British use the environment to promote protectionism

So the British are increasing the international departure tax, and stating that it is an “externality tax”.  What spectacularly wrong-headed logic.

The externality they are talking about is “carbon emissions” – now as long as they tax the fuel that airlines use the externality is accounted for, as the carbon emissions stem from fuel use.  Adding a tax on top of an efficient externality tax is not efficient.

The real reason the British government is doing this is straight out protectionism – they believe that the impact on “outflows” from Britain will exceed the impact on tourist “inflows”, a factor that would improve net exports and help to “protect” the retail industry in Britain.  Beyond this, the increase in tax is also a simple tax grab – one that taxes tourist industries the rest of the world over.

No wonder we in New Zealand are unhappy (*, *)

  • I am about 95% certain that airline fuel is not taxed. airport departures are but not fuel

  • “I am about 95% certain that airline fuel is not taxed. airport departures are but not fuel”

    That wouldn’t stop the introduction of a higher departure tax being silly – they should have just introduced a tax on airline fuel.

  • seams silly. By setting a flat rate it also means that tax is unrealted to the fuel economy of the plane in question. Having a per litre tax would encourage competition between airlines on fuel efficiney since if you flew on a more fuel efficient plane you would pay less.

    I think if you had a fuel tax in practical terms the airlines would have to pay it and then pass it through. More efficent airlines would pay a lower tax and thus pass elss through and thus be able to offer lower prices.

    Sounds like it would increase competition and internalise an externality, win-win in my opinion:)

  • steve

    i agree it should be a tax on fuel,

    the point I think though is for passengers to notice the externality they see it as a tax. of course, they could regulate that the carrier has to show the consumer what portion of the tax they are paying. and it would be less for more fuel effecient planes.

    I wonder which is easier to implement, a higher departure tax or a tax on the fuel. because my understanding is that the govt originally said they would tax the fuel, and have only recently changed their minds. perhaps it is because it is cheaper to implement a higher departure tax, and this recovers the ineffeciencies of taxing each seat, than taxing fuel.

  • It may be an imperfect measure, but the better measures are all more complex to introduce. I don’t think that we can say for sure that it’s not intended to reduce emissions.

  • “the point I think though is for passengers to notice the externality they see it as a tax”

    Why does the consumer have to “notice the externality”. The purpose is to make the price represent the full social cost of consuming the service – if the consumer is willing to pay that then we’re all good.

    “I wonder which is easier to implement, a higher departure tax or a tax on the fuel”

    It could well be, but I can’t envisage it being that much harder.

    “It may be an imperfect measure, but the better measures are all more complex to introduce”

    A tax on fuel as complex? Why is it complex to introduce one for airlines and not complex to introduce one for automotives?

    “I don’t think that we can say for sure that it’s not intended to reduce emissions”

    Agreed, we can say practically nothing for sure.

    However, a departure tax is a very imperfect way of dealing with the externality.

    I believe they are using the idea of an externality as a smokescreen to introduce protectionist policies – it is the UK after all, this wouldn’t be the first time.

  • “Why is it complex to introduce one for airlines and not complex to introduce one for automotives?”

    Is it legislatively easier? I would imagine that the departure tax is an executive decision while a change in the petrol tax is done by the legislature. But I’m just guessing 😛

    Less lobbying by airlines, too, maybe???

  • I think the problem/excuse for the airlines is the international nature of the sourcing possibilities. in most cases the car/truck is confined to the country they are working in. the exception being eastern european truckers filling up in france and having lower costs than english based truckers such is the duty differential

  • Well, it is being passed with a package reducing VAT – so I can’t see any practical different between changing the departure tax and slapping on a fuel tax on.

    However, I buy your argument about lobbying – it looks like it has been an issue in the past for them:

    http://news.bbc.co.uk/1/hi/uk_politics/6439051.stm

    http://www.guardian.co.uk/business/2005/feb/07/environment.theairlineindustry

  • “I think the problem/excuse for the airlines is the international nature of the sourcing possibilities. in most cases the car/truck is confined to the country they are working in”

    Indeed, this is the argument that NZIER used for New Zealand not taxing carbon emissions on agriculture. CARBON LEAKAGE.

    In this case airlines will fill up in countries that don’t have a fuel tax (especially if they are very near by). However, if Britain’s goal is to reduce their carbon emissions – doesn’t this do the trick?

  • steve

    “In this case airlines will fill up in countries that don’t have a fuel tax (especially if they are very near by). However, if Britain’s goal is to reduce their carbon emissions – doesn’t this do the trick?”

    No, I think that was a good point from sagenz. a fuel tax might reduce “Britains” carbon emmissions, but could increase emmissions overall because of the extra fuel required to carry extra fuel from France/Ireland etc. by having a departure tax, it gets all planes and is all passed on to consumers. on the otherhand a tax on fuel would only get long-haul flights (that haven’t also been fifth freedom flights on the same route).

    a departure tax is not perfect, but it does at least okay, and may be cheaper to implement than the more perfect alternative.

