Examination of Witnesses (Questions 280-299)
MR JOHN
HEALEY MP
17 SEPTEMBER 2003
Q280 Mr Jack: Minister, you will
be aware of the current price differentials of the fuels to which
the discussions that we have had so far have referred. Picking
up on what Mr Curry has been saying, of the measures that you
are discussing, have you worked out which is likely to have the
greater effect in closing the obvious difference between the pump
price for these different fuels because the duty argument, that
we shall come on to explore in detail in a moment, is the obvious,
easiest, most straightforward way now to close the price gap?
Have you done some work, for example, if I put it crudely, on
what level of capital grant you may have to make available to
reduce the production costs to such an extent that there will
be a competitive equivalence of the different fuel sources either
in the context of biofuels or bioethanol?
John Healey: Mr Jack, we are carrying
out that work at the moment, so I cannot share with the Committee
any conclusions from that. The question of capital is very important.
When you look at the principal cost of setting up new production
capacity in the UK and if you look, as this Committee has, at
the kinds of analysis and case that Cargill or British Sugar put
forward, the cost of capital is a very important part of their
per litre production costs. In the analysis that they have carried
out it is not just a matter of whether there is appropriate capital
support or allowances that may be provided and at what level they
should be appropriately pitched, but also there is a question
to ask of potential manufacturers. You will know from the case
that they submitted that the capital pay-back period, or amortization
period that both companies propose as part of their calculations
is extraordinarily short for such capital investment. Adjust that
from five or six years to 10 or 15 years and you start to look
at a very different balance of cost per litre produced.
Q281 Mr Jack: It is important for
the Committee, when we come to our conclusions, to understand
which horse we should back. It is not entirely clear to me from
what you have said whether you have been given a clear steer that
capital assistance, either through capital grants, enhanced aids
or the other methods that you mentioned for a given period of
time, will produce fuels at an equivalent price or do we have
to go down the duty route? Are the protagonists who are asking
for help saying, "We do not mind which route you go down,
but please go down one or other as soon as possible". What
is the message that you are being given by those who wish to set
up new manufacturing plants in the UK? Which horse would they
like you to back?
John Healey: The principal, headline
argument that has often been made in this debate is around the
level of duty discount. That is one of the reasons why I welcome
this Committee's examination of this in Parliament because the
debate has been too narrowly focused on that. The question for
me is twofold: as regards those who advocate a larger discount
on duty, my judgment is that they risk having the opposite effect
than the one that they are looking for. If you make the British
market more lucrative, in my judgment you run the risk of a greater
share of that market coming from imports.
Q282 Mr Jack: With respect Minister,
that was not the question that I asked. My question was which
horse we should back. Where should the help go? I wanted to know
from the people who are saying, "We would like to build new
plant here", what addresses the matter of the import situation.
Have they given you a clear steer as to their preferred route?
Are they saying, "Well, Minister, we would like to do it
in the United Kingdom with United Kingdom feedstock but we need
to go down this particular route"? For example, has someone
given you a project that costs £X million and has he said,
"We have Y% of capital write-off over Z period of years,
and the production costs coming out of such a plant for such a
volume would enable us to squeeze the price of production to such
an extent that we would be competitive with the existing road
fuels"? Has someone put such a model to you? Yes or no?
John Healey: The principal case
that has been put to me directly—as I have said I have met
these companies—is that they want to try to find a way of
closing the gap between what they estimate to be their production
costs to make their investment viable and what they calculate
to be the balance of that equation at the moment. In the discussions
that I have had I have not been told that it has to be by the
duty discount rate rather than by other forms of support. These
companies are understandably concerned about the overall economic
viability. Doubtless, Mr Jack, you put these questions to the
companies who have come before the Committee and you will need
to decide which horse you back.
