Examination of Witnesses (Questions 300-319)
MR JOHN
HEALEY MP
17 SEPTEMBER 2003
Q300 Alan Simpson: This follows on
from that point, Chairman. One of my sisters has a card on the
wall that says "It is better to have nothing than the wrong
type of something". In a way I think the question that Michael
Jack raised was not about whether we should do something but what
are the benchmarks against which the government will make decisions
about what to support. I think you were perfectly right in legitimately
saying to us that so far the debate has been perhaps narrowly
focused around duty derogation. The Committee, when it came back
from Brazil, was just in awe at how much work Brazil had done
in having its own domestic transport fleet 100% run on bioethanol
with targets for inclusion in fuels way ahead of anything that
we have set out to do. You have a country just incredibly confident
that something like four times the amount of fertile land—forget
any risk to the rain forest—is available in excess of what
is currently being used for current agricultural production. Their
confidence about being able to meet global demands for bioethanols
was robust. Since coming back, some of the evidence that we have
had has started to question the environmental downside of a domestic
biofuels industry for us. We pressed Lord Whitty quite hard on
this at our last session. I am just trying to take in the reply
that we received from him today where one of the comparisons was
with the environmental impact of using set-aside land or land
conversion for the growing of crops for either bioethanol or biodiesel
where the environmental damage or the carbon gain in comparison
with the use of short use coppice rotation for biomass just makes
the equation radically different. His figure is biodiesel provides
between three and six kilograms of saved carbon dioxide per pound
compared to 20 kilograms of saved carbon dioxide per pound for
electricity from short use coppice rotation. This brings me back
to Michael Jack's question. Do we have a robust audit base for
the decisions that the government is going to have to make within
the next year about the targets we set? If we have that audit
base, can the Committee see what the current thinking is that
goes into shaping that audit base?
John Healey: Mr Simpson, a number
of things there. I would encourage you to look at the Energy White
Paper and in particular one of the charts we have published there
which tries to make comparisons of the cost and the consequences
of carbon saving in various sectors on a consistent basis to try
and aid the sort of judgments that need to be made. That will
indicate to you that the cost of the saving, climate change gain
if you like, of using biofuels in relation to electricity generation
is round about half that for biofuels in the transport sector.
The policy question that then poses is should government simply
back the development or encourage the development of biofuels
for electricity generation purposes or, and this is the general
approach we take, in looking at the climate change challenge we
believe that every sector ought to be making some contribution,
so we are prepared to see what is in effect a more costly programme
to make environmental gains through biofuels in the transport
sector than we would be through biofuels in electricity generation,
or arguably the same amount of money going into things like loft
insulation and other forms of carbon saving. You make the point
about agricultural subsidies, which is really quite an important
one because they are quite pivotal to some of the costings that
the companies—prospective manufacturers—are looking
at. I think it is important to build in a recognition that those
subsidy regimes are likely to change and those costs, therefore,
are likely to change. When I looked at the British Sugar calculations,
their calculations for their cost of production, the sale of bioethanol
based on sugar beet in this country, had the cost of sugar beet
at the current level, which is essentially one that is heavily
subsidised through agricultural subsidies. It is quite plausible
to see that changing in the not too distant future and, therefore,
the cost configuration and viability will change too. You described
them as "benchmarks", the Chairman described them as
"navigational aids", I will do my best to sort out for
you some of the reference points that I believe we need to use
in making the policy decisions across the board in this area.
Principally they are around being clear about the policy purpose
for the different instruments that we might be considering which
is why, I am afraid, I keep coming back to the principal and primary
consideration for the duty discount, which is to see the environmental
gain we can get from biofuels.
Q301 Alan Simpson: Can I just press
you on two further ones. The duty discount is second. I am grateful
for that assurance about the benchmarks or the navigational aids,
or whatever we are talking about. If it is possible, can you get
people to spell out the environmental elements that go into that
just because you mentioned the British Sugar calculations and,
again, we had further representations that said to us, "That
is fine, but you are going to need half a million hectares bringing
into production for bioethanol from sugar beet" and the impact
in terms of erosion of soil quality and the damage in relation
to the natural habitat and the increase use of pesticides are
all big environmental costs that ought to be part of someone's
equation. It would just be helpful if that sort of audit matrix
were able to spell out just how far the impact trail currently
goes.
