advice paper September 2017 I NO: 17–23

air royal society of edinburgh response

Introduction Question 1 Do you support the ’s policy plan to reduce the overall 1 The Royal Society of Edinburgh (RSE) welcomes burden of ADT by 50% by the end of the current the opportunity to respond to the Scottish session of the ? Government’s consultation on the (ADT), which is will replace the current Air 5 The RSE has reservations over whether the Passenger Duty (APD) from April 2018. planned reduction of ADT by 50% would play any significant role in achieving the strategic 2 The RSE submitted evidence in response to the objectives set out by the Scottish Government Scottish Government’s consultation on a Scottish of improving connectivity in Scotland or replacement for in June 2016. strengthening the Scottish economy. This Advice Paper echoes the points made in that response. Question 2 3 The RSE has undertaken a considerable amount Please explain your answer to question 1. of work on taxation, Scotland’s fiscal framework Strategic and Policy Objectives and the further devolution of fiscal powers 6 The RSE strongly supports the objective set out to Holyrood in recent years, including the in the consultation document of improving following papers: Scotland’s connectivity, and the wider aim • Competitive and Fair Taxation (July 2015)1 of a stronger economy which is better equipped • Scottish Fiscal Commission to provide the best possible opportunities and (November 2015)2 quality of life for the population. We have reservations, however, as to whether the • A Scottish Replacement for Air Passenger broad-brush measure of reducing the rate of Duty (June 2016)3 the Air Departure Tax would play any significant • A Scottish Approach to Taxation role in accomplishing these goals, as (a) much of (October 2016)4 the impact comes from boosting tourism and it is not clear that this significantly enhances 4 This response was prepared using the expertise connectivity, and; (b) the strongest boost to of a Working Group of RSE Fellows from connectivity through air travel accrues to the a wide range of institutions and with diverse Highlands and Islands, where airports are already backgrounds. The Advice Paper has been exempt from the current APD. approved by the General Secretary of the Royal Society of Edinburgh.

1 https://www.rse.org.uk/wp-content/uploads/2016/09/AP15_12.pdf 2 https://www.rse.org.uk/wp-content/uploads/2016/09/AP15_23.pdf 3 https://www.rse.org.uk/wp-content/uploads/2016/09/AP16_13.pdf 4 https://www.rse.org.uk/wp-content/uploads/2016/10/AP16_21.pdf 1 advice paper 17–24

7 While the rationale for the reform appears to 11 The RSE recognises that increased connectivity be to improve Scotland’s competitiveness, in is an important aspect of improving the Scottish comparison to both the rest of the UK and the economy and the lives of the people living in world, we find that the proposals do not appear Scotland. However, as noted above, we think that to adequately consider or address: this objective is best addressed by exempting airports in the Highlands and Islands. We also • the efficiency of APD as a revenue-raising tax; note that significant improvements in • the regressive nature of APD; connectivity may encourage people to travel • the lack of examination into how a 50% more frequently and so come with an reduction would actually play a role in environmental cost. Therefore, a balance must achieving the stated objectives. be found which allows economic growth, while contributing to our environmental targets. 8 The RSE recognises the actions of the Scottish Government in setting some of the most 12 Consideration must also be given to whether any ambitious and challenging climate change targets economic benefits derived from a reduction in the in the world, in the Climate Change (Scotland) rate of ADT would benefit all regions of Scotland Act 2009 and proposed in the Climate Change equally or would accrue unevenly. Edinburgh Bill also currently out for consultation. However, and Glasgow airports accounted for more than we find it difficult to reconcile these ambitions three-quarters of Scottish air passenger traffic with the proposed reduction in a tax which serves in 2015 7 and would almost certainly benefit an important environmental purpose as a form disproportionately from the reform. Furthermore, of carbon tax. as airports in the Highlands and Islands are already exempt from current APD a reduction in Economic Considerations the rate for flights leaving other Scottish airports 9 The RSE considers that arguments suggesting could actually be argued to reduce the competitive that the effect of a 50% reduction in ADT would advantage of the exempt airports. be to boost tourism, create jobs and increase Tax Revenue growth in Scotland are not well established. While it does seem likely that a reduction in ADT 13 The RSE believes that a strong case can be would result in, at least, a small increase in made for retaining the current rates as a source tourism to Scotland, we have significant doubts of revenue. Firstly – because it includes residents that the suggested reform would achieve the from outside the UK –- it broadens the tax base. outcomes the Scottish Government desires for Secondly, the demand for air travel is relatively the economy. inelastic, in that it does not respond greatly to small changes in prices. This means that ADT is 10 We also note the trends in air travel across the a relatively stable source of revenue. Finally it is UK. The number of people travelling through difficult, if not impossible, to avoid paying the tax. UK airports has increased year-on-year since All these factors make a relatively high rate of 2010, from fewer than 211 million passengers to Airport Departure Tax an important component over 251 million passengers in 2015.5 This is also of a well-designed tax system. true in Scotland where numbers have increased from under 21 million in 2010 to over 25 million passengers in 2015.6 Considering the trend is already towards greater numbers of air passengers in both the UK and in Scotland, we are unsure of the necessity of action which seems likely to increase further the amount of air travel undertaken.

