APPENDIX 4
Memorandum from Cargill PLC
INTRODUCTION
Cargill is an international marketer, processor
and distributor of agricultural, food and industrial products
and services. As a major player in UK agri-industry, we believe
that the UK agricultural industry can quickly produce sufficient
oilseed rape to supply a significant proportion of the UK's diesel
requirement through biodiesel. Biodiesel is already widely used
in Europe and the United States, and has proved itself to be a
commercially viable, environmentally friendly road transport fuel.
However, the current duty rate of 25.82p per
litre is too high to ensure that a viable biodiesel industry will
develop in the UK. The major purpose of the biodiesel duty rate
reduction which came into effect in June 2002 was to create a
level playing field between biodiesel and Ultra Low Sulphur Diesel
(ULSD), taking into account the extra costs of biodiesel production.
However, many of the variables the Government examined when deciding
to reduce the duty rate to 25.82p, a derogation of 20p for biodiesel,
have since changed. This means that further duty reductions will
be necessary if a true level playing field is to be created for
biodiesel in the UK.
The Treasury's duty rate calculation should
take account of shifting market prices on an annual basis, and
adjust the derogation for biodiesel accordingly. This would typically
result in a derogation between 26p and 30p per litre, or in other
words, an overall duty rate of between 15.82p and 19.82p per litre.
GOVERNMENT STRATEGY
TOWARDS BIODIESEL
The Government awarded biodiesel a duty derogation
in Budget 2001, set at 20p per litre below the ULSD rate, a rate
which came into effect in July 2002. This was intended to support
the production of biodiesel and allow the UK to benefit from the
reduced greenhouse gas emissions it can offer. David Jamieson
MP, Minister for Transport, also recently announced that local
bus operators would benefit from a 100% fuel duty rebate on biodiesel.
It is important to distinguish between the case
for preferential treatment for biodiesel per se, and the
reasons for setting the duty rate derogation at the specific level
of 20 pence per litre below the rate charged on Ultra Low Sulphur
Diesel. The Government is now convinced on the first of these,
the benefits of increased biodiesel consumption to the UK:
— Biodiesel's environmental credentials
are well known. Lord Whitty recently spoke of "the significant
life-cycle reductions in CO2 emissions compared with the now standard
ULSD" that biodiesel can offer.
— Government ministers have also spoken
at length about the positive impact a domestic biodiesel industry
could have on the rural economy. It can present farming communities
with valuable diversification opportunities in the wake of the
crises that have hit the rural economy in the last 10 years.
John Healey MP, Economic Secretary to the Treasury,
listed a number of factors that the Treasury took into account
when reducing the duty charged on bioethanol when he appeared
before the Environmental Audit Committee on 11 December. These
are also valid for biodiesel:
— The balance between the cost to the
public purse and the benefits the UK would gain
— Market stimulation effect: The Treasury
believes that the biodiesel market has been stimulated by the
20p derogation. Indeed, the Pre-Budget Report states, "Biodiesel
is now establishing a market across the country; more than 300,000
litres were sold in October—a five-fold increase in sales
since the introduction of the duty incentive—and it is expected
that biodiesel will be available at over eighty fuel retailers
by the end of the year" (HM Treasury: Pre-Budget Report November
2002).
Cargill remains sceptical that these measures
will allow the Government to achieve its policy objectives for
biodiesel. The 100% fuel duty rebate on biodiesel for bus operators
will make little material difference to the biodiesel market,
as bus operators already receive an 80% rebate on conventional
diesel.
Cargill's calculations have also shown that
a commercially viable biodiesel industry based on oil-seed rape
crops will not develop at the current duty rate. The majority
of proposals for biodiesel production that have been forthcoming
to date are based on biodiesel generated from recycled vegetable
oil. The size of this market is limited, and there are some concerns
about the quality of the final product, mainly because of the
dispersed nature of collection.