John Healey: If I may just say,
it is not, as we discussed earlier, a precise science. Our quantifications
are our best efforts and we do refine them as we go along. The
sort of environmental impacts that you mention are notoriously
difficult to quantify with anything that is consistent or reliable
but I can give you our best indication of that.
Q302 Alan Simpson: In terms of duty
derogations, I have no fixed position on this and I am just wondering
has the Treasury considered instead of the use of derogation,
an approach that is based on obligation in the sense of saying
in the energy industry we have the energy efficiency commitment
obligation that is built into the energy supply industry that
has to make its contribution towards energy efficiency and reduced
consumption? Rather than a derogation regime, has the Treasury
considered making this an obligation within the industry? We have
done it on other things like the Clean Air Act, you do not subsidise
people to act responsibly, you just say "This is now the
statutory duty", so it makes that a market obligation that
everyone has to sign up to. Has the Treasury looked at that and
attempted to follow through the impact trail of just making that
a universal obligation?
John Healey: I did indicate much
earlier in the session that one of the areas that is being considered
within government—it is not principally the Treasury's responsibility
to lead on this because it is not fiscal—is the question
of mandatory blending or measures that encourage a greater level
of blending of biofuels with conventional fuels. We have no conclusions
on that but to confirm the direct question you asked, that is
one of the wide range of possible options for the longer term
that we are considering.
Q303 Alan Simpson: But we are having
to make decisions within the coming year about the targets that
we will be setting. I just wanted to be a bit clearer about what
the longer term is.
John Healey: I did acknowledge
that earlier on both in relation to the European directive and
the setting out the sort of trajectory that we are looking to
put in place to meet some of the aspirations we set out in the
Energy White Paper.
Q304 Mr Wiggin: What representation
has Defra made to the Treasury about the level of government support
needed to stimulate the development of the biofuels industry?
John Healey: The nature of the
conduct of business in government is not one department simply
making representations as an external sort of lobby group to the
Treasury. I have had discussions with Lord Whitty, officials have
discussions all the time, and much of the work that we can do,
the analysis that we do, depends on the work that we do together.
We depend also on the Department for Transport for much of their
analysis as well. The work that is going on across the range of
dimensions to the biofuels issue that I mentioned earlier on is
less a question of one department making representations and very
much more a question of joint work. At times we may take a different
judgment on certain aspects of that but the discussions are going
on all the time, the work is joint, and it is not a question of
one making representations to the other.
Q305 Mr Wiggin: So to go from 20
to 28p derogation, what will that cost?
John Healey: To go from 20 to
28 pence—with the caveat, if I may, that there is a certain
uncertainty inevitably in these sorts of projections—the
current projection that we have for the cost to the Exchequer
of revenue foregone next year is 25 million. Were it to be 28
pence per litre it would be 125 million.
Q306 Mr Jack: How many litres does
that cover?
John Healey: On our best projections
that would give you 0.9% of the market.
Q307 Mr Jack: So 0.9% costs?
John Healey: 0.9% is 125 million
for the year 2004-05.
Q308 Mr Wiggin: I am just thinking
that in order to reach 2% it is going to be about double that,
is it, roughly?
John Healey: To reach 2% is about
280 million, which at 28 pence per litre you might reach in 2005-06.
That does not take account of any of the other factors and variables
that we have discussed. To give Mr Jack an idea of how that translates
into litres, the current biodiesel production is over two million
litres a month, last month it was 2.7 million as I said. Two million
litres is roughly 0.05% of the total diesel market.
Q309 Mr Jack: I just want to take
you to the Sheffield Hallam report, which I know you know very
well because we debated some of it in the Finance Bill Standing
Committee. You were trying to counsel the Committee on the broad
picture of this, that there may be a number of ways in which the
government can achieve various of its environmental targets, whether
they be air quality targets or carbon dioxide reduction. In tables
13 and 12 in the Sheffield Hallam report, glass fibre loft insulation
comes out as the number one best buy in terms of CO2 reduction.
