Outlook: Aviation emissions to be targeted by taxing Chancellor

Some economists believe that the public finances are now so much out of control that Gordon Brown is heading for a breach of his own rules on fiscal stability. The Treasury insists that the Chancellor will vanquish his critics in the pre-Budget report, scheduled for early December. Yet whatever the true state of the public finances, there's no doubt that the Chancellor is on the hunt for new sources of revenue to plug the growing gap between public spending and tax receipts. All the low hanging fruit has already gone, so where else can he turn?

Some economists believe that the public finances are now so much out of control that Gordon Brown is heading for a breach of his own rules on fiscal stability. The Treasury insists that the Chancellor will vanquish his critics in the pre-Budget report, scheduled for early December. Yet whatever the true state of the public finances, there's no doubt that the Chancellor is on the hunt for new sources of revenue to plug the growing gap between public spending and tax receipts. All the low hanging fruit has already gone, so where else can he turn?

One strong likelihood is aviation, which as things stand is comparatively lightly taxed. As with higher excise duty for gas guzzling sports utility vehicles, any such tax could also be justified on environmental grounds, and almost certainly will. According to the Government's own assessment, aviation is responsible for 5 per cent of all CO2 emissions in the UK. If nothing is done to correct the position, this would rise to 10 to 12 per cent by 2020, making aviation the single most polluting industry in Britain. Add in other air pollutants, noise and the effect on local air quality and few other industries come even remotely close in terms of adverse environmental impact.

Yet the Government's options are quite limited. Tax on aviation fuel is not allowed under international convention. But even if the Government could impose such a tax unilaterally, it would presumably hesitate before doing so because of the effect it would have on competitiveness. Aircraft would stop landing in Britain, and land somewhere else instead.

That leaves air passenger duty, which already exists, or a system of emission trading, which the Government could charge for. In terms of environmental benefit, emission trading has the most to commend it, for the effect would be to freeze emissions at their current level, forcing airlines to use fuel more efficiently, or find cleaner technologies, in order to grow. On the other hand, there are big drawbacks. It would take years of consultation to establish acceptable arrangements, they would be extraordinarily difficult to police, and they would inevitably favour incumbents over new entrants.

For the quick fix, the Chancellor must therefore turn to air passenger duty, which he could double without undue pain to the consumer. Unfortunately for him, that would raise only another £800m, which scarcely makes a dent in the extra £10bn he will need to fund his spending plans. It would also have nil impact on the level of emissions unless raised to a level where it began to reduce the amount of aviation taking place. Yet what we want is cleaner aviation, not less of it.

The Climate Change Levy, a well meaning but muddled tax which penalises companies on the basis of how much energy they use rather than how much pollution they produce, shows how difficult it is to achieve effective public policy remedies in this arena. The Chancellor will justify the higher tax as an environmental measure, but don't be fooled. It may help the Chancellor a little in making the sums add up. For everyone else, it's all downside.

Russian credit

The arrest of Russia's richest man, Mikhail Khodorkovsky, while refuelling his private jet in eastern Siberia, has sent a shiver of fear through financial markets. Less than two weeks after Moody's, the international credit rating agency, restored investment grade to Russian sovereign debt, are we about to witness a reigning back on the free market reform of Vladimir Putin's regime, a return to anti-business and dictatorial policy making?

That the arrest of one man could so unnerve markets - yesterday was the worst session for the Russian currency and stock market since the debt crisis of 1998 - tells us that when it comes to the land of kalashnikovs, vodka and borsch, international capital remains in a state of high alert, not with standing the recent stamp of approval from Moody's. It doesn't require much to frighten the horses and create a stampede.

Even so, markets are almost certainly over-reacting by panicking to such a degree, a tendency not helped by Russia's continued inability properly to explain to the outside world anything that goes on within its borders. In that respect, Soviet rule has yet finally to be abolished. The capital markets are forced constantly to resort to the old pseudo-science of Kremlinology in assessing events - that is interpreting them without actually knowing what's going on.

Yet the reality is that Russia is not about to go back to the bad old days either of communism or the lawless capitalism that ruled in the mid-1990s. It has already passed the point of no return in developing a liberalised, free market economy. The Russians desperately need international capital and know-how further to advance their prosperity. Mr Putin understands it as well as the Russian oligarchs he seems to be targeting.

So why is he trying to undermine them? Well actually, it's not all of them, just a small number. There is nothing to suggest this is the start of a broadside assault on private capital in Russia. Mr Khodorkovsky's chief sin has nothing to do with the charges against him for tax evasion and malfeasance.

Rather it is to do with his political ambitions. Most other Russian oligarchs have chosen to stay out of politics. Not so Mr Khodorkovsky, who has taken such umbrage at various aspects of Mr Putin's tax regime that he's promised to fund the election of 20 Yukos MPs to vote it down. He's also said a number of injudicious things about Mr Putin himself. Of course, this is of itself a worrying aspect of the whole affair. Virtually all the Russian oligarchs and the great majority of the country's successful entrepreneurs would be behind bars if the Putin regime were to apply the same standards of justice to them as it appears to be with Mr Khodorkovsky. To a greater or lesser degree, they all have murky pasts.

That the judiciary is prepared to pursue trumped up charges against Mr Khodorkovsky for the underlying crime of political meddling displays an intolerable disregard for the rule of law that investors are right to be wary of. Power is being applied is an arbitrary and dictatorial manner - another aspect of old, Soviet Russia that has not yet been fully exorcised from the body politic.

Mr Putin moved yesterday to distance himself from the affair by saying that justice must take its course. Privately, he would agree with the underlying message sent to the Russian super-rich - stick to business and don't interfere in politics - but publicly he's bound to be alarmed by the over enthusiasm of his subordinates in ensuring that the message is heard. The last thing he needs is another flight of capital. Mr Putin says one thing in saying that business people won't be arbitrarily attacked by the state, but his subordinates practise another. Who's in control here?

On almost every level, the Khodorkovsky affair shows that Russia is not yet at all like the developed West. Yet it has done more in terms of economic and political reform in the 14 years since the fall of communism than most countries achieve in a century of development. For investors, Russian remains high risk, but that's the price you have to pay for high opportunity and return.

Cadbury

Cadbury Schweppes has spent nearly £5bn on acquisitions over the past three years. It's fallen to the new man at the helm, Todd Stitzer, to sort out the resulting mess. At a cost of £900m, he's proposing to axe 20 per cent of factory capacity and 5,500 jobs, all for an eventual saving of £400m a year. Mr Stitzer calls his restructuring plan "Fuel for Growth", and if he sticks to the script by funnelling the bulk of the cost savings back into marketing and innovation, he may succeed. Perhaps wisely, he's leaving himself lots of time to do so, four years in fact. That's long enough for everyone to forget what his promises were in the first place. Handy

jeremy.warner@independent.co.uk