5 https://www.gov.uk/government/statistical-data-sets/avi01-traffic-passenger-numbers-mode-of-travel-to-airport 6 https://www.transport.gov.scot/publication/scottish-transport-statistics-no-35-datasets/ 7 https://www.transport.gov.scot/publication/scottish-transport-statistics-no-35-datasets/ 2 advice paper 17–24

14 We consider the current system of APD has Emissions and the Environment proved itself to be an efficient tax in raising 17 In addition to raising revenue for the government, revenue for government. The most recent ADT would also serve as an important environmental Government Expenditure and tax. Due to international agreements – following (GERS) report found that Air Passenger Duty is the principles of the Convention on Civil Aviation estimated to raise £264 million for the Scottish – airlines are exempt from paying taxes and custom Government in 2016-17.8 We believe that duties on various aviation-related goods, including consideration should be given to whether it is aviation fuel. Thus, while unleaded petrol and wise to reduce a consistent source of government diesel for cars in the UK are taxed at a rate of revenue during a period when it is almost £0.5795 per litre plus VAT 10, aviation kerosene universally accepted that public finances are strained, and are likely to be so for the foreseeable is in the privileged position of having no tax. future. We note this in the context of revenues 18 The tax exempt status of aviation kerosene from North Sea Oil falling sharply. North Sea essentially acts as a government subsidy on air oil and gas production brought in just under travel; one which is not afforded to any other £11 billion in 2011-12, but will cost the UK mode of transport. In 2014, aviation emissions exchequer over £300 million in 2016-17. 9 accounted for around 6% of all UK greenhouse gas emissions.11 Forecasts by the Department for 15 By cutting the rate of ADT, the Scottish Transport suggest that emissions from domestic Government could reduce its own revenue, and international flights could account for 20.6% while increasing that of the UK Exchequer. of UK carbon emissions by 2050.12 Considering We consider that more work must still be these realities we question the rationale for undertaken for it to be confidently suggested reducing the rate of ADT, which is the only that the proposed reduction in the rate of ADT quasi-carbon tax on air travel. would significantly increase tourism in Scotland. However, if this were to be the case, the Scottish 19 The RSE’s previous Advice Paper on A Scottish Government might be sacrificing revenue Replacement for Air Passenger Duty (June 2016)13 derived from a tax it will collect (ADT) in order was written prior to the referendum on the UK’s to increase revenue from a tax (VAT) that the UK membership of the European Union. We noted Exchequer receives from tourists’ expenditure that while the RSE could see no environmental while in Scotland. The justification for cutting the rate of APD, the need legislates for Scotland to be assigned only the first for a quasi-carbon tax, such as ADT, could be 10p of VAT receipts. The Scottish Government lessened in the future depending on the success would, however, benefit from increased income of the EU Emissions Trading System (EU ETS).14 tax revenue from any new jobs created. The system works on a ‘cap and trade’ principle whereby companies can buy and sell emission 16 As the demand for business air travel is relatively allowances, under the framework of an overall inelastic, (i.e. it is not sensitive to small changes emissions cap which is continually decreased. in the price of flying) a reduction in the rate of Should the scheme prove successful (in that a high Air Passenger Duty is unlikely to have a significant carbon price incentivises investment in cleaner, effect on the number of people taking business low-carbon technology, and thus carbon emissions flights. The effect could simply be to reduce in the EU fall significantly) the role ADT would government revenue, unless a substantial increase play in discouraging carbon emissions may in leisure travel compensated for the loss of become less important. Airlines are included in revenue from business flights. the scheme. The UK’s decision to withdraw from the European Union clearly puts its continued involvement in this scheme in considerable doubt.

8 http://www.gov.scot/Resource/0052/00523700.pdf 9 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/637096/Statistics_of_government_revenues_from_UK_oil_and_gas_production__June_2017.pdf 10 https://www.gov.uk/government/publications/rates-and-allowances--duty-hydrocarbon-oils/excise-duty-hydrocarbon-oils-rates 11 https://www.theccc.org.uk/2016/10/25/uk-aviation-emissions-must-be-consistent-with-uk-climate-change-commitments-ccc-says/ 12 http://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN00523 13 https://www.rse.org.uk/wp-content/uploads/2016/09/AP16_13.pdf 14 http://ec.europa.eu/clima/policies/ets/index_en.htm 3 advice paper 17–24

