Examination of Witnesses (Questions 40-58)
MR CHRIS
CARTER, MR
GARY PUNTER,
MS RUTH
RAWLING AND
MR PETER
SMITH
2 JULY 2003
Q40 Diana Organ: British Sugar and
Cargill promise that the development of this industry could be
the answer to the poor farm incomes that farmers are currently
getting. I would like to know quite how you arrive at that conclusion
when you have already said that you have a contract with your
suppliers for wheat at £75 a tonne, which is only slightly
higher than the general prices. Can you not see a situation where
if a whole lot of farmers do become contracted to you for the
product that will go into the fuel, that down the road five or
10 years it will be a bit like milk has got, there will be everybody
in that field and the price will be depressed because you will
be holding the contract and you will be pushing them down on them?
Could you give some comments on how you think this is going to
be a panacea for farm income?
Mr Carter: If you look longer
term the potential volumes associated with this industry are enormous.
If you take just a 5% level of bioethanol alone, that is a 1.25
million tonne industry for the UK which would require, for example,
three million tonnes of wheat. Looking further ahead you could
be talking of 10 or 15 million tonnes of wheat or more than that
so there would be an enormous dynamic in the market place which
I suggest would be particularly valuable at the moment when, post-CAP
reform, the demand for food products is likely, with the best
will in the world, to decline. We need something in the rural
economy to replace that. We need it now and I think we are going
to need it even more in five or 10 years' time. So I do think
it could play a very valuable role. The supplies for processing,
their prices and terms and conditions will clearly have to be
agreed and negotiated in the normal way. But if they are too parsimonious,
adequate volumes will not be grown, and the terms and conditions
would have to be improved to account for that. It is an enormous
potential opportunity for the UK and particularly for the rural
economy of the UK. It is an industry which could be high volume
and I think of enormous value even in medium term let alone the
long term. The concern is if we do not get in now everybody else
is going to and we are going to miss the boat.
Mr Smith: In terms of the rape
seed farmer that is also very true. It is difficult today because
the domestic demand for rape seed oil over the last five years
within the United Kingdom has declined largely due to global food
manufacturers centralising their food manufacturing businesses
across over in mainland Europe. We have seen domestic demand for
rape seed oil fall from 600,000 tonnes in 1999 to 500,000 tonnes
today. If we were to introduce a complete new demand base for
vegetable oils by way of a new biodiesel industry, indeed you
are going to give a huge boost to the rural industry. The costings
that we have put forward are based on real market values. We do
not believe we could persuade farmers, nor would we want to try
to persuade farmers to grow a crop at below market value. Introduce
a whole new demand for your product and the market price inevitably
rises. I would like to comment on your comments on the milk industry.
It is a little bit different because both British Sugar and ourselves
here are asking the farmer for the use of a hectare of his arable
land. If the farmer finds that we are paying him too little then
he can immediately switch to growing an alternative crop that
is paying better.
Q41 Paddy Tipping: Could I follow
this up in biodiversity terms because cereals may be very valuable
and oil seed rape may be very valuable too, but we do not want
the countryside swamped with cereals and oil seed rape, we do
not want Lincolnshire expanding anywhere else! There are issues
there.
Ms Rawling: I think we have to
keep this in perspective. To get to a 2% biodiesel industry in
the UK all we are talking about is going back to the acreage of
rape seed that we had in 1999 because in the meantime yields have
improved and the oil yield from a tonne of rape seed has improved.
We only need to go back to where we were in 1999. We do not need
to go wall-to-wall rape seed to be able to produce a 2% biodiesel
industry, so I think concerns about biodiversity are valid but
they can be exaggerated in this context.
Q42 Alan Simpson: I would like to
take a look at this from a slightly different angle and that is
to say if we were to go down the path of greater tax incentives
in terms of the fuel pricing how would we know that this would
benefit the development of a domestic biofuels industry rather
than sucking on imports that would take the duty discounts and
pocket it so it would develop no particular gift to a domestic
industry at all?
