The Treasury's Pre-Budget review

The Pre-Budget review in early October disappointed green activists. Environmental measures formed a small fraction of the government’s initiatives. It doesn’t look as though Alistair Darling sees climate change as one of the priorities of this administration. But there were two important commitments: a revision to Air Passenger Duty (APD) and (via BERR) a competition to run a commercial-scale carbon capture project. The APD proposal attracted most attention. The government intends to change the duty so that it is levied on aircraft movements and not on individual travellers. Commentators, and the two main opposition parties, have long suggested that this would be a sensible change. Carbon Commentary disagrees. The proposed revision cannot be implemented without infringing international treaties on the taxation of air travel. The chancellor’s proposed consultation will eventually conclude that APD should remain substantially as it is now.

In the article, we briefly analyse the effects of APD and also show that the duty imposes an effective tax on airlines that is greater than would be levied if air travel were fully included in the European Emissions Trading Scheme (ETS).

The BERR Carbon Capture and Storage (CCS) announcement was worryingly unspecific. It did not even bother to mention a figure for the value of the financial support. It also upset some major companies by only allowing entries for the competition from a limited range of technologies. The government is extremely vulnerable to the charge that it is back in the business of picking winners.

CCS is an extremely important part of any strategy for national reduction of emissions. The UK should be throwing far more money at research and development into the various forms of CCS. The simplest and quickest way to get innovation in CCS would be to include carbon storage as a technology that qualifies under the renewable obligation rules. We need to remove the difference between the financial treatment of renewable power generation and carbon capture. Both achieve the same outcome and both should have the same reward.


Air Passenger Duty APD raises about £2bn a year. The government announced that it wants this to rise by about £500m by 2010/11 after it has changed the tax to apply to flights not travellers. Since UK air traffic is rising by 4-5% a year, this means that the average burden per flight will rise by perhaps 10%, or less than £2, by 2010.

The airlines were quick to argue that at today’s rates they are already paying the full cost of their emissions. They didn’t provide figures but the table below gives some background to their assertion.

Share of UK emissions from aviation About 6.3%
Total UK emissions including sectors outside Kyoto About 660 million tonnes
Approximate share of aviation About 40 million tonnes
Current price of carbon dioxide in European Emissions Trading Scheme About €20
Total implied cost of UK aviation emissions About €800m
Total tax raised by APD About €3bn

The table shows that at current ETS prices the UK aviation industry ‘pays’ for its pollution. The tax captures almost four times as much money as the industry would be charged if it had to buy permits for all its current emissions. Air travel emits pollutants other than CO2. Many commentators multiply the CO2 by a figure such as 2.7 or 3 to account for these other climate change implications. But even still the APD captures more cash than would be paid under the ETS. No wonder the airlines are lobbying to be included in this scheme.

The chancellor said that he would consult on how best to change the way APD is levied. At the moment it is added to the ticket price by the airlines. Many agree with Chancellor Darling that it would be better to charge per flight. Airlines with high seat occupancy would pay less per person so it would incentivise the operators to fill every seat.

Our view is that the government will not be able to adjust the basis of the tax. The reasoning is as follows:

  • The tax must be fair and roughly tied to the emissions generated by each flight. So the government will have to set a tax figure for each journey. Heathrow to Rome will have a benchmark charge.
  • Aircraft differ: a 120-seat plane will have different emissions to a 200-seat plane. So the Heathrow to Rome benchmark must have an adjustment factor to reflect this variation.
  • Establishing the benchmark sounds simple. It is not. Eventually the calculation will have to be made using typical fuel consumption figures. So the Rome benchmark will be, say, twice the Paris figure largely based on the average fuel usage to each city.
  • Calculating the adjustment to allow for the different sizes of aircraft flying a particular route will also be complex. A 120-seat aircraft may or may not have a fuel cost of about 60% of the 200-seat plane. Which of these two options forms the benchmark?
  • Eventually, policy-makers will reach the conclusion that the only way to change the tax in a fair way is to base it on the fuel consumption of the airplane from Heathrow to Rome. Nobody can really argue about this. It is transparent and obviously measures the emissions generated on each flight.
  • Our view is therefore that any reasonably fair ‘per flight’ tax must eventually be designed in a way that makes it indistinguishable from a per litre tax on kerosene fuel.
  • Law-makers will then be reminded by the airline industry of the several hundred international treaties that prohibit the levying of a tax on fuel for international air travel. After a court tussle, the plans will be dropped, and we will revert to a per ticket levy.