  • Indeed very interesting. I do think that both sagenz and steve have good points. Let me try to discuss the issues in a bit more detail.

    Ultimately, I guess it depends what Britain’s target for the environment is.

    My presumption was that Britain only cares about their impact on carbon emissions – not the change in net emissions. This presumption is based on the fact that I believe anti-carbon policy is about reduction/paying off the carbon liability associated with the countries emissions.

    Given this presumption, a fuel tax is a far superior instrument.

    However, it is definitely conceivable that a increase in the departure tax will have a greater impact on global carbon emissions – as a result, if Britain is trying to reduce the probability of a global warming event this is could be a better policy instrument.

    Ultimately, I am not convinced that a “national policy” is sufficient to reduce the probability of global warming, even from a nation as developed as Britain – as it is an international problem. As a result, the increase in the departure tax seems more akin to protectionism then to fundamental environmentalism.

    One further note I would add is that the Kyoto agreement was supposedly set at a level that would significantly reduce the probability of global warming (if not then what was the point?). As a result, if Britain expects other nations to act in accordance to their carbon target then the issue of carbon leakage is a relative non-issue – as it should have been taken into account when setting the protocol. As a result, using the method that most efficiently prices their Kyoto liability would be the best way to meet environmental concerns.

  • “a fuel tax might reduce “Britains” carbon emmissions, but could increase emmissions overall because of the extra fuel required to carry extra fuel from France/Ireland etc.”

    The tax would have to be pretty large to make the numbers stack on this wouldn’t it? How many people do planes hold? I’m assuming the big 747s etc.. hold atleast 300 people. If the tax was set to give the same amount of tax revenue as the fixed fee that would get you 75k.

    I wonder if a round trip to Ireland/France would cost less then 100k?

  • “The tax would have to be pretty large to make the numbers stack on this wouldn’t it?”

    Very true. However, I’m guilty of working on a continuous margin as much as anyone else – so I think it is fair to presume that there will be some type of price elasticity 🙂

    Also, you wouldn’t need a “round trip”. If Ireland doesn’t do it but Britain does you could land in Dublin before Heathrow to get loaded up – or something like that 🙂

  • haha, yeah there would probably be some weird scheduling going on in that all long haul flights will conveniently leave right after a service arrives from Dublin:)

  • “haha, yeah there would probably be some weird scheduling going on in that all long haul flights will conveniently leave right after a service arrives from Dublin:)”

    It would be beautiful 😉

    Good for Dublin as well methinks, they would be able to expand the airport 😀

  • it would be great for Dublin, there would be lots of cheap flights between Dublin and the UK:)

  • Maybe its time to get my Irish passport!

  • George Bolwing

    Coming in a bit late, but there is some important context that helps explain why the UK has done this.

    First, the UK is involved in a complex, dynamic, set of international negotiations, both in the EU and in the UNFCCC on climate change. The logic is that because climate change is a global issue (all molecules are created equal), the end goal is to have the issue addressed by all the major emitters and potential emitters – countries to which emitting activity might relocate.

    This is definitely not a one-shot negotiation, nor is it a zero sum game.

    So it is all about building trust and trustworthiness on all sides. It is also about maximising the gains from trade that can then be shared (the hackneyed “win-win situation”).

    This means that the high-income countries (and that includes us as well) have to demonstrate a willingness to incur costs as a way of building trust on the part of the low-income but high actual or potential emitting countries, who will also have to incur costs if a truly effective international solution is to be found.

    (BTW, this is why the NZ Institute’s idea of NZ being a “fast follower” got up the nose of some politicians: it was exactly the wrong signal to send to the international negotiations.)

    On the EU side, the EU has made an in-principle decision to bring aviation into their emissions trading scheme. So again, the UK is showing “leadership” (building trust) as a way of getting the rest of the EU into the mood to address the issue.

    While difficult to quantify, I can see a lot in this line of argument. The rich countries are going to have to put on their hair shirts for a while. The trick is to only have to do so for long enough to make the international negotiations work.

    The other reasons are far less convincing and smack of pretty bad government failure to me. They include:

    a) The UK has just passed a Climate Change Bill that imposes binding, unilateral, emissions reduction targets on the UK (again, partly as a major signalling point to the international negotiations). During the parliamentary processes, the Labour back-bench wanted to include international aviation and shipping, even though they are, as of now, outside the UNFCCC’s scope. Partly about level playing fields (if domestic activity is going to be subject to restrictions, need to try and the international stuff in), partly about influencing negotiations and partly about addressing domestic political concerns (long-haul international travellers, especially of the high-income type, are getting some stick in the UK for being environmentally irresponsible).

