WEDNESDAY 13 DECEMBER 2000 _________ Members present: Mr John Horam, in the Chair Mr David Chaytor Mr Neil Gerrard Mr Dominic Grieve Mr Jon Owen Jones Mr Paul Keetch Mr Tim Loughton Mr Jonathan R Shaw Mr Simon Thomas Joan Walley _________ MR S TIMMS, a Member of the House, Financial Secretary, MR C MAXWELL, Head of Environmental Tax Team, Her Majesty's Treasury, examined. Chairman 1. Welcome to the Thatcher room. Delighted to have you here. Thank you for coming along. We want to concentrate on the major elements of the Pre-Budget Report (PBR) and one particular thing is the ending of the automatic fuel duty escalator which is a significant announcement. We shall lead off on that before discussing a number of other aspects of your responsibilities as a Green Minister in the Treasury. Is there anything you want to say briefly before we begin asking questions? (Mr Timms) I shall make a few brief remarks, if I may. Thank you for your welcome and for the opportunity to speak to the Committee again. May I first of all introduce Clive Maxwell who is the Head of the Environmental and Transport Tax Team at the Treasury. Recent events have probably raised the profile of environmental concerns up and down the country, if anything increasing the impetus to protect the environment and using natural resources in line with the concerns of this Committee. That priority was reflected in a pre-budget report. You mentioned the issue of fuel duties. Recent oil prices have hit people hard and I think it was right that we responded to that, but we did so in an environmentally responsible way and the changes to fuel duties, to vehicle excise duties, to car taxation rules are all focused on encouraging cleaner fuels, more efficient vehicles and greener transport. The publication of the Government's climate change strategy has set out the measures which will move us towards a more sustainable low carbon economy. Progress on one of the main elements of that strategy, the climate change levy which I have talked about to the Committee before, continues as planned. The levy will come into effect on 1 April and in the PBR and in the Urban White Paper we have also embraced Lord Rodgers' vision of an urban renaissance to improve cities to reduce pressure for development on the countryside. There is a number of measures in the Pre-Budget Report on that. The Rural White Paper, also published recently, has set out the steps we are taking towards a countryside which is sustainable economically, environmentally and socially as well. I hope the Committee can welcome this continuing progress on the environmental tax agenda and I shall be very happy to answer the questions you have hinted at and others as well. Chairman: Thank you. It is nice to hear a Minister tackle so many different aspects of Government policy. Mr Chaytor 2. You referred to the climate change strategy and the reduction of traffic growth is a key component within the climate change strategy. Now the fuel duty escalator has been abandoned, where does that leave fuel duty as a policy aimed to deliver the reduction in traffic growth? (Mr Timms) The abolition of the escalator was announced in the November 1999 Pre-Budget Report when the Chancellor said that he considered the appropriate rate of fuel duties on a budget by budget basis, taking into account all of the relevant economic, social and environmental factors; so fuel duty only increased by the rate of inflation at the time of the last budget. Taking into account the strength of the world oil prices, the other measures we have introduced to tackle climate change, the Chancellor made a further announcement in the PBR this year that the duty on all road fuels would be frozen in the coming budget and that will have the effect of reducing the rate of duty by about one penny and a half per litre in real terms. Between 1997 and 1999 the rate of duty on ultra low sulphur diesel was steadily cut relative to conventional diesel with the effect that within a couple of years pretty much the entire diesel market was converted to cleaner fuel, cutting emissions of the most damaging local air pollutants and enabling the interaction of new pollution-reducing technology. We have learned from that experience and in October we have already reduced the rate of duty on ultra low sulphur petrol by one penny per litre. Last month the Chancellor announced that we want to go further with that and introduce a further two pence per litre cut in order to promote the takeup of ultra low sulphur petrol. The package that the Chancellor announced on fuel duty in November did reflect widespread concern about the high price of crude oil and the effect on petrol and diesel prices, as expressed by members of the public and by hauliers and their concerns about UK competitiveness. Those were reflected in the Chancellor's announcement but we were able to make some changes there in an environmentally very effective way. The announcement was of course a balance, but I hope the Committee will feel that the balance the Chancellor struck was about right. 3. You mentioned the impact of high oil prices in leading to the decision to freeze the annual fuel duty rise. Does it follow therefore that if oil prices start to fall you will again consider the need for an escalator? (Mr Timms) We have set out the position for the coming year and the freeze will apply and we will be going further on ultra low sulphur petrol and ultra low sulphur diesel, subject to the conditions which are set out in the PBR about ultra low sulphur petrol being widely available. That will be the position for the coming year. We have also said that if the recent high prices of crude oil continue then we would expect the freeze to apply for a further year. If on the other hand the price of crude drops sharply, then that cannot be taken for granted any more. In a sense the answer to your question is yes. 4. May I compare the impact of the escalator between 1996 and 1999 and the projected impact of the ten-year transport plan? We are told that the reduction of carbon between 1996 and 1999 was somewhere between one to 2.5 million tonnes of carbon (MtC) as a result of the escalator. By contrast the estimate for the reduction of emissions as a result of the ten-year transport plan is going to be about 1.6 MtC of carbon. By contrast the escalator seems to have been a very, very effective means of reducing emissions. Does it not follow then that at some stage in the future, if we are serious about meeting the Kyoto targets, we have to return to the fuel duty escalator? (Mr Timms) It is true that quite a large share of the reduction in emissions which would be achieved to meet the Kyoto targets, and go further in the case of the UK, has been borne by the transport sector. However, the climate change strategy which we published sets out quite a wide range of measures alongside the one you have mentioned which will also reduce emissions: the climate change levy in particular is a substantial contribution, the emissions trading scheme which we are developing, some changes to company car tax also which we reckon will save up to one million tonnes of carbon as well. The point I want to make is that we have a wide range of policy strands to address the reduction in CO2 emissions, not only the transport ones but others as well and between them those will take us to the Kyoto target and indeed beyond that. In the longer term of course calls are already being made for much much deeper reductions in CO2 emissions and I have no doubt at all that the targets set at Kyoto are not going to be the end of the story and we need to revisit all of these issues in due course. The strategy which we have published, the measures we have taken, will achieve the Kyoto objectives and go beyond them in fact and then we shall need to do some completely fresh thinking about where we go in the longer term. 5. May I turn to the principles underlying the green taxation programme, the polluter pays principle? There is now general agreement that the polluter should face the true costs of the environmental damage they cause. In terms of the transport sector, what work has been done and what evidence is there for the true environmental cost caused by domestic transport in private cars and the haulage industry? Do we have some indicators as to what the true cost is by which we could measure the cost which needs to be recouped through environmental taxation? (Mr Timms) One of the pieces of work which I am aware of has been the environmental costs of lorries and that is informing the review of lorry vehicle excise duty which is under way at the moment and we are anxious that the new scheme will reflect more fully the environmental costs associated with each kind of lorry than the present arrangements do. That is a particular piece of work I am aware of. (Mr Maxwell) The only other thing to mention is the transport modal studies that the DETR have said they will be carrying out over the next year or two as part of their longer term work on inter-urban road charging issues. 6. You see my point. If there is not at the moment a published body of evidence as to the true environmental costs then it is very difficult to assess the extent to which the taxation regime is making the pollutor pay. We need both sides of the equation to come to some assessment of the effectiveness of the overall policy. (Mr Timms) In a lot of these areas there is still quite a lot of exploration on the regional thinking going on and being required and gradually a fuller picture is emerging. Certainly there are still some gaps and I accept that. 7. May I continue this theme of environmental damage? Where do you think the environmental damage is greatest within the transport sector and how is the fuel duty policy responding to that? (Mr Timms) I suppose it depends how you measure the scale. There are different ways one could measure it. Clearly there are serious CO2 emission problems; very large amounts of CO2 emissions. Significant local air pollution problems are also being caused in the transport sector and the policies we have put in place are seeking to address both of those and to do so in an increasingly sophisticated way. The effect of the fuel duty escalator is referred to and the new arrangements we have for vehicle excise duty and also company car tax reflect the amount of CO2 emissions being generated by the vehicles and the amount of duty which is payable depends on the amount of emissions, the amount of tax in the case of company car tax depends on emissions. In both of those schemes there is also a supplement for diesel engines reflecting the fact that there are relatively more problems with local air pollution on diesel engines than on petrol engines which have the same CO2 emissions. We now have quite a sophisticated array of measures in place to address both those problems. 8. Just finally to focus on the question of the diesel engine and the haulage industry, I think it would be agreed that it is the older lorries used in the haulage industry which contribute disproportionately to total emissions, but at the same time in the pre-budget statement we have a package of measures which actually reduces the volume of taxation on the haulage industry. How do you reconcile this apparent contradiction with the haulage industry contributing most to environmental damage but at the same time having received the greatest benefits in terms of tax reductions in the pre-budget statement? (Mr Timms) A process is going on of switching the burden of taxation from usage to ownership and it is true we shall be reducing the amount of vehicle excise duty which is payable but we have not introduced the essential users fuel duty rebate which was being proposed and that is partly for the reason you have set out. In addition to that I have said that the new vehicle excise duty scheme will encourage cleaner vehicles and in addition we have announced the œ100 million ringfenced fund to be available over a three-year period for incentives to encourage the modernisation of the vehicle fleet in the haulage industry, including encouragement for cleaner lorries and new technology. We have been able to make progress on that front as well. Chairman 9. Just on this lorry point, the DETR sustainable distribution strategy said that the impact of lorries is the equivalent of œ28,000 per vehicle; a very large sum. I do not know whether we are near that in terms of actually offsetting that pollution effect, but surely Mr Chaytor is right in saying that we are going to lessen the effect, whatever effect we are having, as a result of your changes. (Mr Timms) I hope that we can improve the incentives in the scheme for cleaner lorries by the changes we are making on vehicle excise duty and with the ringfenced fund, also by improved driver training. There is quite a lot which can be done to reduce the environmental costs of lorries and two or three of the elements of the package are directed towards improving the environmental signals we are providing through the tax system. I am not familiar with that total figure or how that matches up to the total amount. 