Letter to the Committee Chairman from
Mr John Healey MP, Economic Secretary, HM Treasury
Thank you for giving me the opportunity to appear
before the EFRA Select Committee on 17 September to explain how
we are using fiscal policy to encourage the development of a biofuels
market in the UK.
I undertook to let you have details of what
the Treasury sees as the underlying principles in making fiscal
decisions on biofuels, and how we reached the conclusion that
a 20 pence per litre incentive for biofuels is appropriate. The
committee raised some other questions which I promised to look
into before reporting back, and I hope that this reply and accompanying
information help the committee to understand the principles and
factors used by the Government in establishing policy in this
The starting point and foundation stone of Treasury
policy on alternative fuels is the environment. Where there is
evidence of environmental benefit, we will consider appropriate
measures. The main environmental challenges facing the transport
sector are air quality and climate change, where emissions from
vehicles are significant contributors to both problems.
On local air quality, the regulation of emissions
from vehicles has been successful in reducing emissions by 50%
over the last 10 years and we expect tighter regulations to cut
emissions from transport further by around a third over the next
decade. Nevertheless, hot-spots of pollution in our urban areas
will remain a problem and the Government is doing a considerable
amount through the Department for Transport's PowerShift
and Clean-Up programmes to target action at these areas.
Equally, the Government is not ignoring the
climate change challenge faced by the UK. We are arguably the
world leader in making climate change the focus of our policies.
The Energy White Paper published earlier this year placed carbon
emissions at the very centre of the UK's strategy on energy and
set the UK on a course toward reducing our carbon dioxide emissions
by 60% by 2050.
Tackling emissions from the transport sector
has to be an integral part of that strategy. Transport causes
over 25% of our national carbon dioxide emissions, the vast majority
of which is from road transport. Reflecting this challenge, we
were the first major country to base our mainstream vehicle taxation
systemin other words, company car tax and Vehicle Excise
Dutyon carbon emissions.
The Government recognises the contribution that
can be made by biofuels in reducing the carbon emissions of transport.
The reduced duty levels for bioethanol and biodiesel of 20 pence
per litre below the mineral petrol and diesel rates reflect this.
In calculating the environmental benefits of
biofuels, we took as a starting point the estimate of the social
cost of carbon from the Energy White Paper, which set a figure
of over £70 per tonne. The calculations (set out for the
committee's information in Annex A), as I explained in my evidence
on 17 September, suggest that about three pence per litre of the
duty cut for both biofuels is justified by carbon reductions.
This figure is based on a life-cycle saving of 55% from biofuels.
Some studies have suggested that savings could be nearer 70-80%,
giving a carbon benefit of closer to four pence per litre. Using
the three pence per litre figure translates approximately to a
cost of £500 per tonne of carbon saved (£350 per tonne
when 80% reductions in CO2 are assumed). Importantly, this figure
underestimates the carbon abatement cost for liquid biofuels,
since it takes no account of the added expense of the subsidies
received for cultivation of the feedstock crops. Notwithstanding
this, the costs are high when compared to other carbon reduction
options such as renewable energy from wind or wave power or, most
pertinently, biomass energy crops.
It is worth stressing that this is a framework
for decision-making; in the Treasury we are pragmatic about applying
these ideas. We think it important not to be so attached to economic
theory as to be detached from reality, and we will always consider
the full range of social, economic and environmental issues.
Clearly, the Government has a duty to ensure
that the duty forgone in promoting biofuels is achieving value
for money. In doing this, the industry suggests other factorssuch
as the diversification of the energy and agricultural marketsshould
be given a greater weighting. There is no denying that these benefits
exist. However, we must remember that other sectors claim similar
indirect benefits from their industries, and equally strong arguments
might be made for greater support in each of them.
The committee mentioned the costings that had
been received from companies involved in the biofuels industry
and asked whether the Treasury agreed or disagreed with them.
It may help if I elaborate more on the factors that we might consider
when assessing such costings. Obviously, companies in the industry
have been keen to put arguments to us that will make as strong
a case as possible for an increased incentive. We have also recognised
that the extra costs of production for biofuels will vary from
company to company, depending on their own particular circumstances,
and we are not in a position to question the commercial detail
of the estimates we have received from companies such as Cargill
and British Sugar.
Nevertheless, there are universal accounting
rules which will affect these figuresfor example, the period
over which capital is written down. Both British Sugar and Cargill
use estimates that assume an amortisation period of five or six
years. As I explained to your committee, this was considered to
be a very short period over which to absorb such significant capital
costs: a 10 or 15 year period would be more common, and this would,
of course, have a material effect on the figures. Also, most assessments
did not take any account of the effects of capital grants on costs
even though a number of Regional Development Agencies have indicated
that they are keen to support the development of biofuels.
