UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 202 -i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

Environmental AUDIT Committee

 

Pre-budget report 2008

 

TUESday 27 JANUARY 2009

 

PROFESSOR TIM JACKSON

MR RICHARD GEORGE, MR ALISTAIR HANTON and MR KEITH BUCHAN

Evidence heard in Public Questions 1- 54

 

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Oral Evidence

Taken before the Environmental Audit Committee

on Tuesday 27 January 2009

Members present

Mr Tim Yeo, in the Chair

Mr Martin Caton

Colin Challen

Mr David Chaytor

Martin Horwood

Jo Swinson

Dr Desmond Turner

Joan Walley

________________

Witness: Professor Tim Jackson, Sustainable Development Commissioner & Professor of sustainable Development, Centre for Environmental Strategy, University of Surrey, gave evidence.

Q1 Chairman: Good morning. I am sorry we have kept you waiting. We had rather more future business to go through than we anticipated. We will run to about 11.15 with you. Thank you very much for coming in. We have obviously seen your response to the Pre‑Budget Report on behalf of the SDC, which was pretty forthright and all the more welcome from our point of view for that. Would you just like to run through the headlines, the main points in it for us?

Professor Jackson: I guess our headline message was that there were bits of the right signal in the sense that the words "green stimulus" were used, and there were some components that could be characterised as green stimulus, but that the scale was entirely wrong, really, when you look at what constitutes that green stimulus, which was pitched at about £535 million in the Pre‑Budget Report; it actually amounts to something like £200 million of spend upon anything other than adaptation and rail; and of that £200 million, some of it was spending brought forward; so you are really talking about a minuscule spend in relation to certainly the average financial rescue package, and indeed the scale of the Pre‑Budget Report as a whole. So we felt that there was a good signal there in the sense that some of those things were mentioned, but that it could and should have gone an awful lot further. We were encouraged by signals in relation to reducing income inequality - that is an important element of sustainability, and the evidence suggests that the UK is at this point in time more unequal than it was twenty years ago, so moves in that direction in terms of fiscal recovery are sensible. We were less encouraged by the attack on employment through higher national income contributions, and that seems to be, again, a move in the wrong direction in environmental terms and in contradiction to the Government's own statement on environmental taxation in 1997, which is just a shift from labour taxes to environmental taxes. Finally, like many other people, we felt that the £12.5 billion spend on VAT reduction was misplaced, not only from the perspective that it may not work in terms of providing the stimulus - there is too much leakage possibility - but also that it was problematic to encourage households into higher levels of consumer spending when they are already exposed to financial risk, when consumer debt is at an all-time high, and household saving has plummeted. It looks like too dilute a measure that is going in the wrong direction to us.

Q2 Chairman: Have you any idea what the Treasury thought of all these comments of yours?

Professor Jackson: We have not had a direct engagement with Treasury on this. They do not seem to trawl our website and respond to it as perhaps we might wish they would! We have had some engagement with Treasury on some of the issues, and, to be honest, I think it would be fair to say that there is a recognition of some of those issues, certainly around environmental taxation and the green investment; and some of that is coming through in some of the work that is going on, for example, in the Low Carbon Industrial Strategy. However, in terms of the direct positive acknowledgment of our undoubted wisdom in this area, we have not quite had what we might have hoped for!

Chairman: We sometimes have the same feeling ourselves!

Q3 Mr Caton: Going back to your comments on the inadequacy of the green stimulus package, how much do you think the Chancellor should have given?

Professor Jackson: There are different ways of putting this into context, I think. One of them is obviously to go to the Stern review and to look at the bottom-line numbers in the Stern review. Stern was suggesting at that time, nearly three years ago, a 1 per cent annual spend on climate reduction, climate mitigation, carbon reduction. That would have amounted to about £15 billion of spend just in the area of carbon reduction. As I say, that was 2006. Stern's target was 550 parts per million in the atmosphere. The perceived wisdom is that it should be considerably lower. There are some estimates that put the spend needed to achieve a low carbon society in the region of 3 per cent of GDP per annum. That is a £45 billion spend, considerably higher than the fiscal package in the Pre‑Budget Report, and clearly subject to all sorts of difficulties in relation to financial prudence and the national debt and so on. Our suggestion is that a spend of this magnitude, of at least £15 billion, of the same order of magnitude as the fiscal package in the Pre‑Budget Report, is entirely in order. We have done some preliminary costing of the kinds of things that you might wish to see in that package, and they fit, I think, with a sort of emerging consensus about what is needed. That consensus suggests a rapid ramp-up of retrofitting the present building stock for energy efficiency; investment in the Grid perhaps to develop the smart grid; investment in public transport, for example rolling out the Department for Transport's Smarter Choices Programme, which is being piloted in three English towns; and perhaps making some movement in relation to greener businesses and the greening of the Government estate - carbon neutrality in the Government estate. Just taking one of those options, there is a really, really obvious case for a quite considerable spend. If you think about the housing stock and say we have got twenty years perhaps to get the housing stock in the UK to a decent level, that is 24 million households; assume that you could do it at a million households a year, at an average cost of £10,000-11,000 a year, which might be conservative, that is a £10 billion a year spending package that ramps up very fast into something that suddenly begins to look like a real green stimulus. It is spending of that order! We did some estimates in relation to the transport spend, which could easily absorb a half billion pound spend a year, but could generate returns, in terms of carbon savings, which the DfT estimates could be ten times that amount of spend. We are saying that there is plenty of room to spend £15 billion if you wanted a fiscal stimulus package in the green measures that we know we need in order to achieve the carbon targets that we are facing, that are now in legislation; and, most importantly perhaps, we also know that that kind of spending generates carbon savings, financial returns and jobs.

Q4 Mr Challen: Following up this point about the overall spend, the Government in the Pre‑Budget Report said it would be spending £50 billion over the next CSR period, starting in this financial year. I have a breakdown of this figure, which I thought was perhaps slightly on the high side, and they include things like Cross Rail, spending on rail and the National Grid infrastructure investment, which might be simply replacing, in the case of National Grid, existing transmission lines and so on. Is it correct to include things like Cross Rail in something described as "driving a low-carbon economy" when it was already in the pipeline? It seems to me that the key question is if Nick Stern, for example, is saying you only need to spend an extra 2 per cent of GDP, can you really transfer projects already in our system as extra, or should we have two Cross Rails rather than one Cross Rail, if you get my point?

Professor Jackson: I would not want to say you should not be spending on Cross Rail - of course you should be spending on public transit, and on approved public transit, and to the extent that that is going to be brought forward, accelerated, fantastic - but it is essentially already in the baseline. You cannot claim it, I would argue, as an additional fiscal stimulus or green stimulus over and above what is already in that baseline. That is the criterion against which what was set out in the green stimulus should be judged. All of these programmes, the Community Energy Savings Programme, the Cross Rail public transport stuff, Ofgem looking at the Grid - all of these are incredibly important programmes; but the question that the stimulus package was asking is where now should Government address additional investment and additional spend in order to achieve what we intend to do, both in terms of jobs in the economy and in terms of meeting carbon targets. We would argue quite strongly that the criterion should be additional spend over and above baseline commitments.

Q5 Mr Chaytor: You have a particular concern about debt levels in the United Kingdom, having huge personal debt levels and public sector debt and national debt, at the same time as the economic downturn, and clearly you think this places us in a particularly vulnerable position. Can you expand on that a little bit?