10. Perhaps Mr Maxwell has a view. (Mr Maxwell) No, not on that in particular I am afraid. It is obviously the case that the measures announced are more to do with encouraging and incentivising particular shifts in behaviour and shifts in the choice of lorry driven or the types of engines used rather than internalising every single cost. It is a bit of both going on. Mr Thomas 11. I wanted to follow up the point Mr Chaytor asked about regarding the impact, where the greatest environmental damage was from. In particular I have in mind private car use when asking this. Would you agree that the price of fuel is lowest in the areas of the greatest pollution? If we are looking at urban areas we find the market looking to deliver low cost fuel for private motorists where the supermarkets are congregating and in competition with each other, with different incentive schemes to buy œ20 of goods in the supermarket and get œ10 off your fuel bill and so forth. On the other hand the price of fuel is highest in the areas where private car use is most essential and I am thinking in particular of rural areas where there are fewer alternatives and fewer choices in terms of transport switching. Though a lot of that is about the market, there is obviously an interaction with fuel prices, fuel duty and any other incentives the Treasury might decide to bring in. I wanted to ask you whether you accepted that premise, whether that shows that competition is not working very well towards your aims within the Government and that the market is not helping you in this regard and whether you have considered any other fiscal measures which could change that market pressure. A windfall tax on oil company profits is one thing which was floated and we certainly saw their profits soar during the fuel crisis, which seems to suggest that as well as fuel duty, there is a question about the way the market works and delivers fuel to the consumer and the way that is not going hand in hand with the environmental objectives. (Mr Timms) I am obviously aware that there is variation in the price of petrol in different parts of the country. I think that is a matter which is determined largely by the market; certainly I have not seen any evidence of a failure of competition in the supply of petrol in different parts of the country. I know that has been looked at from time to time by the competition authorities but as far as I can see the competition is pretty effective in the supply of petrol around the country. I am not sure whether this is one of the things you were driving at but from time to time there are suggestions that we ought to have different rates of fuel duty in different parts of the country. That is not something I favour. It would be extraordinarily difficult to implement and it would create no end of problems and would almost certainly be illegal under EU rules anyway. We have not looked at tax measures which might have an impact and we are not proposing a windfall tax on the oil companies either. Mr Gerrard 12. If we look at the real costs of motoring over a long period the UK sustainable development indicators show that from 1974 to 1998 the real cost of motoring hardly changed, whereas public transport fares have gone up by 50 per cent, disposable income had gone up very significantly. Why do you think then that motorists have this perception that they are being unduly taxed? If we compare with other things which are taxed higher, like cigarettes or alcohol, I am sure if you went into the nearest pub and you asked everybody in there they would say yes, there is too much tax on beer, but it does not seem to provoke the same reaction that there has been on fuel. Why do you think it is that people have that perception? (Mr Timms) I do not know. I suspect you are probably in as good a position as I am to provide an explanation for that. What has happened is that there has been something of a switch in the overall cost of motoring and that the costs of ownership and the element of that total accounted for by the cost of owning a car have fallen, whereas the running costs have not. The two of them together have been broadly unchanged over a couple of decades or longer. Maybe what has happened on the running cost side has had a disproportionately greater impact on people's consciousness than one would have expected. 13. Do you think perhaps there has not been sufficient effort to highlight publicly the environmental rationale for fuel duty? It was quite noticeable during the fuel crisis that we had Prime Minister, Chancellor, talking about the possible economic effects on spending on hospitals, on schools, if there were changes in the rates of duties. A great deal was not said about fuel duty. Is that part of the reason, perhaps over a number of years, that that rationale has not been delivered publicly? (Mr Timms) I think we have said quite a lot about the environmental benefits of the fuel duty escalator; certainly I have talked about it at some length and others have done as well. It was a very important element of the justification for the policy. We have talked about it pretty widely. The financial aspects are important as well but I do not think we have downplayed the environmental aspects of this. 14. You said earlier that you thought if all prices were to drop dramatically then the Chancellor would reconsider. The freeze would stay if prices stay as they are or certainly if they go up. Does that mean that you have really given up on price mechanisms in a sense and think that current prices are as high as they need to go? If we want to encourage fuel efficient motoring, want to encourage unnecessary journeys, we have the prices as high as they need to be? (Mr Timms) I do not think we have considered it in those terms. Clearly the fact that crude prices are so high has a significant impact on prices and therefore without any more needing to be done on the duty side, the relatively high prices do their job in the way that the escalator was intended to. I do not think I would want to speculate about what might happen in the future or how we would respond to that. Those are decisions which can only be made in the light of all the circumstances at the time. 15. Is there a view that rather than using price as a major mechanism for discouraging unnecessary journeys we should look at other mechanisms? (Mr Timms) We are looking at a variety of mechanisms, not only for discouraging journeys but for the ten-year plan for transport which will involve very substantial investments in public transport, so encouraging people to use public transport alternatives. There are the incentives for cleaner engines which the tax system is increasingly presenting, so the journeys which are being run will be more environmentally benign than they have been in the past. A wide range of initiatives needs to be taken and is being taken to ensure that transport is increasingly operating in a sustainable way. 16. Is that what the Chancellor was referring to in the pre-budget speech in 1999 when he announced the decision to stop the escalator and make decisions budget by budget? He said then, "... having cut the deficit and introduced our new environmental policies, we are now in a position" to abandon the escalator and work budget by budget. Are those the sort of new environmental policies he was referring to? (Mr Timms) The point he made was that he wanted to determine the level of duty on the basis of the economic, social and environmental, all of those, considerations year by year. 17. He seemed to be suggesting that there were alternatives now. We have new environmental policies therefore we do not need the escalator any more. I just want to be clear exactly what those new environmental polices are supposed to be. (Mr Timms) On the climate change side, the climate change strategy has set them out. I mentioned some of them: the climate change levy for example, the new arrangements for company car taxation. So there are several clubs at our disposal which are having the effect of reducing emissions across the economy. Because of the effect of all of those we shall achieve the Kyoto objectives and indeed do better than that. The fuel duty escalator for the period it was in operation made a very significant contribution, but there are other measures now in place as well. Mr Jones 18. Forgive me, Minister, you may not like my first question but it is prompted by that answer. You were asked about what the Chancellor had in mind in the 1999 budget when he removed the fuel tax escalator. You said there are environmental, there are economic and there are social reasons. Surely with more candour could you not also say that there are political reasons and that there may be very strong environmental reasons why we should continue a particular tax, but politically you find it too difficult to do at the moment? What is the problem? Why does the Government not just say that? Is that not the honest truth? (Mr Timms) There is not a chasm between economic, environmental and social considerations on the one hand and political considerations on the other. The position we were in in 1999 was that the fuel duty escalator had been operating since 1993, had contributed to a significant increase in the price of petrol and diesel and had had very significant environmental benefits. I do not think it was ever envisaged that the escalator would go on and on for ever; apart from economic considerations one has to bear in mind what other countries are doing. It is not the case that we can set our fuel duties entirely disregarding what is happening elsewhere. We have to take account of that. That is one of the economic considerations the Chancellor takes into account. I stand by the point I made, recognising that economic, social and environmental considerations always have political implications as well. 19. I want to ask some more about the point you made about relative fuel prices but before I do, is it your view now that the price of oil produced by a number of external factors to the Government is such that it really replaces the need for the fuel tax escalator? It serves the same purpose. (Mr Timms) It certainly has a bearing on the decision made each year about what the level of fuel duty should be. Yes, that is undoubtedly the case. Whatever the level of oil prices was to be, I do not think it was ever intended that the escalator would go on indefinitely. 20. Does the climate change levy in any way substitute for or help the effect of the fuel tax escalator? (Mr Timms) It certainly helps meet the Kyoto objectives, which the fuel duty escalator also has helped to meet. I do not see any element of substitution but rather it is addressing another element of the problem and we have taken a series of steps to ensure that emissions are addressed wherever they are generated across the economy. 21. With the introduction of the climate change levy, and the abandoning of the fuel tax escalator and the other tax incentives which have increasingly been given to the transport sector, there is a relative shift of taxation away from transport to the rest of the business sector. How is that justified when we know that the area of the economy which is growing and increasing its pressure on carbon dioxide emissions is not the rest of the business sector, it is the transport sector, yet the Government is shifting its taxation burden away from transport to the rest of the business sector at this time. (Mr Timms) The first point to make is that you talk about abandoning the fuel duty escalator and it certainly is the case that it has been cancelled, but the impact of those increases over a period of six or seven years is largely still in place and will be next year as well. This is not a reverse: it is simply that the automatic annual increases will not be applied in the future. 22. There is a shift in relative levels of taxation. The relative level of taxation of those whose business is to transport things by road is going down, whereas the level of taxation for a business which makes steel will go up. (Mr Timms) The level of taxation on transport usage will not have been very much reduced. The big decreases in transport taxation next year are about ownership, the big excise duty changes. I do not think I entirely accept the thesis you are making. It is the case that CO2 emissions are generated in other bits of the economy as well. The climate change levy addresses that issue. I certainly do not see a shift going on deliberately seeking to change the balance of taxation between transport and the rest of the economy. 23. In the climate change programme the fuel duty escalator is described as supporting the European Union's carbon dioxide from cars strategy. Now that you have abandoned, shelved, the escalator, why do you believe this supporting measure is no longer needed? (Mr Timms) The influence of the duty increases in fuel on vehicle manufacturers remains in place. The great bulk of the increase which has been made to fuel duty since 1993 remains in place and its influence remains in place. We are taking other steps to address this. For example, the encouragement of ultra low sulphur petrol will itself accelerate the introduction of gasoline direct injection technology which will also reduce CO2 emissions. I do not see this as in any sense a U-turn. It is simply the case that the escalator, in the light of what happened to crude prices, is no longer a useful instrument, but the effect of its applications since 1993 remain a helpful and important contribution towards meeting our Kyoto objectives. 24. You will agree that the majority of the population does not like paying the levels of tax they do on petrol; they do not like paying tax on lots of things but of late they have voiced their opinion loudly and the Government has apparently listened. If the price of petrol were to drop because the oil price drops, does the Government have the intention to relook at this and does it have a price in mind, however that price is arrived at, whether it be the price of crude oil combined with the price of taxation? Do you have a price level in mind at which it triggers increased taxation? (Mr Timms) No; no, there is not. You are right about people's feeling about fuel duty and I described to Mr Chaytor what our position is, that the freeze will apply for the coming year and if crude prices stay at their recent levels then we would expect it to apply for another year. No, we do not have a target in mind or a threshold or a figure or any of those mechanisms. 25. If the price of oil at the pumps went down from near $30 back down to $10 in the next two years, and the taxation policy did not change, then presumably the environmentally beneficial effect on the reduction of carbon dioxide which we have seen since the fuel tax escalator was introduced will go into reverse as people will respond to the incentive to drive more. Surely the Government would be ready to react to that? (Mr Timms) Yes, we certainly should. There would be an entirely new set of economic and environmental considerations in effect if that were to happen and those would certainly be reflected in a decision at the time of the budget, whenever this arose, about the level of fuel duty. Yes, it would be taken into account. Mr Loughton 26. Implicit in what you say is that there is a desirability in keeping fuel prices relatively high for private motorists at least either by the mechanism of the fuel duty escalator as before, or now by the mechanism of naturally high oil prices which it can be construed have taken over that role. Going back to basics then, what is the objective the Government is seeking to achieve from that policy? (Mr Timms) Our objective in environmental terms has been to achieve our Kyoto targets. The application of the escalator has certainly contributed to that. We are pretty confident now that we will meet those targets and indeed go way beyond them. Our latest estimate is that we should achieve a reduction of 19 per cent in CO2 emissions by 2010 which is well beyond the 12.5 per cent which Kyoto set for us. In environmental terms that has been the key objective of our policies. 27. The high price of petrol has been part of that key objective achievement. (Mr Timms) Certainly the fuel duty escalator has and no doubt it is the case that the high price of oil will have contributed as well, yes. 28. What always puzzles me on that basis - and I do not disagree with you - is when you look at the DETR's transport statistics and the last set published in 1998, when the fuel duty escalator was ripping away at that stage, the Government's own forecasts of road traffic numbers on a 30-year basis show a gradual and unhindered increase. Against a base point of 100 in 1997, by 2031 vehicle kilometres travelled by cars will have increased from 100 to 150 and car ownership will have increased from 100 to 139 and the number of cars on the roads by 100 to 143. Over 30 years something like a 40 to 50 per cent increase either in car ownership, congestion, the number of cars on the road, or the number of miles travelled, which should be, on the basis of your argument, exceedingly sensitive to the price of petrol. Your own forecasts, on the basis of the fuel duty escalator actually carrying on, or now being replaced, as I think you would say, by the high level of petrol, is not achieving those things whatsoever. What is the objective? (Mr Timms) It is achieving them. There is no doubt at all that the increase in fuel duty arising from the escalator has had an impact on the distances driven. The AA published information some months ago making that point. I forget the figure for the elasticity which the AA quoted. (Mr Maxwell) It varies whether you look in the short term or the long term but the short-term figure is about 0.3 or 0.4, the longer term much higher than that. (Mr Timms) It is an established fact that the price does have an impact. You are right though that usage continues to rise and that is because there are all sorts of economic factors at work here. Without a doubt, the numbers you are referring to in terms of usage in particular would have been greater had there not been the price impact. 