THE FUTURE
OF THE
UK BIODIESEL INDUSTRY
The Government has committed itself to "annually
reviewing the production cost of biodiesel, including the relative
production cost of rape methyl ester and recovered vegetable oil,
and the movements of rapeseed prices relative to fossil fuels
to ensure that any possible overcompensation is excluded"
(European Commission state aid decision). However, HM Treasury
should acknowledge that there is equally a risk of under-compensation,
especially when one considers the shifts in production costs and
input prices over the last few years. Cargill believes that the
Treasury should review the duty rate in an open and transparent
fashion on an annual basis, in consultation with key stakeholders.
Cargill's calculations suggest that, at current
market prices, a duty rate of 28 pence per litre would be necessary
in 2003 if biodiesel is to be competitive vis-a"-vis
ultra low sulphur diesel. We believe that this rate will typically
be between 26p and 30p per litre. This estimation is based on
our production cost estimate of 41.5 pence per litre, as compared
to the Government's estimate of 35.39 pence per litre, and a more
probable "consumption penalty" of 7.5% (rather than
the 6% figure used by the Government). Our figures lead to a real
production price differential between biodiesel and fossil diesel
of 29.93 pence per litre; the Government's figures result in a
differential of 19.71 pence per litre.[2]
A duty derogation between 26p and 30p per litre
would initially yield carbon dioxide savings of 300,000 tonnes
per year, based on a 1% biodiesel uptake as a percentage of national
diesel consumption.
CONCLUSION
Cargill is disappointed that the Chancellor
did not signal his intention to reduce the duty rate levied on
biodiesel in the Pre-Budget Report. Further action will be necessary
from HM Treasury if a meaningful biodiesel industry is to develop
in the UK. The Government needs to consider action on this front
as soon as possible, as state aid and derogation applications
will have to be made to the European Commission, and the necessary
crops will have to be commissioned. A further duty rate reduction
would place biodiesel and Ultra Low Sulphur Diesel on a level
playing field, and would allow biodiesel to make a strong contribution
to the UK's targets for greenhouse gas emissions under the Kyoto
Protocol.
December 2002
Annex
Pre-Budget submission to the Chancellor
of the Exchequer October 2002
INTRODUCTION
Cargill is an international marketer, processor
and distributor of agricultural, food, financial and industrial
products and services. As a major player in the UK agri-food industry,
we believe that UK agriculture can quickly produce sufficient
oilseed rape to supply a significant proportion of the UK's diesel
requirement through biodiesel. Biodiesel is already widely used
in the United States and Europe and has proved itself to be a
commercially viable, environmentally friendly road transport fuel.
However, the current duty rate of 25.82p per
litre is too high to ensure that a commercially viable biodiesel
industry develops in the UK. This is in spite of the fact that
biodiesel has a range of advantages over the remaining alternative
road transport fuels, many of which benefit from a more favourable
duty regime. The major purpose of the duty rate reduction which
came into effect in Budget 2002 was to create a level playing
field between biodiesel and Ultra Low Sulphur Diesel (ULSD) to
take into account the extra costs of the biodiesel production
process. However, many of the variables the Government took into
account when deciding to reduce the duty rate to 25.82p (a decision
originally made in Budget 2001) have since changed, as we demonstrate
below. This means that further duty rate reductions will be necessary
to create a true level playing field for biodiesel in the UK.
In the light of this, Cargill calls on the Government
to increase the duty derogation granted to diesel to between 26p
and 30p per litre. This would give an overall duty rate of between
15.82p and 19.82p per litre.
BIODIESEL AND
GOVERNMENT POLICY
OBJECTIVES
Environmental policy
The Kyoto Protocol commits the UK Government
to reducing greenhouse gas emissions by 12.5% relative to 1990
levels, by 2012. The transport sector accounts for 22% of all
greenhouse gas emissions according to Department of Trade and
Industry figures. Emissions from this sector increased by 5% between
1990 and 2001, and continue to rise. Recent statistics published
by the Department for Transport show that the overall level of
car use has risen by 1.3% in the last year, and motorway traffic
has risen by 1.6%. However, this increase has not been accompanied
by a proportionate increase in the uptake of environmentally friendly
fuels. As a consequence, many of the Government's efforts to reduce
greenhouse gas emissions have concentrated on the transport sector
through the promotion of public transport alternatives and the
encouragement of a shift from traditional petroleum-based fuels
to alternative fuels generated from renewable sources.
