Select Committee on Environmental Audit Second Report


Memorandum from Cargill Plc


  Cargill welcomes the Environmental Audit Select Committee's decision to hold an inquiry into the "Pre Budget Report 2001" to "take stock of where we stand on the process of environmental tax reform which the Government committed itself to in the 1997 Statement on Intent." This submission (which is based on a paper we have sent to the Treasury in advance of the Pre Budget statement) is particularly focused on two of the themes set out in the Committee's terms of inquiry: the Government's progress to date in its programme of environmental tax reform; and the consistency of the Government's approach.

  Cargill is an international marketer, processor and distributor of agricultural, food and industrial products and services. We believe that UK agricultural industry can quickly produce sufficient oilseed rape to supply some three per cent of the UK's diesel requirement, by using suitable set-aside land and, more importantly, land currently used to grow wheat not needed by the domestic market. Bio-fuels are already widely used in Europe and the US and have proved themselves to be commercially viable, environmentally attractive fuels. We would like to see sufficient encouragement given to bio-fuels in the UK to enable them to make a contribution to reducing emissions—noting in particular their strong record on carbon dioxide emissions, and to inject life into UK farming and industry. The Government's current proposed reduction in excise duty is welcome but will be inadequate to stimulate production on the scale necessary to make a significant contribution to reducing greenhouse gas emissions. Moreover, the proposed rate of duty is inconsistent with Government policy on other road fuels, namely the current rate of excise duty enjoyed by the road fuel gases, LPG and CNG both of which are carbon based fossil fuels.


  We welcome the 20p rebate awarded to biodiesel in Budget 2001, to take effect from Budget 2002, and the support that has been given under the auspices of the Green Fuels Challenge to pilot projects for bioethanol. We also welcome the Government's recognition of biodiesel's impressive record on carbon dioxide emissions. However, we strongly urge the Treasury to reconsider the proposed and currently inadequate rate for biodiesel, particularly in relation to the duty on road fuel gases. This rate is still not sufficient to stimulate industry on a large enough scale to give the United Kingdom a viable biofuel industry. The planned rate for Budget 2002 may bring forward some proposals for modest amounts of fuel produced from recycled cooking oil, but will not be able to create a market for biofuels produced from arable crops such as rape-seed. Any biodiesel produced at the proposed rate will, therefore, be of insufficient quantity to have any noticeable effect on air quality. The quality of the fuel will also suffer if it is mainly comprised of used cooking oil, and will not meet the proposed European biodiesel standard. Car manufacturers would also be reluctant to promote the fuel in such circumstances, as it could infringe the conditions specified in vehicle warranties. Cargill believes that a buoyant Biodiesel industry based on arable crops will prove useful in dealing with the environmental problem of disposal of waste cooking oil. The incorporation of small quantities of waste oil into biodiesel can help minimise costs with no detrimental effect on finished product quality.


  EU research has shown that road transport currently accounts for 84 per cent of total carbon dioxide emissions. It is uncontested that we need to tackle the problem of carbon dioxide emissions urgently if air quality is to improve. Research by the Carbon Trust has shown that "we are on target to meet our Kyoto target, but Kyoto is just the start. Stabilising CO2 concentrations in the atmosphere needs global emission cuts of 60 per cent or more. We need to move quickly to decouple the growth of CO2 emissions from economic growth." A wide range of policymakers have spoken at length on the benefits of biofuels in this area. Franz Fischler, EC Agriculture Commissioner, recently stated that "[biofuels] can make an important contribution to reduce carbon dioxide emissions, reinforcing the strategy of sustainable development of the Union" (Speech, 28 September).

  ECOTEC Research and Consulting have conducted substantial research into the life-cycle emissions from biodiesel, fossil diesel, CNG and LPG (BABFO/ECOTEC 2000: Emissions from Liquid Biofuels). The research shows that greenhouse gas emissions over the biodiesel life-cycle are about 55 per cent lower than life-cycle emissions from conventional diesel on a per-mile basis. Life-cycle emissions of carbon dioxide are about a quarter of those of diesel. Biodiesel is also energy positive—for each unit of energy put into the process, at least two units are produced, rising to four if the straw is used as fuel.


  Above and beyond the carbon savings and tailpipe emission arguments, there are a number of other good reasons for a rethink on the duty rebate awarded to biodiesel:

    —  Current energy trends: The Performance and Innovation Unit's Energy Review has emphasised a number of current energy trends which create an even greater need to find alternative fuels. The Department of Trade and Industry is well aware of the current and future problems which must be addressed in the field of road transport. The most recent edition of DTI Energy Trends shows that indigenous production of primary fuels continues to fall whilst our demand for road transport fuels continue to rise. The DTI's submission to the Energy Review reinforced this, stating that if current trends continue, UK oil production "will fall from around 129 million tonnes in 2002 to around 88 million tonnes by 2006" (DTI initial contribution to Energy Review, July 2001, p 4). The significance of the security of supply argument has increased over the last few weeks, with the current political situation in the Middle East adding another element of uncertainty to the equation. There is an urgent need for the Government to address this situation, and encourage the production of non-fossil fuels. LPG and CNG and, of course, fossil fuels that also suffer from insecure supply. DTI Energy Trends March 2001 projected that the UK will have to import 15 per cent of its gas by 2006. It does not seem logical to move production from one fuel in short supply to another one in similarly short supply.