29. It is not actually reducing. I just cannot see that argument. My argument would be: surely what has made a greater contribution towards that 19 per cent achievement is technological advancement in cleaner engines, firstly, and, secondly, the figure you have quoted to us that you are looking to save something between one million and two and a half million tonnes of carbon per year pales into insignificance aside the figure of 7.5 million tonnes of carbon saved per year simply by switching over to 1200 megawatt coal fired power stations, to similar sized gas fired power stations, a vastly greater figure. So the saving you are claiming on cars is a drop in the ocean compared to savings coming from technology and from coal fired power stations conversion. (Mr Timms) Yes, technology certainly has been important and will continue to be very important. We are looking for further technological improvements and the tax system is improving the incentives for further improvements and I certainly do not discount the importance of that. You say it is a drop in the ocean. In the end the reason we shall hopefully achieve our 20 per cent domestic CO2 emissions reduction target is because of quite a lot of drops in the ocean which added together will get us to the position we want to be in. The up to 2.5 million tones from the fuel duty escalator could easily make the difference between us hitting 20 per cent and not doing. 30. But it is, at the most optimistic, one third of what is achieved simply by switching over to power stations. When are you going to revise these figures? If you are now saying that there is not going to be the remorseless rise in car usage both in terms of mileage and car ownership and you are quoting car organisations, although my understanding was that either the AA or the RAC had said that the price of petrol would need to rise to something in the order of œ4 per litre before it would have a substantial impact on the actual usage of those vehicles, why have the DETR, on your advice, not altered their figures to forecast a slowdown at least, if not a reduction, in car usage over the next 10, 20 or 30 years? (Mr Timms) I am not forecasting a reduction in car usage; I hope I have not given that impression. What I am saying is that the impact of the escalator has been to reduce emissions from what they otherwise would have been and that, together with the other steps we have taken, will allow us to achieve Kyoto and domestic CO2 emission reductions. I do not think there is anything inconsistent between that point and the point that other government departments have made. Mr Thomas 31. You are obviously confident that the current change of fiscal measures will hit the Kyoto targets indeed you have just said that they are likely to overshoot them, which I am sure is welcome. However, the Environment Minister has said that the real long-term target for any government now which takes this seriously is the Royal Commission report on emissions which is looking for up to 60 per cent cuts in greenhouse gases by 2050. How can we reach that as a society if decisions are made on fuel tax or any other with environmental benefit on a budget by budget basis? Was it not at least one of the virtues of the fuel duty escalator that it was continued through two governments, in other words a political change did not change that element of environmental benefit and improvement? If we are in a position now where decisions are made on a budget by budget basis, how can we be sure that we as a society are moving towards those long-range targets which are really essential for the long-term future of the planet? (Mr Timms) It has always been clear that the targets set at Kyoto were the beginning of the process and certainly not the end of the story and clear that we would need to go a good deal beyond them in due course, looking at 50 years ahead and undoubtedly as the Royal Commission said we shall need to go a good deal further. That will require some very fundamental changes in the way that we work. My guess is that it is likely that it will be technological change which gives us the potential to go for those much bigger reductions that you have referred to. What we are doing is building into the tax system currently, in the climate change levy, in the fuel duty vehicle taxation arrangements, incentives for cleaner technologies. I would hope that in due course major breakthroughs will emerge which allow us to move in that direction in the longer term. As you know, in the Pre-Budget Report the Chancellor announced an alternative fuels challenge, calling on industry to come forward with proposals for cleaner fuels. We shall be issuing a consultation document about that shortly and I shall be looking with great interest, as will the Environment Minister, at the proposals which come forward. There are several ideas around at the moment and one could see that some of them could make a very substantial contribution towards reducing the emissions which we are generating. It is possible, by making fairly incremental changes in the tax system, to create an incentive for technological change which one could see over a period of 50 years or so could lead us into the sort of destination which you have referred to. 32. Is it therefore the case that you are looking much more now at an incentive-based regime and have turned your back on disincentive-based regimes, which the fuel tax escalator was, for whatever political or social or whatever reasons that shift is to be seen? Would you accept that is happening and is the Government actively involved in that with the public and explaining the way that these processes have to move over the next ten or 15 years? (Mr Timms) It will always be a mixture of approaches but certainly in the last couple of years quite a number of significant incentives have been introduced to encourage people to use cleaner cars: the new vehicle excise duty system with a lower rate of duty for cars which creates lower levels of emissions; the incentive to use smaller second-hand cars because of the 1500cc lower rate of VED; incentives in the company. We have introduced a range of new incentives but the beneficial effects of the overall rate of fuel duty will continue to be a significant element. I would not want to give the impression that we abandoned what was happening before but we have evolved it. Chairman 33. Does that not mean that we shall get clean gridlock? (Mr Timms) That will be better than dirty gridlock. 34. It is gridlock all the same. (Mr Timms) The ten-year transport plan will have a significant impact on reducing congestion. Mr Grieve 35. May I go back to the matter raised by Mr Loughton for one moment? Clearly there was a major crisis in public perception of the fuel escalator and its impact, based in part on the rise in fuel prices and the added effect of the tax on it. Can you let us have sight of the documentary information on which the Government bases its conclusions that the fuel escalator as it was before you stopped it - and you have talked about the possibility of reverting to it - does have this impact on road use growth which you claim it does? It is quite apparent to me that the public are not persuaded by this argument. If we are going to persuade the public that it is necessary for that purpose, it would be very useful to have the objective evidence which the Government has put together to justify it, which you seem to hint you had, although I must say I have never seen it. Otherwise it leaves one with the situation where the impression which was conveyed as the fuel crisis grew was that in fact the justification for the fuel escalator was to provide for public services, which is a completely different matter altogether, as I am sure you would agree. Can you help us on that and is that information available? I appreciate you may not have it to hand today but you seem to hint that it is in existence and there to underpin the Government's fuel escalator policy. Can we see it? (Mr Timms) Certainly the most recent information which I am aware of on this is the work of Professor Glaister for the AA which I have referred to but of course it is important to make the point that we are not simply talking about reducing the distances which are driven by people in their cars, reducing their fuel consumption by other means, by switching to more fuel efficient vehicles, is also helpful in this regard. It is not only about reducing the distances which are driven, but Professor Glaister's work is recent and publicly available and highly regarded. Mr Keetch 36. May I ask you about ultra low sulphur fuels which you mentioned earlier? Certainly the United Kingdom has a very low percentage of alternatively fuelled vehicles compared with France, Germany, Italy, etcetera. What estimate have you made of the effect on CO2 emissions by reducing the duty on ultra low sulphur diesel and petrol? How much do you think it will actually reduce CO2 emissions? What is the target? (Mr Timms) Directly ultra low sulphur petrol is no more beneficial from a CO2 point of view than conventional petrol. So I do not see that directly contributing helpfully to this at all. However, indirectly it is the case that ultra low sulphur petrol allows the introduction of gasoline direct injection technology. That improves fuel efficiency by up to 20 per cent, so that will reduce CO2 emission and indirectly once that technology becomes widespread, which it is not at the moment, then I would expect it to have an impact. Overnight it will not. 37. No, but indirectly 20 per cent. (Mr Timms) Certainly GDI technology improves fuel efficiency by up to 20 per cent. One would have to make an assumption about what the penetration of GDI technology would be over a period and that is not a forecast that I have. It certainly could be significant. I think it will be. 38. By the fact of reducing the duty, there is a concern that those reductions, the penny in diesel last year and petrol this year, have been masked by the overall rise in the actual cost of oil and that also as a form of fuel they are more difficult and expensive to produce. Does the Treasury tag and monitor the fuel prices to see that those duty cuts are actually passed on and that they are not simply overshadowed and thrown away by the overall increase in the oil price? (Mr Timms) No, we do not. We have had conversations with the oil companies about this and it is my impression - and I think the oil companies have issued a press release to this effect - that because of the effect of the forces of competition the additional two pence per litre incentive that we are proposing, subject to fuel being available right across the country from the budget, is likely to be passed on. I suspect also that when petrol production increasingly and ultimately goes to 100 per cent low sulphur, which I hope will not take long, it may well be that some if not all of the existing one penny per litre incentive which came into effect in October might well be passed on as well. It is not something we systematically study and our position is that pricing is a matter for the oil companies and normal market forces. 39. You cannot guarantee to the public that those cuts in duty are being passed on to them at the pumps. (Mr Timms) The two pence per litre change, if that comes into effect, will take effect from the budget. I am pretty confident that it will be passed on to customers but I cannot give a guarantee about that because I am not responsible for setting petrol prices. 40. Can you not somehow force the oil companies to pass that on? If you were cutting duty you would be very surprised if you cut duty in beer or wine or cider and suddenly found that was not being passed on to people in the pubs. They would be rightly outraged. (Mr Timms) It would not be the first time. 41. Can you not actually ensure this is going to happen? (Mr Timms) No. We do not have retail price maintenance on petrol and we are not proposing to introduce it. The reality is that competition for the supply of petrol will see to it that the duty reduction is passed on but that is not a matter which I control. 42. You mentioned that two pence would happen once nationwide access was achieved for ultra low sulphur petrol. How are you going to determine when that nationwide access has been achieved? What is the criterion? Is it number of stations which have it across the country, percentage of stations, what is the criterion? (Mr Timms) What we have said is that we want to make sure that the fuel will be available in all parts of the country. At the moment, it is rising to round about 40 per cent of petrol sold being ultra low sulphur petrol. I am pretty hopeful, and certainly the oil companies have been quite reassuring, that by the time we get to the budget it will be available in all parts of the country but that is going to be the criterion we use. (Mr Maxwell) It is that regional dimension which is regarded as most important, partly because clearly petrol is supplied from refineries in different parts of the country. That is one reason why it is important that it is not areas around particular refineries which are getting low sulphur petrol but that it is available to all areas of the country. 43. Is it that it reaches 50 per cent of all petrol stations, 60 per cent, 40 per cent? At what time do you actually say fine, we now have nationwide access therefore bring in the two pence cut? (Mr Timms) What we want is that everybody, wherever they are in the country, are within reach reasonably of ultra low sulphur petrol. 44. Even in the rural areas. (Mr Timms) Yes; certainly. 45. That is very reassuring to hear. On the actual diesel side that has been extremely successful because we now have 100 per cent usage of ultra low sulphur diesel. Therefore any further cuts in duty there will simply be a duty cut. Now that you have 100 per cent of the market you cannot actually encourage more of that market by cutting the duty level. So will you cut duty level? (Mr Timms) What we have wanted to ensure was that the current playing field, which we think is a fairly level playing field between petrol and diesel, is maintained. We want to introduce the LPG for the ultra low sulphur petrol, for the reasons we have just been talking about, but in order not to tilt the playing field that requires a reduction of the same amount for low sulphur diesel. 