Professor Jackson: There are three areas of debt where one should be concerned. The first is national level, what the public sector owes to the private sector, which, as we know, at the moment is about 40 per cent of GDP and predicted to rise to something like 60 per cent. That might be conservative once financial rescue packages, re-capitalisation of the banks, is taken into account. Actually, that area of debt, although it has broken the Treasury's own rules and is rising fast, is still lower than several other advanced countries. It is a cause for concern, and particularly the rate at which it is rising is a cause for concern; but in a sense it is less of a concern than perhaps the consumer debt position, where we stand at one of the highest consumer debts in the world. Household saving has plummeted so that the position that households find themselves in, going into a recession, is incredibly precarious - borrowing against declining assets, the value of their houses going down, and their exposure to economic risk going up, their savings having declined over a decade. This is a position of financial imprudence at the household level that households are now being encouraged into in order to escape from the economic downturn. That, I think, is a deep concern. It is particularly a concern that our economic stability rests on encouraging financial imprudence at the household level over quite a long period of time. We believe that that is something that needs to be addressed both in terms of the signals that are sent to consumers, the options that are available to consumers and indeed the model of economic stability that relies on pushing people into high levels of debt in order to maintain high-street spending to keep the economy going. That is a structural concern. The third level of concern is what is called the external debt. The UK has the highest level of external debt at around 40 to 50 per cent of GDP, other than the US, at absolute levels in the economy - although that is balanced by a similar level of overseas assets. That precarious position of having a high level of overseas assets and a very high level of overseas debt is exacerbated in volatile markets with the fall of the pound and really does put the economy as a whole in the very precarious position of having lent a little too much, engaged in financial risk in the financial markets a little too heavily, and will make it difficult to maintain and to find economic stability to the future. We are concerned about all of those three levels of indebtedness in the UK. Perhaps the least of those is the one that has had the most attention, which is the national debt, but it is still a concern because it is rising so fast.

Q6 Dr Turner: You also call for much greater public spending on low-carbon investments. How do you square that with the concern about the level of public debt, because we would all love to see massive investments in low-carbon infrastructure projects whether transport projects or electrical engineering - whichever; but how do you propose to finance them, given that you want to restrict the level of public debt?

Professor Jackson: Everybody wants to restrict the level of public debt, even the Government, and there is a recognition at this point, and there is a recognition in the recession that public debt is likely to expand. I think that is almost inevitable. The question of financing that debt, as both a short-term and a longer term aspect - in the short term it is about making prudent choices about what we invest in. To be honest, the debt is expanding at the moment not through anything remotely like green investment, but through financial rescue packages, and to some extent through a long programme of public spending. We are saying essentially that you have to target where you are spending that public money, and if you target that public money at things where you are simply throwing public revenues into something like a dilute incentive like the VAT measure, you have no chance really of clawing that back except through higher tax levels at some point in the future. It may be then that higher tax levels at some point in the future are going to be necessary, but the two things that promote the case for a green stimulus rather than simply a fiscal stimulus, is that many of these measures are cost-saving to the nation over a quite short time period, so that improving the insulation in the housing stock, improving energy efficiency in business, improving the efficiency of appliances, improving the efficiency of cars, generating fuel savings, generating economic savings - these are real savings to the nation. They do not all necessarily come to Government - that depends on fiscal structure, but they are savings to the nation, and as savings to the nation they ease the constraints on households in terms of their indebtedness and spending and they also ease the possibility for getting money back into the public coffers and reducing the burden upon public debt.

Q7 Dr Turner: Can you put rough numbers on the amount of public indebtedness you would like to see in -loosely - green infrastructure projects, and what sort of projects you would prioritise?

Professor Jackson: I mentioned this very quickly before, but we believe that at least at this point in time it is appropriate to have a green stimulus package of a size comparable with the 15.5 that was in the Pre‑Budget Report, and that that spending should be prioritised certainly on a retrofit programme for the domestic housing stock to bring it up to SAP80 to 85. SAP81 is the agreed rating that would improve fuel poverty and put us on track to achieve an 80 per cent carbon emission reduction. The cost of that would be quite high, depending on how long you did it for. If you are going to hit the whole 25 million households in the UK, you would have to be spending around £10 billion a year, so there is a big potential spend there and it would need some time to ramp up and it would generate returns on some of that money quite quickly. Some of it would be longer over twenty years. We also think that there is a need to prioritise something like the Smarter Choices Programme, the DfT's programme, trialled in three English towns to reduce car travel and to improve public transport, access to walking, cycling and to develop personal travel plans, personal mobility plans, that reduce car use; and that estimated cost would be something less than half a billion pounds per year. The smart grid, which has been talked a lot about by various people a lot in the US - the costs for the development of the smart grid in the UK is very difficult to get a clear handle on, but certainly rolling out the development of a grid that is able to take on distributed renewable energy projects and to allow for active management through smart metering, could reduce energy consumption by 10 to 15 per cent per annum and begin to do that quite fast. That is a big investment. It is going to need substantial thought about how to work that through, but, again, the cost savings on that in terms of the total energy bill to the nation are very substantial. A fourth priority area that we have identified is in relation to bringing forward the Government's own ambitions for carbon neutrality in the public sector itself as well as in the Government's estate.

Q8 Dr Turner: Your comments about the Grid do not seem to extend to remodelling the Grid to accommodate far-flung sources of renewable energy, which is a major problem, as you know.

Professor Jackson: Absolutely, no. That idea of making the Grid accessible to distributed and far-flung renewable energy sources is absolutely key to this. That would be about strengthening, redesigning and smartening the capacity of the Grid to do the job.

Q9 Dr Turner: To what extent would you want to see the green stimulus package applied at the household level, given that you want to encourage households to save?

Professor Jackson: It does apply at the household level. As we go into possibly quite a lengthy recession, the plight of households, particularly poorer households, is something that should be at the forefront of concerns. Again, this is one of the self-reinforcing aspects of the green stimulus, particularly if it is focused properly; it is mainly the poorer households that find themselves in fuel poverty and unable to maintain even basic living conditions under higher energy prices and threats to their income. So it is absolutely appropriate, we would argue, that you focus attention on easing that burden on households. That will put money into the pockets of householders, but some of that of course legitimately they will want to spend on the high street, which could provide a stimulus effect to the economy. At this point in time, in the short term, with the economy declining, it is absolutely clear that there is a need to stabilise the economy as a whole, and that is probably going to mean a change in consumer confidence. That change in consumer confidence has to come through both the ability of households to spend and their confidence that they are spending in a financially prudent way. So although offering energy efficiency frees up funds to households and allows them to spend where they want, they will not begin to do that unless they are confident that it is financially prudent; so at this point in time I think that is both right in terms of financial prudence, and right in terms of a moral choice that people should be looking to their future financial and economic stability, and that the Government should be encouraging that kind of prudence. So along with the idea of stimulating household spending through improved energy efficiency, which has national savings, is the idea of encouraging financial prudence at the household level, doing something about the plummeting savings rates and reducing debt.

Q10 Dr Turner: You have criticisms of conventional measures of economic growth.

Professor Jackson: Yes.

Q11 Dr Turner: Would you wish to see some refined measure of economic growth that took into account environmental considerations, so a green measure of economic growth, if you like, so that you can redirect the economy?

Professor Jackson: That is something that personally I have worked on over a number of years, and I do believe that it has a role to play. The failings of GDP are well known. It does not account for changes in the asset base properly, whether that is financial assets, social assets or natural capital. There are some ways of improving that measure. There are a number of pilot measures that have been developed over twenty years or so. The Stiglitz Commission in France is looking at those measures and the idea of measuring social progress and environmental performance in a more accurate way. It is our position that a sensible long-term position going forward beyond recovery from recession is to address very firmly that relationship between economic growth and sustainability and take on board those criticisms of GDP as the simple single measure of economic progress; and indeed a green measure of some kind, some kind of programme that looks at those limitations of GDP and adjusts for the most obvious ones, at least, is very long overdue.

