Examination of Witnesses (Questions 1-19)
MR CHRIS
CARTER, MR
GARY PUNTER,
MS RUTH
RAWLING AND
MR PETER
SMITH
2 JULY 2003
Chairman: Welcome to the Committee. As
I said outside, it is a bit of a case of the usual suspects but
it is nice to see you again. For the record, British Sugar and
Cargill plc are in front of us. From British Sugar we have Chris
Carter, who is the Corporate Affairs Director and we have Gary
Punter "a genuine Punter!) who is Technical Manager of British
Sugar; and from Cargill Ruth Rawling, Vice President of Public
Affairs, and Peter Smith who is Commercial Manager, Refined Oils.
Welcome to the Committee. When I look at this whole subject of
biofuels it seems to me in energy terms to be roughly the equivalent
of Kennington in real estate; you are always expecting it to arrive
but it never quite does. Is that a fair assessment? Forget the
Kennington side of it.
Mrs Shephard: Some of us live in Kennington.
Chairman: That is why I used the example;
I do as well.
Mr Jack: It is more a question of Mornington
Crescent!
Q1 Chairman: Ignore the Kennington
part of the question because it is too controversial. Is it true
that we have been talking about this for a long time and it always
seems to be almost at the top of the agenda but never quite there?
We always think that one more push is going to deliver it but
somehow it never quite seems to get over the top of the barricade.
Why should we think it might be different this time, if that is
the case? Politicians are always terribly unwilling to admit ignorance
but if you use any complicated expressions like "bioethanol"
or "biomass", would you just define what you mean and
that will help us without embarrassing us any further!
Mr Carter: There are two main
biofuels which could realistically be used in the medium to short
term. One is bioethanol which is made from feedstocks like wheat
and sugar beet and could be made from woody foodstocks like straw,
and the other is biodiesel. The position at the moment is that
the Government has agreed a duty rate of reduction of 20 pence
per litre for both of those two biofuels in recognition of the
environmental benefits which they bring, which are primarily associated
with greenhouse gas and CO2 reduction, ie climate change, but
there are other benefits as well. That is welcome, but unfortunately,
as far as we are concerned, that is not quite enough to stimulate
investment in the industry and, as you say, Chairman, that is
the very reason why we do not have an industry in bioethanol of
any kind at all in the UK at the moment.
Ms Rawling: I speak on behalf
of biodiesel which is made out of vegetable oil which would come
primarily in UK circumstances from rape seed. There is an extremely
small cottage industry, I think I would describe it as, at the
moment in the UK producing biodiesel, but in order to have an
industry which would really make a difference in terms of environmental
benefits, in terms of our farmers or indeed in terms of being
able to go into a petrol station and buy something which contained
biodiesel wherever you were in the country, we do not yet have
an industry and the reason is very similar; we do not think that
the duty derogation is large enough to make the investment worthwhile.
We have argued consistently for the last three years that we need
a duty derogation around 28 pence per litre in total or at least
between 26 and 30 pence, depending exactly on the price of vegetable
oil, and we still have not got there. We have only got 20 pence
and that is why we do not have a biodiesel industry of any size.
Q2 Chairman: We are going to come
to those questions in some detail in a minute. If you look round
countries which enjoy broadly similar climatic and agricultural
conditions to ourselves, which of those have gone further in developing
those products and what instruments have they used to get there?
Mr Carter: If you look at Europe
to start with, the countries that are directly involved at the
moment are Sweden, Spain, Germany and France, they are the main
protagonists. All of those except Germany are producing bioethanol.
Germany is Europe's largest biodiesel producer and is about to
start producing bioethanol as well. They all have duty reductions
considerably higher than 20 pence per litre. They range from 27
pence per litre in Spain and France, to 37 pence per litre in
Sweden to 48 pence per litre in Germany.
Q3 Mr Mitchell: This is a reduction?
Mr Carter: They are all duty reductions,
that is right. They are all considerably higher than in the UK.
Most countries that I am aware of that have substantial industries,
looking a bit further afield like the US and Brazil which have
more than two-thirds of the world's production, and indeed Spain
which is the largest producer in the EU, all have used a combination
of duty reductions plus capital grants and other forms of assistance
to get the industry started. The key thing is that the capital
investment has got to be supported initially to allow them to
be able to compete, otherwise they are competing with sunk costs
in the oil industry which also operates at a very, very large
scale, which is extremely difficult to compete with.