46. Even though it is now 100 per cent of the market. (Mr Timms) Yes. Clearly we are not aiming to incentivise further ultra low sulphur diesel because it is effectively 100 per cent already but we do not want to mess up the competitive position between petrol and diesel. We want to keep the current equilibrium which we think is about right. Mr Jones 47. To maintain your metaphor of the level playing field, the playing field is very level between petrol and diesel in this country. If we extend the playing field across the Channel, the playing field between petrol on either side of the Channel is rather sloped. The playing field between diesel on either side of the Channel is a precipice. What consideration does the Treasury give to the relative prices of fuel on either side of the Channel or indeed within Ireland? (Mr Timms) I am the Treasury Minister on the Road Haulage Forum and one of the topics we have been looking at on the Road Haulage Forum has been the competitive position of the UK haulage industry compared with the industry elsewhere in Europe. Clearly the different models of fuel duty here and elsewhere are an important element of that consideration but it is not the only one. Other tax levels also are important and the fact, for example, that we have very low levels of corporation tax is also a consideration, that we have much lower levels in National Insurance. 48. Yes, but we cannot transport corporation tax. I know you can shift the company but in Ireland you can easily transport the fuel from one side of the border to the other, so it is a different issue. (Mr Timms) Yes; indeed. 49. You can transport it across the Channel as well but not quite as easily as you can in Ireland. (Mr Timms) I take your point. Your question is: what attention do we pay to these matters? I was just making the point that we have been looking at the levels of taxation being applied to the haulage industry in the different countries of the EU. However, we have not only looked at fuel duty, we have looked at the other taxes as well. Specifically about Ireland and the encouragement to people to smuggle fuel across the land border, that is something we have looked at very carefully. I have received two deputations now from petroleum retailers in Northern Ireland who were obviously very concerned about the position. Our response has been to increase the customs input very substantially across Northern Ireland to the problem of petrol and diesel smuggling. The initial results I have seen from that have been very encouraging, that we are identifying substantially greater amounts than we were before of smuggled fuel and I hope that will have the effect of curtailing that problem, which has been a very serious problem for petroleum retailers in Northern Ireland. 50. Do you think there are any good historical examples of countries being able to maintain a hugely different rate of revenue on a product which is transportable for any length of time? (Mr Timms) Yes; I think there have been numerous examples of that. 51. Can you give me some then? (Mr Timms) We have had different rates of fuel duty; at one time we had a significantly lower rate than in Ireland. That carried on for quite a few years. I am not sure precisely what the differential was but there are several examples one could give. 52. Would you agree that the fuel protestors and the transport lobby were essentially arguing a case for tax harmonisation? Did they not have a point? Answer the first rather than the second bit because I realise it is an easier political question to answer. (Mr Timms) I certainly did not see any banners saying "Harmonise Fuel Duties". The process in the EU that we have of course supported has been the development of the draft energy products directive, which would raise the minimum levels of duty which are applied to energy products. That is a process we have supported and supported for quite a long time. Some other members of the European Union take a rather different view to us and my impression is that that process is somewhat stalled at the moment. Certainly it would be helpful from a UK point of view and the point of view of lots of other countries as well, if there could be some progress in achieving a directive. 53. What about the fuel protestors? Were they actually arguing for fuel harmonisation, whatever they may have called it? They may have called it a level playing field but that is another phrase for the same point. (Mr Timms) I am not sure what you mean. Certainly lots of people in the fuel protest, the hauliers in particular, were raising the fact that fuel cost less in other countries than it does in the UK. I do not think they would have expressed their demand in terms of harmonisation of fuel duties but the essential point you were making was certainly raised frequently nevertheless. Joan Walley 54. Earlier on in answer to Mr Chaytor you did say that when you were looking at the prospect of abandoning the fuel duty escalator you took account of social and environmental factors. Given that this Committee has really stressed the importance of environmental appraisal, I should be really interested to know what environmental appraisal you have carried out of the impacts of the new package of duty/VED measures which do not any longer include the fuel duty escalator. (Mr Timms) The measures we formally announced in the PBR are reflected in Table 6.2 in the PBR documentation and that sets out what our assessment is of the environmental impact of those measures. Those measures we are consulting on at the moment with a view to introducing in the budget we will set out there in the budget documentation what our assessment of the environmental impact, of the overall package, is. To the extent that measures have already been announced to be implemented, we have presented those, but there will be further information at the time of the budget. 55. What confidence do you have about the environmental appraisal methodology that you are actually using? (Mr Timms) It is as good as you can get. There is some uncertainty in these matters and we are still learning as we go along. It is an exercise which we take seriously and I think the assessment we have made is as good as one can hope for, given the state of the art. 56. All the detail on that has been made available to this Committee has it? (Mr Timms) Certainly the data in Table 6.2 is available. If you would like further information, that request will be made. 57. In terms of the analysis of air quality benefits delivered relative to other emission reduction policies, what assessment has been made of air quality benefits in respect of the measures which are now proposed in the Pre-Budget Report? (Mr Timms) There are several measures which are intended to address air quality and I particularly point you to the way that diesel engines are being treated compared with petrol engines because there is a significantly greater local air pollution problem with diesel engines than there is with petrol. The surcharge for diesel is being waived in the case of diesel engines which meet the Euro 4 standard, precisely because the problems have effectively been resolved with that new technology. So there are several measures in the package which address that. Table 6.2 is on page 139 of the Pre-Budget Report. There are several references there to impacts. 58. My concern really is with the quality of the analysis and the quality of the environmental appraisal, not just in respect of air quality but in respect for example of CO2 emissions as well. If we are going to have a full environmental appraisal I should have thought that we really want to have an analysis which looked at option one, option two, option three and which looked at the effect for example on air quality, perhaps increased amounts of emissions which could contribute to global warming. To my mind if that analysis is really going to be the quality analysis which I would have thought the Treasury would want, I should also want to see some reference to the kind of issues perhaps raised by Green Peace in respect of renewable energy and green fuels, so that you took all the options into the equation rather than perhaps just came out with one aspect of it, so that you looked at it as a whole and on the strength of that analysis could then really do a genuine environmental appraisal. How much has that kind of entire environmental appraisal been taken on board by the Treasury and do you or do you not have the tools to do that? If you have not, where might you go to find them? (Mr Timms) On each occasion I have spoken to the Committee you have spent some time on Table 6.2 and its equivalent in previous publications so I hope the Committee will feel that what we now present is significantly improved on where we started. Certainly it has changed significantly and contains a good deal more information now than it did when we started and that is not least because of the points which have been made by this Committee. The aim of this documentation is to set out the impact of the measures which have been announced in the Pre-Budget Report. It is not to set out a range of alternative scenarios. That would be a rather different kind of exercise. Chairman: Should you not be doing that? Joan Walley 59. If you had your own environmental appraisal, would that not be the way to go forward? I appreciate that we are in early days in terms of environmental appraisals and perhaps we are having to wait a long time before it gets to the Treasury in its entirety, but should we not really be doing that, not just looking at the effects of one change or adaptation to policy but really looking at the options and making an environmentally based decision which looks at all the different impacts on the environments of every single kind? Should the Treasury not be doing that? (Mr Timms) Across government certainly large parts of that are being done but in rather different exercises to the Pre-Budget Report. 60. It is how government joins them up together, is it not? (Mr Timms) I defend the way we are joined up. We work very closely indeed with DETR over things like the climate change strategy which does contain a lot of information about projections for CO2 emissions. I think that has been a model of joint working. 61. I take that but I am just thinking that if we were really being successful in this, then presumably we would know exactly how much extra energy was being used, for example to produce ultra low sulphur petrol. Did you take account of the extra energy which would then be contributing to the extra global warming which you would need to produce the ULSP? Did you take that into account? (Mr Timms) I did not receive a set of data weighing up that compared with the CO2 benefits of the GDI technology. 62. If we had generally an environmental appraisal would you not have received that? Or could we look for that the next time round? (Mr Timms) What is clear is that there will be significant environmental benefits from the introduction of ULSP and that is the justification for the incentive we have introduced. I am not sure that it is necessary to do a point by point calculation about every single measure if it is clear that the measure we are talking about is a beneficial one. 63. How do you know if you have not actually looked? If you have not actually taken account of the extra energy used for manufacturing, how would you know that it was clear that this was the most environmentally favoured option to take? It is not a criticism, this is really to get at how much we do it. (Mr Timms) Indeed. From my understanding the point is that on balance in CO2 terms, as well as in sulphur terms, we can expect the change to be beneficial. I take the point entirely. There are some serious issues here. For example, with the next generation of the low sulphur petrol there are real concerns about whether the amount of energy that is required to produce it would outweigh the benefits of introducing it and I know that research is being done at the EU on that subject specifically. The point I am making is that it is not for the Treasury necessarily to be doing all this. 64. It is the Treasury which is actually making the recommendation. (Mr Timms) Some of the work will be done in the EU, some of it will be done elsewhere in government and we have access to that in reaching our decisions. 65. We can look forward to the whole balance sheet on environmental factors being included in a more sophisticated version when we get the next document, can we? (Mr Timms) What I should be interested to know is how the Committee feels about this form of the table, which is a considerable improvement as a result of what the Committee said previously on what we had before and if there is specific further information you would like to see then let us know about it and we shall certainly have a look at that. 66. The Committee would like the full environmental appraisal with the methodology and everything else so we can actually make an informed decision. That is really what I think the Committee would wish to see. The question is: to what extent has that already been provided to us? (Mr Timms) It depends what you mean by "full environmental appraisal". I am not quite clear. Chairman 67. The Government has set out a model way of doing environmental appraisals with which we are all familiar. We have discussed at endless length with endless Green Ministers a model way of doing it. You have not done it on this occasion, have you? (Mr Timms) What I would say is that we have supplied the information to the Committee and to members of the public. Joan Walley: Environmental appraisal is different. Chairman 68. You have supplied conclusions. You have not supplied the reasoning. (Mr Timms) It is the case - and I am being prompted to remind me - that we do assess all budget measures for their environmental impacts using the guidance which has been set out by DETR. 69. Can we see that? Can we see the papers on the environmental appraisal which was done which you are now mentioning? (Mr Maxwell) I know that the Government has made available the documentation about environmental appraisal of measures it has introduced. 70. Not to this Committee. We have seen nothing in the nature of an environmental appraisal of the changes in fuel duty which have taken place. Remember you did this back in 1999. You stopped the fuel duty escalator in 1999 so there has been plenty of time for you to do a thorough analysis exposed to the public on exactly why you are dropping the fuel duty escalator. (Mr Timms) What I would suggest is that not increasing fuel duty is not changing things. I know you have some difficult things and you carry out an environmental impact assessment of them. 71. I would say it is changing things dramatically. (Mr Timms) No, not changing duty is not something which --- 72. Come on. You are playing semantics here. The Government has altered its view about the role of the fuel duty escalator. There is no doubt about that. That is a very significant change in a very sensitive area. Why have you not done a proper full environmental appraisal and published it? (Mr Timms) I do not think I am just playing semantics. An automatic annual increase in fuel duty clearly has a significant environmental effect which one could discuss but that is the change which needs to be assessed. Leaving duty unchanged in real terms, which is what we did in the budget this year, is not something we are going to talk about as having a significant environmental impact. 