Budget 2011 and Environmental Taxes

Written evidence submitted by Gatwick Airport Limited

Introduction

1. Gatwick Airport Limited ("Gatwick") welcomes the opportunity to respond to the Environmental Audit Committee’s inquiry, Budget 2011 & Environmental Taxes. Gatwick is UK ’s second largest airport and the busiest single -runway airport in the world. We serve more than 200 destinations (more than any other UK airport) in 90 countries for around 33 million passengers a year on short- and long-haul point-to-point services. We are also a major economic driver for the South-East region, generating around 23,000 on-airport jobs and a further 13,000 jobs through related activities. The airport is 28 miles south of London with excellent public transport links, including the award winning Gatwick Express. Gatwick is owned by a group of international investment funds, of which Global Infrastructure Partners is the controlling shareholder .

2. Gatwick is committed to reducing our impact on the local environment and, in particular, to reducing our carbon emissions. The airport has a target of achieving 25% of all on site energy consumption from low or zero carbon sources by 2020. We have also publicly committed to a 50% reduction to our carbon emissions by 2020 [1] . On site energy generation is considered essential to our achieving this objective, and is likely to take the form of a combined heat and power plant (CHP).

3. Our approach extends to encouraging low carbon surface transport to and from the airport. Already, 37% of all passengers arrive at Gatwick by public transport (the highest of any UK airport) and we are installing a network of electric vehicle charging points to encourage the use of zero carbon vehicles. We are also the only UK airport to jointly hold the Carbon Trust Standard, the Level 2 ACI Carbon Accreditation Standard and the ISO 14001 Environmental Management Standard.

Summary

4. Gatwick is directly subject to environmental taxation in the form of the Climate Change Levy (CCL), which amounts to a bill in excess of £1 million per annum. We will also be a mandatory participant in the Carbon Reduction Commitment (CRC) energy efficiency scheme. We expect to be required to purchase allowances to the value of £1.2 million in 2012, and possibly more than that amount in future years, depending on the price of carbon and our own efforts to reduce our emissions. Following the reforms introduced in 2010 Comprehensive Spending Review (CSR), we consider the CRC scheme, in effect, to be an environmental tax that actively reduces potential for our investing in low-carbon, onsite energy generation.

5. The airlines that operate from the airport either are, or will be, subject to two further taxes which have been interpreted by many, and appear to be interpreted by the Committee, as environmental in nature. These are Air Passenger Duty (APD) and the European Union Emissions Trading Scheme (EU ETS). Gatwick itself has also been a participant in the EU ETS scheme since its inception as a result of our on-site combustion processes in our heat generation facilities. The Government must acknowledge that EU ETS is, effectively, a new ‘green tax’ on aviation and recognise this in future environmental tax policy.

6. Unlike other sectors, particularly the energy sector, aviation does not receive any fiscal incentive to move towards the use of more sustainable fuels and technologies. If there is to be a wide-ranging transition to such technologies, such incentives are necessary. Simply increasing taxes on flying, and maintaining a situation where the sector is effectively taxed four times over for its environmental impacts, will not achieve the behaviour change the Government wants in terms of a more sustainable aviation sector, and will in the process irrepably damage the UK economy and the aviation sector’s capacity to promote growth in future.

7. APD is economically counter-productive and, as currently structured, does very little to promote the Governments ‘Green’ Objectives’. Fiscal incentives for further development of more sustainable technologies in aviation, and encouraging their use by the sector as a whole would be far more effective. A significant number of EU Member States see high levels of aviation tax as an active inhibitor of economic growth, rather than as part of a strategy to achieve their own, or the EU’s environmental objectives

The budget and the Government’s green objectives

8. The 2011 Budget does not acknowledge the range of fiscal and other measures that Government is implementing, either on UK basis or in compliance with binding European Directives, that in themselves have the same effect as acknowledged ‘green taxes’ do on the aviation industry.