Q4 Chairman: Really the public in
practice is putting in a very large subsidy indeed to deliver
this in those countries?
Mr Carter: In all of the countries
in the world that have biofuels industries they have had to have
government support to get them started in the first place, yes.
Q5 Chairman: Is the purpose of this
because it benefits the farmer or benefits the environment or
benefits the economy through import savings? What is the strategic
purpose behind this?
Mr Carter: Each country has had
a different strategic objective. If you take the United States
its main objectives were fuel security and air quality in towns
and cities. If you take Brazil it was fuel security and rural
economic development. If you take the EU the main objective was
climate change and CO2 abatement. In most of the more advanced
countries that have biofuels industries it is not necessarily
the taxpayer which finances it. It can be equally well done through
the consumer by a mandate or an obligation to have a certain volume
of biofuels in the petrol or diesel. In Brazil, for example, that
is how they do it there.
Q6 Mr Jack: I would like to pursue
the question as to why you both think the Treasury do not recognise
the validity of your calculations because before the Finance Bill
came through Cargill produced a very careful and detailed worked
out example of why your 28.8 pence per litre derogation was required
and that related to the price of oil seed rape, and it was meticulously
worked out. You have now had the chance of reading what John Healey,
the Economic Secretary, had to say in the Finance Bill when we
had the debate we had about that and when all of the detailed
arguments that you have underscored to the Committee were put
to him. Why do you think he was wrong?
Mr Smith: I think one of the problems
is that since we received the 20 pence duty rebate an industry
has started. As Ruth mentioned, at the moment it is no more than
a cottage industry with several small plants producing a few hundred
tonnes per year and distributing those locally. Production adds
up today, according to figures from John Healey, to about 4,000
tonnes per year of biodiesel. That is translated into 400,000
litres per month, which sounds an impressive figure. In fact,
400,000 litres per month is less than 350 tonnes per month. Diesel
consumption is something in excess of 1.3 million tonnes per month.
Figures of 400,000 litres sound to the layman perhaps as if we
have a very significant industry when in fact it is 0.025% of
consumption, that is one quarter of one-tenth%. If we were to
achieve EU targets of just 2% biofuels we would need to expand
the industry today by 80 times.
Q7 Mr Jack: Have the Treasury explained
to either British Sugar or to Cargill why they think that 20 pence
is the right number and why they do not believe your more carefully
calculated alternative?
Mr Carter: We have repeatedly
asked the question. The response we have got back has not been
entirely conclusive about how the 20 pence per litre was arrived
at. All I would say is that the Treasury mention continuously
that they are cautious of not over-supporting biofuels, they are
concerned about sucking in imports, and perhaps they are putting
a nominal figure out to see what happens. But, no, there has not
been any quantified explanation of how the 20 pence was arrived
at.
Q8 Mr Jack: Have they told given
you any breakdown of why the calculation of 28.8 or above, because
there is a range above the 20 pence, are incorrect? Have they
challenged the calculations, first of all?
Ms Rawling: No, I would say they
have not challenged the calculations. All we have heard from them
is that they wanted to proceed cautiously and not over-stimulate
the industry. We have always said in any case there should be
an annual review of the tax rebate because in the biodiesel case
it does depend on the price of vegetable oil and the price of
Brent crude and you need each year to look at how that is varying
in order to make sure that you do not over-compensate the industry,
but we have not received any real criticism of our calculations
and, indeed, they are based on experience which we have, particularly
in Germany, of producing biodiesel and we are as surprised as
you are that there does not seem to be an incentive to really
get on and make this industry work in the UK.
Q9 Mr Jack: Is there an economy of
scale argument, notwithstanding the variabilities of the market
place that you have just put before the Committee in determining
the annual level of rebate, that says at a certain critical mass
both with bioethanol and biodiesel we could start to reduce in
absolute terms the amount of duty reduction because we would have
got the economies of scale and they will pull the cost of production
down?
Mr Smith: In terms of biodiesel
we are already making our calculations based on those economies
of scale. Cargill is well-known for its methods of production
which tend to be large, high volume, high efficiency, low cost
plant, and that is what we have on the drawing board for here
in the UK biodiesel industry. We have experience of large-scale
plants in Germany. We are aware of the costs and efficiencies
we can bring and we believe a plant in excess of 100,000 tonnes
per year would bring the efficiencies we need to allow us to operate
with the 28 pence derogation.