73. I think most people would disagree with you. Clearly if you are changing policy, that is a major event. We will want to know the reasons for it. (Mr Timms) We have set out the reasons for it. 74. That is a proper environmental appraisal. How can you quantify it? What is the effect? What other policies are affected by it and so on? Surely you want to do this thoroughly. This is the whole point about an environmental appraisal. It is not just presenting conclusions in half a page of the Pre-Budget Report, it is exposing the logic behind it, the reasoning behind it. You have had plenty of time to do it since you changed the policy in 1999. (Mr Timms) I simply say that we have amply set out the thinking that we have been through which has led us to the conclusions that we have announced and published. The difference between us is about our understanding of what the nature of the decision about the fuel duty escalator was. We are not any longer going to have automatic annual increases. 75. Surely we agree that there has been a change in policy. (Mr Timms) There has indeed. 76. That is right. What we are saying is that every policy of this kind which has major environmental effects must have an environmental appraisal underneath it, sustaining it, discussing it and justifying it. That is Government policy. (Mr Timms) I am being reminded that we have sent a memorandum to the Committee on this topic specifically, presumably after I appeared here a year ago. Maybe we should have a further look at that and if there is further information you would like us to provide --- Chairman: You have changed the policy again. You have now brought in other things like low sulphur content fuel and so forth. The policy is developing but we have seen nothing to justify that other than a very small statement of your conclusions in the Pre-Budget Report. That is not consistent with a proper environmental appraisal as anybody understands it. Joan Walley 77. If you were doing a true environmental appraisal we should be able to take into account the recommendations, for example, that organisations such as Green Peace would want to look at in terms of how you perhaps move away from dependence on oil to other options instead, so you could look at the whole picture. It is how you take that environmental process so we can measure, so we can audit and measure what effects policy options and subsequently the choice of policy which is adopted, what effect that has overall on the environment. That is the situation we want to move towards. (Mr Timms) I simply reiterate that I think we are providing the information which is needed to make those assessments. If there are specific things that the Committee feels are missing, by all means draw our attention to them as you have done in the past and we shall certainly have a look at them. Mr Loughton 78. Let us change the subject. Let us go onto technology and where we are going to be in five or ten years' time. Some people would say that our discussions so far, interesting though they be, particularly in the last five minutes, are tinkering because in five or ten years' time we shall have hydrogen fuelled cars and other forms of technology which will make discussions about different types of fossil fuel taxation rather redundant. What is the Government actually doing about looking to the longer term to encourage these far more environmentally friendly forms of fuelling car transport? (Mr Timms) That is the background to the alternative fuel challenge which the Chancellor announced in the Pre-Budget Report. I agree with you that I think we can look to very substantial improvements in fuel efficiency as a result of technological change, some of which, as in the case of hydrogen fuelled cars, may well be very radical indeed. We are also taking a number of smaller steps. For example, in the new company car tax arrangements we have discounts on the tax payments for electric cars for hybrid petrol/electric cars as well, which are a couple of models we have now seen on the market. We are taking steps within the company car tax system as well and that is potentially very significant because in company car fleets you are getting relatively small numbers of organisations making very significant decisions about purchasing large numbers of vehicles. If we can set the incentives right to encourage people to choose the most beneficial technology in company car fleets, there is the potential for us to have a very substantial and wider beneficial impact as well. 79. What specific tax incentives has the Chancellor given to the development of hydrogen fuelled cars? (Mr Timms) I guess that could be one of the candidates for the alternative fuel challenge, if people want to propose that in response to the challenge the Chancellor has given. What we have said is that once we have received all the responses to the challenge and made an assessment of them, we would hope to be in a position to introduce significant duty incentives for the most promising one or ones at the time of the next budget. 80. In terms of the development of the technology, why in all the tax reliefs on capital spend available for industry or the tax reliefs available to invest in venture capital opportunities for example is there no green angle whatsoever? (Mr Timms) There is a variety of forms of support for environmental technology being channelled mainly through DETR. 81. What? (Mr Timms) I am certain, although I do not know the details, that there is support for hydrogen fuel cell technology. Certainly substantial support is being introduced for renewable energy technology, for example from the proceeds of the climate change levy amongst other things. I do not think that is the case. Support is being provided. 82. If it is, it is small pockets which come from DETR rather than from tax incentives from Treasury itself. The Chancellor makes great claim about tax incentives to encourage smaller companies, particularly technology based high risk companies with which we would certainly agree, but nowhere have I seen any specific requirement that they should have an environmental good attached to them. Surely what we are trying to encourage is not only companies to produce extra technology but to produce environmentally sustainable technology even more, but there is no bias towards that in any of the tax incentives which have come from the Chancellor which I have seen. (Mr Timms) Look at the arrangements for renewable energy under the climate change levy. The climate change levy will not be applied to renewable energy at all. To go back to talking about playing fields, that is a very significant tilting of the playing field in favour of a very substantial tax incentive to encourage the development of renewable energy sources. I do not agree with the point you are making. 83. It is a negative tax incentive because you are trying to clobber everything else. Let me take one example of things you have tried in the past. Let us just look at LPG which we all recognise as a more environmentally friendly way of fuelling cars and on one occasion the Chancellor has reduced the fuel duty significantly and we all certainly praise that. He also introduced tax differentials for heavy goods vehicles and public transport buses switching from fossil fuels to LPG fuels. These were introduced fairly early on; I think it was in the first main budget. Do you think they have been successful? (Mr Timms) I am not sure of the impact on the bus side. We have of course supported the power shift programme for converting private cars for use of LPG and other alternative fuels and we have set aside œ9 million for that in the next financial year which is almost three times what has been provided in the current financial year. That is a substantial increase and that has been very effective. You made the point early on about the fact that we have significantly fewer LPG driven vehicles in the UK than elsewhere, but the number is rising very rapidly and certainly there is public support for that through power shift. I am not sure about buses. Do you know what the position is? (Mr Maxwell) No, I am afraid I do not. 84. Would you like to take a stab at how many buses you think have taken advantage of that scheme to convert to LPG from fossil fuels? (Mr Timms) I see a little bit of a trap opening up here. My answer is no. 85. Would you be surprised to hear that in 1997 there were 24 HGV vehicles and 15 buses in the entire country which took LPG and at the last figures available 68 HGV vehicles and 36 buses in the entire country are powered by LPG? In percentage terms that is terribly good but in real terms is not terribly impressive, is it? The point I am putting to you is that some of your schemes, some of the Treasury instigated schemes which were trumpeted enormously at the time - I remember before your time at the Treasury, when I was on the Finance Bill these were trumpeted - as great ways of changing environmental attitudes amongst HGV drivers and bus drivers have actually been a complete and utter disaster. What we do not want to see is the same happening with the next generation of much more environmentally friendly fuels in terms of hydrogen which seem to me not to be getting proper development capital, certainly tax incentives, at this stage. I want to be more convinced of the evidence that the Government is really looking much beyond just the next budget, five or ten years, for a whole new generation of how we fuel our vehicles and really pushing us to the top of the ladder in giving industry every incentive to be developing that technology now. (Mr Timms) On LPG vehicles as a whole we have a much better story to tell than the one which you have related. It is the case that since the 1999 budget there are about 9,000 more gas powered and bi-fuel vehicles than there were at the time. The number of LPG refuelling sites has risen from 185 to 560, so there is quite a significant shift taking place. I hope that in due course that will be reflected in the commercial sector, buses, as well. I do not underestimate the scale of the change that there needs to be. I agree with you that there is an important role for the tax system in helping to ensure that change occurs. I see the alternative fuel challenge as an important step in helping us to identify which are the fuels which we ought to be giving incentives to very quickly but no doubt there will be more in due course. We are some way from having widespread availability of hydrogen fuel cell vehicles at the moment but at some point I am sure that will become an important issue. Mr Gerrard 86. You mentioned in that answer the question of distribution and that there had been a significant increase in the last couple of years in sites where LPG was available but that was certainly a problem for some time. With the newer technologies which are coming along, hydrogen fuel cells, biodiesel, ones which we know are available now and used much more in other countries than in the UK, is the Treasury looking at what might be done to help develop the infrastructure? It is all very well encouraging a manufacturer to produce a vehicle but you need the infrastructure to support that, the distribution networks as well. Is that something this challenge fund might support as well as the actual development of the vehicle or are there other ways in which we might look at supporting infrastructure developments? (Mr Timms) The challenge is specifically about the level of duty which is applied to the fuel. Biodiesel certainly is a potential beneficiary from a lower rate of duty, depending on the outcome from the challenge. I met a number of people in the runup to the Pre-Budget Report specifically about biodiesel and there may well be some promising possibilities there, including with the recycled vegetable oil which a few people came to talk to me about. The question of how those fuels would be distributed would have to be a commercial matter for those who were seeking to distribute it. That is not something I would expect us to be directly involved in. 87. You would not see any role for financial incentives from the Treasury to a company prepared to invest in infrastructure? (Mr Timms) That is what the effect of the duty incentive would be. By charging a significantly lower rate of duty on the fuel, that will amount to an incentive which will have the effect what you are proposing would have. Mr Chaytor 88. Two points on this issue, if I may? First of all a general point about the hypothecation issue of fuel duty because in the 1999 budget, as I recall, the Chancellor announced that any future use of the fuel duty escalator would be hypothecated to public transport investment. Of course the abandonment of the escalator has meant that pledge is now not irrelevant but at least not immediately important. Is there not an argument for hypothecating a component of fuel duty to further investment in alternative fuels and would this not only be an efficient use of fuel duty but also be a way of persuading public opinion and concentrating the public mind on the importance of getting out of petrol and oil and getting into alternative fuels? That is my general point about the possibilities of hypothecation of fuel duty to alternative fuels. My specific point is about the power shift programme itself. I would put to you that one of the difficulties, accepting the success of the programme to date and the numbers of vehicles which have been converted, one of the difficulties lies in a paradox whereby the power shift programme provides the incentive to the vehicles which are already the most fuel efficient in so far as the grant is only available for vehicles which are under 12 months' old. Really almost by definition they are more fuel efficient than vehicles which are two or three or four years' old. Accepting that there are questions of engine design, which constrain the range of vehicles which can be converted to LPG, is there not an argument which says we really ought to be getting the parameters widened a little bit, so that eligible vehicles could be two, three, four years' old. The point also being that the overwhelming majority of vehicles under 12 years' old is bought by fleets and we are hardly impacting at all on the general public buying a private car for their own use. In terms of influencing public opinion, is there not a role for the power shift programme to do that by broadening its eligibility criteria for older vehicles? (Mr Timms) On hypothecation, we are seeing more uses of hypothecation than we have seen in the past. We are seeing some of that in the environmental tax area and I am thinking of what the Chancellor said about future real term increases in fuel duties, which there have not been any of so that has not actually had an impact as yet. However, as well, in the climate change levy of œ1 billion, œ150 million is being applied to promoting energy efficiency through a number of routes: the aggregates levy. We are setting up a sustainability fund to address the problems caused by aggregates extractions. We are seeing more hypothecation. 