9. The EU ETS is one such measure. The Government has recently introduced a statutory instrument to Parliament that would require UK airlines to participate in this scheme [2] . In 2012-2013 alone–the first year of trading for airlines under the EU ETS– the aviation industry will bear an additional cost of approximately €1.125 billion across the EU as a result of compliance with it [3] . In the long term, this cost will be borne by passengers, as profit margins for airlines are particularly low and compliance costs are very likely be passed to them. By 2020, airline tickets for a return journey could increase by between €4-€39 per passenger depending on the length of the journey [4] across the EU. The EU ETS will add to the cost of flying in the same way APD does. This should be acknowledged by Government in determining levels of APD in future budgets.

10. The 2010 Comprehensive Spending Review (CSR) stated that the CRC Energy Efficiency

Scheme ("CRC") will be simplified to reduce the burden on businesses, with the first allowance sales for 2011/12 emissions now taking place in 2012 rather than 2011" and that "Revenue from the sale of CRC allowances, totalling £1 billion a year by 2014/15, will be used to support the public finances, including spending on the environment, rather than recycled to participants". The 2011 Budget confirmed that allowances would be priced at £12 per tonne.

11. Previously, participants in the CRC scheme had expected to have the initial proceeds from

purchasing carbon allowances returned to them. Those participants that performed

particularly well in terms of the CRC ‘league table’ of carbon footprints could expect to

receive a bonus of the order 10% of the original amount paid into the scheme through

purchase of carbon allowances.

12. As a result of the changes introduced in the CSR, none of the proceeds of allowances sales will be returned to participants by Government and no bonuses will be paid. As such, the CSR effectively created a new tax on carbon emissions, and one that will result in, 2012 alone, Gatwick being subject to, at the very least, an additional £1.2 million in effective taxation in 2012. The Government have stated that the reform of the CRC is intended to ‘reduce the burden on business’ from participation. This impact of the reform would appear to suggest that it is in fact simply a revenue raising measure. The Government should acknowledge in forming future environmental tax policy.

13. We believe the reforms to the CRC must also be considered in the context of determining the best way to incentivise investment in low carbon energy generation. As a mandatory CRC scheme participant, Gatwick stands to incur costs as a result of reforms to the scheme. In the short term, this could threaten our capacity for future investment in low carbon energy generation that we wish to undertake in the course of reducing our emissions by 50% by 2020.

14. The 2011 budget could have done a great deal more to promote local energy generation as an effective mechanism to reduce carbon emissions. The Governments ‘Plan for Growth’ focuses on initiatives to reduce carbon emissions from macro generation which are complicated and financially prohibitive. By contrast, more wide-ranging fiscal incentives to support to small scale local energy generation projects would reduce the reliance on the already capacity constrained grid and offer a more efficient power generation solution.

15. We note and welcome the commitment made in the 2011 budget to increase the CCL only in line with inflation in the current financial year. There is clear potential for the streamlining of carbon taxing mechanisms for UK businesses in order to reduce the administrative burden inherent in complying with them. One fundamental change would be the administration of the CRC as a tax. The way the scheme now operates is akin to being a tax. We see no reason why it should not be referred to, and operated in such a way. Consideration should be given to its amalgamation with other instruments such as the Climate Change Levy as a way of reducing the Green Tax compliance burden.

16. The effective removal of the ‘cap and trade’ element of CRC would considerably simplify the process and cost of compliance on the part of participants. Gatwick, for one, and soon all airlines that operate from Gatwick are participants in the EU Emissions Trading Scheme. We are already incentivised to reduce emissions through these means.

17. The Government should focus on simple mandatory reporting of emission levels, to which a tax with a transparent rate would be attached, rather than another ‘cap and trade’ scheme in which a large element of the incentive to participate has been removed, and which incorporates a ‘league table’ that has no effective purpose.

18. This could brought about relatively simply through the use of the mechanism currently used to collect the Climate Change Levy (CCL) and has had the clear effect of reducing energy consumption and hence carbon emissions, a recent independent review by Cambridge Econometrics, published in the Government’s Climate Change Levy Report, highlighted its impact.