The joint DTI/DEFRA/HMT strategy on Powering
Future Vehicles, published in July 2002, is a key part of these
efforts. Whilst the strategy depends mainly on a combination of
gas-based fuels, hydrogen fuel cells and electric vehicles, the
Government admits that "although the ultimate low-carbon
destination looks likely to be fuel cells using renewably-produced
hydrogen, the detailed route to that destination will depend on
how the many technical issues are resolved" (Powering Future
Vehicles: The Government Strategy: p.6).
Whilst the environmental credentials of some
of these fuels are not in doubt, there are substantial hurdles
in the way of their medium and long-term development, and these
"technical issues" are likely to take some time to be
resolved. There are substantial costs associated with the creation
of a Liquid Petroleum Gas (LPG) infrastructure in the UK, and
the development of such an infrastructure will take considerable
time. Vehicles also need to be retro-fitted to allow them to function
on LPG. There are currently fewer than 55,000 LPG vehicles on
the road, and gas vehicles are still not allowed on Channel Tunnel
trains for safety reasons. Availability of compressed natural
gas (CNG) is even more limited.
Hydrogen cells suffer from the same infrastructure
problems as the gas fuels, and will not be available for day-to-day
use for some years. The Government's Powering Future Vehicles
strategy states that "most experts feel that fuel cell cars
are not likely to reach viable mass-market cost before 2010 to
2015." Recent reports have speculated that they may not be
in everyday use until as late as 2020. Biodiesel, on the other
hand, has strong environmental credentials, and has the advantage
of being readily available. The fuel does not require any additional
infrastructure provision or expensive vehicle conversion.
Policymakers have spoken at length about the
potential for biodiesel and other biofuels to reduce greenhouse
gas emissions. The 20p rebate awarded to biodiesel last year was,
in part, an indication that it had "won" the Green Fuels
Challenge. The European Commission's communication on alternative
fuels for road transport, published last year, stated that "[biofuels]
are CO2 neutral since their carbon content is captured from the
atmosphere (European Commission: Communication on Alternative
Fuels for Road Transport 2001: p.5). Franz Fischler, EC Agriculture
Commissioner, recently stated that "[biofuels] can make an
important contribution to reduce (sic) carbon dioxide emissions,
reinforcing the strategy of sustainable development of the Union"
(Speech, 28 September 2001).
Security of supply is also an issue of key concern,
especially in light of the current instability in the Middle East.
In a recent speech to the RUSI Energy Security Symposium, Peter
Hain MP drew attention to this problem, saying that "There
is no better way to enhance our energy security, and thus to increase
our ability to pursue our broader foreign policy objectives, than
by finding innovative and cost-effective ways to reduce our dependence
on oil as a transport fuel." As Hain admits in his speech,
renewable energy technologies have a substantial role to play
in this context. Biodiesel, as a readily available, renewable
road transport fuel, could make an important contribution.
The potential of biodiesel in these fields was
recognised in the European Commission's Communication on alternative
fuels and biofuels directive, published last year. The directive
proposes to establish a minimum level of biofuels as a proportion
of total fuels sold from 2005, starting with 2% and reaching 5.75%
by 2010. A number of other European countries, including Germany,
France, Austria and Italy, already have a substantial biodiesel
sector, accompanied by encouraging tax incentives for environmental
purposes. The UK duty regime, however, currently puts the potential
British biodiesel industry at a comparative disadvantage to a
number of other countries in the European Union.
AGRICULTURAL POLICY
AND THE
RURAL ECONOMY
The devastation caused by Foot and Mouth Disease
last year inflicted serious damage on the economic fortunes of
farmers, and had wide-ranging repercussions for the rural economy.
