Memorandum submitted by Cargill PLC
Cargill is an international marketer, processor
and distributor of agricultural, food and industrial products
and services. We believe that the UK agricultural industry can
quickly produce sufficient oilseed rape to supply some 2 per cent
of the UK's diesel requirement through biodiesel, by using suitable
set-aside land, and, more importantly, land currently used to
grow wheat not needed by the domestic market.
Whilst we welcome the 20p duty rate cut awarded
to biodiesel in last year's Budget, which will come into effect
as soon as the current Finance Bill has negotiated its way through
Parliament, we have constantly stressed that this should only
be seen as a first step, and is not sufficient to stimulate industry
to produce biodiesel in earnest. Ideally, the duty rate of biodiesel
should be linked to the world price of both vegetable oil and
fossil fuel, reflecting prevailing conditions in the markets of
the main variable cost elements in biodiesel production. However,
Treasury officials have informed us in the past that this system
is too complex, even though it is in operation in other parts
of Europe, notably France.
In terms of the current duty system, charged
at a rate linked to the duty rate for Ultra Low Sulphur Diesel,
a further 15p reduction in duty rate, giving an overall rate of
10p, will give the necessary boost to industry. This duty rate
need not be permanent, but is needed to give the nascent biodiesel
industry a starting boost.
2. BUDGET 2002
In Budget 2001, the Chancellor of the Exchequer
announced a new duty rate of 25.82 pence per litre for biodiesel,
20p below the duty rate for ultra low sulphur diesel. The justification
given for this decision was the environmental credentials of biodiesel,
in particular its strong record on greenhouse gas emissions. Biodiesel
also has the advantage that it is renewable, requires no conversion
costs and is energy positive.
Cargill welcomed this decision as a first step,
but has constantly stressed that the proposed rate was not sufficient
to ensure that an economically viable biodiesel industry would
develop in the United Kingdom. The Budget Report stated that "There
are already signs that this initiative [the 25.82p rate] is stimulating
activity, including investment in production facilities and plans
by one major supermarket chain to use biodiesel in lorries"
(HC 592: 133). However, the quality of fuel that will be produced
at the current duty rate is highly questionable. The lower duty
rate may bring forward some proposals for modest amounts of fuel
produced from recycled vegetable oil (RVO), but will not be sufficient
to create a market for biodiesel from arable crops such as rape
seed. Any biodiesel produced at this proposed rate will be of
doubtful quality and will have little noticeable effect on air
quality, Car manufacturers would also be reluctant to promote
a fuel predominantly based on RVO, as it could infringe the conditions
specified on vehicle warranties.
In his Budget Statement, the Chancellor announced
the following on fuels:
"To encourage more environmentally friendly
fuels, I will, from next year, introduce a fuel duty incentive
for sulphur-free fuel. Having already cut fuel duty for projects
on hydrogen, bio-gas and methanol fuels, I am now inviting British
business to come forward with further proposals for pilots that
would encourage new fuels and which we would support with fuel
duty cuts and exemptions. "
In addition, enchanced capital allowances were
also announced for vehicle refuelling infrastructure for compressed
natural gas and hydrogen. However, there have recently been reports
that the Government has concluded that fossil fuels will not be
phased out for at least another 50 years, despite its considerable
investment into hydrogen cell research. This is a reflection of
The cost and capital outlay associated
with putting a hydrogen infrastructure in place;
The high cost of hybrid vehicles, which
can be run on both hydrogen and conventional petrol or diesel.
These problems are also salient for the promotion
of road fuel gases. The necessity to build adequate infrastructure
means that, even if the Government saw the gas fuels as the major
alternative fuels of the future, it would be unable to build the
necessary infrastructure in time.
Biodiesel presents a solution to this problem.
It requires no expensive engine modification, and no expensive
infrastructure provision. Hydrogen fuels and gas-based fuels both
require extensive vehicle modification and refuelling infrastructure
provision. The fact that the Government heralds each new LPG plant
is indicative of this, especially when existing petrol stations
could easily be used for biodiesel. The European Commission recognises
all of these arguments, and stated in its recent communication
on alternative road transport fuels; "Biofuels are for
the short and medium term the only option. Therefore, launching
the appropriate policy instruments to promote the introduction
of biofuels will give a clear signal that the Community is serious
about developing alternatives to petroleum products in transportation"
(European Commission Communication on alternative fuels for road
transport 2001: p13).
3. BUDGET 2002
The aftermath of last year's Foot and Mouth
Disease (FMD) crisis has left Britain with a rural economy which
urgently needs to diversify if it is to recover. In terms of the
economic costs of FMD to the food and farming sectors, farmers
550 million and the food chain and other businesses
300 million (DEFRA research presented at December
2001 FMD conference in Brussels).
In the 2001 Budget Statement, Gordon Brown stated
that, "For farming, an industry essential to Britain which
today faces both immediate and long standing difficulties, the
Government, over and above its statutory obligations, has made
available agri-compensation money worth 150 million pounds."
In Budget 2002, it was health, for obvious reasons, that grabbed
all the headlines. However, the Chancellor pre-empted the results
of the Comprehensive Spending Review by also announcing extra
funds for education and crime-reduction measures. No mention was
made of the continuing problems being experienced by the agricultural
industry, and the fact that the aftershocks of the FMD crisis
are still being felt in some parts of the country.
Cargill was particularly disappointed that the
Budget ignored the proposals of the Policy Commission on Food
and Farming, which reported earlier this year that alternative
crops are one of the best diversification options open to farmers
who lack opportunities in tourist markets: "We think that
producer collaboration is vital in the non-food crop market ...England
needs a long-term strategy for creating and exploiting opportunities
in non-food crops, including starch and oils" (Report
of the Policy Commission on Food and Farming 2002: 54-55). The
report goes on to call for a further reduction in the duty rate
for biodiesel "to help convince processors to drive the
market forward" (p56).
A number of other organisations have also stated
that energy crops for biodiesel could provide a much-needed boost
for the beleaguered UK agricultural industry. The National Farmers'
Union remains a strong supporter of the UK biodiesel sector, and
has urged the government to further reduce the duty rate charged
on the fuel.
Cargill has undertaken thorough research into
the potential size of the UK oilseed rape sector, and we intend
to produce our biodiesel from domestically grown oilseed rape
crops. Our tight proposed production schedule reflects this and
is based on the commissioning of the necessary crops this year
to allow biodiesel to be produced to reach the market next year.
We have written to ministers on a number of occasions stressing
that we need an early indication of the Government's intention
to reduce the duty rate to enable us to make the necessary commercial
decisions. Such an indication has not been forthcoming.
Cargill believes that, in Budget 2002, the Government
missed out on the opportunity to inject significant life into
the agricultural industry, and help the environment at the same
time. This could have been achieved by a further reduction in
the duty rate for biodiesel.
The Department for Environment, Food and Rural
Affairs recently commissioned a report on biodiesel for the Government-Industry
Non-Food Crops Forum. We understand that Professor Nigel Mortimer
of Sheffield Hallam University, who is conducting the research
for DEFRA, will be publishing his findings imminently. This presents
the Government with another opportunity to signal its intentions
towards the nascent biodiesel industry. Cargill hopes that this
opportunity will be taken.