedging to an average of 50%)—and
accompanying surcharges of recent years would be a reduction in
demand and therefore in movements. In fact, over the two years
global movements rose 5.1% (IATA). Furthermore, if we look at
the most financially sensitive global market, the United States,
data released last November show that over 2000-2005, total US
passenger airline costs rose by 80%. A quarter of that was fuel,
the cost of which increased by 266% to account for 25.5% of costs
as at November 2006. Landing charges also increased by 145%
(Source: US Air Transport Association [s1]). Between 2000
and 2005, IATA reported that US carrier movements rose 27.5%.
So this suggests that a tax imposing a burden at even the high
level experienced by the market would not be sufficient to cap
or reverse emission growth, still less in the more robust European
sector.
13. The above cost:movement ratio could
misleadingly be interpreted as a "movement elasticity"
of -2.9: misleading because, as we have noted, although it is
impossible to assess accurately, cost increases may have reduced
the rate of passenger and movement growth. Nonetheless, the observed
responsiveness of aviation emissions to price signals appears
to be very low and the Committee should note the Air Transport
White Paper progress report's (DfT, 2006, Table C1) acknowledgement
that the Department's passenger growth forecasts were considered
more or less robust regardless of whether DfT's assumed £70/tonne
cost of aviation carbon was doubled or halved.
14. The industry's response to cost pressures
has in fact been to seek to increase load factor while driving
down other operating costs, and while those pressures might under
conventional models be expected to lead to increased fares and
possibly to reduced demand, despite marginal trading conditions
highly competitive market dynamics forced overall US fares down
by 12% between 2000-2005 (Source: ATA). This has had its
parallel in the influence of no frills carriers in the UK, although
the European market, with a greater passenger emphasis on service
quality, has allowed network operators to maintain a wider pricing
and cost premium over no frills operators than has been possible
in the US. While some US domestic services were scrapped following
the start of the sharp fuel price rise, their operators merely
transferred capacity to more profitable international flights
and within a few days even the shelved domestic services were
restored. US load factors have risen markedly, and while emissions
per passenger have reduced, the number of emitting flights has
increased.
15. It appears clear on the basis of the
above evidence that a green tax would have to be levied at a very
high rate—perhaps upwards of 150% on fuel—in order
to prompt a demand reduction sufficient to cut load factors to
a level where flights become uneconomic and are consolidated or
cancelled. It is possible, however, that where substitution between
transport modes is relatively convenient[s3]—for example,
journeys of under 400km—increasing the cost of air travel
would be more effective in encouraging a shift to less polluting
modes, although any tax or charge would have to be sensitively
applied in order not to prejudice communities (such as the Highlands
and Islands) which may be highly dependent on the availability
of air services.
Would taxes or charges stimulate fleet replacement?
16. If even steep increases in costs have
not reversed movement growth, would they encourage airlines to
move to higher-efficiency aircraft?
17. Leaving aside the high opportunity costs
of accelerating planned fleet replacement, the evidence is that
UK airlines are extending their fleet life, not because they want
to continue using out of date aircraft but because the UK (and
indeed the European) fleet is pretty much state of the art and
more efficient models to replace the key short-medium haul workhorses
of most UK carriers (the A320 and B737 and B757 families) are
unlikely to be launched for several years. While the efficiency
of an engine falls slightly over time, dependent on maintenance
standards, there is little environmental benefit in replacing
an eight year old 757 with a new one if lower-impact types are
not yet available. The known potential for near to medium term
advances in engine and airframe technologies could, in our assessment,
radically mitigate climate change impacts (cf GBD's 2006 Annual
Report: http://www.greenerbydesign.org.uk). However, manufacturers
do not believe the incentive yet exists to commercialise them
or to invest in higher risk research. That incentive—whether
by market dynamics, incentives or regulatory standards—must
be created if a substantial improvement in environmental performance
is to be achieved by 2030.
Would taxes and charges encourage fuel saving?
18. At such a significant share of operating
costs, airlines currently need no incentive to save fuel and they
all have fuel saving schemes. The November 2006 DfT review of
Continuous Descent (so-called "clean flying) and the introduction
of the EU Single Sky system will, in our assessment, do more than
any tax to reduce fuel burn.
CONCLUSION
19. It is important to assess the likely
effectiveness of green taxes sector by sector, not on the basis
of broad economic theory. Those who advocate green taxes or charges
as a mechanism for improving aviation's environmental performance
have not to date adduced any evidence based on market performance
that supports their contention.
20. Ahead of next generation technologies
coming on stream, if green taxes were to stimulate an improvement
in environmental performance they would have to prompt a reduction
in demand to the extent that load factors would fall to a level
at which services would be consolidated or cut. The reverse has
occurred. While this may be an inconvenient truth to advocates
of green taxes on aviation, market evidence suggests that the
sector has been highly resistant to classical economic signals
in the face of significant cost increases.
21. Government's elasticity assumptions
have been over-optimistic. The likely "movement elasticity"
of air travel in response to tax and charge-like signals is very
low. We would be happy to assess evidence to the contrary.
22. It is however possible that for journeys
of under 400km where rail and bus alternatives are available,
increasing the cost of air travel might be effective in encouraging
a shift to lower-emission transport modes.
23. The funding of offsets[s4], while not
influencing aviation's performance, is an example of beneficial
green taxation provided the efficiency of the funded projects
is properly assessed. Standards are being developed that will
lead to a more uniform market and it is possible that such schemes
could complement emissions trading. While it is likely that transaction
costs will rise, offsets offer a way of achieving environmental
benefit at a low cost. Moreover they can be taken up immediately
and could carry a strong message to consumers not of simply assuaging
any guilt associated with air travel but to encourage careful
consideration of the reasons for flying.
24. There may be a role for hypothecated
charges in order to accelerate improved efficiency through, for
example, air traffic control improvements or support for technology
research programmes; but taxes and charges, unless hypothecated
(and possibly not even then) are unlikely to persuade manufacturers
to accelerate development of step-change technologies because
the opportunity costs of not optimising revenues from current
and planned aircraft models are so high. An approach focusing
on regulation (for example, the International Civil Aviation Organisation's
NOx standard has significantly influenced Rolls-Royce's engine
design programme) and incentives is needed.
Air Travel—Greener By Design Group,
Royal Aeronautical Society
January 2007
85 The IFS' own report on green taxes (The UK Tax
System and the Environment, October 2006) cites a Canadian study
claiming that a 10% tax cuts leisure demand by 10% and short haul
demand by 15% but it is uncertain on reading the study whether
it was based on economic assumption or on market observation.
(Source: Financial Times, 8 December 2006) Back
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