Mr Carter: The issue of imports
is one that we have looked at extremely closely. It is quite clear
that the Treasury and other government departments are worried
about imports for the reason you mentioned. We have done various
calculations ourselves and we have drawn the conclusion that given
a reasonable scale industry, given the fact that East Anglia is
one of the most globally competitive areas you will find to produce
wheat, and we are not far off it for producing sugar beet, and
given that we are an efficient producer (just as Cargill is) then
we see absolutely no reason why we should not be able to compete
with other very low cost producers of bioethanol. In our case,
wherever they are in the world, bearing in mind that they have
to be brought here, shipped, loaded, unloaded, and all the rest
of it, we feel that we would be able to compete on a perfectly
reasonable basis. The worry is that if there is no domestic industry
to compete with them, then exactly the scenario you have just
painted will probably happen. Imports will start to dribble into
the country and if the duty reduction rate is then subsequently
raised at some point in the future that will encourage more to
come in. If there is no domestic industry at that point there
will be no overall competitive situation. Providing five or 10
years out the industry could be set up, we would see imports as
being part and parcel of the commercial mix along with a domestic
industry as you would normally expect. But that will not happen
unless there is a domestic industry in the first place.
Ms Rawling: On biodiesel we know
what the economics of the plants in Europe are and we know that
we can do that equally competitively here in the UK. We know that
UK farmers are very competitive in their production of rape seed
so providing we have the certainty to invest we are not worried
about this idea of pulling in imports because we know we will
have competitive local production.
Mr Smith: Could I expand a second
on that competitive nature. We are clearly competitive in growing
rape seed here. Because of the declining demand for oil in food
products we are exporting our excess seed today. We are exporting
it into Germany, we are exporting it into France. What we are
essentially doing is exporting our biodiesel industry.
Mr Carter: Funnily enough exactly
the same is happening on wheat. We are exporting right now quantities
of wheat to Spain for their bioethanol industry and they are buying
our wheat from East Anglia and converting it into bioethanol.
Q43 Mrs Shephard: So they can export
it back to us by road?
Mr Carter: Certainly to Sweden,
absolutely.
Q44 Alan Simpson: In a sense that
is where my question is leading. A number of global environmental
movements have been saying to us moving into biofuels is a great,
fabulous idea but you need to work out the mechanisms through
which you build in incentives because it is the ecological footprinting.
The idea, for instance, of saying it would be good idea to import
biofuels that have been produced as a result of clearing the rainforests
in Brazil and planting palms for palm oil, once you start to ecologically
footprint that as a basis of a UK supply chain it becomes an environmental
nightmare. What suggestions do you have for the way we develop
the UK biofuels industry that would build in these incentives
which would also be ecologically sustainable?
Ms Rawling: If I may say something
here, there is another way of looking at what is happening at
the moment which is that the very small amount of biodiesel that
is being imported is having to be sold at a premium to make it
worthwhile. We worked out that that was equivalent to a duty derogation
of 40 pence per litre and at that rate it would pull in imports.
So if you went to a duty derogation which was very high, then
I think the risk of pulling in imports does occur, but if you
are at the sort of levels we are talking about, 28 pence, then
we do not think it makes it viable at all.
Q45 Alan Simpson: I am sure you will
be aware of the initiative of Greenergy in their Farm to Forecourt
initiative and that was for direct contracts with UK producers
for UK supply outlets. Have you done anything the same?
Mr Smith: We are working on that
with Greenergy. We are helping them write the farmers' contracts
and helping through our own agricultural merchanting division
to get the farmers signed up to these contracts. Again, Greenergy
today are importing 100% rape seed biodiesel, they are selling
it only in the niche market place which pays a premium. They wish
to replace those imports with domestically produced rape seed
and we wholeheartedly support them and are helping them in doing
so, but it is only ever going to be a very tiny proportion of
the market place that is willing to pay the premium that is required
to buy rape seed biodiesel today with only a 20 pence duty derogation.
Q46 Alan Simpson: When you say a
niche market, are you talking about the Tesco's/Sainsbury's market
for global diesel?
Mr Smith: No, my understanding
is that there is only one, perhaps two supermarkets, that are
actually selling rape seed biodiesel but there are also some fleet
owners for whom the environmental benefits of 100% biodiesel are
very important, and Greenergy have done a magnificent job in marketing
biodiesel to those people. We see them as a very significant route
to market into the niche, premium paying market-place.
Mr Carter: I think the point you
make is an important one in that we would have to be clear that
the same kind of standards we were imposing on ourselves for carbon
dioxide and greenhouse gas accreditation, are equally being applied
to any imports that come into the country. That equation would
have to take into account any major land clearance of the type
you mention and of course getting it here, which is no small matter
when it could be up to 9,000 or 12,000 miles away and transported
in ships. So a way of doing that would be to build on the Greenergy/Cargill
idea and have some form of simple, fairly straightforward, auditable
accreditation scheme, and there is initial work being done to
look at that at the moment.