The report of the Policy Commission on Food and Farming, published
under the stewardship of Donald Curry, was published in January
2002. The Policy Commission's final report recommended that the
duty rate on biofuels be reduced to 4.5 pence per litre, in line
with the rate currently levied on the gas fuels. Whilst Cargill
does not believe that a derogation of this magnitude is necessary,
a reduced duty rate would encourage diversification in agriculture
and would boost the economic fortunes of the rural economy. The
National Farmers Union and the Country Land and Business Association
(CLA) have expressed strong support for biodiesel on account of
the diversification it would encourage.
Farmers do, of course, have a range of other
diversification opportunities, one of which is the growing of
energy crops for biomass and electricity generation. There is
a perception in some circles of a conflict between biomass and
road transport biofuels, and that a shift of land-use from biomass
applications to biodiesel would infringe upon the Government's
abilities to meet its targets under the Renewables Obligation.
However, this fails to take account of a number of recent developments
in the biomass industry. The recent demise of the Arbre project,
a willow-burning power station near Selby in Yorkshire, seems
to suggest that biomass is not performing as strongly as originally
anticipated. Miscanthus is proving to be uneconomic and yield
rates are poor. Increasingly, the best biomass opportunities are
seen to be presented by the straw by-product of the oilseed crop
grown for biodiesel production. Recent research conducted by ECOTEC
shows that the output/input ratio for biodiesel increases from
1.78 to 3.71 if the straw is utilised as an energy source.
There is, therefore, no conflict between biomass
and biofuel. The CLA agrees with this verdict, stating recently,
"We think there is no conflict . . . Arable land will, if
the right conditions are put in place, be ideally suited for the
production of oil for diesel engines" (CLA Submission to
the Department of Trade and Industry: Developing Energy Policy:
Key Issues for Consultation for White Paper).
British Biogen, the trade association for the
UK biomass industry, also sees no conflict. In its response to
the DTI Energy Policy consultation, it pushed the advantages of
both biomass and biofuel, adding, "Modern technology is creating
a new opportunity for bioethanol and biodiesel to make a significant
contribution to the transport fuel market . . . With the appropriate
fiscal incentives, biofuels for transport are capable of delivering
a range of policy objectives, notably, low carbon transport fuels,
increased fuel security and development."
THE DUTY
RATE CALCULATION
The current duty rate of 25.82 pence per litre
was announced in Budget 2001, coming into effect in Budget 2002.
The new duty rate was set at 20 pence per litre below the Ultra
Low Sulphur Diesel rate, and was intended to "offset the
additional production costs of biodiesel and permit the UK to
benefit from the reduced greenhouse gas emissions that this fuel
can offer" (Budget 2001: HC 279: p.112).
Cargill studied the European Commission's state
aid decision for the biodiesel rebate (European Commission: State
Aid No 804/2001: Reduced rate of excise duty on biodiesel C (2002)
933fin) with great interest, as it provides a detailed exposition
of the thinking and calculations behind the Government's decision.
The rebate does not count as aid to promote
the economic development of an area where the standard of living
is abnormally low or where there is serious unemployment under
Article 87-(3) (a) of the Treaty. Given the current malaise in
rural areas, Cargill believes there would be a good case for introducing
a rebate on this basis, as we have explained above.
There would also be good reason to see the rebate
as aid to facilitate the development of certain economic activities
under Article 87-(3) (c) of the Treaty. The Government does justify
its decision partially on these grounds, as the aid was designed
to enhance the use of environmentally friendly fuels in order
to reduce the emission of greenhouse gases. As detailed previously,
there are powerful arguments for making further duty reductions
on this basis.
Central to the Government's decision to grant
the duty rebate, though, is the cost differential between biodiesel
and ultra low sulphur diesel. The Commission decision states that
the UK authorities argued that "the duty reduction is only
intended to offset the additional production cost [of biodiesel
relative to conventional diesel] to enable it to be sold at a
similar price to conventional diesel" (C(2002) 933fin: p.2).
