Airports National Policy Statement Contents

Annex B: The economic case

When the Airports Commission published its final report in July 2015, it endorsed the NWR scheme based on its potential to deliver reported £147 billion in wider economic benefits it was expected to deliver. Even though the Commission was advised by its own economic advisors to use caution in attaching significant weight to the £147 billion figure,312 it was the only figure published in its announcement. The Commission also made it clear that the economic benefits delivered by a Gatwick scheme were “considerably smaller” than the NWR scheme at Heathrow.313 It is clear from the figure below, that very little separated the economic cases of the three schemes when the Commission completed its work and in fact, Gatwick was the economically favourable scheme under a carbon capped scenario.

Figure 22: Net Economic Benefits estimated by the Airports Commission, Central Case, £bn (2014 prices)314

There still appears to be very little separating the economic cases of the NWR, ENR and Gatwick schemes. The most recent figures show that the gross economic benefits over the appraisal period are now marginally in Gatwick’s favour at £74.1 billion in benefits; compared with a Heathrow NWR at £72.8 billion (table below).

Once costs are considered, the net economic benefits of the NWR scheme are relatively small at a maximum of £3.3 billion over 60 years, and in fact may be negative depending on the demand scenario assumed in the appraisal. The ENR scheme also has a similar profile of net benefits to the NWR scheme. Gatwick’s net economic benefits are also relatively small but remain positive under all demand scenarios.

It has become apparent that there are inaccuracies and inconsistencies in the way the economic case supporting the NPS has been developed. These errors, discussed below, undermine the economic case for the NWR scheme which already depended on marginal net present value benefits at a maximum of £3.3 billion over 60 years.315 The Government explicitly acknowledges in the NPS that “in monetary terms, the environmental impacts of all three schemes are small when compared to the size of the benefits, or considered over the 60-year appraisal period.”316 Upon examination, it has become apparent that there are issues with the way the environmental costs have been monetised.

Table 3: Monetised impacts under the DfT’s central case (present value, £bn, 2014 prices)317

Rapid growth assumption

The Government has stated in both the NPS318 and in oral evidence to the Committee319 that the NWR’s economic benefits would be realised sooner than in the other schemes (figure below). The DfT stated that “there is a very clear difference in the dynamic profile between the two schemes” and that “by 2030, a third runway at Heathrow would deliver three times the number of benefits that a second runway at Gatwick would deliver.”320 The only way this profile of benefits would be realised is if the runway is open by 2026 and at capacity after two years.

As discussed in Annex A, this is inconsistent with HAL’s own plans for phased passenger growth. If the appraisal assumed a phased approach, the monetised benefits would be lower and would not be realised until later in the appraisal period.321 The Department conducted sensitivity analysis assuming “a very conservative phasing over 10 years.”322 Under this scenario, the economic benefits are reduced by £0.5 billion, which was described by the Department as being a “very marginal difference.”323 However, the difference accounts for 15% of the maximum net present value benefits estimated in the economic case. The Airports Commission previously estimated that the economic benefits of the scheme would be reduced by £1.3 billion with phasing. It is not clear how the benefit reductions are smaller under the Department’s scenario given that the demand and the subsequent benefits from the scheme are coming from a higher base. Also, the Airports Commission’s ‘assessment of need’ scenario has a smoother profile of growth when compared with that produced by the Department in its central case.324

Figure 23: Cumulative benefits to passengers and the wider economy by forecast year (present value, £bn, 2014 prices)325

Surface access costs

The Department has included £5 billion326 of surface access costs as part of their appraisal. This figure only includes those schemes deemed essential by the Airports Commission to support expansion, including Southern Rail Access, M25 tunnelling, M4 widening and other road works.327 The schemes which have already been committed and funded, including Crossrail, HS2 and Piccadilly line upgrades, are not included in this figure. The appraisal assumes that Western Rail will be delivered but its costs are not included.328