Q47 Mr Wiggin: Could you just tell
us what the Treasury told you the extra eight pence per litre
would cost them?
Ms Rawling: I am not sure I can
tell you what they told us but I can tell you what we think it
would cost them, which is an extra £32 million on top of
what the current 20 pence per litre derogations costs if it were
taken up, which would be £78 million. In fact, because we
reckon the take up is so tiny it is costing them less than £1
million today. So they have already reserved £78 million
and we think it would cost them an extra £32 million so in
total £110 million on the duty derogation.
Mr Carter: Similar figures for
bioethanol, just slightly up.
Q48 Mr Wiggin: Can I follow that.
If you both get it what percentage then of our fuel would be bio?
If you got the 28 pence and both of you go into production at
the same time and therefore both your types of biofuel would become
viable, what percentage of the national fuel consumption would
be bio?
Mr Carter: That will depend on
the future date that you are looking at. Within the next five
to 10 years, 5% easily, and just over 5% happens to be the guideline
figure that the European Commission is using and recommending
for use by 2010.
Q49 Mr Wiggin: So we can have this
for £110 million!
Ms Rawling: Can I qualify that,
first of all I should make it clear that the kind of plant that
we would expect to build would be a plant producing around 1%
of the diesel market, so a plant producing around 170,000 tonnes,
which is 1%, at a level of 28 pence duty to get derogation. It
is difficult for us to say what other competitors might also come
into the market at that rate, one might expect other competitors
with mainstream plants to have a look at it. I should make it
clear that the investment we have in mind would only fill about
1% of the market.
Mr Carter: If I can just clarify
the numbers for you. To go to 28 pence a litre and stimulate a
5% bioethanol industry would cost the Treasury roughly about £120
million extra.
Q50 Paddy Tipping: Can I talk about
carbon dioxide reduction, just a very simple points to begin with,
Mr Carter you have talked about a 5% mix, but you could have 10%.
I am told in Brazil—members wait with bated breath, we are
going there shortly- some cars run on 22%. Are these figures right?
Mr Carter: The typical inclusion
level in the United States is 10%. In Brazil they have just mandated
25%. In both of those countries they have slight modifications
of car engines which allows that to happen. We have chosen up
to 5% initially (and it requires a lot of investment just to get
that), because you can do it now. You do not need to change anything,
it is within specification, it is within warranty, it is easy
to do. Yes, other countries have gone for much higher figures.
You can go for higher than 25%, you can go to 85% if you wish
to but you do have to modify the engines then.
Q51 Paddy Tipping: If you go up to
25% you have much bigger carbon dioxide reductions.
Mr Carter: Yes, absolutely.
Q52 Paddy Tipping: Let us just talk
about carbon dioxide reductions, there is a lot of confusion round
this. There is a recent study from Sheffield Hallam which I have
seen, I do not understand the science of it, perhaps you would
tell us the difference between fermentation and lignocellulosic
methods, that would be quite help? If you go the latter route
that gives you a bigger carbon dioxide reduction.
Mr Carter: The most recent study
which has been published by Sheffield Hallam University has examined
different feed stocks to produce both bioethanol and biodiesel.
If I can speak on behalf of bioethanol, it has assumed and concluded
that a carbon dioxide reduction of 70% using wheat and very similar
for sugar beet, would be achieved relative to fossil fuel. However,
if you consider the whole crop, the CO2 reduction improves considerably.
The wheat is still fermented, but the straw fraction, what do
you do with that? You could sell it. Alternatively you could put
it in the boiler and replace some of the fossil fuel in the boiler.
If you do that your 70% number goes up to 100%, similar to that
claimed for lignocellulose or straw based, woody feedstocks. There
has been a lot of confusion in the Government on this issue over
the last few years. The reality of the situation is that the equation
is virtually identical. In the case of lignocellulose, you can
chop up wood ferment it—that is harder to do and is more
costly. The bits you cannot ferment you pop in the boiler to get
up to 70% to 100%. Basically the CO2 equation is just the same.
The enhancement from about 70% up to about 100% CO2 reduction
is caused by being able to burn some of the feedstock. I need
to make that quite clear. What ligno fermentation does for you
is to broaden the range of feedstocks you can use: you can use
straw, chopped up trees or chopped up waste wood, things like
that. That is primarily what it does for you. It does not inherently
improve the CO2 reduction number. There has been a real misunderstanding
about that. At the moment it is also pretty costly and still not
fully commercially available.
