Examination of Witnesses (Questions 40
TUESDAY 23 JANUARY 2007
Q40 Chairman: The EU emissions trading
scheme does not come in until 2012,
so in a sense you have four years until then. What are you doing
in the interim?
Mr Barker: I make two points.
First, this industry is an extremely competitive one. It is very
unusual for the two of us, for example, to be sitting next to
each other. We are each other's biggest competitors. There is
an extremely big commercial and economic incentive in this industry
to be as efficient as possible. Fuel costs are, as we put in our
paper, 29% of our total operating costs. It is far and away our
biggest operating cost. We seek any advantage we can to out-compete
other airlines to be more efficient.
Q41 Chairman: What I am asking is
what you will be doing in the interim?
Mr Barker: I was going to say
that that emissions trading scheme now provides us with a target.
The proposals provide us with a target. The benchmark is 2005.
Any emissions that the industry produces beyond 2005 levels will
have to be paid for. We know that that is going to happen and
easyJet and myself as director of planning are already configuring
investment decisions to offset that.
Q42 Chairman: Motorists pay tax;
they go into petrol stations every day. You do not pay any tax
on your fuel. What will you be doing in the next four years? What
example will you set?
Mr Barker: Obviously, we pay corporate
tax, but APD at current rates is 25% of the value of the tickets
that we sell. That is quite a high rate of tax that our consumers
have to pay.
Chairman: I pass it over to Mr Mudie,
but I have no idea of what is happening in the next four years.
Q43 Mr Mudie: Chairman, thank you
for making sense of my questions. You did not present a very statesmanlike
approach to the DEFRA initiative and the voluntary code. British
Airways seemed to be intent on not participating for one excuse
or another. Why on earth did you pull out of the launch of this
voluntary code simply because of something done in the Budget?
It is a bit like throwing your toys out of the pram. Are you reconsidering
this, and will you be coming to the table and behave responsibly
on this matter, despite, if you wish, the actions of the Chancellor?
Mr Wiltshire: I am sure that British
Airways will point out its own track record in offsetting and
the history behind this. All I can say in representing the wider
range of British airlines is that before the Pre-Budget Report
the various airlines in the industry were in dialogue with DEFRA
and proposed quite significant and innovative approaches to offsetting.
We pointed out to DEFRA, as we do to the Committee, that the promotion
of offsetting is very important because offsetting does not have
a good track record or reputation either with environmentalists
or others. There has been a lot of criticism of offsetting in
the public domain recently. We felt that it was very important
to promote it. How possible will it be for airlines to promote
offsetting when after the Pre-Budget Report announcement air passenger
duty will be paying far in excess of the carbon cost of that flight?
As I mentioned in the BATA submission, we believe that one-fifth
of air passenger income would be able to offset our emission using
European permits at the current market price today, so the whole
promotion of offsets is a very important matter. The reason the
airlines stood back from getting involved in the launch of the
offset initiatives was because there was a totally new game with
air passenger duty being as high as it will be from 1 February.
Mr Humphreys: I completely agree
with that. To return to the Chairman's question about what we
are doing today, we are doing an awful lot. To give you some examples,
Virgin has taken the initiative of organising experiments for
the towing of aircraft at airports. A lot of fuel is wasted and
emissions created by the taxi-ing and parking of aircraft waiting
to take off. We have taken the initiative with the airports to
see whether it is possible to cut down on that very substantially.
So far those experiments are going very well. We are also lobbying
and working very strongly with governments because massive amounts
of fuel are wasted in Europe every day because of the organisation
of air traffic control and the large areas of Europe set aside
for military training. But that is not something we can do anything
about on our own; we need governments to sort it out, and we are
putting a lot of pressure on them to do that. It is not true to
say that we are not doing anything; we are.
Q44 Mr Mudie: I did not say you were
not. You are here to represent an industry and I am anxious that
you put on record what you are doing. To be helpful to you, British
Airways said that the APD would total more than £400 million
a year. For the same cost using clean development mechanism offsets
British Airways could offset the total annual emissions of its
entire worldwide fleet many times over. Tell me what "clean
development mechanism offsets" are?
Mr Kershaw: The clean development
mechanism is one of the Kyoto flexible mechanisms, so it is related
to international emissions trading. Effectively, what it means
is that we can make investments in projects in third countries
where emissions reductions can take place which would not already
have occurred. For example, we can offset emissions from an activity
in the UK by purchasing the emissions credits from a project to
create a renewable energy programme in, say, India. The clean
development mechanism is the functionality provided at international
level through the UN to facilitate that process. It facilitates
the flows of carbon finance from, if you like, the developed world
to the developing world and is a very important element in the
emissions trading process. It enables the emissions reductions
to take place globally at least cost. That was something to which
Stern pointed as one of the critical elements in achieving emissions
reductions at least cost to the economy. The clean development
mechanism is something that we need to develop further and strengthen
and realise its full potential in order to make least cost emissions
reductions across the economy.
Q45 Mr Mudie: What is the total profit
of the airline industry? I am not referring to the individual
Mr Humphreys: I think aviation
has a very low level of profitability relative to most other sectors.
It varies and it is of a highly cyclical business.
Q46 Mr Mudie: We can get a figure
from the Treasury, but nobody can put a figure on it at this hearing?
Mr Barker: As a quoted company,
we currently make a return of between 10% and 12% on equity shareholders'
funds. An average UK company would make 17%, so we are much less
profitable than the average.
Q47 Mr Mudie: For the layman, can
you convert that into a figure? I want to compare it with the
figure of £400 million.