Q12 Chairman: Given the external debt figure of 450 per cent of GDP, external debt is defined as the borrowing by British individuals and corporations from overseas sources - is that right?

Professor Jackson: Yes, indeed.

Q13 Martin Horwood: Can I draw you on the subject of the banking sector, where obviously the British Government now has a surprisingly large interest and degree of control. Do you think the Government has been right to exercise that kind of control for the moment at reasonable arm's length; or do you think we should get involved in using environmental priorities to determine the policy of the banks we now control, for instance, either by disinvesting from the unmentionable Bank of Scotland's less than wonderful record of investing in fossil fuel projects, or lending to consumers for green mortgages and energy efficiency or lending to businesses that were in green industries? Do you think that would be an appropriate way to go?

Professor Jackson: It is a really tough call in terms of politics and in terms of financial prudence. What I would say is absolutely clear is that we need mechanisms for investment in green infrastructure, and some of the things that have been talked about, for example, are a green infrastructure bank where everyone from Deutsche Bank to Greenpeace, or Greenpeace to Deutsche Bank, whichever way you go, has argued for something along those lines, and there is rather a strong case for something that would be a public infrastructure bank able to lend into the green sector and to stimulate that kind of investment. Another of the options that has been put on the table, which is an interesting one, is the idea of raising green bonds, essentially bond issues which were specifically dedicated to the idea of investment in green technologies, green businesses, renewable energy, energy efficiency and so on and so forth. As the bond market looks to have some signs of possibly saturating, actually the idea of a green bond attains a nice market distinction, which might make it something quite attractive as the years go by, and as this year goes by even. The question of what you should do with these now part-nationalised banks in terms of managing how they lend and where they lend is much more fraught than that general principle that we need this kind of green infrastructure. It is about the precise way in which the mechanisms of rescue, re-capitalisation, the housing market, lending into the housing market, separation of toxic assets - all of that plays out. It is enormously complicated and I would not pretend to sit here and offer you financial expertise at that level. What is really important is that there is an examination of the appropriate mechanisms for both protecting against the toxic debt and ensuring that lending is going into the appropriate places in households and businesses, and something which directs green investment towards the kinds of things we know we need in terms of carbon reduction.

Q14 Martin Horwood: Would the kind of green infrastructure you are talking about be created out of existing banks or would it be an entirely new institution?

Professor Jackson: It could be that that is the best way to do it, with all this other stuff parcelled up in the mix. It is really difficult to answer off the top of your head and you really do need to look at that incredibly carefully. There have, for example, been calls, largely from within the more mainstream financial sectors, that the only bit that should be nationalised is toxic debts; that you take that out and keep that and clean up the rest of it and take away the liabilities from the private sector and let it do its job. That is one way of addressing where the banks stand at the moment. It is not one, I think, that addresses the difficulties associated with getting investment flowing into the green areas that we know that it needs to go into. My point to you is that from that end of the spectrum, where you just take away the nasty liabilities and say to the financial sector "okay, boys, off you go", as it were before business as usual, to one where you say, "RBS is the target now to become a green infrastructure bank and that is what we are going to turn it into". That is a huge range of options in the banking sector, and to some extent it would be cleaner to say, let us start from scratch with a national infrastructure bank and build what we need out of that, rather than saddling it from the word "go" with the toxic liabilities that are associated with part nationalised banks.

Q15 Martin Horwood: You are happy with the idea of the Government running banks, are you!

Professor Jackson: Happier at this point of time than the way they have been run up into this crisis.

Q16 Mr Challen: You have been critical of the Pre‑Budget Report for not doing enough to reverse inequality in the UK. Can you explain the importance of tackling equality issues in the context of sustainable developments?

Professor Jackson: It is really important to acknowledge that sustainable development is not just ecology, not just environmental limits. What environmental limits do in terms of social well-being is that they put a finite bound around the pie, what can be divided up between people. The distribution of that pie is incredibly important both in terms of its environmental components and environmental qualities divided up and environmental resources divided up and are deeply unequal across the world and even to some extent within the UK. Of course, they are the social goods that those resources are used to produce. As I mentioned before, inequality is higher now than it was twenty years ago. There is a need to address that inequality. What do we know about unequal households, or those at the lower end of the income distribution? We know that they have lower life expectancy, higher morbidity; they report lower satisfaction with life and typically live with lower environmental quality. These are real standards of living differences between huge sections of the population, and that cannot be characterised as a strong, healthy and just society - one of the principles of the UK sustainable development strategy. The important of inequality to us is absolutely central, and it is inequality now; it is intra-generational inequality that matters as a priority in sustainable development. We all know that inter-generational or cross-generational inequality also matters in the ability of future generations to achieve a decent standard of living and are also compromised by promiscuous resource use and breaching of environmental limits. Both of those, now today - inequality as we see it in the country at the moment, is unacceptable from the sustainable development point of view, as is the risk to future generations.

Q17 Mr Challen: What sort of redistributed measures would you suggest to tackle this?

Professor Jackson: There are various issues. The statement of intent on environmental taxation in 1997 does provide the basis for shifting taxation from income to taxes on environmental bads, from goods to bads. It is a fairly basic principle. We know that there are all kinds of difficulties with it, but we also know that in some cases it can have some progressive impact because typically higher income households use more energy and emit more carbon, so that in itself is a measure that hits both the needs of reduced environmental resource use and throughput, and to some extent addresses the inequality issue. It is not necessarily the only one - I have mentioned already that we have praised the idea of a shift in taxation to higher income earners, at least as a recovery measure and possibly as a way of achieving more income equality in the longer term. There is also a role for caps on executive remuneration, perhaps a range of income levels from not just minimum income level but maximum income level. These are measures that are deeply contentious and fiercely argued against by liberal market economists; but from a social welfare perspective something like this looks like it must be in order at this point in time, in order to achieve the social well-being goals that sustainable development has at its heart.

Q18 Mr Challen: Do you think in this context the Government was right to downgrade its interests in personal account analysis(?)

Professor Jackson: I am not sure I understand why that might be right.

Q19 Mr Challen: They said it was an idea before its time but most people say it is redistributive.

Professor Jackson: It could be redistributive. What we know about the evidence in relation to that kind of measure is that you have to look after the poorest households incredibly carefully because it is not typically - it is not always, across the board, exhaustive in terms of its progressive impact. It can be regressive on the most fuel poor. The only way really to address the impact of that is to target very strongly investment measures in the building - particularly the building fabric in the poorest houses. That comes out very clearly from all the analysis. In terms of, was it before its time - I do not think it can possibly be regarded as being before its time in the context of the carbon targets that we are now in legislation permitted to achieve.

Q20 Mr Challen: In relation to part of what you have said, we have quite a number of regressive influences at work: climate change policy, like the EU ETS, the renewable obligation and other things that add to household costs for energy use. What specific thing do you think could be introduced to compensate people for that and try to keep them out of fuel poverty?

