Select Committee on Environmental Audit Minutes of Evidence

Memorandum from the Institute for European Environmental Policy (IEEP)


  1.  The Institute for European Environmental Policy (IEEP) is an independent, non-profit policy studies institute, specialising in environmental policy in Europe. One of our areas of expertise is the environmental dimension of European and UK transport policy, which includes fiscal policy and alternative fuels.


  2.  The fact that road fuel consumption has risen in spite of the fuel duty escalator has led some to claim that it is not an effective policy instrument, but this is really not the case. Fuel consumption can be expected to rise as disposable incomes increase, but it would have risen more if fuel prices had been lower.

  3.  Other things being equal, motorists are known to consume somewhat less fuel as prices rise. This is the elasticity of fuel demand with respect to price. It is generally agreed that the short term elasticity is fairly small, but the long term elasticity is larger. That is, motorists do not change their behaviour very much in the short term, but are rather more likely to respond in the longer term, particularly if they expect that prices will remain high or get even higher.

  4.  A wide range of consumer responses to high fuel prices is possible. In the short term they may drive more economically, avoid making some trips by car, or switch to another mode. In the longer term they might seek a more efficient car, or adopt different working practices in order to cut the distance which they need to drive. When moving house or changing their place of work, they might also take motoring costs into account in selecting a location.

  5.  In this sense, high fuel duties can be regarded as synergistic with other stated transport policy objectives such as promoting more efficient vehicles, increasing the use of public transport, or reducing the need to travel. Conversely, reducing fuel duties is likely to undermine these objectives.

  6.  Fuel duty is currently the principal instrument available to help to internalise the external costs of transport use, and hence to deliver environmental and related objectives in transport policy. It is a very effective mechanism to address CO2 emissions because these are a direct function of the quantity of fuel consumed, but it is less efficient as a means of tackling other problems such as congestion. Other instruments such as congestion charging and distance-related taxes on heavy goods vehicles are now under consideration in order to tackle these specific problems, and if these were introduced, then a reduction in fuel duty might be justified.


  7.  In the Pre-Budget Report (PBR) 2000, the government announced a proposed cut of 2p per litre for ultra-low sulphur petrol (ULSP). ULSP is not, as yet, generally available in the UK in spite of a 1p duty differential introduced last year, as ULSP costs more to produce than standard unleaded petrol. The additional reduction should however be sufficient to encourage the general availability of ULSP from next year.

  8.  This cleaner fuel will bring about a modest reduction in conventional pollutants (including NOx and particulates) from petrol cars. Its impact on CO2 emissions is slightly more controversial, however. The oil industry has argued that the cost of a wholesale switch to ULSP would be excessive and would exceed the environmental benefit, as the additional demands in refining the fuel could lead to a net increase in CO2 emissions on a "well to wheel" basis.

  9.  These claims are disputed by some, and may well turn out to be overly pessimistic, however. Against this, an important long-term benefit of ULSP is that it will enable motor manufacturers to use certain advanced engine technologies which offer improvements in fuel efficiency. Thus, provided that carmakers rise to the opportunity now provided to them, the net effect of the ULSP duty changes on CO2 levels appears likely to be positive in the medium term at least.

  10.  At the same time as the cut in duty on ULSP, the Chancellor announced a further cut of 3p per litre for ultra-low sulphur diesel (ULSD). This was presented as an additional environmental measure, and a rational approach to fuel taxation by moving the duty rates for ULSP and ULSD in harmony. In reality, however, there is no clear reason for the latter to be done, and there was no additional environmental benefit to be gained from cutting the duty rate on ULSD because ULSD already has a virtually 100 per cent market share of diesel in the UK. Instead, the cost reduction will obviously encourage some increase in diesel consumption, and hence in CO2 and other emissions.

  11.  This, then, was in effect a diesel duty reduction rather thinly disguised as something else. There are of course understandable reasons for the government to wish to disguise a reduction in the rate of diesel duty, but it was regrettable that the apparent linkage of changes regarding ULSP and ULSD created some confusion over the new "green fuels" policy.


