Written evidence submitted by the Air
TravelGreener By Design Group|
establishment of clear cause/effect relationships in a complex
area with a large number of variables is harder than advocates
of green aviation taxes have claimedthere is little evidence
that Air Passenger Duty has had any material environmental impact.
are significant shortcomings to the methodologies underpinning
estimates of the sensitivity of aviation emissions to taxes and
fiscal instruments to make a significant difference to aviation's
climate change impact, they would need to induce the equivalent
of at least replicating, on at least a medium-term basis, the
recession of the past three years. Regulatory signals such as
tighter emission limits, on the other hand, are likely to be more
effective regardless of the economic cycle.
1. This submission by the Air TravelGreener
By Design Group ["GBD"] addresses the theme of the Inquiry
covering the scope "for the tax system to create a 'modal
shift' from high carbon transportation to low carbon alternatives,
including Fuel Duty, Vehicle Excise Duty, and Air Passenger Duty
and issues the Government should consider when developing strategies
for sustainable aviation and motoring". It focuses on APD.
2. GBD is a BIS-sponsored body with the remit
of assessing options for addressing aviation's environmental impacts.
It is based within the Royal Aeronautical Society but is not aligned
with any sectoral interest. This submission draws on the interim
conclusions of a GBD project that has been running for four years
with the objective of testing the thesis, advanced on several
occasions by EASC
and by many others, that the imposition of additional taxes or
charges on airlines and/or passengers would reduce demand, leading
to a reduction in capacity/frequency and a stimulus to renew fleet
and develop more efficient aircraft. The submission focuses on
questions surrounding the effectiveness of such instruments rather
than on options such as a change to per plane charging.
3. The genesis of our project was the claim by
Chris Huhne, when LibDem environment spokesman, in The Independent
in late 2006 that "On flights, there is well-established
evidence on responsiveness of air travel to price changes. This
suggests a 1% change in price leads to a little more than 1% change
in travel, assuming other factorssuch as incomesdo
not change." Following correspondence with Mr Huhne, and
with the Institute of Fiscal Studies, which at roughly the same
time had published a study
citing an omnibus elasticity study as evidence that aviation-related
taxes could reduce emissions, GBD decided to initiate a study
of the likely effectiveness of economic/fiscal instruments in
influencing the sector's environmental performance.
4. The project has gone through four stages:
research on elasticities, which following an examination of 128
studies, some frequently relied upon as the basis for subsequent
elasticity calculations, found significant methodological flaws
in most of them, with material omissions in others.
with a range of full service, No Frills and charter carriers.
of UK, European and US airline and passenger market responses
to a full economic cycle.
Table last Autumn, with representatives from DfT, CAA, DECC, airlines,
academics, and aviation consultants convened to test methodological
5. Further analytical work is required.
However, in connection with EASC's examination of Budget issues
such as the freeze in APD rates and of whether stronger fiscal
stimuli should be adopted, provisional guidance for policymakers
can be offered in the following paragraphs with a reasonable degree
6. We took as a starting premise the assumption
that for taxes or charges to be considered effective they must:
a reduction in capacity or flight numbers.
an overall reduction in fuel burn.
fleet replacement with more efficient models (if available).
accelerated commercialisation by airframe and engine manufacturers
of more efficient technologies.
7. On the methodological basis for the claimed
effectiveness of taxes/charges, we found that only CAA (2005),
DfT (2007) and possibly the MARKAL-ED and Dutch Aero models came
close to producing elasticities based on reliable assumptions,
but the Round Table concluded that even these may have overlooked
difficulty of measuring price sensitivity independent of all the
other variables in the demand function. For example, because of
surcharges and other fare increases, the flight component of overall
holiday costs has increased, but the current models do not properly
take account of the ability of travellers to reduce their overall
holiday spend without changing the air travel element. In other
words, forecast pressure on carriers to reduce capacity might
fuzzy relationship between cost/price, demand and emissions (for
example, a 30% cost increase or a 10% demand fall may not reduce
emissions at allit depends on the stage of the economic
cycle, Me Too pressure, fear of losing valuable slots
and whether carriers are still profitable).
