Energy and Environment

The airport debate has forgotten free markets


Tax and Fiscal Policy
If you’ve ever wondered why the airport capacity debate has become so problematic, two contributions last week, each exemplifying one of the camps by which it is dominated, show why.

First, International Airlines Group chief executive Willie Walsh warned that the UK economy risks falling behind if the government blocks airport expansion. He pointed to Dubai Airport, which looks set to overtake Heathrow in terms of passenger numbers this year. Secondly, the New Economics Foundation (NEF) called upon the government to shut down London City Airport, claiming it was taking up precious inner city land.

Walsh used the rhetoric of the ‘global race’; the NEF represents a ‘deep green’ mix of environmentalists and anti-consumerists who are deeply hostile to air travel. From a free-market economic perspective, however, neither camp is convincing. And since it was deregulation and privatisation that led to the astonishing growth and democratisation of air travel (211m passengers passed through UK airports in 2011, up from about 40m in the early 1970s), this is a big problem.

The ‘global racers’ see airports as a mercantilist tool, to be deployed in a strategic industrial policy. They never question the rationale for the existence of the Airports Commission, which should have no place in a market economy. It has forced airports wishing to expand to submit what amount to business plans. Yet when demand for beer increases, we do not set up a Brewery Commission to evaluate which brewery should expand, and in which way. We let the market decide.

Global racers also view airports as objects of national prestige. But decisions should be determined by what makes economic sense, not by a perceived imperative to match whatever Dubai or other countries are doing.

Still, the global racers generally reach sensible conclusions. Environmentalist opponents of expansion are profoundly wrong. Aviation does cause negative externalities, but these are already internalised through Air Passenger Duty, a quasi-Pigouvian tax with rates that exceed available estimates of the social cost of carbon. Final ticket prices already contain the ‘social cost’ of flying. Emissions from intra-European air travel are also covered by the EU’s carbon cap-and-trade system, so environmental costs are tackled twice. Surely, there is no environmental case for arbitrarily shutting down airports.

The NEF’s economic arguments are spurious too. It claims there are better uses for the area of City Airport, which could be true. But nothing would stop a private consortium from acquiring the airport, closing it, and putting it to whatever that better use is. The NEF also says City Airport provides no benefits to the local area, citing Newham’s low average income and high unemployment rate. But this is judging it by impossible standards. Nobody could expect such a tiny airport to singlehandedly regenerate a whole borough.

This is where we come to a better solution to the whole issue. If securing greater benefits for local residents is the NEF’s concern, it should advocate fiscal decentralisation: let local authorities retain most of the tax revenue generated at the airport. And the principle could be extended to airport expansion more generally. Let beneficiaries ‘buy’ the right to conduct the activity from those who are adversely affected, without involving politicians.

Unsurprisingly, this is the one option the NEF steers well clear of. It might endear residents to airports a lot more.

This article was originally published by City AM.

Kristian Niemietz is the author of Depoliticising Airport Expansion.

Follow @K_Niemietz on Twitter.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Editorial Director, and Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).