    So given that international travel is no included within the total UK emissions cap, a measure is needed to apply a price signal.

    Now, as others have pointed out, there are other ways to do this, but since the political goal was to show that the parliament was listening to community concerns about rich pricks (to coin a term).

    b) there is a strong push in the UK to apply instruments at the individual level, as a way of building “community” (this is the point were we start singing Vera Lynn songs and tell stories about the good old days of the Blitz). One particularly silly idea was that each person would get an individual “carbon credit card” that would include their portion of the UK’s Kyoto allowance and who have to use it whenever they purchased anything with a carbon footprint. If you used up your allowance, you would have to go and purchase a “top up”. The compliance costs were horrendous.

    So putting the price of carbon on in a very transparent, but high cost and potentially ineffective manner is part of this trend.

  • Hi George,

    I completely agree with the signaling argument surrounding the wish to “get hard on climate change”.

    However, even so – the way to get hard is to directly reduce Britain’s carbon emissions, as they can put any carbon leakage down to the fact that other countries are slagging off.

    I am also not convinced that a tax on fuel is a particularly high cost way of doing this – and it definitely provides a better price signal that a tiered departure charge as it attacks something that more closely resembles marginal carbon emissions.

  • I too agree that getting ard on climate change is a good idea, that doesn’t resolve us from the responsibility to try and pick the best policy to get hard on climate change and I think our point is that there are better ways to do it then what is currently proposed.

    An intersting point nobody has raised is that while the planes might fuel up in Dublin to avoid the fuel tax, passengers could equally have their long haul flight depart from outside the UK to avoid the long haul departure fee, i.e fly to dublin and then to NZ.

  • “An intersting point nobody has raised is that while the planes might fuel up in Dublin to avoid the fuel tax, passengers could equally have their long haul flight depart from outside the UK to avoid the long haul departure fee, i.e fly to dublin and then to NZ.”

    I saw that point raised on the Standard.

    http://www.thestandard.org.nz/the-departed/

    Steve rightly said that the cost of flying to Dublin will probably exceed the charge.

    However, airlines might have the incentive to make “tailored deals” if they think they can increase demand by effectively lowering the tax that is paid.

  • Aviation fuel used for international air services cannot be taxed. There are now literally thousands of bilateral air services treaties that prohibit this. The relevant New Zealand-United Kingdom “open skies” agreement is available at http://www.fco.gov.uk/resources/en/pdf/3706546/3892733/4190568/4356125/Av8 See Article 7.

    The EU is, however, planning to unilaterally include international aviation in its emissions trading scheme from 2012. See: http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/misc/103533.pdf The legality of this move is being questioned by some countries, notably the USA.

  • Thanks John, that is very interesting.

    Do you have any idea why there is an agreement that states it cannot be taxed?

  • Okay, so how would we work out to what extent what is proposed is a “tax grab” and/or protectionism or could have environmental legitimacy?

    Could we:
    – take the distance and emissions of CO2 for a one-way London-Auckland economy flight from the International Civil Aviation Organization (ICAO) carbon emissions calculator at: http://www2.icao.int/public/cfmapps/carbonoffset/carbon_calculator.cfm which gives an answer of 18,335 Km generating about 1,341.73 Kg of CO2
    – take the price of carbon emissions today from Point Carbon at: http://www.pointcarbon.com/ which today gives a value of €15.70 per tonne
    – do a conversion from Euros to Pounds giving £13.36 per tonne and multiple that by 1.342 tonnes
    – and come up with £17.93 compared with the current Air Passenger Duty (APD) of £40, the proposed APD of £55 from 1 November 2009 and the proposed APD of £85 from 2010 (see: http://www.hmrc.gov.uk/pbr2008/pbrn20.pdf ) or do I misunderstand the basis of how HM Treasury arrived at the appropriate value of this “green” tax?

  • I think that the tax exemption dates back to the late 1940s and has been added to bilateral air services agreements ever since.

    You may find the following working paper from the IMF of interest: http://www.imf.org/external/pubs/ft/wp/2006/wp06124.pdf (see pp10-11).

  • “However, airlines might have the incentive to make “tailored deals” if they think they can increase demand by effectively lowering the tax that is paid.”

    That’s what I had in mind, it would basically be the same as flying the plane to Dublin to fuel up, except you would have all the passengers on board that are going to NZ. Effectively airlines could just schedule all their long haul flights via other airports so it doesn’t count as long haul flight when it leaves the UK.

    I guess a key thing here is how long a flight we are talking to Dublin etc…? is the extra flight time really worth saving the extra £85?

    Very interesting figures John.

  • Indeed, very interesting figures from John – I think we will have to have a look back at the issue some time soon 🙂