Professor Jackson: What households are facing at the moment is an increase in the unit cost of energy. That might increase with the carbon price. The total cost of energy to that household, the total cost of the service of staying warm and achieving the services they want in the household is partly about the unit cost of energy but it is also about how much energy is needed to deliver that service. The really important thing is to be able to achieve measures not that attack the unit price of energy, but attack the overall cost to households of energy services; and we know what the options are for that; they are about fabric measures, they are about improved appliance efficiency and they are about, to some extent, relatively simple changes in behaviour that do not change quality of life but do reduce energy consumption. We know what that package of measures is that would both reduce the overall cost of achieving those services whilst at the same time incentivising reduced fuel use through higher fuel prices. Those things exist. We also know some of the difficulties and dangers in achieving those things, and they are about access to capital, access to know-how, the fact that it is a low priority on some people's agenda; and for the poorest households that they simply do not have the capabilities, either financially or in terms of their time and their ability to access the knowledge that is needed. The measures that come out of that are, again, pretty straightforward; they suggest that you have to make capital accessible for those investments at a broad level, across households, and in particular with the fuel poor - that you have to provide infrastructures to improve the built environment, improve the building environment, and you have to make that part of the working model of some agency/agencies, enterprise or business, that it has to be part of the modus operandi, the ethos of the business. We had a unique opportunity to do that, I believe, in the suggestion in the 2006 White Paper for a supplier obligation, which would have imposed a cap on energy supplies in terms of the amount of energy they could supply, the carbon from the energy they could supply to households. That cap, if properly executed, could have changed the business model of the energy suppliers. It would have allowed us to develop energy suppliers into energy service companies in a way that could tackle the aspects of fuel poverty, invest in building infrastructure, and at the same time reduce the overall fuel bills in households across the nation. One of our concerns at the moment is that that indication of change and the application of a capping trade system in relation to suppliers seems to be being moved away from in policy, and at this point in time it looks as though the Government is favouring an extension of the measures-based approach which we have had for a number of years, which has implemented some energy efficiency but has not changed the basic build - business model, and under which energy consumption in households has increased. There is clearly a need for a different approach. That approach, we believe, is to be able to transform business enterprises and agencies into things that can effectively get energy efficiency into all households and in particular the fuel poor.

Q21 Mr Chaytor: I want to ask about the attitude of the Treasury to the work that you have been engaged on: specifically, why do you think the institutional culture of the Treasury has always been so wedded to neo-conservative ideas?

Professor Jackson: There is obviously a sort of cultural history aspect to that question, and it is an interesting cultural history. It is fascinating in the sense that it applies across the broadly Anglo-Saxon nations, that there is a well known split between liberalised market economies, which are the US, Canada, New Zealand, Australia, the UK; and the so-called coordinated market economies where the emphasis has been much more around regulation of the labour market and coordination between enterprises. The cultural answer to that question is that we have emerged and possibly even led that culture of neo-classical liberalised market economy and are therefore historically wedded to it to an extent.

Q22 Mr Chaytor: At this point in time, when there is growing awareness that that economic thinking that has collapsed, do you think it is going to be possible to shift the culture of the Treasury, or do you think they are still wedded to getting through the current crisis and just taking us back to where we left off a couple of years ago?

Professor Jackson: No, I think this is the point in time in which there is an enormous opportunity for change, and to some extent an appetite for change, because there is an understanding that at least some of what went under the auspices of being a liberalised market economy have failed, and they have failed spectacularly, and particularly the deregulation of the financial sector leaps out as being one of those things. But in the questioning of that and the questioning of the boundaries between the private sector and the public sector in that most holy of holies in relation to the liberalised market economy, it opens up almost anything really, certainly in a - not necessarily in the eyes of Treasury spokesmen, but certainly in the eyes of those who are doing blue-skies thinking about how economies develop. I believe there is an enormous window of opportunity. In addition to the cultural differences, I would say that both liberal market economies and coordinated market economies are wedded to the idea that economic stability depends upon economic growth; so they are divided over the best way to achieve it, but they are united in the idea that economic growth is the aim. From the point of view of sustainability, this is a piece of work that we are taking forward on prosperity, on re‑defining prosperity, which questions that relationship. What is clear is that it does provide Treasury with the rationale to be wedded to whatever it believes will stimulate economic growth for as long as economic growth is seen as the basis for economic stability. To some extent, you would have to argue that it is a legitimate, essential role of government to ensure economic stability. If the mechanism for that is economic growth, then that also explains some of the allegiances.

Q23 Mr Chaytor: The re-defined programme will be translated into a report quite soon.

Professor Jackson: Yes.

Q24 Mr Chaytor: Do you have a publication date?

Professor Jackson: We are looking at the end of March/early April for that.

Q25 Mr Chaytor: In that report, without pre-empting the conclusions, will you be challenging the existing methodology of calculating GDP, or to what extent do you think that is a problem for the economy as a whole?

Professor Jackson: We were challenging existing methodology for challenging GDP - not quite - certainly challenging the primacy of GDP as the appropriate measure for measuring prosperity, lasting prosperity in forward terms, and in challenging the assumption that economic stability has to be achieved through continual, never-ending growth.

Chairman: I am afraid we are probably out of time. There may be some other points we might like to put to you in writing, if we may, some further issues that we hoped to explore which are important, but in order to preserve the integrity of our timetable we have to stop there. Thank you very much indeed for coming.

Witnesses: Mr Richard George, Roads and Climate Campaigner, Mr Alastair Hanton, Treasurer, Campaign for Better Transport, and Mr Keith Buchan, Director, Metropolitan Transport Research Unit, gave evidence.

Q26 Chairman: Good morning. Thank you for coming in. You will have heard a bit of the last witness's evidence. We are up a time deadline and need to finish at 12.10. Can you begin by giving us your general verdict on the Pre‑Budget Report?

Mr George: Absolutely. I think the Pre‑Budget Report is a real missed opportunity because we have not really had such a level or such an opportunity for increase in spending, and I suppose it is the time to coincide with the very public discussion on climate change. Certainly that is the theme the Chancellor was using when he described the fiscal stimuli he was investing in. Sadly, what came away was the idea that economic growth can only be obtained by investing in high-carbon industry, certainly so far as transport goes. Even the stimulus that they went for - mostly investing in road construction - is not, either because of the long lead times - you are talking 2011/2012 before construction will start - and also the number of jobs, type of jobs and length of jobs that will be provided is not the kind of measures we need. They are very high in capital. What we really need are revenue projects, which employ people now and get people working. I suppose the equivalent example is digging a ditch and filling it back in again - filling potholes is the best example you can think of that in a practical sense would boost the economy and provide jobs. We really should be on the pathway to low-carbon transport; instead, we had guidance for the regions, saying: "The way to go if you want to boost the economy is build roads." Two-thirds of the investment in transport was entirely road building. The remainder was a very, very small amount of rail freight and the moving forward of a pre-announced purchase of train carriages, which came at the exact time that the regions are deciding on future of transport for the next ten years, and many of those schemes were promoted as schemes that were not under consideration, entirely road schemes. The Transport Secretary and the Chancellor have turned to the regions and said: "If you are looking for guidance, fund road building." That is exactly where we do not want to be if we want to hit our 80 per cent targets. It is a missed opportunity really, and also does not provide the stimulus that we need.

Q27 Chairman: In terms of the speed with which jobs can be created, are there opportunities in rail investment that offer a more rapid job creation than roads?

Mr George: Rail has got much higher revenue costs. You need staff to check that the tracks are being maintained; you need staff to man the ticket desks and drive the trains, which is not the case with roads. I think light rail has an awful lot of projects - Mersey Tram springs to mind immediately and has been ready for years, and also some of the schemes that we considered - the Manchester TFM(?), the track renovation funding that occurred in December - these are all schemes that are ready to go. There is no need for extensive public inquiries. The road schemes that are chosen often have strong local groups opposing them, which generally draws out the process. Going forward, any public transport certainly has much higher revenue costs and therefore more job creation.