In terms of your deciding how the public pound should be distributed
in helping you to achieve environmental objectives, just give
us a feel as to how findings like that weigh in the determination
of where you are prepared to put a share of that public pound
in achieving these objectives because the figures from Hallam
might suggest that we should forget all about biodiesel if CO2
is our number one objective and bang it all into making certain
we have got maximum loft insulation.
John Healey: The figures from
Hallam would certainly suggest that if we took that narrow view.
What it does is two things. First of all, it suggests the government
ought to be looking particularly closely at those types of policies
and programmes which can deliver the biggest environmental gain.
Second, in relation to biofuels it is an important contextual
consideration because it underlines the crude point I put to you
before, Mr Jack, which is that we cannot pursue environmental
gains through biofuels at any cost to the public purse. I tried
to explain earlier that despite, as the Energy White Paper made
clear, the cost of carbon reductions is different whether you
looking at energy generation, transport fuels, energy efficiency
in homes in this case, in order to achieve the sort of climate
change objectives that we are seeking we believe that every sector
ought to be making some contribution to that. In other words,
we will not, and do not, simply say to business, "It is okay,
you do what you like because actually we are going to put all
the government resources and effort into home insulation and we
think we are going to get a long way down the track because of
that". Although the costings are different, and that may
lead to a relatively different weight in priority in different
methods, it does not exclude but it does mean that we look more
critically at those areas and those policies where the relative
costs are greater.
Q310 Mr Jack: Let me ask you another
question. Does the Treasury support the operational mechanisms
of the Renewables Obligation in the field of electricity?
John Healey: Does it support the?
Q311 Mr Jack: The mechanisms that
are used to support the Renewables Obligation in the field of
electricity generation?
John Healey: There are mechanisms
fostered and set by government and the short answer is yes. Mr
Jack, you will be aware that the DTI as the lead department is
consulting on reforming and possibly reviewing those at present.
Q312 Mr Jack: But, given the status
quo, am I correct in my assumption that the Renewables Obligation
to encourage the development of renewable energy sources, the
costs of that are effectively spread out across the whole of electricity
consumption so that all of the users of electricity are paying
something towards the higher cost of that bit of electricity that
comes from renewable sources?
John Healey: I suppose that assertion
is plausible in the most general sense.
Q313 Mr Jack: Either it is or it
is not. I think the reality is that is the way that it works.
If you support the way that the Renewables Obligation operates,
and you have made that extremely clear in your first answer, what
work have you done to apply the same principles as that to the
area under discussion, namely spreading out the cost? Let us talk
about duty reduction and/or the fiscal cost of the allowance regime
that you opened your discussion with over the consumption of all
other road fuels of a comparative nature. Have you done any work
on that so that it would be a zero cost exercise following precisely
the principles which you support on the Renewables Obligation?
John Healey: To follow the principles
in the Renewables Obligation, I did indicate earlier on that we
are looking as one of a wide range of possible measures at whether
some sort of transport fuel obligation on that sort of model may
be appropriate, and we are perfectly prepared to consider that
at this stage.
Mr Jack: So that is a possibility, a
zero sum gain in which however you fund the encouragement of the
industry it could be at zero cost to the nation but a cost to
the users? That is a possibility? Can I just move on finally to
try and ask you—
Q314 Chairman: If it is not you might
just want to say so. You gave a sort of sighing noise.
John Healey: The only qualification
is whilst Mr Jack is talking about translating the particular
mechanics of the Renewable Energy Obligation, I am talking about
the broad model and whether or not that might have a role to play.
Q315 Mr Jack: A very conservative
view. Let me just press on.
John Healey: Thank you.