Q283 Mr Jack: With respect, Minister,
you have put to this Committee the fact that you are trying to
adjudge which fiscal vehicle you ought to back. Unless you have
some order of magnitude of the costs, either of a larger duty
derogation or backing in the way you have described additional
capital expenditure, when you come to make your budget submission
to the Chancellor and/or other departments make theirs to you,
you will not know how much is on the bottom line, how much public
expenditure or tax foregone you will have to recommend is worth
doing. You know what the endgame is. You mentioned that you would
have to publish in not too much time a figure as to what the market
share would be for biofuels, so you will have a number. You already
know what the targets are—2 and 5%—from the Commission,
so you have an envelope with the production. You know how much
is being produced now and you know what the gap is. I would have
thought that if the Treasury were doing its job, you should be
able to work out what size of unit we would need to produce that,
or you would have been given that information. If you have not,
you are working in a fog.
John Healey: Perhaps I was not
clear enough.
Q284 Mr Jack: No.
John Healey: We do not have a
precise number and I tried to explain that I do not accept that
the indicative numbers set by the European directive are necessarily
appropriate and the best thing for the UK in terms of our development
now for the UK biofuel industry or the contribution it can make
in the longer term. The short answer to your question is that
I have not been approached by people saying that we have to have
this policy instrument and none other. The principal concern of
those who are potentially interested in manufacturing in this
country is whether they can make their total package economically
viable. Perhaps I can answer your question in a different way.
I want to underline the principal policy purpose of the duty discount.
The primary consideration for the Government is the environmental
gain that can come from the use of biofuels. Our process for trying
to make a judgment—therefore the appropriate rate for this—is
not what companies tell us is economic in terms of their current
potential investment plans; our principal starting point is the
attaching of monetary value to the environmental gain that can
be achieved from biofuels. Less easy to quantify but also part
of our recognition of the value of biofuels is the matter of security
of fuel supplies for the country in the long term; the development
of new technologies associated with the industry in the long term;
and for biodiesel the value of recycling waste products. Those
calculations that we have done—I shall be happy, Mr Curry,
to let you have the detail of the figures and the way that we
have done this—suggest that the environmental gain for biodiesel,
over and above ultra low sulphur diesel, is 2.7p per litre. For
bioethanol it is 2.5p per litre. That is at the lower end of the
calculation for the environmental improvement that you get from
these fuels compared with conventional fuels.
Q285 Mr Jack: It is all right quoting
the figures to the Committee and saying that you will let us have
the details afterwards, but if we look at the weighting effects—for
example, the reduction of greenhouse gases, improvement of local
air quality, diversity of supply, new economic activity in employment
and matters such as safety, biodegradability, ease of use, to
name a number of factors—I do not know at this point what
weighting you have given to them. When you say, "Here is
a figure", I have no idea how you come to the calculation
that you put before the Committee because you have not told us
what weight you are applying to these different environmental
benefits.
John Healey: If you consult the
Energy White Paper you will see that across the board for the
policy measures in this area the Government use the figure that
we developed with academics: for the environmental, social impact:
the cost of carbon is £70 per tonne. I can give you the workings.
When you look at the emissions per litre of conventional diesel
or biodiesel, you can then work out the environmental cost per
litre of diesel consumed. For the conventional diesel it is 5p.
That is the most easily quantifiable and most significant area:
the environmental gain. I have mentioned other potential benefits
of biofuels, but the gap between 3p per litre and the duty discount
takes into account the recognition that production costs for biodiesel
are above those for conventional fuels. That returns us to more
or less where we started. We have not been convinced of the case,
either that a larger discount is necessary to see the start of
the industry in this country nor are we convinced that it is justifiable
in terms of the environmental gain and the kind of cost to the
public purse that a higher duty discount rate would involve. I
am also sceptical. As I said, simply looking at that as your instrument
for developing the UK biofuels market risks having the opposite
effect than many of those who are keen to see non-food crops grown
more widely in this country and an indigenous UK biofuels manufacturing
industry in this country. It may well have the opposite effect
to that intended.
Q286 Chairman: Given the conversion
ratio of energy in and energy out, and the fact that temperate
zone crops are not very good as converters, there may be an argument
for saying that imports could do the trick; they can deliver our
targets and our obligations internationally at a lower cost than
trying to do it nationally. That may be Defra's anxiety to find
new things for farmers to do rather than being a hard-headed,
arithmetic calculation. Is that a feasible line of argument?
John Healey: That would be feasible
and it would not be unfair. I understand Defra's concern to see
as much support for farmers and the farming industry as possible.
