Heathrow Expansion, Economy and Carbon Leakage

What is “Carbon Leakage”? The United Nations Intergovernmental Panel on Climate Change defines carbon leakage as:

the increase in CO2 emissions outside the countries taking domestic mitigation action divided by the reduction in emissions of these countries’ (IPCC, 2007).

In other words, if we take measures to reduce CO2 emissions and another country takes action in consequence that increases CO2 production, there is “carbon leakage”.

Do we agree with the Department for Transport (and indeed the Airport Commission before it) that not allowing airport expansion will harm the UK economy? Do we think that reducing passenger numbers in the UK will lead to carbon leakage by our competitors increasing operations abroad? Will UK aviation be damaged?

We think not.

There has been much discussion on whether aviation needs to restrict its operations or not, in order to comply with climate change targets. Some say that we do. Heathrow says we do not, and can offset to compensate.

Chris Grayling, while secretary of state for transport, said to Parliament on the 5th June 2018 that:

“Expansion at Heathrow will bring real benefits across the country including a boost of up to £74 billion to passengers and the wider economy, providing better connections to growing world markets, and increasing flights to more long haul destinations. Heathrow is a nationally significant freight hub, carrying more freight by value than all other UK airports combined. A third runway would enable it nearly to double its current freight capacity.”


The Parliamentary Briefing Paper Post Note 615 at https://researchbriefings.parliament.uk/ResearchBriefing/Summary/POST-PN-0615 on climate change and carbon leakage states that:

“However, recent research commissioned by the Department for Transport (DfT) suggests that discouraging passengers from flying would not risk carbon leakage or competitive disadvantage”

This comes from an advice paper to the DfT in 2018 entitled “The Carbon Leakage and Competitiveness Impacts of Carbon Abatement Policy in Aviation” produced for the DfT by Clarity Economic Consultancy and can be obtained online at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/763260/carbon-leakage-report.pdf

The Clarity Report is long and detailed, but the executive summary is helpful in getting a broad perspective. A section as follows gives the summary on demand. Note that passenger behaviour reducing demand is unlikely to have a substantial effect, since long-distance connecting passengers who use UK hub airports are less than one twentieth of the total flights to and from the UK:

“This study finds that carbon leakage associated with airline behaviour is usually positive. In this case, a decrease in emissions from UK aviation is associated with an increase in emissions from non-UK aviation. Actions airlines can take in response to policy which could cause leakage include swapping fleet between UK and non-UK routes; selling older aircraft and buying or leasing newer ones; and tankering fuel (taking on excess fuel at non-UK airports where possible so that a subsequent flight from a UK airport can be flown without refuelling). Leakage associated with changes in fleet allocation can be close to 100%, depending on fleet availability. This is because airlines can move lower-emission aircraft into use on UK routes and move higher-emission aircraft into use on non-UK routes. This leads to a decrease in the emissions from UK aviation that is roughly matched by an increase in emissions from non-UK aviation. Leakage associated with fuel tankering is variable depending on which flights are most-affected by policy and on how emissions are calculated. If emissions are calculated based on fuel taken up at UK airports, tankering leakage is positive and may be up to 40% in the cases explored here. If emissions are calculated based on fuel used on UK departing flights, regardless of where that fuel was taken on, then tankering leakage is much smaller, typically below 4%.

In contrast, this study finds that leakage associated with passenger behaviour is usually negative. In this case, a decrease in emissions from UK aviation is matched by a decrease in emissions from non-UK aviation. This is because the main effect of a policy which increases UK-specific ticket prices is to decrease passenger demand to and from the UK. Although long-distance connecting passengers who use UK hub airports may switch to competing non-UK airports, the overall impact of this is small compared to the demand impact on passengers who start or end their journey in the UK. In 2015, there were more than twenty times as many passengers on itineraries which started or ended in the UK than passengers who used a UK hub on journeys which started and ended elsewhere.”

At clause 4.3.9 of the report on modelling and competitive disadvantage the section concludes:

“In terms of competitive disadvantage between airlines, policies which have only a demand impact have an approximately symmetric impact on UK and non-UK airlines operating on UK routes, with some small differences arising from the different fleet and networks of different airline types. However, the ability of airlines to respond to policy differs by airline type. Therefore, we would also expect policies which have a greater supply-side impact to also have a higher risk of competitive disadvantage. Policies which mainly affect demand are likely to affect the competitiveness of UK airports, however, as demand shifts between them and non-UK hubs.”

However as between UK and non-UK airports, we have seen above that only one twentieth of UK aviation traffic is dependent on a UK hub that is vulnerable to an alternative country

In the Conclusion it was said:

“The main general conclusion is that there are two main components to aviation policy carbon leakage. One component is associated with airline response to policy. This component is generally positive leakage: emissions decrease within the policy area, but increase outside the policy area. It is caused by airline strategies to reduce policy costs, for example swapping fleet between policy and non-policy routes, selling older aircraft to airlines outside the policy region, or tankering fuel. The second component is associated with passenger response to policy. On a whole-network basis, this component is negative: an emissions reduction within the policy area is matched by an emissions reduction outside the policy area. This passenger effect arises because, even if a policy applies a cost increase on a single flight segment, this will be experienced by passengers as a cost increase across their entire round-trip itinerary. This effect has been neglected in previous studies due to a focus on individual route case studies rather than examining leakage on a whole-system basis. It is robust across a range of values for uncertain parameters, including cost pass-through at congested airports and the price elasticity of demand.

A second conclusion is that policies may differ substantially in the mix of passenger and airline response that they produce. In turn, this leads to substantial differences in typical leakage. In this study, increasing the carbon price led primarily to negative leakage. This was because the dominant effect of doing so was to increase ticket prices. Although some international-international transfer passengers were projected to change routing away from UK hubs in response, the primary impact of this ticket price change was to reduce demand for the much larger cohort of passengers starting or ending their journeys in the UK. This resulted in net negative leakage of typically between -50 and -150%. In contrast, a policy to increase landing charges for older aircraft and reduce landing charges for younger aircraft led primarily to an airline-based response, and resulting positive leakage.”

It is unlikely that Heathrow have not seen this and will be anxious to increase the proportion of hub traffic in the UK to above the one twentieth. Heathrow have made much of the necessity of maintaining the Heathrow hub as the biggest in Europe and only recently commented that Paris Charles de Gaulle was likely to have more passengers. Expansion is ever more urgent, they argue. In reality, this is only relevant for about 5% of UK commercial passenger aviation

The economic consequences of an overall passenger led reduction should not damage the economy as a whole since more money is going out of the Country than coming in. According to the Office for National Statistics in 2018:

    • “A total of 37.9 million visits were made by overseas residents to the UK in 2018, which was 3% fewer than in 2017.
    • There were 71.7 million visits overseas by UK residents in 2018, a decrease of 1% when compared with 2017.
    • UK residents spent £45.4 billion on visits overseas in 2018, which was 1% more than in 2017.
    • Overseas residents spent £22.9 billion on visits to the UK in 2018, a decrease of 7% compared with 2017.
    • The most frequent reason for visits was for holidays, both for UK residents visiting abroad and overseas residents visiting the UK.”

Grayling stated to Parliament in 2018 that there would be “a boost of up to £74 billion to passengers and the wider economy”. However, on the Office for National Statistics figures the current deficit is £22.5 billion (£45.4 – £22.9) per year. It will only take 3.3 years at full capacity for Grayling’s stated benefit to be annulled.

In view of the changed circumstances, does the current secretary of state for transport still think that Heathrow expansion will bring £74 billion to the wider economy?

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