It should also be noted that these estimates have not been updated since the Airports Commission completed their work in 2015.329 The DfT’s aviation passenger demand forecasts are now higher and growth is anticipated to occur much more rapidly by 2030. This means more people will be accessing the airport and much sooner than was previously assumed. While the Department has not published a comprehensive surface access reanalysis based on updated passenger demand forecasts, the air quality reanalysis indicates that there could be as many as 17% more cars on the road than was previously assumed by the Airports Commission.330 Transport for London forecast an additional 76,000 vehicles on the road.331 If the ambition of no more road-related traffic is to be realised, additional surface access measures will be required, adding unknown costs to the scheme appraisal. TfL, for example, estimate that £15 billion will be required to cover the surface access and to support the background passenger growth in West London. There is also the possibility that an emissions charge of some sort may need to be introduced around the airport.332 We do not know what such a scheme might cost, how it would affect the appraisal or what impact it could have on passenger numbers. The DfT acknowledge that “surface access cost estimates remain uncertain given schemes different stages of development.”333

The Airports Commission factored optimism bias into its estimate of surface access costs,334 but given the scale and nature of the schemes being proposed, there is a possibility that the cost increases may be greater than those assumed as part of the £5 billion. Highways England, for example, concluded that “there is significant potential for cost overruns of these large-scale proposals on the M25 and M4 J2-3 because of the high level of uncertainty over the scope of works.”335

Air quality costs

The Airports Commission monetised the present value costs from worse air quality in the economic appraisal. It estimated these at £835 million, including £72 million for NOx and £764 million for PM10.336 A ‘damage cost’ approach was used to calculate the costs in accordance with the cost per unit mass values (in £/tonne) specified by Defra in their guidance at the time.337 These damage costs were updated by Defra in September 2015 and are now considerably higher at £64,605/tonne (in 2015 prices), compared with £875/tonne (in 2008 prices) in the 2011 guidance. Adjusting for inflation, this damage cost is around 63 times higher than that used by the Airports Commission. On this basis, if the DfT applied the damage costs approach in its updated appraisal, the total damage costs from NOx emissions could rise to around £5.9 billion, taking the total damage costs to around £6.8 billion including PM10 costs (though for several technical reasons the increase may not be as considerable as that).338 In the updated October 2017 appraisal, the aggregate damage costs of air quality are 90% lower than this estimate, at £30 million for NOx. It is not clear how this can be the case given the substantial rise in unit damage costs for NOx. In response to questions on the plausibility of the DfT’s estimates, Professor Helen ApSimon, former expert air quality advisor for the Airports Commission, concluded “I have no idea how DfT can have calculated their value - it seems quite wrong!”.339 More detail on this is provided in Annex F.

Carbon costs

Jacobs, on behalf of the Airports Commission, initially estimated the monetised costs of carbon for the NWR scheme at £19.2 billion, including £18.5 billion for air travel.340 In the DfT’s latest appraisal, the damage costs of carbon from air travel are removed, and only those costs from passenger surface access, airport operations and construction are included. Based on these assumptions, the DfT’s approach assumes that the additional damage cost from carbon dioxide emissions, is completely and effectively ameliorated by effective trading within a carbon trading scheme.341

Expert evidence given to the Committee suggested that carbon trading would not work effectively or on the scale anticipated by the DfT and that it was ‘optimistic’ to not include these costs in the economic case.342 While it is impossible to know with certainty how effective carbon trading will be in the future, an assumption of a linear improvement in trading practises towards a perfect trading platform over the 60 year appraisal period, would “very indicatively” lead to between 10% and 25% residual damages (£1.8 to £4.5 billion using the Jacobs estimate of emissions and carbon price).343 More detailed on this is provided in Annex I.

Noise costs

The monetised health impact of noise is based on the population exposure over a full day, accounting for health and annoyance impacts at differing noise levels.344 The monetised costs of noise for a NWR scheme were initially estimated by the Airports Commission at £1 billion. This figure was later revised down by the DfT and estimated at around £600 million (see table below). At face value, it was not immediately clear how the costs decreased by 40% when the estimated number of air traffic movements from a NWR have increased, particularly during the early years of the appraisal.345 This would typically have resulted in a much greater noise footprint from a NWR and presumably greater monetised noise costs.