89. There is a series of precedents in place which would justify hypothecation of part of the fuel duty revenue to investment in alternatives. (Mr Timms) What one is sceptical about is what the value would be of going back and claiming that an element of an existing duty income stream was being applied to a particular thing. What is the difference between that and just saying we are going to spend X money on this thing, whatever it is. 90. The argument would be that it makes the whole concept of fuel duty more legitimate in the public eye if it is seen to be re-invested and developed to alternative fuels because there is general public support for alternative fuels but there is general public hostility to fuel duty itself. By tying the two together, it could be a way of influencing public opinion very significantly and legitimising the fuel duty to a far greater extent. (Mr Timms) I am not sure that it would because in reality fuel duty does make a substantial contribution to the Government's overall income and it uses it for schools and hospitals. I am not convinced it would increase the popular support for fuel duty. I do not know, I should be interested in other people's views, but I think it might actually have the opposite effect. Where there is a new measure and a new income stream is being received, then hypothecation is something one can consider, but I am sceptical about going back on previous income streams and reclassifying them. I am not sure that is changing anything very special. On power shift, we have very significantly increased the resources at the disposal of the power shift programme. Whether we should be looking at the criteria I do not know. That is perhaps something I should take away and have a look at. Mr Thomas 91. Earlier on in reply to Mr Gerrard you said that you did not feel you had a role in the infrastructure for alternative fuels, LPG in particular, and that that was a commercial matter, albeit that the fuel duty is an incentive there. Surely you, as a Government, have very firmly pinned your colours to the mast as far as ultra low sulphur petrol is concerned and the need for the infrastructure to deliver that to all areas of the country. I would suggest that the public at large at least feel that the Government has given a promise that the reason for the three pence cut in fuel duty, which is only applied to low sulphur petrol but is interpreted by Cabinet Ministers together with MPs as an eight pence cut in fuel duty - that was the answer I had this afternoon from the Secretary of State for Wales - can only work if you can deliver that ultra low sulphur petrol to all areas of the country and meet the public expectations that you do that. Why are you prepared to do it for that fuel, which makes no contribution towards CO2 emissions at all, but are not prepared to do it for the infrastructure of LPG or biodiesel which would make a huge contribution to a reduction in CO2 fuel? (Mr Timms) I do not think we are doing anything for ultra low sulphur petrol that we would not be doing for alternative fuels which are successful in the challenge. We are not providing resources to invest in --- 92. But you have nailed your political colours to the mast. If oil companies do not deliver, you will to a certain extent be blamed for it. I do not know how you have done it behind the scenes but you certainly made it clear that the political objective here is to deliver a three pence per litre cut in real terms to the public in response to the political demands which were placed upon you in the autumn but you are not doing the same for much more greenhouse friendly fuels, as it were. (Mr Timms) We are not making any investment in infrastructure at all for ultra low sulphur petrol. We are simply offering a duty incentive which will only be introduced if the fuel is available across the country. Similarly on alternative fuels, we will offer a duty incentive and then it will be for the providers to distribute it. I do not think there is any difference between the two. 93. There is no material difference but there is a huge political difference in the attitude you have struck and the way that comes across to the public. For example, earlier on this afternoon you made it very clear that rural areas must benefit from ultra low sulphur petrol as well. In my own very rural constituency I have one LPG fuelling depot; just the one. It is also an area which has older than average cars. I know a lot of people would switch in rural areas to LPG if they could be part of the power shift, which they cannot, because the average car in a rural area is older than in urban areas and, secondly, if they could get access to it, which they also cannot. Would you not agree that there is a task there for Government to be more explicit in its support for alternative fuels and to consider the points made by Mr Gerrard regarding a support for the infrastructure delivering that? (Mr Timms) I am not sure what form of support you are proposing. I think the evidence is that the very significant duty incentive which has been provided for LPG is leading to a very rapid takeup now of the fuel, a very rapid increase in the number of stations, something of the order of one a week, that sort of scale opening up around the country. We expect that to continue. The lesson I draw from that is that the incentive has worked and I would expect it to work well with the alternative fuels. Mr Grieve 94. Can we move to vehicle excise duty? As I understand the position, the primary change has been to cut vehicle excise duty for cars under 1500cc. Remembering what the Chancellor had to say about this, there appeared to be an argument he was putting forward that this had some environmental justification. It was going to produce an environmental benefit. It was not, as I understand it, being put forward as merely a palliative to angry motor-car users, there was some wider justification. Could you explain what it actually is and why it is seen by yourself that there is going to be an environmental good or plus from that change? (Mr Timms) Yes. The lower rate of VED for normal new cars less than 1500cc will provide an incentive for people who are buying a secondhand car to buy a smaller one. The question is: what is the right place to set that threshold? The view we have reached is that 1500cc is the right level to go for. I can only judge this from my postbag. My impression is that that is about right in terms of having a significant impact on quite a lot of people in making their choices about which secondhand car to buy. Originally when this was introduced it was at 1100cc and I received very large numbers of letters from people with 1108cc cars who were very upset about it. It was not my impression that it was having as big an effect as one might have hoped in encouraging people to obtain smaller cars than they otherwise would have done. Probably at the 1500cc level it will have a better impact. I do not want to overstate the significance of it, but it does send out the right signal in a way that is likely to be helpful. 95. Was there any appraisal as to what the likely environmental impact might be of this change? (Mr Timms) I do not think it would be large enough to warrant an entry in Table 6.2. 96. The other way of approaching car engines is about fuel efficiency, which may in fact not be dependent on engine size at all. Arguably that might be a much more logical, although perhaps more complex, approach to the rate you should have for excise duty but it is not the route that you have chosen. (Mr Timms) It is; for new cars that is precisely the route we have chosen. The rate of vehicle excise duty will be graduated according to the CO2 emissions. 97. There is no reason why you could not do it on existing vehicles. (Mr Timms) There is a reason. The reason is that the CO2 emission data will only appear on vehicle registration documents from next March. 98. I do not quite follow that. I appreciate that, but if you wanted to look at fuel efficiency in terms of types of engines in cars, that is something you could do with existing vehicles. You just have to carry out the necessary tests on them. (Mr Timms) No doubt one could introduce some kind of nationwide testing system which required everybody to have their car tested. 99. You could set up benchmarks on existing vehicles as to which are fuel efficient and which are not in type and model and base it on that. (Mr Timms) I should be interested to know more about the system you envisage. It sounds to me potentially an extremely cumbersome mechanism. What is really important about all of this is that the system is extremely simple, that somebody can look at their vehicle registration document, they can read the CO2 emission data and they will know what excise duty they have to pay. Anything more complicated than that and you very quickly start to lose the benefit and introduce a significant new bureaucratic burden which is not helpful. 100. The difference would be, would it not, to require the Government to take some view as to whether a particular vehicle is fuel efficient or not in its construction, which is something which could be tested and established? If I understand it, that is what you are intending to do with new cars. (Mr Timms) The point I am making is that for new cars the data is readily available, it will be on the registration document so everybody can see what it is. I would not favour a system which required everybody to have their car tested in order to find out what level of vehicle excise duty they had to pay. Would this be something which varied from one year to another depending? We would be getting into levels of bureaucratic burden which would not be warranted. 101. Forgive me but I do not think the proposal I am putting to you is completely illogical. Even when you do this for new cars, depending on the way people maintain their cars, it is soon going to make a huge difference to the level of fuel efficiency which is in fact being generated from any individual engine. That is still the route you have decided to embark on, but it is not the route which you have decided to take in relation to existing vehicles. I am just trying to probe a little bit about the reasonings behind all this. I have to say to you that I am very unconvinced that there is an environmental benefit at all from this proposal to move it up to 1500cc, which is why I asked you whether there was an environmental appraisal. We do not have it. Is this a palliative to motorists or is this a reasoned, thought through process by your department in conjunction with DETR or whoever else it may be, that you have come up with a scheme which is going to have a really good impact on emissions and use of vehicles? Is it the one or is it the other? (Mr Timms) I do not want to claim too much for what will be achieved by this change. The way that I see it is that it is sending out a signal which is clear and is actually going to be quite effective, that if people go for a smaller car they will pay rather less in duty. 102. A smaller bigger car or bigger smaller car you have decided, because previously you were trying to keep people down to 1100cc; you have expanded it up to 1500cc. So it is already an enlargement of the type of vehicle which is brought into the process. (Mr Timms) Yes. What it will do is provide an incentive for people who might otherwise have bought 1600cc plus to go for a sub-1500cc car. It is addressing a different part of the car buying public and I suspect that where we have set it now is probably the most effective point. I do think it is important that any arrangements of this kind are simple and do not require people to go through very complicated processes in order to work out whether they should be paying œ105 or œ155. 103. May I just turn to VED on lorries? Is the change not inconsistent with your own ten-year transport plan which wants to see an 80 per cent increase in rail freight by 2010? With a halved rate of VED, what is the incentive to use rail or the waterways or take goods off the roads? (Mr Timms) There are several points to make here. Certainly one of the concerns which we have been looking at quite closely over the last year or so is the competitive position of the UK haulage industry compared with the industry in France, Belgium and elsewhere. UK hauliers certainly are not only competing with rail, they are competing with hauliers elsewhere as well. I think the international competition is an important part of the consideration here. Equally of course it is the case that we have not gone anywhere near as far as people in the haulage industry were calling for in reducing the fuel duty which is paid by hauliers. What we have done is to introduce a balanced package which addresses some of the competitiveness concerns that UK hauliers have been experiencing, which continues to ensure that other competitors to road haulage have a level playing field. 104. Forgive my saying it but during the period between September and the Chancellor's pre-budget statement, I remember oft repeated statements coming from the Chancellor, indeed I think from the Prime Minister, saying that the argument put forward by the road haulage industry that its costs were very much higher than its continental competitors was wrong because it was failing to take account of a series of indices which in fact showed that they could be very competitive because there were certain areas where they were much cheaper. Suddenly, hey presto, Pre-Budget Report, we have a halving of VED. Let us try to be realistic about this. I appreciate governments are subject to political pressures. Is not the reality that that was simply a response to political pressures from the road haulage industry and had absolutely nothing whatsoever to do with an environmental policy at all? (Mr Timms) No, I do not accept that. At the Road Haulage Forum which I attend, we have been looking at these issues over a lengthy period. We have carried out a good deal of work. I have mentioned the study carried out about the environmental costs of lorries and that was available to us as well and the conclusions of that work will be reflected in the revised scheme for lorry vehicle excise duty. So it will be a properly considered new scheme, taking full account of all of the environmental issues which are appropriate and it certainly was not and it will not be an ill-thought-out knee-jerk response in the way you are proposing. It is the case that if you look at the overall rates of taxation on hauliers in the UK compared with those in other EU Member States, the difference is nothing like as great; for some of the countries there is not much difference at all but certainly the differences are nothing like the same as one would conclude if you only looked at fuel duties. But of course things are changing. Changes were made in some EU countries over the summer in response to increased oil prices and those are changes which we need to take account of as well. The new scheme for VED will take very full account of environmental considerations. 