Q28 Joan Walley: Given your objective of moving towards a low-carbon budget, particularly looking at transport and integrated transport, can I ask you about the Government's position on the Heathrow expansion? Given that part of the justification is to help secure jobs now and for the future, can I ask what your analysis is of the economic impacts of the Heathrow expansion? I am not talking about just the proposed third runway but about the construction work that would be underway in order to achieve that runway.

Mr George: Absolutely. It could not have been a more bizarre statement and position to be in. The assumption that jobs will be created by the third runway and that this will bring us out of recession assumes that we are still going to be in a recession around 2015, which I do not think any of us would want! This is tied with the fact that the economic benefits - the calculation is very interesting, shall we say. They count, for example, benefits to non-UK residents as part of the overall package of benefits, which is against Treasury guidance, and certainly is not the kind of thing we should be relying on to sort the economy out. They also do not use the Stern figure for CO_2­ costs - the Stern figure for the cost to the economy in CO_2­ impact. If you calculate all these together, the World Wildlife Fund reckons that instead of having a 5 million benefit, you are looking at a 5 million deficit. Also, when they are calculating the tax input, 3.7 billion of the benefits come from air passengers, and the new rate increases that to 5 billion. What they failed to take account of was the fact that any money they have spent on tickets and aviation tickets would otherwise be being spent on general goods. There is no VAT on a plane ticket. There is 15 per cent VAT on almost all other goods and services, so there is a huge amount of lost revenue that ought to be calculated in the full tax account.

Q29 Joan Walley: I just wanted to concentrate on the jobs issue, given that you were present for our previous witness where we had just got to the point about economic growth and whether that was sustainable.

Mr George: Again, the jobs that are created are not being created for the better part of half a decade. There is no construction work taking place now. We have got a full public inquiry to go through, which is expected to last a good number of years. There is no planning permission set. None of this will happen in the immediate future. The idea that Heathrow would otherwise be losing jobs is - I simply don't believe it, to be entirely honest. The industry is in decline at the moment because of the recession, but there is no idea that Heathrow will close without a third runway. I find it very hard to believe that that many jobs will be transferred away from the airport. That is also ignoring the tourism deficit we have in the UK - I think it is between 17 billion and 19 billion. That is the amount of money spent abroad by British citizens versus tourist revenue brought in; far more is spent by people transferring their holiday from destinations in the UK to France and Spain, which is entirely made possible by the growth in short-haul aviation. It is an enormous deficit. This is more Mr Hanton's area of expertise.

Mr Hanton: The expansion of aviation which the Government is planning will roughly double the tourist deficit. At the moment about twice as many Britons go abroad for their holidays as foreigners come here; so the doubling of that deficit between now and 2030 will, we calculate, cost the UK economy about 700,000 jobs. To put that into perspective, over that 20-year period, on average that is 35,000 jobs a year because of the tourist deficit, even calculating that there will be more people, but not a huge number more required to run the expanded airports. That is roughly the figures. It is quite against the statement that jobs will be created; they will actually be lost.

Mr George: It is also worth saying that this is a very expensive project - 9 billion to 13 billion, depending on whose estimates you believe. If you spend that much money on almost anything you will create a fair amount of jobs, but aviation and to a certain extent road-building is very capital-intensive and most of that money is going on buying - setting concrete, building terminals and buying materials. If you invest in anything like that in revenue-heavy jobs, you create far more jobs, simply because you are not spending so much on the materials required.

Mr Buchan: Can I say a word about the Heathrow decision because I think it is important in all this that we get our forecasts right! The big issue for me on Heathrow is whether the forecasts of future aviation demand are correct. Let me give just one example from the most recent document. It says in that document that full account has been taken of the change in the UK exchange rates. The exchange rates are absolutely critical in forecasting demand for aviation because it affects the cost of the whole trip, not just the air fare, and that is what has a major effect on people's choices. The document says it takes account of the most recent exchange rates, but if you read the small print carefully it actually uses the 12-month average ending in September 08. It gives a dollar price of $1.97 and a euro price of €1.31. It is very important that when we look at the foundations on which this investment is built, that we are very careful about the small print and fine detail of what has been done. If I could conclude by saying on aviation that I do find it remarkable that the Heathrow case economically is so weak, there is a lot of attention given to environmental problems with it, but we have major doubts over whether this is a low-risk investment for the future.

Q30 Mr Chaytor: In terms of the £1 billion on transport infrastructure that was announced after the Pre‑Budget Report, what is your estimate of the proportion of that that would be genuinely green transport infrastructure?

Mr George: At new money, 54 million of the total 1 billion investment was money that was not promised for anything else and was going to something other than road building, and that is a small amount of tinkering in North London in regard to rail freight. It is a drop in the ocean because of what we need if we are going to shift HGVs and their goods on to rail. The only other non-road announcement was 300 million for train carriages, which is part of the package of investment in rail carriages promised in the 2007 White Paper. It is a re-stating of existing money. To a certain extent, the managed motorway schemes, the hard shoulder running schemes, are greener than road widening, which is about the best you can say for them. They have got some advantages. They do not require huge land-take and you are not generating as much traffic. But the overall impact will be an increase in CO_2­ and traffic, and they do not tackle the problem of congestion, 80 per cent of which is in urban areas. You cannot build roads and you cannot have people driving on the hard shoulder because there is no hard shoulder. It is also fair to say that it is not an economic stimulus at all because of the lead-in times. These projects are not ready to go. Many of them are in the very early stage of planning. We became very worried when we started to hear rumours that there were roads to be fast-tracked because what appeared to be happening is that the Transport Secretary or his officials were phoning the regions and saying, "What road projects do you have? We need some quickly." - without really any strategic thought. We have had for the best part of two years a long, ongoing discussion through two departmental documents Towards A Sustainable Transport System and Delivering A Sustainable Transport System. It is under consultation at the moment and is supposed to lay out a clear pathway towards, as I say, a sustainable transport system; and yet what it appeared to be was a ring-round, saying, "What have you got we can build?" There was very little analysis of whether these schemes were deliverable, whether they were even considered as regional priorities. The regional funding advice process is underway at the moment. It is ten years looking forward, giving the regions an opportunity to choose whatever they like for transport. It is incredibly road-heavy. One estimate has the north-west between 65 and 95 per cent road building. Just as this was underway, as the regions were compiling their first round of advice, we had a huge amount of investment in road schemes, making road schemes easier to fund, because they were part-funded as part of the small ... initiative. The advice we are sending is, "please go ahead, build road schemes, ignore all the Treasury guidance that we have just published about needing to consider CO_2­; if you want economic growth we need to build roads". It is something we have been fighting very hard against - both the idea that we should build roads at all because of CO_2­ emissions, but also the idea that the road to prosperity comes from road-building. It was the worst possible thing that could have happened at the worst possible time if you are looking to moving towards a greener transport system.

Q31 Mr Chaytor: At a time of rising unemployment and significant recession, you do not think it is at all legitimate to invest in infrastructure projects that can be delivered! It is not as if these have no priority. Picking up your point about picking up the phone and ringing transport authorities, these are projects that are in the pipeline and in transport authorities' long-term plans. You do think there is any validity in re-ordering those strict priorities as a means of keeping employment levels higher than they would otherwise have been!

Mr George: You are absolutely right; there is a real need to bring forward transport schemes but they have to be schemes which conform to Government objectives and policies. A very good example is bringing forward many light rail schemes, ready to go that often -----

Q32 Mr Chaytor: How many light rail schemes are ready to go?