19. The review stated that since the climate change levy’s introduction in 1999, a carbon emissions saving of 3.5 million tonnes had been achieved, and there had a reduction in energy demand of 14.6%. The Government has the objective of reducing carbon emissions further by an additional 11.2 million tonnes by 2022. The approach of simple, transparent taxation of carbon emissions would undoubtedly assist them in achieving this objective. Schemes that have the appearance of being fiscal incentives, but are in fact taxes, are bound to be less effective and more administratively burdensome than transparent and simply administered ones.

20. Amalgamation of CCL with CRC would mean that there would be no need for CRC participants to register and submit details of their emissions every year. This could instead be delivered through the energy billing process. All obligated businesses would be captured, reducing the audit burden on the regulator and resolving the fact that until recently, of the projected 4000 mandatory participants in CRC, 2779 had actual l y registered . There could be an additional line entered on to utility bill to cover consumption and carbon emissions, with the resulting data being automatically entered into the proposed league table. In this way, the administrative burden of compliance between both CRC could be substantially removed and the overlap between the two schemes reduced.

Use of the tax system to create ‘modal shift’

21. We note and welcome the Governments move to ‘freeze’ Air Passenger Duty (APD) for the next financial year as long overdue, and particularly appropriate in the context of the UK already maintaining the highest levels of aviation tax of any European Union Member State. The view that the aviation sector is in some way "under-taxed" in proportion to its environmental impacts or compared to other carbon emitting industries has no basis in fact. As we outline above, airports and airlines are currently subject to four separate taxes that are in some way linked to their environmental impacts. Furthermore, the current VAT exemption applied to aviation fuel is required under international law [5] . The Government would be in contravention of an international treaty obligation if it removed this exemption unilaterally.

22. The taxation of aviation per se is counterproductive in numerous ways, and APD does nothing to promote the sustainability of the sector. On a fundamental level, increasing the cost of flying through the tax system actively disincentivises the economic activity, tourism and cultural exchange that air travel generates. For example, Gatwick is one of the main air travel routes into the Caribbean, and therefore one of the main catalysts of this activity. Since November 2010, the total amount of air passenger duty (APD) that passengers must pay in order to travel to the Caribbean from Gatwick has risen by 30%, from £40 million to £60 million every year. Gatwick has a key role to play in helping developing countries, including those in the Caribbean to grow, and in building relationships between the UK and citizens of those countries. Current levels of APD harm our potential to fulfil this role.

23. The aviation sector directly accounts for £53 billion (3.8%) of UK GDP. Of this, £24 billion is generated directly through the activity of airlines, airports and ground services and the aerospace sector. £16.6 billion is accounted for through the aviation supply chain, £12.8 billion through the spending of employees of the sector and its supply chain, and an additional £25.5 billion is provided through ‘catalytic’ benefits through tourism [6] only possible through the air links that aviation provides. Gatwick alone accounts for £2.4 billion of added value for the economy every year. The 2011 Budget, which purports to focus on economic growth, does very little to enhance the contribution that aviation makes to the economy or to promote the sustainability of the sector.

24. The Eddington Transport Study (2006) correctly identified that the most important catalysts for economic growth are ease of access to markets, customers and clients. As an island, the UK’s ports and airports facilitate the vast majority this access, and through that access the majority of international trade. Evolving economic conditions have made the need for the international connectivity that aviation provides particularly acute. The UK economy needs better access to markets, customers and clients. Effective and well supported international gateways are central to facilitating the export led growth, and the inward investment, that the 2011 budget outlines is necessary for our future economic success. Encouraging a modal shift away from aviation would reduce the substantial contribution the sector already makes to the UK economy, as well as its potential to foster the inward investment that is a precursor for future growth.

25. EU Member States are reducing the cumulative levels of the various taxes they levy on their respective Aviation Sectors or abolishing them altogether. Ireland recently cut its aviation tax as a way of stimulating economic growth. The Netherlands trialled an aviation tax for a year between 2008-2009. They estimated that it resulted in net €1.3 billion loss to the Dutch economy, and abolished it as a result [7] . Likewise, Sweden, Malta and Denmark have also seen fit to abolish their own respective aviation taxes in recent years. A significant number of EU Member States see high levels of aviation tax as an active inhibitor of economic growth, rather than as part of a strategy to achieve their own, or the EU’s environmental objectives.