Is APD working? The government says it has a ‘valuable role’. The Pre-Budget review repeats earlier figures that suggest that policy-makers think that it will cut 2.75m tonnes from aviation’s emissions by 2010. This is about 6% of the likely CO2 output from air travel at this date, less than the extra emissions coming from likely air travel increases between now and the end of the decade. At current levels (£10 for a European flight), it is clearly doing very little to alter the price competitiveness of air travel. If the government were serious about reducing air emissions, it would double the tax again next year, rather than leaving it unchanged in this PBR.

Carbon Capture and Storage There are many ways to stop the CO2 produced by the combustion of fossil fuels entering the atmosphere:

  • The CO2 can be caught after it is produced and then either stored or used in another chemical or biological reaction (‘post-combustion’). The gas can be stored in underground reservoirs such as depleted oil fields.
  • The fuel can be broken down before it is burnt. In the case of natural gas, which is mostly methane (CH4), it can be split into hydrogen and carbon monoxide by forcing a reaction with water in the absence of air. The hydrogen can then be burnt as fuel and the CO taken off and reacted with oxygen to make CO2. (These techniques are called ‘pre-combustion’.)

The government asserts that its analysis shows that it should only support ‘post-combustion’ techniques, combined with geologic storage and at a substantial power station. It has therefore declared that its long-promised ‘competition’ should only be open to these technologies. The form of the competition is unclear and the government only says it will ‘support’ one pilot commercial project over the next few years.

As we understand it, the entry conditions reduce the number of potential competitors to a small number of existing large coal-fired power stations, led by Scottish Power’s Longannet, which sits over a disused coal mine into which the CO2 can be pumped.

This was the wrong decision on a number of counts:

  • We do not know which route is the cheapest way to capture the CO2 from a power plant. All the technologies are in infancy.
  • If Longannet wins the competition, the money may be wasted. Scottish Power would possibly carry out the investment anyway. It certainly has already flagged its intention to use geologic storage for the CO2.
  • Some possible post-combustion technologies need to be proven at a smaller scale first. American Electric Power, a big coal-fired generator in the US, is installing an Alstom scrubbing technology on part of one plant. It may be that the Alstom technology is also right for the UK, but no subsidy is offered.
  • It is completely unclear that geologic storage is right or necessary. The most exciting carbon capture technologies in the world are using CO2 to make biomass. If the Carbon Commentary mailbox is any guide, the most promising technique is to use CO2 as a fertilizer for algae growth. The algae can then be squashed for their oil to make biodiesel fuel. Algae are far better at capturing CO2 than plants, and a surprisingly small area of land is needed to deal with all the emissions from a large power station.
  • Using algae to swallow CO2 is still at a very early stage of development, though large amounts of US venture capital have already swung behind the technology. Perhaps readers will be surprised to know that using tomatoes to capture CO2 is more advanced. A series of huge glasshouses at Immingham on the north-east coast collects CO2 from a fertilizer plant and uses it to encourage tomato growth. Sainsbury’s buys the output twelve months of the year. In theory, the CO2 from a power station could be used in a similar way. But the terms of the competition disqualify such a technique.
  • Most importantly, the competition doesn’t allow entries from pre-combustion methods of carbon capture. We shouldn’t be surprised. The proposed BP plant near Aberdeen, which would have split methane prior to burning and then disposed of the CO2 into an oil field was cancelled early in the summer of 2007 after the government refused to support it. Perhaps it was clear to BP six months ago that civil servants had already made up their mind against any technology that split the CO2 before burning. If there was economic logic behind this decision, we need to be told.

BP itself has said that pre-combustion CCS imposes a relatively small cost penalty on the generation of electricity. When we say ‘relatively small’ in this context, we mean that it approximately doubles the cost of electricity. This may seem an outrageous increment to pay. But the Renewables Obligation is currently subsidizing electricity generation technologies, such as the burning of energy crops, by approximately twice the amount of the BP CCS cost penalty.

This is irrational: if BP can capture the carbon from burning gas at a cost of £40 per MWh, its plant is at least as worthy of subsidy as E.ON’s energy crop power stations. To state the obvious: the UK isn’t supporting renewable generation because it is inherently better but because it reduces CO2 emissions. If a CCS power plant does the same thing, we should support it to the same level. Government policy must treat CCS as equivalent to renewables.