But if one simply took a hard economic view of this, one would
say that it does not really matter where the biofuels are sourced,
if their use in the UK allows us, in our country, to acquire the
environmental gains. I have tried to explain to the Committee
that the environmental gains are the core concern. The contribution
to the long-term UK climate change is our core policy purpose.
We also have a concern about the other aspects that the Committee
is probing and, therefore, these are factors that we take into
account.
Q287 Chairman: How wide do you take
the paradigm on this? Castor oil products have very high ratios.
What happens if you knock down the rain forest to grow the plant
that castor oil comes from? We have the Sustainable Development
Commission trying to elaborate a model of all the layers of consideration.
How wide does your pyramid of decision making go and how wide
is that base?
John Healey: Do you mean how wide
geographically?
Q288 Chairman: I am talking of the
range of considerations. You could start with the impact of the
demolition of the rain forests and the effect on indigenous peoples
and wildlife in Brazil or Indonesia—that is one end of the
matter—and you could go right up to what happens to the
quality of the air over Peterborough. How many of these considerations
do you think are legitimate in bearing upon the final decision?
To what extent does it eventually have to turn out as a kind of
mathematical decision because it has to be incorporated in the
budget?
John Healey: At the risk of fudging
the answer, it is somewhere in between. The potential environmental
gains for us in the UK and the policy instruments that we put
in place are not designed, nor should they be designed to create
some kind of "fortress UK" industry. But I have tried
to explain that beyond the primary consideration of seeing a contribution
to the impact on the environmental challenge, at the core of our
duty discount on biofuels is a concern not to see the potential
development of a UK biofuel industry overtaken because we create
an immediately lucrative market in the UK that can more easily
be supplied from those countries where they have an established
biofuels industry.
Q289 Mr Wiggin: You have set up the
20p duty and you have told us about your fears. But you have not
told us how long you will wait before you decide what you will
do next. We have had no results, so how long will you give it?
John Healey: There are two answers
to that, Mr Wiggin. The first is that we are and always have been
open to new analyses and new evidence in this area. Indeed, during
the past 12 to 15 months it was good new analysis and detailed
discussion with some of the potential producers and academics
that allowed us to reappraise the environmental gain that potentially
is there through bioethanol and, therefore, we came to the conclusion
that the Government should back that with the duty incentive.
If the evidence suggests that the environmental gains and the
environmental benefits of biofuels are significantly greater than
the evidence suggests at the moment, we will review the discount
rate. In terms of the other policy measures that we have touched
on that may be better suited to supporting the development of
a new industry in this country, there is detailed work taking
place looking at those across government at the moment.
Q290 Mr Wiggin: Are we going to reach
the targets?
John Healey: Are you referring
back to the European directive?
Q291 Mr Wiggin: I am referring to
the 2.5% in 2005.
John Healey: As I said earlier
on, what we will need to do as a government, and this is our obligation
to Europe, is during the course of the next year to set out what
we believe will be the targets and the trajectory for the UK biofuels
industry and its share of the total market. My principal interest
here is in setting those and setting that path in a way that best
suits the UK and is not designed specifically to meet what have
been set as across the board, single size fits all for the European
Community, which as I said may well be appropriate for some of
those European countries like Sweden and others that have a well
developed biofuels industry already.
Q292 Mr Wiggin: That is all very
well. The motor technology at the moment, without adapting the
engine, can only take up to 5% bioethanol or biodiesel. Therefore,
it is not really such a movable feast, we are either going to
get there or we are not and to suggest, as I think you were, and
please correct me if I have got this wrong, you are still waiting
to see how things are going to change, or if there is any new
evidence, there are fairly realistic deadlines. Even if you reassess
the quality of the argument for biofuels there is still a deadline
and we have got to get there somehow. If we do not do it by encouraging
our domestic industry then we will have to bring it in from abroad.
I am just wondering how comfortable you are with that.