Promoting sustainable aviation & the design of ‘green taxes’

26. In the first instance, the 2011 Budget does not acknowledge a range of measures that Government is implementing, either on UK basis or in compliance with binding European Directives, that in themselves constitute ‘Green Taxes’.

27. The view that APD is an appropriate and effective measure for achieving the Government’s environmental objectives deserves serious scrutiny. APD, as currently structured, delivers no positive externalities beyond providing additional revenue to the Treasury. The Government have stated that rises in APD are "partly intended to help achieve environmental goals" [8] . The Treasury also classify APD as an environmental tax. However, APD is only calculated according to one element of a given flight - the distance travelled. The 2011 Budget does not propose to change this. There are a whole range of other factors relevant to a given flights impact on the environment, including the type and age of the aircraft, the time that the aircraft is physically in the air as well as how heavy it is. The Government choose not to take these factors into account. In its current form, the effectiveness of APD as an environmental tax is severely limited.

28. We appreciate that the introduction of a ‘Per Plane Duty’ (PPD) is not possible under international law. We had reserved our position on the relevant commitment in the Coalition Agreement pending the publication of firm proposals by Government. We await the results of ministerial discussions with fellow signatories to the Chicago Convention (1944) with interest. In the mean time, we would encourage the Government to seriously consider how APD could be reformed in order to effectively incentivise greater use of aircraft that have less impact on the environment. This could be through the integration of other variables relevant to the environmental performance of a given aircraft into the way the tax is calculated.

29. More broadly, there is a real scope to explore whether the current environmental tax regime applied to the aviation sector as a whole is overly punitive, and incentivises less actual transition to technologies that are more environmentally sustainable than might otherwise be the case. The Government implicitly acknowledges incentives, as well as punitive taxation, can be effective through the fiscal approach it adopts to promoting the reduction of emissions in other sectors. For example, the energy generation sector currently receives £1.4 billion of effective fiscal incentives every year to transition towards greater use of renewable energy sources [9] . This approach has been remarkably successful. Sin ce its introduction in 2002, these incentive s have led directly to the tripling the level of renewable electricity in the UK from 1.8% to 6.64 % [10] .

30. The Aviation Sector is likely to significantly increase its overall capacity for reducing emissions in the next eight years . It is entirely possible that engine and airframe improvements could increase the fuel efficiency of new aircraft by up to 40% in the 2020s relative to new aircraft in 2005 . Moreover, the introduction of more speculative radical technologies could make new aircraft up to 60% more efficient by 2050, compared to 2006 levels. In addition, its apparent that more efficient air traffic control measures (many of which are already being deployed), and airfield operational procedures could contribute between an additional 6-13% per flight by 2020 [11] . This progress is being achieved with no direct fiscal incentive on the part of Government.

31. If the environmental tax regime as applied to aviation were geared towards actively incentivising development of technology that reduced or eliminated carbon emissions by the aviation sector, and timely adoption of that technology by airlines, there is every prospect that the sectors progress towards reducing its environmen tal impact would be accelerated .

32. In the long term, we believe the only viable option available to the aviation sector to drive real carbon savings is through the further development of and deployment of biofuels amongst major airlines. This is a concept that has been proven many times already. But there are a range of constraints that currently prevent this happening.

33. Measures to promote a transition to biofuels must be considered in a global context. The industry is after all, global in scope. Worldwide, existing airlines fleets are thought total around 23,000 aircraft. Total investment in this fleet is thought to in the region of billions or even trillions of dollars. Aircraft have a typical life of 25 to 30 years, meaning that a significant fraction of the current fleet will be operational to 2020 or even 2030 and beyond. This long life cycle and high cost, coupled with stringent certification requirements for fuels, mean that airlines are generally not willing to consider any fuel that is not a immediate, or drop-in, replacement for current, petroleum-derived jet fuel [12] .