Supplementary memorandum from Cargill
PLC
I am writing to thank you and the rest of your
committee for taking evidence from Cargill on biofuels and non-food
crops last week. I hope you found our evidence useful.
Further to our oral evidence, I thought I would
write to you to reiterate some of the points we discussed, and
update you on some recent developments:
— Timing: I believe Ruth Rawling mentioned
the importance of the timing issue to you during our evidence
session. If the UK is to produce sufficient biodiesel to meet
the indicative EU target in the Biofuels Directive (2% biofuel
consumption by 2005, rising to 5.75% by 2010), producers such
as Cargill would need to commission the necessary crops for planting
in August for harvest in July/August 2004. If we are going to
make the necessary investment in esterification plants, we need
a clear signal from government at the earliest possible opportunity,
ideally in the Chancellor's November statement. There seems to
be a lack of urgency in Treasury, and a lack of understanding
of the timetable constraints within which industry operates.
The Department for Transport has informed
us that the Government's consultation on the implementation of
the Biofuels Directive is likely to be published in December.
Again, this shows a lack of appreciation of the crop-planting
timetable which potential biodiesel producers such as Cargill
need to take into account. As a result, it is probable that the
opportunity to produce biodiesel from domestically grown crops
will have passed even before the close of the Department for Transport's
consultation period.
— Annual review of derogation:
After granting the 20p derogation for biodiesel in 2001, the UK
Government committed itself to reviewing the duty rate on an annual
basis, taking into account the relative production costs of rape
methyl ester and recovered vegetable oil, and the movement of
rapeseed prices relative to oil prices. These reviews were to
be used when making future judgements on duty rates. However,
Cargill has seen little evidence of these reviews to date, and
industry has certainly not been consulted systematically on production
costs. As the committee is aware, Cargill did submit detailed
evidence to the Treasury in its 2003 Budget Submission, which
emphatically demonstrated that a derogation of 28.20 pence per
litre was needed to equalise the production costs of biodiesel
and conventional diesel.
— Capital grants vs duty
derogations: We have also now had an opportunity to read the
EEDA report on the impacts of creating a domestic UK bioethanol
industry referred to by Mrs Shephard. Whilst the report makes
a number of useful points, I would emphasise that bioethanol and
biodiesel are two very different products, produced by different
methods, and therefore require different policy measures to encourage
production and use. The main costs for bioethanol production occur
in the construction of capital infrastructure, whilst operating
costs are relatively low; hence, capital grants have an important
role to play. The capital cost issue is not as significant for
biodiesel, as esterification plants can be added onto existing
plants. Day-to-day production and raw-material costs are higher,
however, meaning that it is the duty derogation which makes the
significant difference. Capital grants would make little difference
to these costs.
— LPG vs biodiesel:
As you are aware, whilst biodiesel only benefits from a duty derogation
of 20 pence per litre below the duty rate levied on ultra low
sulphur diesel, LPG and other road gas fuels attract a duty rate
which equates roughly to 41 pence per litre. The report issued
on alternative fuels published last month by the IPPR comments
that the local air quality benefits of LPG have been negated by
advances in pollution abatement technologies and improvements
in the performance of conventional petrol and diesel cars. The
gas fuel duty rates are currently the subject of a Treasury consultation.
The consultation paper has a very narrow focus, looking at gas
duty rates in isolation Cargill is disappointed that the Government
did not take this opportunity to examine alternative fuel taxation
in the round.
— Intended production at 28.2ppl
derogation: We briefly discussed the amount of biodiesel Cargill
would produce for consumption in the UK market if a 28.2 pence
per litre derogation was forthcoming from government. At this
rate, Cargill would anticipate producing between 150,000 and 200,000
tonnes of biodiesel annually, equivalent to between 171.5 million
and 228.5 million litres. Given annual UK diesel consumption of
17 million tonnes, Cargill's share of biodiesel production would
initially represent 1% of total UK diesel sales.
John Healey MP, the Economic Secretary to the
Treasury, has since stated in the House of Commons, "As yet,
we are not convinced that a bigger duty incentive for biodiesel
is justified." (Official Report, 10 July 2003, col. 1369).
Given the widespread support for the fuel in political, environmental
and agricultural circles, and the warm support we received from
Michael Meacher during his tenure as Minister for the Environment,
we are extremely disappointed by Mr Healey's comments. It is clear
that the existing derogation has not stimulated industry, and
that if the UK is to produce biodiesel from domestically grown
oil seed rape on a significant scale, further tax breaks will
be needed.
As we discussed last week, there is still a
lack of transparency about the exact mechanisms used in the Treasury
model, and the scale of the industry the Treasury hopes to stimulate
in the UK. We look forward to hearing the comments of the Secretary
of State for Environment, Food and Rural Affairs on this issue
when she appears before you next week.
17 July 2003
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