The cost of feedstocks was also often, in our
opinion, at the upper end of the scale. Again, Cargill gave an
estimate for use of pure virgin rape-seed oil. However, if they
had suggested using a blending of 20% recovered vegetable oil
with rape seed oil, overall production costs would be reduced
by two pence per litre. The figures also assume continued high
levels of support for crops which are unlikely to be met: reform
of CAP, for example, will lead to a reduction in the value of
sugar crops which in turn should reduce the costs of ethanol production.
There is further scope for cost savings from
the new processes technologies based on lingo-cellulosic feedstocks.
Although a number of these technologies are still several years
from being applied on a commercial scale, they hold the potential
to provide bigger environmental benefits at lower cost. It is
important that Government encourages the development of these
technologies, while being realistic about the speed and scale
of their introduction.
During my evidence session, Mr Jack mentioned
plans that Argent Energy have for a plant that will produce up
to 50 million litres of fuel a year from fats and used cooking
oils, and asked whether the plant would in fact be built. I explained
to him at the time that it is under construction, and he asked
me to double-check that, which I undertook to do. I can now confirm
that foundations for the factory at Newarthill near Motherwell
have been laid and the plant is still on course to begin production
of fuels next year. In addition, I am aware of Global Commodities'
announcement that it will build a 180 million litre a year biodiesel
plant in Lowestoft. These plans for additional capacity, combined
with current production of over 2 million litres a month, constitute
1.3% of total current diesel sales (or approximately 0.5% of total
current fuel sales). This means biodiesel is beginning to make
a significant contribution towards the UK's climate change objectives
and enabling a valuable alternative use for waste oils.
Finally, Mark Lazarowicz asked about the take-up
level for the Bioenergy Capital Grants Scheme. This is a £66
million scheme, jointly funded by the Department of Trade and
Industry (DTI) and the National Lottery's New Opportunities Fund
(NOF). The scheme was competitive and over-subscribed. In total,
21 projects have been offered a grant under the scheme, ranging
from the installation of heat cluster technology and small-scale
combined heat and power (with electrical output less than 1 megawatt),
to larger-scale projects (of over 20 megawatts) deploying state-of-the-art
thermal combustion and advanced conversion technology. A priority
of the scheme is to increase usage of energy crops, which must
account for at least 50% of the fuel mix in some technology areas.
Developers receiving DTI funding are required to spend the grant
within 3 years, once all consents are in place. Developers offered
support by NOF have until 2010 to complete the spend. Planting
of energy crops to supply the projects will not take place until
the capital grant has been accepted, the main consents are in
place and it is clear that the project is likely to go ahead.
Only the heat cluster developments have reached this stage so
To summarise, we are at an early stage in the
development of a biofuels industry in the UK and although the
early signs are encouraging, we want to make sure that the industry
develops in a way that is sustainable. It is in everyone's interest,
including the industry's, that we avoid the creation of an entire
sector dependent on excessive subsidy. That is why the Government
is pursuing a policy of appropriate support, which is already
yielding rewards in terms of environmental benefits. I hope that
the committee will agree that it is important that the Government
takes a long-term perspective on a long-term issue.
9 October 2003
VALUE OF CARBON SAVINGS FROM BIOFUELS
|CO2 emissions from diesel car (Peugeot 206 1.9D):
|Fuel consumption of car:||5.5 litres/100km or 0.055 litres/km
|CO2 emissions per litre of diesel:||144/0.055 = 2620 g CO2/litre
|Carbon emissions per litre of diesel:||2620 x 12/44 = 715 g C/litre = 0.715 kg C/litre
|Damage cost of emissions from litre of diesel (valued at £70/tonne carbon):
||0.715/1000 tonne C/litre x £70 = £0.050/litre = 5.0 p/litre
|Biodiesel saves approximately 55% of CO2 emissions, so value of carbon savings is:
||0.55 x 5.0 = 2.7p/litre|
|Carbon saved per litre of biodiesel consumed:
||0.55 x 0.715 = 0.393 kg C/litre|
|Support given:||£0.20 per litre
|£/Tonne of carbon saved:||0.2/(0.393/1000 tonne C) = £509 per tonne C
|CO2 emissions from petrol car (Peugeot 206 1.6):
||153 g CO2/km|
|Fuel consumption of car:||6.4 litres/100km or 0.064 litres/km
|CO2 emissions per litre of petrol:||153/0.064 = 2390 g CO2/litre
|Carbon emissions per litre of petrol:||2390 x 12/44 = 652g C/litre= 0.652kg C/litre
|Damage cost of emissions from litre of petrol (valued at £70/tonne carbon):
||0.652/1000 tonne C/litre x £70 = £0.046/litre = 4.6p/litre
|Bioethanol saves approximately 55% of CO2 emissions, so value of CO2 savings is:
||0.55 x 4.6 = 2.5p/litre|
|Carbon saved per litre of bioethanol consumed:
||0.55 x 0.652 = 0.359kg C/litre|
|Support given:||£0.20 per litre
|£/Tonne of carbon saved:||0.2/(0.359/1000 tonne C) = £557 per tonne C
Assumes 55% savings in life cycle emissions of carbon from biofuels.
Note that some studies would suggest higher savings than this. Back