Mr George: I have to admit I am not a rail expert - my area of expertise is road building - but there is a wide variety of schemes that have been worked up. The problem with -----

Q33 Mr Chaytor: Surely light railway, for example, is a classic example of something that takes a much longer lead-in time than widening a road or building a by-pass that has been planned for many years?

Mr George: Yes and no; it depends on how far the scheme is along. I would be happy to come back and list the schemes we think would be ready within the next year. These road schemes are not schemes that can be delivered quickly; they have got at least a one-year or possibly two-year lead-in time. There are jobs out there - the Department for Transport's Smarter Choices transport package that we heard Professor Jackson talking about beforehand is a very good example of this. We know that if you pay people to engage the public in discussion around transport, targeting their local area, they will make a shift - 10 per cent car use, for example, as a result in the sustainable demonstration towns. Also road maintenance is a massive issue all around the country. Motorists, cyclists, pedestrians, are very happy to see that go on, and at the moment the amount of money paid out in compensation for people injured or vehicles damaged by collisions as a result of holes in the road is as high as local authorities' maintenance budgets. If we had invested in that, that can provide people with jobs tomorrow because there is always a need to fill in the road and get them to a decent standard, and it is the kind of work that could then feed in and create construction jobs or those sort of jobs that can then feed into these - be it road-building, light rail, train, or whatever construction schemes, when they become ready in a year or two. But none of the measures that were promoted in this £1 billion can be done now; they all have a couple of years' lead-in. We believe in conservative estimates - but that is roughly when we might be coming out of the recession, but none of these measures tackle the problem now.

Q34 Martin Horwood: I am disappointed you say you are not a rail expert because that is the area of my question really, which was, if part of your alternative strategy is to invest in rail rather than roads, which I would certainly agree with, whether it is those kinds of projects like light rail, which have some problems but which have enormous potential - or the big dramatic projects like high-speed rail links to Scotland or the West, or smaller scale faster return links like my personal favourite, the redoubling of the Swindon to Kemble line, but those kinds of local infrastructure plans that which can increase capacity quite dramatically. Maybe your colleagues will want to come in on this, if it is not your bag particularly.

Mr Buchan: I think it is true there are a lot of light railways. The one in South Hampshire for example has got to quite an advanced stage. There has been a lot of to-ing and fro-ing and a lot of speech about whether they be bus-based or rail-based, and there has been a lot of change of mind in the Government, really as to what is flavour of the month. There are some complications there, and that needs to be sorted out because some of the light rail schemes were, quite plainly, by the conventional cost-benefit analysis that the Department for Transport uses, very good value. The Southampton one is 4:1 which is a fairly stunning cost-benefit ratio. The trouble is that there has been a lot of to-ing and fro-ing and there does not seem to be a proper national framework in which these things can proceed. I have mentioned the to-ing and fro-ing between - should we have bus rapid transit or light rapid transit, which is often taken to be the heavy tram end, but there are a whole range of opportunities in between for doing this. I think that in this country we have slightly suffered from not having a consistent policy, which would lead probably to some bus rapid transit, probably to some tram schemes and probably to something in between sometimes. There has been a general failure of policy in that regard. On the rail side, it is crucial to look at the speed issue very, very carefully and robustly; but before we get to that issue there is the issue of capacity, at the local level and at the national level. Capacity is probably the key issue rather than speed. We have seen some excellent speed improvements although I know there is some issue as to whether track work is completed properly. We have seen some schemes now for a relatively modest investment and I do think that capacity is the first line of attack. That is what is required. What speed that capacity runs at needs another study, and I think that study will come in due course. At the local level there is a need for investment. I would like to reiterate the emphasis on Smarter Choices because that does deliver both jobs and benefits much faster than any form of infrastructure investment. If we had a go at the sort of Smarter Choices programme tomorrow, within six months we would have people out on the road, on the street, actually putting these schemes into action. In terms of the speed of implementation and support and creation of jobs, those sorts of initiatives are very good.

Q35 Mr Caton: You have talked about the Secretary of State's announcement about Heathrow and increasing road capacity; what about what he said in that same announcement about the high-speed rail link to Scotland and indeed the investment in ultra low-carbon cars?

Mr George: There has been an awful lot of fixation on high-speed rail as the solution, and I think we need to step back somewhat and work out what the problems are and whether high-speed rail can address them. High-speed rail will certainly solve your London to Edinburgh trips, if that is as far as the line is built. It is unlikely to solve people going to Birmingham, which is only as far as the current plans are going. You are missing out the Manchester/Leeds section, which has real capacity issues that could be solved by high-speed rail. The further you extend it, the more of the aviation market you can divert and the more CO_2­ reduction you can get. However, we need to solve capacity across the board and improve services across the board. If high-speed rail is implemented, it is not going to make it easier for people to get to work or travel around their local area. As we have seen on the London to Ashford line, where they have spent on services, we have seen huge increase in rail fares, though, which is now dissuading people from taking trains. It is no good running every train because they are fast. We need to go back and look at how we fund and structure the current franchise system. I know that the 2007 White Paper reduced the amount of Government subsidy for services, because it led to above-inflation fare rises for the unregulated tickets, which is again moving people off the rail back into cars and planes. Until we can tackle that price parity issue and until we can increase capacity across the board so that people do not hear horror stories in the newspapers about cattle-truck conditions - for the most part they are not really experiencing those - but where they are, they are very iconic and dissuading people from using rail - even including building high-speed rail will not attract people back into railways. If it is unaffordable, people will still continue to fly.

Q36 Mr Caton: What about the ultra low-carbon cars?

Mr George: It is certainly part of the solution. I am sure Keith will be very happy to talk about the impact and the Grid, and moving people to electric vehicles, but according to the King conclusions it is not quite as rosy as it looks. My understanding of the measures was that in part they incentivise people to borrow to buy. That is kind of what has got us into this economic crisis at the moment, and I am not entirely sure whether we should be making it easier for people to borrow at all at the moment. I am not an economist, but perhaps what we ought to be doing is using the current fiscal system we have in place with the level of taxation and level of VED that we have on vehicles rather than encouraging people to get further into debt for a car they may not need on the grounds that the loans are now available.

Mr Buchan: I think the real issue is to move the whole vehicle fleet into a more efficient form. To do that you need to ensure that when cars are replaced, they are replaced with the most efficient vehicles. That needs to run not just to a few interesting efficient vehicles, but it needs to spread into the whole of the car fleet. We have a problem in that the recession will slow down the replacement rate, so all the forecasts of improvements by replacing inefficient cars with efficient cars will have to be revisited. In terms of the structure of what the Government has done, which is not to put the VED up but keep the first year tax in place, and have fuel duty raised is the right structural approach, because it is at the point of purchase that one wants to influence behaviour, and then it is the amount of fuel duty you are interested in. The VED is fairly indirect in operating on those two key items. Structurally, they have not gone as far as we would like but I think that structurally it is the correct way, which is to penalise inefficient voluntary sector at point of sale, and then to encourage more economical driving and less use through fuel duty. Richard mentioned the electric vehicle. I have noticed, going round to various meetings on transport that the electric vehicle has become suddenly a new magic bullet. We have to look at this very, very cautiously. If you think of about 15 million vehicles coming home in the evening from work and plugging in at the same time, the very lowest charge rate would be something equivalent to four electric kettles and you would have to keep them plugged in for six hours. The idea of peak flow on the Grid as opposed to the 24-hour average, which the King report was based on, would mean something like a two to three-fold increase in peak generating capacity. Given that we are going to be struggling to maintain our power generation capacity when our already dirtier coal-fire stations are shut - I think one has to be very, very careful about encouraging a particular sector. Research and development is fine, but, really, we have to move the mass of cars into a more efficient box. In the short term hybrid vehicles would be very beneficial - but it is going to come slowly even if we do sort out getting credit moving in the economy. The replacement rate will still slow down.

