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Budget – No Surprises In Proposals But Interesting Statements

30th March, 2007

The important change – a doubling of Air Passenger Duty (APD) – has already been announced and implemented. Given the furore surrounding that, no-one expected any further announcements about taxes or charges on aviation. However, Gordon Brown’s statement did contain some interesting points -see full story.

The important change – a doubling of Air Passenger Duty (APD) – has already been announced and implemented. Given the furore surrounding that, no-one expected any further announcements about taxes or charges on aviation. However, Gordon Brown’s statement did contain some interesting points. The parts of his speech and report relevant to aviation follow, together with our comments. It is important to read the comments; otherwise you could be seriously misled.

Budget Speech

Mr Deputy Speaker, I have had representations to put VAT on airline tickets, a 17.5 per cent rise in airline ticket prices. I have investigated the detail of this proposal. It gives me no pleasure to tell the House that the substance of this measure has not been properly thought through. It would apply only to domestic flights, business would be able to claim back VAT, and even by 2020 it would save just 50,000 tonnes of carbon – less savings in one year than achieved by the climate change levy in just one week. [Comment 1,2] So I have rejected this proposal in favour of the 6 million tonnes of carbon saving achieved by the fairer and more environmentally efficient measures I have outlined in the Budget today. [Comment 3]

Comment 1: The figure of 50,000 (presumed to be pa) seems low, even accepting that VAT would apply only to domestic flights and that businesses might be able to claim it back.Comment 2: The carbon levy and other measures would apply to various sectors, not to aviation, so comparing it with VAT on aviation is misleading. The 50,000 tonnes should not be compared with 6 million tonnes from unspecified sources. (But it could be compared with the effect of APD of 750,000 tonnes – see 7.85 below.

Comment 3: VAT and the various measures proposed such as the increased climate change levy are quite different animals and are not mutually exclusive. The climate change levy increase and other things were going to happen anyway. So Gordon Brown did not reject VAT “in favour” of the climate change levy; he just rejected VAT on aviation.

Budget Report

7.32 Climate change in general is an international challenge that will affect all countries but aviation in particular is an international industry operating across country borders and reducing emissions from aviation requires a multilateral solution. Globally, carbon dioxide from aviation is responsible for around 1.6 per cent of total greenhouse gas emissions [Comment 4] but this level is set to increase as other sectors reduce emissions while demand for air travel rises.

Comment 4: This low figure of less than 2% is the one seized on by the industry as an argument for not addressing aviation and climate change. It is largely irrelevant to the debate since aviation represents some 6% of UK emissions of CO2 alone and approaching this for the EU (and is growing fast).

The UK aviation sector currently emits 5.5 per cent of the UK’s total carbon dioxide output [Comment 5] –and this could rise to 15 per cent by 2030. [Comment 6] Aircraft are also responsible for high-altitude emissions of nitrogen oxides (NOx), and for the formation of cirrus clouds and contrails, which means that the total climate change effect of all aviation emissions is two to four times greater than the effect of carbon dioxide emissions alone. The Government’s policy, as set out in the 2003 White Paper The Future of Air Transport 3, and supported by the Stern and Eddington Reviews, is to ensure that aviation pays the external costs it imposes on society at large according to the ‘polluter pays’ principle. [Comment 7]

Comment 5: The figure of 5.5% looks wrong since government statistics show it to be at least 6%; Douglas Alexander (Minister for Transport) has said it is 6.2%.Comment 6: It will ‘only’ rise to 15% if significant cuts are not made in other sectors; for example the 3% pa cuts which most commentators believe are needed. If there is success in the other sectors, aviation will be far more than 15%.

Comment 7: This is an important statement. However no government policies, notably the ‘Emissions Trading System’ (ETS), are likely to ensure that aviation does pay its external costs.

7.33 The UK has long argued for changes to the international laws which prevent the taxation of fuel used on international flights, but this process will inevitably take time. That is why the Government’s priority over the last few years has been to work to include aviation within the EU ETS. [Comment 8] Adding aviation to the scheme will improve the liquidity of the market and ensure that the aviation sector plays its part in delivering real carbon reductions across Europe. The UK continues to make progress to facilitate, at an international and European level, inclusion of aviation in EU ETS and the Commission legislative proposal for inclusion by 2011 recently received broad support from member states.

Comment 8: The government has not just given “priority” to ETS; it has done nothing on anything else (such as VAT on domestic flights). So if aviation emissions trading does not happen or is ineffective, there is no ‘Plan B’. ETS does not in any case address non-CO2 greenhouse gas emissions from aviation. Nor will ETS ensure that aviation pays its external costs (see 7.32 and Comment 7 above).

7.34 The EU ETS already covers approximately half of UK emissions including all emissions from electricity generation, and forms the central component in the Government’s domestic policy framework to tackle climate change. In sectors not currently covered by the EU ETS, national measures can play a part in pricing carbon. Governments should choose the most appropriate policies to achieve this taking account of economic, social and other factors. Given that different sectors have different characteristics, consideration of these factors leads to different approaches being adopted in different sectors. [Comment 7 – above]

7.85 The Government believes that air passenger duty plays a valuable role in ensuring that passengers understand and acknowledge the environmental costs of their actions. The resultant behaviour change can deliver significant climate change benefits: the decision announced in the 2006 Pre-Budget Report to increase the rates of air passenger duty from 1 February 2007 will deliver climate change savings equivalent to around 0.75 MtC per year by 2010-11. [Comment 9]

Comment 9: This is a useful justification; however it does not answer the partially correct “blunt instrument” argument of the industry. The problem is recognised – see below.

The aviation industry has suggested to Government that the way in which air passenger duty defines different classes of travel may not always send the appropriate environmental signal and may cause market distortions, for example for “business class only” flights and “premium economy”-type seats. The Government is open to introducing changes to the definition, but only if it can be done on a broadly revenue neutral basis. The Government will discuss further with industry how this can be achieved. [Comment 10]

Comment 10: Re-balancing APD according to seat type does not properly address the fact that emissions are proportional to fuel consumption. Empty seats, leisure facilities taking space on planes (eg rich Arab’s personal A380) and freight all contribute to emissions but will still escape the net.General comment: The Budget confirms what we knew already – Gordon Brown and the government are not prepared to make aviation pay its fair share of taxes or pay for its environmental costs. They would rather pander to the aviation industry and the consumers of cheap flights than address the issues of climate change and the other implications of reckless and unsustainable aviation growth.