The duty rate reduction at its current level
was originally announced in March 2001; there have been significant
changes in the market since that date. Cargill has conducted detailed
research on the production costs of biodiesel, and believe that
further duty reductions are necessary if the UK biodiesel industry
is to produce the fuel at a competitive price. The ineffectiveness
of the current duty rate has been demonstrated by the lack of
actual investment to date.
There are still very few functioning biodiesel
pumps in the UK, and any domestically produced fuel that is available
is generated from recovered cooking oil. This will yield only
limited environmental benefit, and will make no additional contribution
to the livelihood of UK farmers.
The final decision document from the European
Commission refers to a production cost estimate of 35.39ppl, based
on medium-scale production of 30,000 to 60,000 tonnes per annum,
from which the UK duty rate has been derived. This figure appears
to be based upon outdated market price information and an unduly
optimistic estimate of production costs. Taking the current rapeseed
price of £168 per tonne delivered to our plant in Liverpool,
and realistic costs for processing the seed, refining the oil
and esterifying the finished rapeseed oil to produce biodiesel,
we calculate the total cost to be around 41.5ppl. Further, we
use a more probable "consumption penalty" of 7.5% (rather
than the 6% referred to in the Commission decision) and a fossil
diesel pre-tax production cost of 14.68ppl. I have summarised
this data in Annex 1 of this submission.
In the light of this evidence, Cargill believes
that a further derogation is necessary if biodiesel is to be sold
at a competitive price vis-a"-vis conventional diesel.
Updated calculations, based on current market prices, demonstrate
that a variable 26p to 30p duty derogation, linked to the world
price of vegetable oil, representing an extra 6p to 10p off the
existing rate, would allow large scale production to take place.
The current duty derogation is based on an estimated
project life time of five years, taking into account the timescale
for the implementation of the European directive on the promotion
of biofuels. Our rate between 26p and 30p is based on a project
life time of 10 years, which would allow industry to recoup its
costs. These calculations take into account the costs of all inputs
across the production chain, and would stimulate production of
approximately 300,000 to 400,000 tonnes a year.
We note that HM Treasury has promised to review
the production cost of biodiesel on an annual basis, and take
the conclusions of its reports into account when making future
judgements on duty rates. Given the shifts in production and substitute
costs that have occurred in the last two years, Cargill would
welcome an early indication that the Government intends to reduce
the duty rate on biodiesel to between 15.82p and 19.82p per litre
in Budget 2003, representing a derogation of between 26p and 30p
per litre.
CONCLUSION
Cargill calls on the Treasury to take further
action to encourage the production and consumption of biodiesel
in the United Kingdom by linking the duty rate to the world price
of vegetable oil, and reducing it to between 15.82p and 19.82p
per litre.
This would place biodiesel and Ultra Low Sulphur
Diesel on a level playing field, and would allow biodiesel to
make a strong contribution to the UK's targets for greenhouse
gas emissions under the Kyoto Protocol. A new rate would also
encourage further diversification in the agricultural industry,
as foreseen by the Policy Commission on Food and Farming.
We realise that duty rate decisions will not
take effect until the 2003 Budget. However, the Treasury should
signal its intentions to reduce the duty rate at the earliest
possible opportunity to allow suitable energy crops to be commissioned,
and to give industry the required impetus to start production
in earnest. The necessary applications for state aid clearance
and derogation under the EC Mineral Oils Directive should also
be completed as soon as possible.
Cargill PLC
October 2002
Annex 1
DUTY RATE CALCULATION
| Government estimate (GBP/litre)
| Cargill calculation (GBP/litre) |
| Production cost of biodiesel | 0.3539
| 0.4150 |
| Production cost + consumption penalty | 0.3751
| 0.4461 |
| Pre-tax price of fossil diesel | 0.1780
| 0.1468 |
| Real production price differential | 0.1971
| 0.2993 |
2
Government estimates are taken from the European Commission's
state aid decision for biodiesel (C 2002: 933fin). A more detailed
exposition on the duty rate calculation can be found in Cargill's
Pre-Budget Submission to the Chancellor of the Exchequer (annex
to this memorandum). Back
| 