  12.  Assessment of the environmental impacts of the changes announced in the Pre-Budget Statement was largely confined to Table 6.2 of the PBR. This was accompanied by very little discussion, or presentation of underlying assumptions or methodologies used in reaching the estimates in Table 6.2. This is in marked contrast to the economic aspects of the budget, which are discussed at considerable length.

  13.  As a result of this lack of detail, it generally remains very difficult to reach an independent assessment of the accuracy or otherwise of the estimates produced.

  14.  One exception to this is the statement which claims that reductions in NOx and particulates will result from the reduced duty on ULSD. This is clearly incorrect for the reasons set out in paragraph 10 above, as a slight increase in emissions is likely to occur.


  15.  Given the continuing concern over transport sector CO2 emissions and the apparent difficulty in maintaining high levels of fuel duty, alternative measures merit consideration. The Green Fuels Challenge represents a useful and timely opportunity to increase the uptake of other transport fuels.

  16.  A number of alternative fuels have been promoted over the years in various parts of the world, for a range of reasons including improving emissions performance, reducing oil dependency, etc. Some of these (notably electric vehicles) have never really delivered their supposed potential, and few have made serious headway on account of practical drawbacks or cost disadvantages relative to petrol and diesel. Successive UK governments have in the past shown little enthusiasm for alternative fuels, and as a result, the UK has as yet relatively few alternatively fuelled vehicles.

  17.  Probably the most readily available alternatives to petrol and diesel are gaseous fuels - most notably compressed natural gas (CNG) and liquefied petroleum gas (LPG). These offer significant air quality benefits, and some reduction in CO2, particularly relative to petrol engines, because natural gas has a lower carbon to hydrogen ratio that petrol or diesel. They are also much cheaper in terms of running costs, as the level of duty payable is much lower than that on conventional road fuels. A viable refuelling network will be essential to ensure broader takeup of gaseous fuels. Several major oil companies have now addressed themselves to this question, but got off to a rather slow start in 1999-2000.

  18.  Hybrid vehicles combine an electric motor and batteries with a small conventional engine. They are technically complex and relatively expensive, but do offer benefits in terms of emissions and fuel economy. Production models are now available (Honda Insight and Toyota Prius), but have a rather small market share.

  19.  For the longer term, fuel cells appear to be the technology of choice to tackle vehicle emissions of both conventional pollutants and CO2. After a long gestation period they now appear to be approaching market-readiness for the light vehicle sector, with several manufacturers vying to offer the first production model, perhaps by 2004. They do not suffer from many of the drawbacks of battery-powered electric vehicles, and the only emission from the vehicle itself is water vapour.

  20.  As with many alternative fuels, however, it is important to consider the full life-cycle emissions of the fuel. While the end-use fuel is hydrogen, there are three main routes whereby the hydrogen can be delivered to the fuel cell:

    —  Hydrogen generated from natural gas in a stationary plant, and pumped into a tank in the vehicle;

    —  Methanol fuel, reformulated on board the vehicle; and

    —  Petrol (with very low sulphur content) reformulated on board the vehicle.

  21.  A recent report from the Pembina Institute in Canada found that, of these, only the first option reduces greenhouse gas emissions substantially (by around two thirds). The other two offer much smaller savings, which are really no better than the improvement expected over the next 10 years in conventional engines. Unfortunately there is a danger that the latter options are likely to be favoured by some industrial interests.

  22.  It is therefore important to ensure that the most environmentally-beneficial development path is the one to be pursued, and the Green Fuels Challenge should be structured in such a way as to ensure that an independent assessment of the full life cycle impacts of the range of alternative fuel paths is undertaken before we commit to any particular route, and that a wide range of stakeholders is involved in this process.

  23.  The Powershift Programme is also investigating options to provide greater incentives for the uptake of alternative fuels, and a further increase in the funding of this work is desirable.

January 2001

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