Q37 Mr Challen: There has been some discussion about the Government bailing out the car manufacturing industry in the US as well as here of course. If that were to take place it would be conditional upon producing models with lower emissions.

Mr George: Absolutely. One of the opportunities being afforded by the economic downturn - one of the few silver linings - is that the Government has the ability to say to the banks and car manufacturers: "We will give you this money, but here are the conditions; we need you to stop lobbying against the EU CO_2­ limits and start bringing them in faster" and we also need to see heavy investment in high skills job as well as the manufacturer. We need to ask ourselves why the car manufacturers should be singled out when carriage manufacturers, tram manufacturers and the like are not. They are equally British-based manufacturing with similar levels of skills, and they are also transport related. They are not the iconic brands that we see - Jaguar Land Rover is a good example - but also Jaguar Land Rover is one of the most polluting, the most prestige forms of vehicle out there; and whether we want to be committing ourselves to another ten or fifteen years of large numbers of heavy CO_2­ four-by-fours specifically and associate those brands for the sake of preserving an icon is something that needs further discussion.

Q38 Mr Chaytor: I think Jaguar is the one that is in contention here. Even if they said they could produce a new luxury model with, say, 15 per cent reduction in CO_2­ emissions, you would still oppose that in principle!

Mr George: We do not oppose it - I think we need to make sure that any bail-out enables Government policies, and if we could use the bail-out as an opportunity to shift the more - I do not use the word "stubborn" in terms of resisting but stubborn in terms of the harder-to-tackle areas of the market for these niche vehicles, and start using the investment to get good research and development and really show the rest of the world how you can make cars that appeal to that audience but that are also low in emissions and low in particulates. That would be fantastic and that would really be something to work for. In the absence of that, it is a very odd decision to single out car manufacturers for receiving bail-outs in the absence of similar bail-outs for the rest of the manufacturing industry.

Q39 Joan Walley: In relation to aviation and tax, can I ask for your views on the Treasury decision not to charge air passenger duty into a charge per plane rather than per passenger?

Mr Hanton: We were very disappointed. It would, for the first time, have imposed tax on air freight. The background is that the Treasury deficit on aviation is about £10 billion a year.

Q40 Joan Walley: Can you explain by "Treasury deficit"?

Mr Hanton: The cost of not applying any tax on aviation fuel and not applying Value Added Tax to aviation passengers is about £10 billion a year. APD contributes about £2 billion, and aviation duty would have increased that by about half a billion. It would also, as I say, have taxed air freight for the first time, freight planes - so we were very disappointed that this was U‑turned on. Of course, we welcome the fact that APD is being reformed to be more distance related, but it still remains a small tax. If I remind you that in 1997 the figure of APD was £10 for the short haul, and even with the new proposals will only go up to £12, we are talking of a small tax.

Q41 Joan Walley: I understand that your director has written to the Chancellor about whether or not anything can be done in the short term to tax air freight. Have you had any indication back from the Treasury as to whether there might be any progress?

Mr George: Not as yet. The letter only went out very late last week.

Q42 Joan Walley: Does that representation include changes in respect of flights without passengers operating just to keep the slots?

Mr George: Auctioning slots, for example, would be a very good way around that, or would just restrict them, saying, "you are not using this for a genuine passenger service; you cannot have the slot". We have heard talk about green slots, which sounds in principle like a good idea but I think you would need a third runway, which would be a disaster. Also there is potential for taxing fuel for domestic flights. That is not covered by the Chicago Convention. You probably need to do an equivalence in tax because of the opportunity for suppliers to get fuel abroad and then transfer fuel over. Certainly there would be nothing to stop you doing that. They have something like that in Norway and in America at the moment, and with the Obama presidency perhaps there will be an opportunity to re-negotiate the Chicago Convention, which would probably need EU agreement in the light of the Emissions Trading Scheme being finalised there, and there are plenty of opportunities to lobby at an international level. There is really no reason, given the climate change impacts, that it should be singled out as a special case.

Mr Hanton: The government has indicated that it is in favour of re-negotiating the Chicago Convention, enabling countries to impose tax on aviation fuel. We think that that is an important urgent priority nationally, particularly given the fact that aviation is much more polluting than the mere CO_2­ emission figures would indicate; it is because of other emissions between two and four times polluting as the CO_2­ figures would imply; and the Government uses a multiplier of two for that, so that is urgent. The other urgent thing is to begin a process of Value Added Tax imposed on aviation within the EU at least, and also Value Added Tax imposed on domestic flights, as is done in most other European countries.

Q43 Joan Walley: You have raised quite a few suppositions there.

Mr Hanton: Yes.

Q44 Joan Walley: I just wonder again what indication you have got that there might be some movement on each of those, including the change of president in the US, and whether there is any scope for the Chicago Convention to be re-negotiated.

Mr Hanton: We are only in day eight of the administration, so it is difficult to know, but if the world - if the UK is serious about an 80 per cent reduction, and if the world is serious about reducing CO_2­ and its polluting effects, this is an urgency. That is all we are saying.

Q45 Joan Walley: You have almost answered a previous question I had when you volunteered information that the changes in the levels of duty that would be paid with the new short-haul and long flights over 2000 miles et cetera would in the lowest grade bring about an increase to the Treasury from £10 to £12. Have you done any research on how these changes altogether will have any implications for the amount of annual flights that are made? Do you have any idea how it would affect some people's travelling habits and use of aviation?

Mr George: I think Keith's point about the exchange rate is likely to be the biggest deflator of the aviation market at the moment. If you are moving from $2 to the pound to considerably less at the moment - I am not sure what it is today - that will dissuade people from shopping trips to New York and unessential flights that would otherwise effectively just a tiny drain on our economy because people are not only flying abroad and not holidaying here but spending large amounts of money abroad, and returning, with all the tax, all the duty and all the profit being absorbed in other countries.

Q46 Joan Walley: That is not the tax issue, I am talking about the green issue that might come from the Pre‑Budget Report.

Mr Buchan: I think it is important to separate out the international flights where the exchange rate mechanism is terribly important, and the domestic flights issue which is often overlooked because it is quite small in terms of its carbon emissions, but is very important in terms of its capacity, because if you take take-off and landing into account, about 30 per cent of all take-off and landings in the UK; so in terms of capacity, domestic flights are incredibly important. Also, the actual cruise bit tends to be a bit shorter; then the take-off and landing emissions are quite serious. It is very odd that we have a situation that if you take a coach and drive between London and Leeds or Liverpool or Edinburgh, you have to pay fuel duty, but if you fly you do not, and yet the emissions are doing, as Alistair said, about twice the damage to the climate. It does strike us that there is a complete discontinuity here and there is something wrong, even in liberal economic terms; there is a market distortion caused by not having a proper taxation framework. That is something we could address. There are various options for doing it. You can use the VAT route or the fuel duty route, and everyone knows what they are! That needs to be done. I think that the current recession did cause the Government to withdraw and come back from the position of a major reform of APD and possibly looking at domestic, because they are very concerned about disrupting the domestic airport situation. Some of the airports are fairly marginal and I think if you look at places like Norwich, which has just lost its main international operator, and lost 20 per cent of its passengers in about three months, I think there is going to be some restructuring in terms of local airports. I think the prospect of that kind of scared the Government away from making the reforms that are necessary, but those reforms do need to come. If you look at the competition between rail and domestic air, the Civil Aviation Authority is quite open about it; they have predicted - and we are now seeing - transfer from domestic flights to rail where they are available.