John Healey: We do not have to
meet those targets of 2% and 5.75%; they are not binding. I would
argue they may not necessarily be appropriate for the UK. That
work in relation to the European Directive will come to a conclusion
next year, as I have explained, because we are required to do
that. The most significant work that is going on, and it is going
on with a vengeance within government, is to map out the role
that we want biofuels to play in the much longer term, the much
more significant challenge that is set out in the Energy White
Paper. It is certainly not a wait and see policy as you may have
the impression. The judgments on that will depend also on assessments
of the likely developments in technology and costs of some of
the alternative low carbon forms of transport and transport fuels.
Q293 Mr Lepper: Minister, you referred
just now to work going on across government to assess these issues.
John Healey: Yes.
Q294 Mr Lepper: A little earlier
still, you told us about the Department for Transport taking the
lead in some of the work, I think in relation to renewables et
cetera. We have got the DTI with its responsibilities for
energy policy and we have got Defra with some responsibilities
for energy policy, the Department of Transport as well, and obviously
we have got the Treasury involved in this. Who takes the lead
in this work which is going on across government? Which department?
Can you sketch in for us what are the mechanisms for co-ordinating
that work across government?
John Healey: As I think the Committee
has been laying out, the dimensions to biofuel are varied and
certainly not restricted to the Treasury's remit, which is obviously
fiscal measures and fuel duty decisions. Quite rightly, Mr Lepper,
you say the Department for Transport has a lead in some areas:
transport policy clearly, fuel quality, the future of low carbon
fuels, including the lead responsibility in preparing the response
to the European Commission's directive. Defra has responsibility
for climate change more broadly, air quality policy and instruments,
a concern about non-food crops and also the health aspects of
using animal waste material, which is significant for some of
our current biodiesel production. There is also the Department
of Trade and Industry that has an interest essentially in industry
sponsorship in the development of new technologies. On the particular
areas you are concerned about, I guess apart from the ad hoc or
project work that goes on across departments, the principal ministerial
vehicle is the Ministerial Low Carbon Group, ministers from those
departments looking broadly at technology as well as fuels, in
other words all methods of reducing carbon through the transport
field. That is one integrating point across government. At official
level the contact and the work is more regular. There is a group
of officials working on the concerns Mr Wiggin has about how we
make our response to the European Directive and there is work,
as I have indicated, cross-departmentally through officials following
up the Energy White Paper and producing—I really do not
like the term any more—a road map towards where we need
to be in order to meet the aspirations that we set out for 2020
and 2050.
Q295 Mr Lazarowicz: You have let
slip the comment that the indicative levels set by the EU might
not be appropriate for the UK. Could you expand upon that?
John Healey: Yes. You have got
one figure for 2005, 2%, you have got one figure for 2010, 5.7%,
which is a figure which is an indicative figure supposedly to
apply to all 15 Member States. If you look at the degree of development
of the biofuels industry and the sales in some of those European
countries they have had duty discounts in place for more than
20 years, they have got levels of consumption which are way above
ours. In those circumstances I think you can see that what may
be an appropriate trajectory for a country like that to develop
its biofuels industry, to see the share of fuel sales being taken
up by biofuels, is likely to be different, particularly in the
short-term, than it is for the UK. That is why I say that I think
the principal responsibility for us is to work out what is best
suited to Britain and to use the Directive as a context for that
but not to be bound by it, as indeed we are not obliged to be
bound by those figures.
Q296 Mr Lazarowicz: Looking at the
20p per litre duty discount as it exists, how does that break
down to the sum that is ascribable to environmental benefit, the
sum to issues relating to security of supply, how much to agricultural
support? Can you give us that kind of breakdown?
John Healey: First of all, to
be blunt and clear, this is not an agricultural production support
measure. As I have explained, the proportion of that 20p that
is the quantifiable environmental gain from biofuels is just under
3p. The other potential gains, more broadly, are less quantifiable:
the security of supply, new technology—forgive me, I cannot
remember the third one that I explained earlier—but essentially
very marginal to this monetarisation of the calculation. The balance
of that 20p is in recognition of the likely additional production
costs for these biofuels over conventional fuels.
Q297 Chairman: But it is not all
just science, is it? You have talked about the wider context of
the Energy White Paper and the Energy White Paper makes provision
for a very significant contribution from wind power, for example.