105. I am grateful for that. In effect this is the end of the DETR's sustainable distribution strategy. We have been told authoritatively that the authoritative figure for a lorry on the road is œ28,000 per vehicle in terms of environmental damage. On the face of it, what you have just done does not contribute in any way towards achieving that policy objective, if it is really costing in environmental impact terms œ28,000 per vehicle, and the DETR is aiming to try to deal with it - and that is their figure. Forgive my smiling just a little bit but we are bombarded with figures on this Committee, authoritative figures, half-authoritative figures, non-authoritative figures, all telling us that there is an environmental strategy which can be pursued based on objective evidence. It comes back in a sense to what I was asking you much earlier. Yet here we have a decision which appears to fly completely in the face of the so-called objective criteria laid down by DETR. Is the reality that the policy and political pressure considerations have just overridden whatever DETR thought about this? (Mr Timms) No. The decisions which we have announced will take full account of environmental and social and economic considerations. I am going to ask Mr Maxwell to comment specifically on your question about œ28,000. (Mr Maxwell) In respect of the reform of the lorry vehicle excise duty, the existing scheme has something like over 100 different classes. It is very difficult to work out where the incentives lie for different people to use different sorts of lorries. One way of tackling the environmental cost of lorries is to encourage people to use cleaner lorries or to use lorries which impose less track damage. The aim is that the reformed lorry VED scheme with fewer, simpler classes and those classes themselves based on environmental costs and the differences in environmental costs caused by different types of lorries, will help to encourage people to use cleaner lorries which damage roads less. So it is possible to reduce those costs. 106. Does that mean that the DETR is going to be coming up with a new impact survey, consequences, results, because I have not seen it? (Mr Maxwell) There is an understanding that over time the improvements in lorry technology and in particular engine technology have reduced the costs associated with air pollution, for example local air pollution, and those are the sorts of things we factored in to the VED reform. 107. You would expect the DETR therefore to agree with you about this and to be in a position to come to us, just as an example, and say they have thought this through again and with all these extra things we are factoring in we have to look at it differently. (Mr Timms) We are certainly working very closely with DETR on all of these issues and of course the licensing agency is a DETR agency. There is very, very close cooperation between us. Chairman: If you had produced an environmental appraisal on this it might have been to your advantage. Mr Chaytor 108. May I return to the point on VED for private vehicles and just endorse the comments of my colleague, Mr Grieve, about the position of older vehicles? I really must press you on this point as to why it is exceptionally bureaucratic to have a progressive system for older vehicles either through emissions' ratings which the manufacturers must have for vehicles or by using engine size as proxy, when the fact remains that for all the vehicles we simply have the one incentive, the œ50 reduction for vehicles under 1500cc. Really my question is: do you not think there is a perfect logic for older vehicles to have a greater number of bands of engine sizes or emissions rating and a wider spread? The point surely is that one of the greatest groups of polluters is large engined older vehicles. At the moment there is little disincentive to get those off the road and to persuade people to trade them in for more efficient vehicles. (Mr Timms) There are incentives. Inefficient older vehicles consume more fuel and so that in itself provides an incentive for newer and more efficient cars. There is a limit to what one can expect the vehicle excise duty system to deliver; we are talking about œ160 a year. To introduce a system, which, if I have understood correctly what is being suggested, would involve some sort of annual test being carried out on the vehicle, is just --- 109. I am not suggesting an annual test, I am saying that the manufacturers are simply asked to give a rating to all of their vehicles still in production, whether they are registered in the year 2001 or whether they have been previously registered. I am just challenging your notion that there is a responsibility on the individual to designate the rating of their vehicle and say this is information that the manufacturers must have. (Mr Timms) It is very important that the system should be very simple and that people should be able very easily to tell what the level of duty they are going to have to pay is. It is the case that the data is actually available for vehicles manufactured since 1998. I suppose one could require people to ring up the manufacturer or find the information in that way, but that seems to me to be introducing a degree of complexity into what is a pretty limited system. 110. The onus would not be on the individual, surely. The onus would be on the DVLA when they sent out reminders for renewal of vehicle excise duty. The DVLA would keep a central record of the emissions rating of all vehicles up to a certain point and they would then send out with the reminder the appropriate charge and explanation as to why the charge was different. There is no need for the onus to be on the individual to find out. DVLA ought to keep this on record. (Mr Timms) It would be a pretty big task for DVLA to set up a database for emissions. I think the information has only been available since 1998 anyway, so we are only talking about cars between 1998 and 2001. It just sounds a bit over the top to me. 111. May I pick up on your other point about the limited use of VED because of the ceiling of œ155? With the emissions rating, am I right in thinking there will be four bands from next April? (Mr Timms) Yes, that is right. 112. So my question there is: is there not really a choice to be made of accepting that VED has limited impact because we have established four bands and the maximum VED is œ155 and therefore the cash incentive is really quite small, or accepting that VED has potentially much more significant impact if it becomes more progressive and if the range of charge is widened? I suppose the essence of my question is when are we going to see a Range Rover tax, is it not? (Mr Timms) There is a bigger range in the rates; œ70 between top and bottom as opposed to the œ50 for the 1500cc. So there is a wider range. We need to see how that goes. My hunch is that the signals that sends out are going to be quite effective in influencing people's behaviour but we will just have to see. 113. Would you accept that there is potential for something far more progressive, as already applies in other western European countries, a much bigger range of VED levied according to emissions rating? (Mr Timms) I accept that theoretically one could certainly do something along those lines. Whether it is desirable is another matter. Mr Jones 114. I want to come back to an answer you gave to Mr Grieve in giving the Government's justification for the reduction in VED on vehicles 1500cc or lower. You said that would give an incentive for people buying second-hand cars to buy a smaller vehicle. I was trying to think through that. I am a serial second-hand car buyer, in fact third-hand car, fourth- hand car buyer. I enjoy going to car auctions and buying second-hand cars. I do not understand how this works. If I go and buy a car I am going to gain on the VED by buying a cheaper car. But if I am trying to sell a car and I have a bigger car, what does that mean? It means that I reduce the price of my larger vehicle to sell it. How does it affect the proportion of the total number of cars on the road? The gate is the cars which are sold new. Once they are sold new, if 20 per cent or 30 per cent of your cars new are over 1500cc, what do you suppose is going to happen to them? Are they just not going to get sold? Someone is going to buy them cheaper than they bought them before you reduced the VED on smaller vehicles, but those cars are not going to sit there not being sold because you have reduced VED. How have you had any effect, any net effect, on the total number of smaller vehicles on the road with this policy? What is the environmental justification? (Mr Timms) I think that it will make smaller cars somewhat more popular. I suppose one would have to look at the point at which vehicles ultimately get scrapped to come up with an answer to your question. It clearly will reduce the cost of running a smaller car compared with running a larger one and at the margin that will have some impact. (Mr Maxwell) It reduces the fixed cost of owning that car. Of course it does not have a bad environmental impact of reducing the marginal costs of driving extra miles. A change in vehicle excise duty of this nature does not increase the incentive for people to drive more miles. 115. I think we have established that whatever effect this policy has on the environment it is extremely marginal. (Mr Timms) I do not know about extremely. I have made the point that it is not huge. Mr Shaw 116. Continuing the theme of working closely with the DETR I want to talk about regenerating our inner cities. In protecting the environment, in the Pre-Budget Report at 6.80, you say that you are going to introduce a package of œ8 million to encourage property conversion etcetera. The Empty Homes Agency tell me that there are 250,000 properties which have been empty for a year or more. The DETR are only able to tell me about properties which have been empty for a year because the local authorities provide that for them in their housing investment programme returns because they have a statutory requirement to do so. How then are you able to assess the number of properties which have been empty for ten years or more, as you say you are going to reduce to zero the VAT rate for renovation? What model have you used? How have you obtained the information when the DETR do not have the information? How many houses have been empty for ten years? (Mr Timms) You have got me there. Certainly this is information which I presume was obtained from DETR. 117. They did not have it in answer to PQs. (Mr Timms) The answer is that we do not know but perhaps I may send the Committee a note. 118. You are saying you are prepared to spend œ80 million but you have no idea of how many properties. How do you arrive at that figure? (Mr Timms) We do know the number of properties we think are involved. What I am not able to tell you is what the source of that data is and that is what I shall check and come back to you on. 119. The DETR do not know and they are the responsible department. I wait with bated breath on that one. Is the adjustment to zero rate of VAT for these something you are going to take up with Europe because previously you have always said when we tackled this issue that it is impossible to go to zero rate. Are you going to zero rate because it is of an environmental nature which is beneficial to the end user as we have other zero rates for? How can you do it on this one when you have not been able to do it on energy saving materials as you have told us in the past? (Mr Timms) The EC rules on this are fairly complex and the EC law requires a reduced rate to have a social objective. Our aim is to create relatively affordable housing units. It is going to require some quite careful discussion and quite careful work with the European Commission to ensure that we do not fall foul of state aid rules, but I am pretty confident that we are going to achieve those negotiations successfully. 120. If we are talking about protecting the countryside and regenerating our inner cities, one of the central recommendations within the Rodgers' report was to harmonise the VAT in order that there is far more than just planning incentive, fiscal incentive for builders to renovate and a disincentive to build on greenfield sites. At the moment greenfield sites are zero rated and we get zero rating for environmental reasons. That simply does not stack up. What was the thinking as to why you would not harmonise? At the very least you could argue that it should be far more on a greenfield site to protect the countryside and much less on renovating and getting more from what we already have. (Mr Timms) May I first of all go back to what you asked me about a moment ago and the position with the EU to correct what I said? The adjustment to the scope of the zero rate for the sale of refurbished, previously vacant dwellings is just adjusting an existing zero rate. It will affect dwellings which have been continuously vacant in the time from 1973 to 1990 and then refurbished and sold after April 2001. In other words there was an existing zero rate in place for properties which have been vacant since 1973. What we are saying is that in future it will be properties which have been vacant for ten years or more. My understanding is that amending an existing zero rate in that way does not in fact require EC authorisation. 