Table 4: Cumulative monetised noise impacts by 2084/5 under DfT17 forecasts, central estimates (present value, £bn, 2014 prices)346

When the profile of noise annoyance impacts is examined, it becomes clear that the noise impacts, despite being much higher in 2030, are lower in 2040 and 2050. The monetisation is determined over a 60-year appraisal between 2025 and 2085. Costs are interpolated between zero in 2025 and the estimates for 2030, 2040 and 2050 and remain constant thereafter. Because of this, the lower population impacts, and thus the lower noise costs dominate for most of the appraisal period, even with discounting being applied. This is reflected in the steep decline in changes in the numbers of lost ‘Disability-Adjusted Life Years’ (DALYs). This is an estimate of the potential healthy life years lost due to premature morbidity or mortality and upon which the monetisation figures are derived. In other words, the steeper the decline in the figure below, the less of an impact there will be in terms of the monetised costs of noise over the appraisal period.

Figure 24: Estimated Changes in Total DALYs Lost Due to All Assessed Health and Amenity Effects Compared with Do Minimum (Central)347

As discussed in detail in Annex H, the lower noise footprint for the 2040, 2050 and the remainder of the appraisal period is driven almost entirely by more optimistic fleet mix and flight path assumptions.

314 Airports Commission, Business Case and Sustainability Assessment, July 2015

315 It should be noted that the appraisal methodologies were scrutinised in much more detail for the Northwest scheme, compared with the other two schemes. In some cases, these methodological issues apply across all three schemes and would proportionately impact their respective business cases.

316 Department for Transport, Revised Draft Airports National Policy Statement, October 2017, p 28

317 Department for Transport, Updated Appraisal Report, October 2017, p.44

318 Department for Transport, Revised Draft Airports National Policy Statement, October 2017, p 31

319 Q487

320 Q60

321 Discussed in detail in Annex A

322 Q488

323 Q499

324 Airports Commission, Strategic Fit: Forecasts, July 2015

325 Department for Transport, Updated Appraisal Report, October 2017, p.47

326 The overall cost of surface access is considered to total £4,962m and a spend profile is illustrated over the years 2021 to 2026.

327 Airports Commission, Business Case and Sustainability Assessment, July 2015

328 Airports Commission, Business Case and Sustainability Assessment, July 2015, p 76

329 Department for Transport, Updated Appraisal Report—Airport Capacity in the South-East, October 2017, p 32

330 WSP, 2017 Plan Update to Air Quality Re-Analysis, October 2017, Appendix B

331 Transport for London, Heathrow third runway: Surface access analysis, January 2018

332 Q546

333 Q546

334 Airports Commission, Business Case and Sustainability Assessment, July 2015, p 104

336 Airports Commission, Business Case and Sustainability Assessment, July 2015, p 65; Present Value in 2014 prices.

337 Department for Environment, Food and Rural Affairs (DEFRA), Interdepartmental Group on Costs and Benefits, Air Quality Subject Group, Air Quality Appraisal—Damage Cost Methodology, February 2011

338 See Annex F for more discussion.

339 Correspondence from Professor Helen ApSimon, 3 February 2018

340 Jacobs, Carbon: Further Assessment, May 2015, p.29

341 Professor Piers Forster (NPS0088)

342 See Annex F for full discussion

343 Professor Piers Forster (NPS0088)

344 Department for Transport, Guide to WebTAG Noise Appraisal for non-experts, 2017

345 Department for Transport, Aviation Forecasts, October 2017

346 Department for Transport, Updated Appraisal Report—Airport Capacity in the South-East, October 2017, p 41

347 Department for Transport, Appraisal of Sustainability, Appendix A-4, Noise, p 58

Published: 23 March 2018