Q10 Mr Jack: Can I ask you whether
you have explored any of the territory which exists in the field
of electricity generation where, effectively, existing users of
electricity pay for the renewables obligation because it is part
and parcel of the price of electricity, in other words a zero
sum game? Because of the very small proportion, which you indicated
a moment ago in your response, that, even enhanced, it would represent
of the total diesel usage, the amount per litre of non-biofuel
that you would have increase the price by would be infinitesimal
if in fact you recycled the money from such a process into your
area. Have you discussed such a model with the Treasury?
Mr Carter: Yes, we have discussed
it and particularly in the context of the Biofuels Directive,
which of course came on the stocks on 8 May last. This has become
a live issue because the Biofuels Directive requires each Member
State to come up with target inclusion levels of biofuels, (which
is biodiesel and bioethanol), by certain guideline dates and those
are by the end of 2005 and the end of 2010. So, yes, we have discussed
that idea with the Treasury, that it would not be the taxpayer
that paid for it but it would be part of the consumer price effectively
for environmental goods delivered, but so far it has not received
a tremendously enthusiastic response. Perhaps that position will
change though with the advent of the Biofuels Directive when each
Member State will have to modify its position somewhat.
Ms Rawling: I might add a concrete
example there. We reckon for our production you are talking about
less than a quarter of a penny per litre on top of the ordinary
diesel.
Q11 Mr Jack: In terms of where the
reduction in price should bite, is it at the pump or is it upstream
of that?
Mr Carter: That is a key issue
as far as market deliverability is concerned. If we are talking
about fuel duty reduction, which is what is on the stocks at the
moment, the 20 pence per litre, then if that is paid effectively
to the supplier of the petrol—in the main the oil companies
and the multiple stores—then clearly those companies are
in the driving seat as far as negotiating the price downstream
to allow deliverability onto the market. Now that means that those
companies are in a very strong position from that point either
to encourage it or to block it, whichever way they prefer to operate.
So the point of delivery of the price reduction is key to its
initial introduction, but it does not have to be done that way.
In Sweden, for example, the duty reduction is allocated not to
the end supplier but it is allocated to a number of parties who
have to bid to the Swedish government for that purpose.
Q12 Mrs Shephard: The questions so
far have concentrated on your face-to-face with the Treasury.
How many government departments are involved in policy on biofuel?
Mr Carter: Five altogether normally.
Q13 Mrs Shephard: These are?
Mr Carter: They are Treasury,
Customs, DFT, DTI and Defra.
Q14 Mrs Shephard: And I think the
Cabinet Office which is responsible for joined-up government?
Mr Carter: Indeed.
Q15 Mrs Shephard: Have you gained
the impression that there is any one department which is taking
the lead and that is the department to which you should be addressing
your concerns? Self-evidently the Treasury is not accountable
for the Government meeting the Biofuels Directive for the EU,
the Department of Transport is.
Mr Carter: The answer to your
question seems to be that depending on the issue in hand different
departments take lead responsibility so, for example, as you say,
if it is the introduction of the Biofuels Directive, it is the
Department for Transport; if it is climate change, normally it
is Defra; if it is the involvement of the oil industry, it is
DTI; and if it is implementation of the duty reduction it is Customs
and Excise; and payment is Treasury.
Q16 Mrs Shephard: So your impression
I imagine must be the same as mine and that is that no one is
in charge?
Mr Carter: I'm not sure I can
answer that.
Ms Rawling: At this point the
question comes to me!
Q17 Mrs Shephard: If you say no I
will ask you to identify the lead department in your view. Well,
that is good.
Ms Rawling: I would just add that
we have had conversations with all these departments.
Q18 Mrs Shephard: It is indeed the
Department of Transport that is responsible for making sure that
the UK meets its obligations under the Biofuels Directives and
I think you gave a date of 2005 when those plans had got to be
in place.
Mr Carter: Slightly earlier than
that. The Directive which has just been announced states that
the targets need to be supplied to the European Commission by
1 July coming, so that is exactly 12 months' time, just to be
clear, and the legislation needs to be sorted out by each Member
State by the end of next year, so that is just 18 months away.
Q19 Mrs Shephard: I suppose in advance
of the legislation one might reasonably expect policy perhaps?
Right, are you aware of the report produced by the East of England
Development Agency?
Mr Carter: Yes.
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