instruments can be offset through service and passenger migration
(carriers moving bases and routes to more fiscally advantageous
regimes and sectors and passengers minimising their exposure by
travelling via another country) and offsetting activity (such
as cuts in Spanish landing fees) elsewhereso-called Carbon
intended to incentivise fleet replacement and accelerated commercialisation
of next generation technologies depend on whether those technologies
advocates of green aviation taxes/charges that we have studied
do not appear to have taken account of opportunity costs (for
example, the availability of low cost leases for older aircraft
and curtailing the planned lifecycle of current production models
in order to commercialise more efficient Blended Wing Bodies).
are behavioural factors, such as the desire to operate marginal
services in order to retain slots rather than see them go to competitors
or the influence of "Me Too" behaviour on the ability
to absorb or pass on costs (airlines have shown a reluctance to
raise prices through, for example, fuel surcharges out of line
with their competitors) captured. The models Government has used
to project the environmental impact of APD are not intended to
take into account strategic behaviour on the part of firms or
8. The view from airlines was that even before
the recession, demand was reduced, but it was impossible to disaggregate
the impact of fuel surcharges from other stimuli. They felt that
APD will have reduced emissions, but the effect will have been
very marginal. It has not affected scheduling (ie the number of
flights). It is perhaps noteworthy that nowhere in the Budget
2011 consultation document on reform of APD
is any mention made of the impact to date of APD on emissions.
It is not structured in a way that directly targets fuel burn/emissions
and provides no incentive to replace fleets with more efficient/more
economical (appropriately sized) aircraft as the same tax is payable
irrespective of the efficiency of the aircraft. Furthermore, because
almost no other country has followed suit (several have introduced
and then rescinded APD-type instruments) passengers can limit
their tax exposure by travelling longer distances via a third
country (for example, London to Dubai via Amsterdam), increasing
emissions. However, the Treasury has been advised that its attempt
to make APD more reflective of environmental impact would be illegal.
Claims that APD is an environmental tax have been replaced by
statements emphasising its role in ensuring that aviation contributes
to deficit reduction.
This may at least in part be due to an acceptance of the methodological
uncertainties surrounding the relationship between taxation and
fuel burn in this sector.
9. The industry's resilience to the intended
stimulus of economic instruments may, at least in the short to
medium term, have been eroded by cost and capacity-trimming induced
by a combination of a rise in fuel price and recession, but on
the basis of observed responses to those factors it is still likely
to be the case that aviation-related economic instruments are
only likely to achieve material improvements in environmental
performance if they exert pressure close to that experienced between
2008-10. In other words, for instruments to make a significant
difference, they would need to induce the equivalent of at least
replicating, on at least a medium-term basis, the recession of
the past three years. Regulatory signals such as tighter emission
limits, on the other hand, are likely to be more effective regardless
of the economic cycle.
10. Market abatement curves produced by IATA
and OMEGA show that the stimulus required for early retirement
of aircraft is significantup to $500/tonne of carbon. However,
the establishment of a floor price for carbon
and/or using instruments to stimulate biofuel commercialisation
could be effective fiscal options.
11. Although models take a long term view, from
the point of view of effectiveness within typical political horizons,
when economic stimuli are introduced is at least as important
as their level. At times of economic optimism, carriers and passengers
are less sensitive to such stimuli.
7 April 2011
1 Ninth Report of 2002-03, Budget 2003 and Aviation,
HC672; Third Report of 2003-04, Pre-Budget Report 2003:
Aviation follow-up, HC 233; Seventh Report of 2003-04, Aviation:
Sustainability and the Government Response, HC 623 and reports
on the Budget and PBR in most years. Back
We have identified the following issues:
- how the industry absorbed/adapted to cost increases and demand
- the extent to which it did so rather than react directly to
APD/fuel price/economic downturn;
- the "new" industry/market model and its sensitivity;
differences in likely airline/passenger responses to passenger
taxes, incorporation of aviation into the EU Emission Trading
Scheme, carbon pricing and fuel taxation;
- and the market conditions/signals that economic instruments
must seek to replicate Back
The offsetting impact of factors that do not feature in economic
models of "logical" market behaviour-for example, the
desire to operate marginal services in order to retain slots rather
than see them go to competitors; or the influence of "Me
Too" behaviour on the ability to impose surcharges (some
US surcharges imposed by carriers individually or in small groups
in response to cost increases were withdrawn after a few days
because the market did not follow suit)-should not be overlooked. Back
Budget 2011, 1.153 Back
ICAO concluded through use of the AERO model that a tax would
have to be about 23 times more expensive than emission trading
(c. $600/tonne fuel) to be as effective as trading. Back