Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 40 - 59)

TUESDAY 23 JANUARY 2007

MR ROGER WILTSHIRE, MR ANDY KERSHAW, MR ANDREW BARKER AND MR BARRY HUMPHREYS

  Q40  Chairman: The EU emissions trading scheme does not come in until 2012[1], 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 airlines.

  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 you not?

  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 public—over 50% of the UK population take an air trip each year, and some more than that—that 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 level.

  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 APD—in Virgin's submission John Healy is quoted to this effect—is 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


 
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