121. But we do not know how many. (Mr Timms) We put in a figure of how many buildings we think are involved. What I do not know is the source of that data and that is what I shall come back to the Committee on. On your question about changing the basis for VAT, as you know, in Lord Rogers' report there was a large number of recommendations; 105 of them all together. What we have done in the Pre- Budget Report and in the Urban White Paper is pick up very much the spirit of the report's recommendations. We subscribe entirely to Lord Rodgers' vision of a major urban regeneration and I think that the package of proposals, not just on VAT but on stamp duty and other things as well which are in the Pre- Budget Report and Urban White Paper will enable us to take forward that vision. It is perfectly true that we have not introduced all the individual measures which were recommended by Lord Rodgers but we have picked up the spirit of his report and we are going to see very significant progress as a result of these measures in the direction he has called for. 122. Would you agree that of the 103 recommendations the one I have referred to was number one? I think that is the general consensus, certainly from what Lord Rodgers has said in the press in response to the Pre- Budget Report. (Mr Timms) It was quite an important point in Lord Rodgers' mind. It is important to make the point as well though that Lord Rodgers has warmly welcomed what we said, particularly on stamp duty. I am not saying that we have done everything he has called for but we have made very significant progress in these announcements in the directions he has called for. 123. On stamp duty, how are you going to account for pockets of valuable property within deprived areas, so we do not have Lords of the Manor in a great big mansion getting money for doing up their properties, when we want to see the money being put into more modest property, particularly in certain parts of the UK where property might be below œ60,000? (Mr Timms) The key driver here is business property rather than residential. What we really want to do is to encourage enterprise into the most disadvantaged wards in the country. Removing stamp duty from public transactions in those wards will be quite an effective measure in encouraging businesses to locate in those areas and I think that will have a very substantial beneficial effect in regenerating those areas. There will of course be a knock-on effect for residential property and on the whole if we are talking about the most disadvantaged wards in the country, then making residential property there somewhat more attractive than it otherwise would be, would probably have a beneficial effect as well. It is really the business side which is important. 124. Can you confirm that where there is immediate tax relief for property owners on conversion, that is conversion from flats into a single house as well as a house into single flats? I was talking to my colleague from Hastings and they actually have a shortage of family houses but an excess number of flats, Victorian properties? (Mr Timms) I can confirm that. Joan Walley 125. I want to press you a little more about how we are going to achieve what the Rodgers' report set out to achieve. I agree with Mr Shaw that the number one priority really was to get this level playing field. I am thinking about constituencies like my own where, as welcome perhaps as the stamp duty proposal is, I wonder how effective it will be because it might be that there might be properties which would not reach that basic minimum level anyway. There is the added issue about VAT and its relationship not just to houses and to residential properties but I have an inner city area with lots of buildings where we are not necessarily looking for the buildings or the land to come into residential use, but to come to use which should be for business, small enterprises and so on and so forth. That does not really seem to be covered in quite the way Lord Rodgers perhaps anticipated it would be. (Mr Timms) I am sorry, I did not quite understand the point about business premises. 126. I am saying that as I understand it under the proposals in the budget on the stamp duty exemption for disadvantaged communities if you have derelict factories or buildings which were used for manufacturing purposes, then maybe the value of those will not bring such relief that would encourage growth because they would not be worth that much from the very beginning. I am saying as well that in terms of residential properties, okay, you are looking at the prospects of VAT reform to encourage additional conversion of properties for residential use, but I can think of a lot of buildings in my constituency where we would not necessarily want residential use, we would want some of the former potteries, pot banks and so on to be converted into small-scale small- and medium-sized enterprises and units within those. I do not see how these proposals will really bring about the investment that we are all crying out for on a scale that we need. (Mr Timms) If there is a derelict factory somewhere in one of the areas which will benefit from this change, and somebody acquires that, stamp duty will not be charged, whereas stamp duty will be charged on an equivalent property in a different area. It is a significant new incentive for businesses to locate in disadvantaged areas and that is what we are aiming to achieve. 127. I was just look at what the value of that dispensation or that exemption would be on the stamp duty where the value of property is very low in the first place. (Mr Timms) If we are talking about a disused factory --- 128. Small factories. (Mr Timms) My guess is that on the great majority of factories stamp duty certainly will be payable so the exemption will be a significant new incentive for businesses to use properties there rather than elsewhere. It has to be part of a broader package and the package is set out in the Urban White Paper. As an element in a strategy to bring enterprise into disadvantaged areas is going to be very useful. 129. So you will be keeping a very close monitoring brief on how effective the proposals are compared to the ones which were set out in the Rodgers' report. (Mr Timms) Yes, we shall certainly be following that with great interest. 130. May I ask very quickly about the issue of VAT for listed buildings and places of worship? When I heard the budget statement, I immediately understood that many, many derelict or older churches would be eligible and I did not immediately pick up on the fact that it was only relating to listed buildings. In many of our heartland areas, inner city areas, not all church buildings are listed buildings. I am thinking for example of Methodist churches and buildings such as this where we really want to make sure this relief extends right the way across the board. Will you be reviewing that or is it absolutely the case that it will only apply to places of worship, churches, which are listed buildings? (Mr Timms) Yes, we are only proposing it for listed places of worship but that does include Methodist chapels and I understand that there are certainly Quaker Meeting Houses which are listed, synagogues, mosques. It is not just traditional parish churches which will benefit but we are only proposing the exemption for listed places of worship. 131. That will exclude a lot of run-down churches in some of the most deprived inner city areas, will it not, or even the edge of town estates where we would want to be improving the quality of these houses? (Mr Timms) It is targeting the relief on those buildings which are the most valuable, which is why they have been listed. That is the right priority to set. 132. That is not directed towards the environmental benefit which would come about from addressing social exclusion and buildings which are going into disrepair because there is not the money to bring them into repair. (Mr Timms) No, it is not going to solve all the problems. By targeting listed buildings, including those in disadvantaged areas with high degrees of social exclusion, this could make a significant impact because raising the quality of those buildings which have that heritage potential can make a significant contribution towards improving the overall environment in the area. Mr Shaw 133. That could actually benefit wealthy areas, therefore you are not targeting to deprivation in inner cities. If the building requires to be listed in order to qualify for the grant, it could be in the most wealthy constituency in the country and it would qualify but the rundown church in constituencies such as yours would not qualify. (Mr Timms) We do have some listed churches in Newham. It is neutral. It is true that this measure is not targeted at disadvantaged areas; that is true. 134. This measure comes under regenerating Britain's towns and cities and it is not doing that. (Mr Timms) No, it is, but it is true that this is not targeted just at disadvantaged towns and cities. Mr Loughton 135. Whilst I do not wish to accuse the Government of being spiritually divisive, it is true, is it not, that 90 per cent of the churches which will qualify are Church of England churches and it is the Methodist chapels and Catholic churches which tend to be unlisted and newer which will not? However, I do not want to pursue that point particularly as I have a vested interest as my father is a Church of England vicar. I want to come back to be clear on the stamp duty matter. (Mr Timms) Just as a matter of interest, the 90 per cent figure is not correct. You are right that the bulk are, but I can tell the Committee that we think there are about 13,000 listed Church or England churches and over 3,000 others. It is not 90 per cent but it is the bulk. 136. It is convincing. We will not use the word "extremely" but it is pretty convincing. Let us go back to stamp duty because this is one of the key considerations for me in the regeneration package. What you have said now, which is not what has been said before, because I have questioned this matter with the DETR Ministers in particular, is that the stamp duty exemption is to be targeted to businesses. On the basis that last year stamp duty brought in approximately œ2.1 billion, of which I believe just under œ1.1 billion was residential property and just under œ1 billion was business, that is roughly a 50:50 split, then surely there is going to be a big knock-on effect on residential, not just a knock-on effect but a big knock-on effect because of where it is actually coming from. Why do you not exempt residential property if the real aim is to advantage business investment in these disadvantaged areas which you have not yet defined? (Mr Timms) I hope I have not confused the Committee. I am not saying that this relief is targeted at commercial property. What I am saying is that the real importance of it in regeneration terms is going to be the benefit for commercial property because that will encourage businesses to locate in disadvantaged areas when they might not otherwise do so. That could have a potentially huge impact on regenerating those areas. The benefits of the relief of course will be available for residential property transactions as well, but the real regeneration game, although that is helpful too, will be on the commercial property side. 137. The problem is that this is not focused, is it? What I want to get at is first of all what qualifies as the disadvantaged area. You spoke in terms of wards as well. Is it not the case, certainly within wards in London and the South East and places like Hackney and Islington, that the biggest beneficiaries by far are the Georgian terraced houses worth over half a million pounds who will be exempt from four per cent stamp duty? Against that, the number of properties in the whole of the country last year which sold for less than œ60,000 is 660,000. Some 45 per cent of all residential property sales last year did not qualify for stamp duty at all. If you take out London and the South East the vast majority, a significant majority, of residential property sales, particularly in the most deprived areas, did not qualify for stamp duty at all, therefore there will be no knock-on effect to the most deprived areas who have very low property prices. Is that not the case? (Mr Timms) There will be benefit for commercial property transactions in those areas and that is the real gain from this, that it will encourage businesses to locate in disadvantaged areas when they would not otherwise have done so and that is going to be a powerful incentive for regeneration in those areas. You asked about how we are going to identify what those areas are. There is a DETR index of deprivation at the ward level. Other approaches have been developed in the other countries of the United Kingdom and we shall be working with the administrations there to come up with a nationwide uniform assessment of disadvantage which will then apply across the country. 138. You have again come back to saying the biggest advantage, the biggest boost, will be given for commercial property, businesses investing in disadvantaged areas. (Mr Timms) No, I am not saying that. I am saying the biggest benefit in regeneration terms will be the commercial property advantages. That is the point I am making. 139. I agree with you. I completely agree with you. On the figures I have given you therefore the knock-on effect on residential property will benefit very significantly people who do not need to be benefiting from stamp duty exemptions, that is benefiting from four per cent exemption on a œ0.5 million property, œ20,000 to a resident of Islington. Why not, on what you are saying, limit it to commercial property, or at least cap it on an upper value of a house? Are you actually now confirming, because nobody has yet, that it will be determined on a ward by ward basis where inevitably you will have the Georgian terraces slap bang next to the tower blocks and the poor areas, particularly in London and the South East? (Mr Timms) Let us wait and see until we know what the basis of the assessment will be. My view is that it will need to be on a ward by ward basis because making an assessment on a sub-ward basis would be practically very, very difficult. If one does select the most disadvantaged wards in the entire country, my guess is that the number of half million pound houses in those wards across the country will not be very great. Let us wait and see what the selection is. I would not favour introducing a different stamp duty regime for residential as opposed to commercial property. That has never been done in the past by the previous government either. That would introduce a degree of complexity to the stamp duty system which would not be warranted. 140. It is quite easy to do though, is it not? We know what a business is and we know what a residential property is. (Mr Timms) It introduces an additional complication into the system which is not there at the moment and it is not something I would favour. 141. It is not terribly complicated, is it? (Mr Timms) There are complications and complications. It is one we could do without. Mr Thomas 142. May I briefly tease out some further ideas about what constitutes a deprived area? You mentioned the DETR's list of wards with deprivation but you will also be aware that there are four areas in the United Kingdom which have been acknowledged as being deprived areas by the Government, which are the Objective 1 areas. Those are the four areas which the Government has put forward to the European Union for particular regional assistance, saying these are our most deprived areas, larger areas than a ward I accept. There is one in Wales and three in England. Will those qualify for this relief as well? (Mr Timms) There will need to be a ward by ward assessment and I have no doubt at all that many wards in those areas will meet whatever the threshold eventually turns out to be. I would not anticipate a blanket passport so that anything which happens to be in an Objective 1 area automatically benefits from this. It will not work like that, it will be an assessment made on a ward by ward basis. Chairman: I wanted to ask you a few questions about your role as a Green Minister inside the Treasury but I am conscious that we have had a very lengthy session so I shall put these down in writing, if I may. To your relief no doubt. It remains for me to thank you for coming to the Committee. We have had a very helpful and very meaty session.