Q47 Joan Walley: How much have or should those calculations feature in the overall framework within which the assessment is made in respect of the third runway at Heathrow Airport?

Mr Buchan: The central case does not actually include the Pre‑Budget Report changes because of the very odd way that the economic case treats taxes. If you put air passenger duty up, the benefits go up. I have to say I am not entirely convinced that that is an accurate picture because it would mean that the more and more you put the tax up, the more benefits you get, and I think at some point there should be some kind of break from that. I do think that in terms of the overall tax treatment, that needs to be sorted out. There needs to be a proper extraction of the way that is being dealt with before we can have a really sensible debate about what the genuine economic case is for a Heathrow third runway. I am sorry, I have strayed slightly from your question.

Q48 Chairman: Just on the question of VAT on flights within Europe, how do you think that would interact with the inclusion of aviation in the ETS?

Mr Hanton: It would be additional to. We need all the instruments that we can get for containing the growth of aviation on grounds of the climate and on the grounds, as far as the UK is concerned, balance of payments; so let us have both.

Q49 Chairman: In practical terms, it is almost certain that the amount of flying will be the maximum permitted under the ETS, is it not; and so just charging a bit more does not make any difference to the amount of flying that takes place?

Mr Hanton: It will discourage it. It will be less likely to come up to a maximum.

Q50 Mr Chaytor: Can I come back to Vehicle Excise Duty, because you defended the Government's position in the Pre‑Budget Report to soften the increases originally proposed on the existing vehicles and sticking with the original increases for new vehicles. But my recollection of the evidence we have received from the motor industry was that as a proportion of total annual sales, new vehicles were about 2 per cent of total sales. Given the impact of the recession and the collapse of new vehicle sales in the last few months, by focusing overly on a substantial tax on new vehicles, how many years will it take to have an impact, because presumably now it is not just 98 per cent of vehicles in the second-hand market - it must be higher than that as the new vehicle market has collapsed.

Mr Buchan: Yes, I think the new vehicle at its peak, say 12 to 18 months ago, was about 2 million vehicles a year and total vehicle parts about 29-30 million vehicles - that is in terms of private vehicles and company cars taken together. That replacement rate has at least gone down by half. In the longer term, structurally the new car tax has to be right. In the short term the VED merely taxes you for owning a vehicle, so in fact it is just saying, "you have got the vehicle; if it uses a bit more fuel you will have to pay more just to keep it standing there"; whereas the fuel duty, which is the other aspect of this, means that there is a direct incentive to drive that car more economically, which is a very great possibility and can save you 10 to 15 per cent, and in fact we do see that. We have some data on the effect of fuel duty since the escalator was introduced in the nineties and we can see a division between people buying ‑ about half are getting more efficient cars, and the other half is driving what they have got more efficiently. It is roughly split. I think that is the right way to go. I think you are right, obviously, that that replacement rate will be slow, but even with that replacement rates one needs to have the right incentive. If it was VED and you get people going into the showroom and saying, "my annual duty is ..." it does not impinge so directly on the decision as saying if it goes the wrong side of the desired average, "it will cost you £900" which is the top rate.

Q51 Mr Chaytor: Surely the other point is that leaving aside the change in new vehicle sales, the majority of households in Britain never buy a new vehicle; they get their cars entirely through the second hand market, so you have a huge number of people who are just not affected, so behaviour would have no reason to change if they never by new vehicles, and therefore are never faced with the differential tax spend. This is the point I find hard to understand - how you are so relaxed about the tax not being used to influence the second-hand market because that is where most people buy their cars, and as time goes on even more people are going to buy through the second-hand market!

Mr Buchan: Sure, but there are two responses to that. One is that we still have a company car purchase, which is still very, very important, and that has been very much reformed and is still being reformed and other reforms are in preparation. That has had the effect of reducing the average size of company cars that are purchased significantly. In other words, it has worked. However, it partly worked by pushing some people out of the company car perk into looking at other ways of things like company loans, mileage allowance, which also could be addressed. Those purchases are now private purchases but some are related to company finance, for example. Those purchases will undoubtedly be influenced by a change in the actual purchase price of the vehicle because some of that will have to be funded by the private individual. The mileage allowances are now more or less - you do not get more mileage allowance according to the fuel consumption, so we have got rid of that aspect of it. I think that will therefore influence those new car purchasers, even though they are semi-private as well as company. It is getting at those that are semi-private, and the modest number of people who can afford a new car. Then the VED is even less important. That is my response.

Q52 Chairman: The Pre‑Budget Report raised the fuel duty by 2p in the context of a 20p fall per litre in pump prices because of the fall in oil prices. The 2p rise is of course offset by the cut in VAT. What do you make of the coherence of the Government's use of fuel duty as a policy?

Mr Hanton: We would say that it is necessary that fuel duty goes up progressively to offset the reduction of motoring costs because of ecological improvements - so this is necessary. The Government has intermittently increased the charge, but not enough to compensate for technological improvements and thus keep motoring costs stable in real terms. On the assumption, which we hope will be true, that the charge will not be reduced when VAT goes up again to 17.5 per cent, it is faltering steps along the road of gradually increasing fuel duty, but inadequate steps.

Q53 Chairman: It is your view that those steps could be taken regardless of the underlying oil price!

Mr Hanton: Yes.

Q54 Chairman: What has been the effect of the rise in oil prices and more recently of the recession on carbon emissions from road transport?

Mr George: We know that the AA reported, and the DfT confirmed this, that at least the second and third quarters reflected a roughly 2 per cent decrease in vehicle traffic, and the AA survey of its members also reported that people were thinking about how they travelled, switching to public transport where possible. Stagecoach reported that their passengers had gone up. I do not think we have got the data yet as to CO_2­ but we could assume therefore that there was a 2 per cent decrease in road transport CO_2­ as a result. It probably is not quite as correlated as that! Certainly over the next year or so we will be able to get that data together. We did see for the first time people having motoring costs on a better parity or more even playing field to public transport fares, which have been rising. To give the comparison, the RAC report looking back on twenty years - 80 per cent decrease in real terms in the cost of motoring. At the same time rail fares went up 55 per cent in real terms and buses 63 per cent. Even with the high oil prices in the summer you still saw, if not a decrease in cost of motoring only a levelling off, while you saw bus operators putting up fares because they were paying the oil prices as well. Until we can tackle that disparity we will not see long-term reductions in CO_2­ emissions. I suppose the fluctuation in the oil market is not something we can rely on as a means of CO_2­ reduction. It may achieve some benefits, but at the same time it may be difficult for the government to introduce the 2p fuel duty increase as well as the changes in VED because the focus of the media and the public at large was very much on the high cost of motoring. The price of motoring is high, and of course year on year, but when you get such a sharp increase it feels that it is very high and that makes it very hard to bring in the kind of taxation measures we need. It also opened up a very interesting discussion around this such as the fair fuel stabiliser the Conservative Party produced, the Scottish National Party stabiliser. Neither of those is the solution but at least people are talking about measures and about the impact of the idea of long-term high oil prices. Of course, the recession has rapidly brought that back down again and has probably undone all the benefits we had in the summer as motoring became 20p cheaper - the price of fuel. When you are getting that decrease at the pump, which is where most people experience the cost of motoring, if you only buy a car every few years and pay VED once a year and you buy petrol once or twice a week, whether people go out of their way to drive further I do not know, but certainly when prices are high they will drive less.

Chairman: Thank you very much. We are out of time this morning. Thank you for coming in; it has been a useful session.