Mr Barker: As far as we are concerned,
as we put in our paper the current rate of APD would be about
one and a half times our profit last year.
Q48 Mr Mudie: You still have not
told us the figure.
Mr Barker: Last year's profit
was £94 million.
Q49 Mr Mudie: If easyJet made £94
million I presume that the bigger airlines made more than that.
You could be doing some of this stuff out of your profit, could
Mr Barker: It is a very capital-intensive
industry. We invest in technology. We invest all of our profit
back into new technology.
Q50 Mr Mudie: You could be making
the Chancellor an offer, for example, "If we trigger this
now you can remove the APD"?
Mr Wiltshire: A better option
for government when they announced the doubling of APD in December
was to have used a portion of that to incentivise the public the
use of offsets. That could have been an opportunity to say to
the travelling publicover 50% of the UK population take
an air trip each year, and some more than thatthat they
could have a real opportunity to make a difference environmentally.
Unfortunately, the Government did not take that opportunity.
Mr Humphreys: It is also important
to remember that at present 20% of APD is already hypothecated.
Q51 Chairman: In terms of APD, you
are really back to 1997 levels. It was imposed in 1997 and reduced
in 2001 and now you are just back to that. There really has not
been any debate within the aviation industry up to that point.
Mr Wiltshire: I must correct one
point. On long-haul flights that is not correct, whereas it may
be so on short-haul flights.
Chairman: But you agree that generally
you are back to the 1997 level, so it is pretty minimal.
Q52 Peter Viggers: Please correct
me if I am wrong, but you seem to be reconciled to, even intellectually
supportive of, the emissions trading scheme as a mechanism. What
are the technical problems relating to its introduction? Do you
see any of these as being very serious, or even insoluble?
Mr Wiltshire: A number of issues
have been debated in Europe within a working group set up by the
Commission. The issues range from the scope of the scheme: which
flights should be included? That is an ongoing issue. The Commission
proposed a two-stage process, intra-Europe in one year and all
arrivals and departures in the following year. The second notable
difference compared to the existing scheme is the allocation process.
We have strongly recommended an international, ie at European
level, allocation and we see that the Commission has supported
that approach, but that is a different type of allocation mechanism
from the one under the present scheme.
Q53 Peter Viggers: Stern suggests
that it is difficult to assess the effect of aviation CO2
emissions by way of CO2 equivalents. Are the airlines
undertaking work to clear up that point?
Mr Wiltshire: We are very keen
to see the scientific knowledge improved in the non-CO2
area so that it includes a much better way of measuring those
effects. In that way a comparison, if that is desired, can be
made with the effect of a long-lived gas with a 100-year life
such as CO2 and other much shorter-lived impacts.
Q54 Peter Viggers: How do you respond
to reports that to allowing aviation into the European Union ETS
will create windfall profits from the allocation of carbon quotas?
Mr Wiltshire: Quite frankly, when
we heard that comment we laughed. The only way that an airline
in an overall capped scheme could make a profit in this way would
be to close up shop and close the business. The emissions relate
to the operations under which one wants to conduct business. If
one wants to reduce or close the business in theory one could
sell on one's permits, but there is no other way that that could
happen. I do not see anything in it for any airline, or any industry
like the airlines, to sell its emissions and close up shop.
Q55 Peter Viggers: Therefore, quotas
would be allocated to airlines according to their operations?
Mr Wiltshire: The proposal by
the Commission is that there would be an allocation based on the
benchmarked efficiency of the industry. That is one detail that
is yet to be worked through finally. The benchmarked efficiency
would be used to allocate based on the operations of the airlines,
and I understand that the years 2004 to 2006 are the baseline
from which emissions are to be calculated.
Q56 Peter Viggers: The Treasury is
hoping to move eventually to a global emissions trading scheme.
What are the obstacles to achieving that?
Mr Humphreys: Clearly, there is
some opposition from foreign governments to the introduction of
such a scheme. We certainly have done our best to persuade our
fellow airlines around the world that this is the best approach,
but there is no secret that in particular the United States is
opposed to the application of ETS to its own airlines flying into
Europe. That is an issue that will have to be sorted out at government
Q57 Mr Todd: You do not like APD.
Is there any change that you suggest may make it more effective
in terms of an environmental tax? You have argued that it is not
effective at the moment, setting aside for the moment hypothecation.
Mr Humphreys: That was what I
was going to suggest. The trouble with APDin Virgin's submission
John Healy is quoted to this effectis that it is a poor
environmental tax; it does not achieve any environmental objectives
and there must be better ways of achieving them.
Q58 Mr Todd: What are those objectives?
Mr Humphreys: We believe that
ETS is far more efficient.
Q59 Mr Todd: Is not another mechanism
a tax or charge that is directly related to inefficient technology?
For example, in this country if you buy a motor vehicle and it
consumes energy in a particular way it is taxed differently.
Mr Barker: We suggest that that
is what ETS will do. It is not just the technology that you have
but the way you use it, for example the number of seats in the
plane and the number of people on the plane. The ETS scheme as
proposed will incentivise airlines to operate much more efficiently;
otherwise, they will be penalised.
1 On 20th December 2006, the European Commission adopted
a proposal for legislation to include aviation in the EU Emissions
Trading Scheme (ETS). The proposal provides for aviation to be
brought into the EU ETS in two steps. From the start of 2011,
emissions from all domestic and international flights between
EU airports will be covered. One year later, at the start of 2012,
the scope will be expanded to cover emissions from all international
flights-from or to anywhere in the world-that arrive at or depart
from an EU airport Back