    —  The contribution of biofuels to the rural economy: European Commission figures show that on an EU-wide basis, between 45,000 and 75,000 jobs could be created by the biofuels industry, mainly in farming regions. The aftermath of the Foot and Mouth Disease crisis has left Britain with a rural economy which urgently needs to diversify if it is to survive. The Government has discussed the principle of diversification into non-food crops in detail, as such crops "contribute to sustainable development, both in environmental terms by reducing greenhouse gas emissions, and in economic terms by boosting farm diversification and rural incomes. They also have the potential to create new jobs in rural areas." (MAFF/DETR: White Paper: Our countryside: the future).

    —  The EU legislative landscape: The European Commission has already published its Transport White Paper, which calls for greater use of alternative fuels throughout the European Union. The long-awaited biofuel directive will also be published shortly, and will set ambitious targets for member states to meet. European Agriculture Commissioner Dr Franz Fischler has been an enthusiastic supporter of biofuels over the last few months and has urged member states to "expand the use of bio-fuels and enlarge the area of energy crops." (Speech, 28 September). We hope that the UK Government will be arguing the case for biofuels strongly in the Council of Ministers, but would also like to see a concrete acceptance of the benefits of biofuels within the Budgetary process. We are concerned that other European countries will overtake the UK if a viable duty rate is not awarded to biodiesel. Germany, for example, already has a strong domestic biodiesel industry. Used cooking oil is already being exported to Germany to be esterified and blended with RME to make biodiesel which then meets the required quality standard. This represents a double loss to the UK in terms of environmental benefit and business activity.

  David Jamieson MP, Minister for Transport in the DTLR, recently stated that he would like the UK to become "a world leader in biofuel technologies." Cargill would also like to see the UK in a strong position in the world biofuel market, but believe that the current duty rate is insufficient to stimulate a UK market for biofuels. Unless action is swiftly taken, industry will go elsewhere. Biodiesel is already produced in Germany, France, Austria and Italy, all of which provide appropriate tax incentives for environmental reasons. Germany and Austria have no tax and no quotas on biodiesel production. Italy and Spain do not apply tax, but impose quotas on production. If the UK fiscal regime does not become more favourable towards biofuels, it is clear that production will shift to these other countries, with their more advantageous tax regimes.

  We welcome the recent announcement that DEFRA has taken on board a recommendation made by the Government Industry Forum on Non Food Uses of Crops that an independent study should be carried out by Professor Nigel Mortimer of Sheffield Hallam University to provide an independent, comprehensive and rigorous evaluation of the comparative costs and benefits of biodiesel production in the UK. However, we believe that the scientific evidence for biodiesel's case is already proven. Given the lead time for plant construction and the need for Government to give industry a clear steer for investment decisions, we urge the Committee to recommend to the Government that it gives the earliest possible indication of a further reduction in excise duty.

  HM Treasury has argued in the past that one reason for not granting biofuel a further rebate is the revenue that would have to be foregone. Cargill takes issue with this argument: this loss at the moment is only theoretical, as there is no market for biodiesel. This theoretical loss could occur if motorists switched from Ultra Low Sulphur Diesel to biodiesel in sufficient numbers, but is limited to deferring income from a finite revenue stream. As the RSPB stated in evidence to the Environmental Audit Committee last year, there is no further air quality benefit to reducing the ULSD duty rate further. Instead, we should be looking at new ways to decrease emissions, of which the promotion of biodiesel is one.

  Evidence demonstrates that taxation can be an effective tool for altering fuel preferences. A European Commission Communication of 10 October stated that "[taxation] is a crucial instrument in meeting the commitments of the Kyoto Protocol and has the potential for providing an effective stimulus for policies to . . . develop renewable energy sources, like biofuels." (OJ C284:11). The example of Ultra Low Sulphur Diesel is enlightening: the vast majority of the diesel market moved to ULSD on account of the preferential duty rate enjoyed by the fuel, which is 3p below ordinary diesel. The Treasury wholeheartedly supported the move because of the perceived environmental benefits of ULSD. The biodiesel industry, however, does not benefit from the massive economies of scale which the UK's diesel producers enjoy, meaning that an extra inducement would be needed to kick-start production.


  Cargill would like to see real support for biodiesel. It performs strongly on all environmental grounds against the other competitors in the field. It is carbon positive, biodegradable and does not require expensive vehicle conversion before it can be used. It also has a very low flashpoint, and is, therefore, considerably safer than many of its competitors. Gas fuels, for example, are still not permitted in the Channel Tunnel in case of ignition. A strong domestic biofuel sector would give a much-needed boost to the beleaguered rural economy and would allow the UK to develop a new, home-grown industry in the provision of environmentally friendly, sustainable fuels. Given the likely future economic climate, industries with such a potential should be encouraged wholeheartedly. The nascent biofuels industry presents the Government with an ideal opportunity to boost industry, agriculture and the environment simultaneously. If a fuel duty rate that gives the industry the necessary encouragement to start production in earnest is withheld, the opportunity will be lost.

October 2001

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