Mon 9 Nov 2009 – According to a report published by Oxera Consulting, the revenues raised by the UK’s Air Passenger Duty (APD) in 2007 covered the UK Government’s own carbon emissions cost assessment for the UK aviation industry, including allowing for a radiative forcing factor. Given continued increases in APD, along with the introduction of the Carbon Reduction Commitment in 2010 and the EU Emissions Trading Scheme (EU ETS) in 2012, the expected contribution of UK aviation sector in 2012 will exceed its external environmental costs by between £700 million ($1.18bn) and £1.1 billion ($1.85bn), depending on future carbon prices. The report also seeks to answer criticism that aviation does not pay its fair share of tax due to its exemption from VAT and fuel duty and finds that even without APD, the sector contributes about 32.5 percent of the wealth it generates in tax, very similar to the UK economy as a whole.
Commissioned by the Airport Operators Association (AOA), which represents the interests of 72 UK airport companies, the report points out that the tax burden faced by UK aviation via APD is higher than that resulting from aviation taxes in other European countries, which either have lower or no aviation taxes.
The tax revenue from APD has risen from £806 million in 2001/2 to £1.99 billion in 2007/8, and is expected to increase still further to £2.44 billion in 2012.
The EU ETS is forecast to result in auction revenues of between £75 million and £115 million in 2012, depending on the prevailing level of the carbon allowance price. However, the overall financial burden on the aviation sector is expected to be higher than this – at £171-261 million – as the sector will need to purchase emissions allowances both through government auctions and from the carbon trading market.
To be introduced in 2010, the Carbon Reduction Commitment (CRC) will cover CO2 emissions by large UK organizations, such as airports, not already covered by the EU ETS. Its objective is to reduce carbon emissions by driving the uptake of energy efficiency measures. The price of CRC permits will be fixed at £12 per tonne for the first three years and will then be subject to full auctioning from April 2013. From an estimate of costs provided by the AOA and government forecasts for passenger numbers, the total costs of the CRC to airports may be expected to be around £11 million in 2012.
Oxera argues that airport security costs should be added to the tax and regulatory burden faced by the aviation industry on the grounds that these government-imposed costs are incurred entirely by the airports themselves, whereas in a number of other European countries and the United States, the government does make a contribution towards them. The study arrives at an approximate figure of £400-500 million per year.
Totalling these costs together, Oxera estimates the regulatory and tax burden to be between £3 billion and £3.2 billion per year in 2012.
In terms of the climate change costs of aviation, using UK Department for Transport (DfT) figures on the sector’s CO2 emissions and applying a radiative forcing factor of 1.9 to incorporate the heightened impact of climate change of emissions at altitude, together with government guidance on the shadow price of carbon, the study estimates the cost will rise from £1.7 billion in 2007 to £1.9 billion in 2012.
The study also added the environmental costs for local air quality and noise. The former, based on a DfT 2003 analysis, works out at between £200-400 million in 2012 and the monetary value put on aircraft noise is between £40-50 million.
Oxera therefore concludes that comparing estimates of the ‘externalities’ of aviation with the tax burden on the sector, even with a radiative forcing effect in place, aviation is more than making up for its climate change and environmental impact.
The latest DfT forecasts show that by 2030 there will be passenger demand in the UK for 434 million flights, an increase of about 3% per year. But if growth were restricted to just 1.5 % a year, a measure the AOA says has been touted as a UK-only alternative to an international emissions cap, the report estimates that average return air fares could see a 40% rise from £258 to £360 by 2020.
By 2030, the report estimates planned increases in APD could reduce the sector’s economic footprint by about £40 million. Increased revenue from APD of about £1.06 billion could be offset by reduced receipts from the wider economy, it maintains.
Speaking at the launch of the report, a panel of aviation and business leaders said that UK-only alternative measures would deal a severe blow to passengers and the wider economy and that a global deal on aviation emissions must be achieved.
“Aviation should be part of a low carbon future, and a global sectoral approach is needed at Copenhagen. Aviation must grow sustainably, within environmental limits. This growth will provide further benefits to the UK economy, through increased productivity and competitiveness; creating jobs and wealth which can enhance our quality of life,” said AOA Chairman, Ed Anderson.
Commenting on the need to address environmental impact, Deputy CEO of Peel Airports Group, Neil Pakey, said: “While the tax burden on aviation does more than cover its environmental costs, airports need to continue to work hard with other parts of the aviation sector to realize a global deal on carbon emissions. The EU Emissions Trading Scheme, which aviation enters in 2012, is a hugely significant first step.”
Jim French, CEO of Flybe, added: “Flybe aircraft operate from 36 UK airports and as such we understand completely that regional connectivity is key to supporting the UK economy. More government taxes would deal a real blow to the huge benefits aviation has brought to our regional economies. Instead, we need to support regional demand by growing our air transport network using environmentally efficient aircraft.”
David Johnston, London Stansted Airport’s Managing Director, said: “Aviation has an important strategic role in the future economic development of the UK. We are committed to delivering a programme of sustainable growth at Stansted so that we continue to maximize the social and economic benefits of air travel but at the same time carefully managing our environmental impacts and recognizing the need for us all to play our part in addressing the global challenge of climate change.”
The report calculates that aviation represents 1.5% of the UK economy, contributing £18.4 billion towards the nation’s GDP and providing jobs for 234,000 people – 141,000 directly and the remainder in the supply chain.
[£1 = $1.67]
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