Q316 Mr Jack: When we were preparing
for the Finance Bill I had given to me, I think by British Sugar
but I apologise if it was not, a business case that talked through
the potential costs of a 100,000 tonne production bioethanol plant
and the case that they put was based on an asset that had five
years of life and a capital cost of £55 million with a multi
feedstock of either wheat or sugar beet with the raw materials
dealing from the Common Agricultural Policy. If you multiply up,
I think it is the achievement of the 2% target using bioethanol,
you would obviously need about four of these plants, so we are
talking about a capital expenditure in excess of £200 million.
I would not expect you off the top of your head to say, "Right,
I can tell you how much in capital allowance terms with the following
different ways we can achieve capital allowance assistance, how
much it would cost to run those", but are you looking at
models to say, let us just take our £55 million plant, if
we were to devise a capital allowance regime which would enhance
its write-off over the minimum period of, say, the five years,
how much it would cost the Treasury to enable the output of that
plan to price its biodiesel competitively with existing hydrocarbon
sources of that fuel? Are you doing those calculations?
John Healey: Not precisely because
we have not taken at face value or fully the cost structure that
British Sugar or any of the other companies have submitted to
us. You have mentioned yourself the five year capital write-off
period. The calculations that British Sugar made do not take account
of the capital allowances that could be available already and
they also build in, as I mentioned earlier on—
Q317 Mr Jack: I would expect you
to take those into account because we are talking about a different
capital allowance regime over and above what would currently be
available for a capital investment of that size. I would automatically
expect you to do that.
John Healey: Clearly looking at
the potential role of capital allowances, government is making
some calculations as we are looking at that. What I am saying
to you is what we have not taken fully and at face value as our
starting point and our imperative are the costings that British
Sugar or Cargill or the other potential producers have given to
us.
Q318 Mr Jack: The reason I am probing
this is you have asked us, quite rightly I think, to give consideration
to different ways of encouraging this embryo industry and we can
work out, because we have had evidence from people, how much a
straight duty derogation of whatever per cent costs. We know how
much money we are talking about. When you have received these
submissions from industry there must be a number which they require
to put into the balance sheet of these investments to say, "At
that extra level of help with the capital cost we think we can
produce a competitive product", otherwise they would not
ask for this alternative way of this assistance being given. I
think it would be helpful to the Committee to have some order
of magnitude as to what kind of help that would amount to in the
context of the type of example that we have been given. As I say,
to get to 2% with bioethanol, if I have understood this correctly,
we need to spend 200/250 million. How much have you got to put
in in allowances on an investment of 250 million in ball park
terms to make certain the output of those plants can be competitive
with the existing mainstream producers? That is why we are having
a discussion as to how you help this.
John Healey: I am keen to be as
helpful as I can to the Committee and what I would happily share
with you is the analysis and view in the Treasury that we have
done and we take of the business case that British Sugar has proposed
that Mr Jack was talking about, for instance. Why I say that that
business case does not give us the level of capital allowances
that we should appropriately be looking to consider putting in
place is if one simply altered the write-off period from the five
years that is in the business case to perhaps ten or 15 years,
that brings the production costs down from whatever it is in the
business case, around 27 or 28p per litre, to 21p per litre. That
is a really important factor in any sort of calculations because
it is patently absurd simply for government to be looking to find
a way to meet that sort of level.
Q319 Mr Jack: For example, if we
take the film industry you and I both know that in terms of the
way that the film and television industry have been helped by
the Treasury in recent years there has been a specified end point
for the life of help. You are quite right, you could have it for
the figures in the business plan or you could have it over a longer
period. You make the assumptions and I am just trying to get some
idea of the order of magnitude of public expenditure that you
are asking us to consider, is it a better deal to use that money
in pump priming capital investment or as straight duty derogation?
Turn it round the other way, how much capital allowance in whatever
way you think appropriate does the amount of money for a given
duty derogation buy over a particular time period? If you cannot
do that then something has gone radically wrong with the Treasury's
calculation because when I was there they were always able to
do that kind of calculation.
John Healey: I think what I am
saying to you is we are not taking what is presented to us as
the benchmark by which we need to measure what we might put in
place. I have to say to you very clearly that I am not convinced
either that the duty incentive that we now have in place will
not deliver the sort of establishment and early development of
the biofuels industry in this country.
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