That is an aspirational goal at the moment and it must rest, for
example, on assumptions about the level of gas and alternative
energy prices, all of which can only be predictions and subject
to all sorts of things that go bump in the night. Would you accept,
Minister, in looking at this issue as well that there comes a
point at which, if you like, the calculator has to stop and the
government has to make a political decision as to whether it wants
to do it because there may be wider benefits or wider issues at
stake, which may be purely political in character, which is what
governments are there to do, and a decision has to be taken and
we suck it and see?
John Healey: I would entirely
accept that one can take the objective analytical scientific approach
only so far and the nature of this type of policy making means
that at a certain point then judgments have to be made. You mentioned
wind power: if the Committee were to look at the Energy White
Paper you would see that we try to be consistent across the piece
and calculate that the likely cost per tonne of carbon saved through
offshore wind is round about the same level as biofuels. That
is a guide only, as it happens it is probably four to five times
more than the £70 per tonne that I mentioned as the strict
environmental cost. There are clearly then questions of policy
judgment about whether or not government should pursue that and
there are clearly questions of judgment about the relative importance
we give to different types of policy in order to reduce the impact
on climate change.
Q298 Mr Lazarowicz: Is there not
a danger that the very cautious signals that we appear to be giving
out will lead to the industry reading the position as being that
in not too many years' time the government might well draw back
from the level of derogation, and level of support that is currently
being given, and that is going to result in the consequence that
industry will not develop the desired level of production? Is
that not the kind of danger in what is happening at the moment?
John Healey: I think the medium
to long-term place of biofuels in this general concern to see
the challenge to climate change tackled is clearly set out in
the Energy White Paper. There is the context of a long-term commitment
to the biofuels playing a role. The work going on to try and assess
just what role, how we develop it, the impact that we want it
to have, is going on at present. In the end all fiscal decisions
are made Budget by Budget by the Chancellor, but I think the government
when it has been looking to see developments like this, for instance
with road fuel gases, in that instance, for instance, has been
prepared to give a commitment that we would not increase the real
rate of the duty on those, in fact, in 2001-04. The context of
the interests that government has and the commitment in the medium
to long-term to biofuels should give confidence that this is something
that we will wish to see developed and will wish to see supported
where necessary. The question is, and none of us can know this
for sure, particularly once we get into looking three, five, ten
years down the track, the changes in technology, the changes in
cost, and therefore the changes in the sort of equation that leads
us as a government to decide that this is the appropriate and
necessary level of support we must give.
Q299 Alan Simpson: I was going to
ask you what factors determine the government's approach to the
place of biofuels in our energy policy but I think you have already
been fairly good at taking the Committee through that. What I
would like instead is to follow on a different tack. I think I
took it down correctly, that earlier you said: "It does not
really matter where biofuels are sourced if their use in the UK
allows us to meet our targets and obligations". Does that
mean that you would be urging us, as a Committee, to think separately
about the question of a biofuels market as opposed to a domestic
biofuels industry?
John Healey: No. I made that observation
in response to the particular point the Chairman put to me. What
I said was in hard-nosed economic terms, purely intellectually,
if one was solely interested in the environmental gain for the
UK one could deliver that in principle through fully imported
use of biofuels. What I think I am encouraging the Committee to
consider is that the concern that is quite widely shared is to
see not just the wider use of biofuels within the UK but this
as an opportunity to see a biofuels industry developed in the
UK potentially with the interests that it has also for the farming
community in terms of non-food crop feedstocks. What I am encouraging
the Committee to do is not simply to consider the rate of duty
discount as the measure by which that might be submitted and encouraged.
Indeed, I am encouraging the Committee in particular to look quite
critically at whether the duty rate is actually the instrument
that is best suited to an industry that is new and is in its developmental
stages and, like we are in government, whether other policy instruments
might be better suited to supporting those sort of developments.
Chairman: I am going to come back to
you, Alan. Reverting back slightly to an earlier conversation,
Mr Jack said can you give us some navigational aids in trying
to make that assessment as to how the different possibilities
stack up. Anything you can let us have would be very helpful on
that. I think we agree that we need to look at the menu and see
which bits of the menu are the most productive from the use of
taxpayers' money. It would be helpful to have whatever navigational
aids you have so that at least we might try and have methodologies
which speak to each other.
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