Ms Rawling: On biodiesel the Sheffield
Hallam Report said the net CO2 savings were round 72%, this was
normal rape seed production. If you went to rape seed production
with low fertiliser use, if you also used the rape seed straw
to replace some of the fossil fuel and if you also use biodiesel
in the tractors when you were growing the crop then the carbon
dioxide reduction would go up to 86%.
Q53 Paddy Tipping: Okay. When I have
talked to the Treasury about this, our old friends at the Treasury,
in particular to the Financial Secretary, John Healey he has led
me to believe, let me caricature it, there is a model in the Treasury,
it is not just about Mr Wiggin's point, affordability, but there
is an environmental cost. It has a machine there that works out
the benefits of carbon dioxide savings. I do not really understand
how this model works, I wonder whether you would explain it to
me?
Mr Carter: Speaking on behalf
of ourselves I wish I could. Again we have asked the same kind
of question, as you can imagine. We have also been told there
is some kind of model but none seems to have been released. I
can shed little light on that, perhaps Cargill might be able to.
Ms Rawling: I cannot speak on
behalf of the Treasury model. All I can say is that we have worked
out that the carbon dioxide saving from the 2% biodiesel industry
would be of the order of 600,000 tonnes, the tax derogation cost
of that is £110 million, I can give you that as an estimate.
Q54 Paddy Tipping: Let me ask a simple
question, if we were to get to the EU Directive target of 5.75
in 10 years' time what would be the carbon dioxide saving?
Mr Carter: If you use the figure
of 70% (that assumes you do not burn the straw, the ligno bit,
the bit you cannot easily ferment, you do not do that), then you
get a figure of between 3.0 and 3.5 million tonnes of CO2 saved
per year. If you do burn the straw then that just goes up pro
rata by about one third.
Q55 Paddy Tipping: That is agreed
with Cargill.
Ms Rawling: On biodiesel, I have
figure of 5% biodiesel, 1.5 million tonnes of CO2 saved. If you
went to 5.75% it would be slightly higher than that.
Q56 Paddy Tipping: Let me ask a final
question, I am a bit confused, there are duty reductions on liquid
road gases and those are far more substantial than you are asking,
what is the rational for that? Is it linked to alleged carbon
dioxide savings?
Mr Carter: The duty reduction
currently on offer, which is just now subject to consultation,
for LPG and road fuel gases is 41 pence a litre as opposed to
the 20 pence per litre currently on offer for biodiesel and bioethanol.
We are asking for 28. My understanding is that the duty reduction
of 41 pence per litre for LPG was based primarily on tailpipe
emissions and not on carbon dioxide reduction. The carbon dioxide
reduction for LPG is a maximum of 12%, as confirmed in the Energy
White Paper just recently released. The LPG duty reduction was
predicated primarily on air quality benefits. We have made this
point but not, I hope, over made it: that the air quality benefits
from bioethanol are pretty much similar to LPG. We are therefore
not clear where 41 pence a litre came from or how it is currently
justified.
Q57 Paddy Tipping: You are deriving
the same kind of environmental benefits, indeed higher carbon
dioxide savings but being offered a reduction rate of 20 per year
as opposed to 41 per year?
Mr Carter: The air quality benefits
for bioethanol are the same as for LPG. However, the carbon dioxide
climate change benefits for bioethanol are very substantially
greater by a factor of about six or seven times greater than LPG.
The current duty reduction rate for bioethanol is only half that
for LPG.
Mr Smith: The same is broadly
true of biodiesel.
Q58 Chairman: Ladies and gentlemen,
thank you very much. Is there anything that you want to say which
you have not said which you are burning to get off your chest?
Ms Rawling: The only issue we
have not touched on is employment in the countryside. We are not
experts on this but we do think this is about additional jobs
in the countryside. There is a study in Germany looking at biodiesel,
which we think might be a little high given the German circumstances,
which talked of between 5,000 and 8,000 jobs coming from a 2%
industry. We think it might be a bit lower than that in the United
Kingdom but nevertheless we think the employment dimension should
not be forgotten.
Mr Carter: If I can add, Chairman,
I think it is a valuable point. Using a slightly different comparative,
for a 5% industry, there have been three estimates made in the
bioethanol industry and the results range from 12,000 to 25,000
jobs, which would be created throughout the economy by a 5% bioethanol
industry in the United Kingdom. About two thirds of those would
be rural ones.
Chairman: Ladies and gentlemen, thank
you very much indeed. If there is anything you think of you will
no doubt let us know. I have no doubt we have not seen the last
of you given nature of our inquiries. Thank you very much indeed.
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