20 It should be stressed that even if the EU ETS were levy taxes covering tourism, such as on hotels, to prove a success, this alone would not balance which the UK does not. It is far from clear what out the de facto subsidy on aviation kerosene conclusions can reasonably be drawn from such compared to other fossil fuels. international comparisons of tax rates. 21 The RSE considers that there is a general lack Question 3 If you answered ‘Yes’ to question 1, of data relating to the potential effects on carbon please provide any suggestions you may have on emissions of the proposed policy decision and we the most effective way, in your view, in which a strongly recommend that further research is 50% reduction in the overall ADT burden should undertaken to address this. We warn against be applied across tax bands and tax rate amounts modelling which simply multiplies emissions by in order to achieve the Scottish Government’s the forecast number of new passengers into overall connectivity and sustainable growth Scotland as this will likely overstate the climate objectives. change impact. An increase in air traffic in Scotland is likely to come at the expense of air 25 While the RSE submission does not express traffic elsewhere, rather than due to an outright support for the Scottish Government’s policy plan increase in passengers. to reduce the overall burden of ADT by 50% there are particular issues around the distribution and 22 Should Scottish airports offer an incentive for structure of such a tax the government should passengers to travel through them rather than consider. airports in the north of England this may lead to passengers travelling to Edinburgh or Glasgow Distribution in order to continue to their final destination via another mode of transport. This scenario is likely 26 The proposed Air Departure Tax would be a to be less energy efficient and would be of specific tax, rather than an ad valorem tax. considerably greater financial benefit to air However, it does have a degree of proportionality carriers and airports than to the larger Scottish as it differentiates by both class of travel and economy. distance of journey. Despite this link between rate and distance, the fact that ADT would be applied Rate only to departing flights could lead to the 23 In the consultation document the Scottish unsatisfactory situation whereby return flights Government notes that Air Passenger Duty is one within the UK attract a greater amount of tax of the highest aviation taxes of its kind in the than return journeys of a similar length that world. However, it is important to highlight that either originate or terminate outside the United this is not necessarily negative. It could be argued Kingdom. The proposed reform does not address that the UK has simply been quicker than other this problem. countries to note the benefits of such a tax at 27 As a specific tax ADT does fall disproportionately raising revenue and set rates accordingly. While on cheaper flights and so could be considered, the document suggests that reducing the rate at least to some extent, a regressive tax. of ADT would “level the playing field” with The possibility of making ADT more progressive competing European airports, there is no (perhaps by decreasing only the reduced rate/ evidence that the relatively high UK rate is increasing only the higher rate) should be adversely affecting the growth of air travel considered. in the UK. 24 It should also be acknowledged that there are other types of taxes where the rates levied by other countries are much higher than those levied in the UK. For example, many other countries

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Structure Question 4 Please provide any other comments you have on the policy plan. 28 The RSE considers that the current Air Passenger Duty is, on the whole, an effective tax, that both 33 The (limited) modelling and analysis that has raises revenue and plays a role in limiting carbon taken place around the effects of a reduction in emissions. However, it is an imperfect substitute ADT work on the assumption that Scotland for a carbon tax and the Scottish Government may enacts such a policy in isolation. It must be wish to re-examine the entire structure of how considered whether such action would result in Scotland plans to levy tax on air travel in the tax competition with the rest of the UK, which future. would leave the analysis flawed and potentially lead to an unhealthy ‘race to the bottom’. It is also 29 We suggest that the possibility of reforming possible that the UK Government could devolve taxation on air travel from a per-passenger duty responsibility for APD to English regions, giving to a per-plane duty deserves further consideration. areas with airports most likely to be adversely This step would serve to ensure that sparsely filled affected by a lower rate of ADT in Scotland the flights, with equivalent emissions, pay the same power to alter this tax. tax as fuller flights. More importantly, this change would also bring freight transport into this tax 34 The discourse around a Scottish replacement for base and incentivise this subsector to operate in a Air Passenger Duty has taken place based on the more environmentally friendly manner. Such assumption that airlines would automatically pass a tax could set bands by fuel efficiency and on the tax saving to passengers and thus airfares emissions, and thus encourage airlines to switch from Scottish airports would fall. The behavioural to cleaner aircraft. response of businesses to a reduction in APD is not addressed in the document and is at this stage 30 We do acknowledge that a drawback of such a unknown. change would be to make the tax less perceptible to the public. An advantage of the current APD is that the individual tax being paid by each passenger is clear. 31 It should also be noted that the aspect of ADT which would seek to tax tourism could be levied on other areas such as hotels, as is the case in some other European Union countries. While such a tax could be set at a local level, it would still predominantly benefit Edinburgh and Glasgow over the rest of Scotland. Importantly, this would come with a significant environmental cost as a tourist tax would not serve as a tax on emissions. 32 We suggest the Scottish Government commits to significant and rigorous economic policy analysis. Proposals for reforming tax should provide clearly expressed objectives with supporting evidence on why these are important and how they will be achieved. The costs and benefits to the economy, public revenue, and the environment can then be analysed in detail and the case for specific policy presented.

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Additional Information

Any enquiries about this response should be addressed to Craig Denham, Policy Advice Officer ([email protected]).

Responses are published on the RSE website (www.rse.org.uk).

The Royal Society of Edinburgh, Scotland's National Academy, is Scottish Charity No. SC000470

Advice Paper (Royal Society of Edinburgh) ISSN 2024-2694

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