Oral evidence

Taken before the Environment, Food and Rural Affairs Committee on Wednesday 2 July 2003

Members present:

Mr David Curry, in the Chair
Ms Candy Atherton
Mr David Drew
Mr Michael Jack
Mr David Lepper
Mr Austin Mitchell
Diana Organ
Mrs Gillian Shephard
Alan Simpson
Paddy Tipping
Mr Bill Wiggin

__________

Memoranda submitted by British Sugar and Cargill plc

Examination of Witnesses

Witnesses: MR CHRIS CARTER, Corporate Affairs Director, and MR GARY PUNTER, Technical Manager, British Sugar; and MS RUTH RAWLING, Vice President, Public Affairs, and MR PETER SMITH, Commercial Manager, Refined Oils, Cargill plc, examined.

Chairman: Welcome to the Committee. As I said outside, it is a bit of a case of the usual suspects but it is nice to see you again. For the record, British Sugar and Cargill plc are in front of us. From British Sugar we have Chris Carter, who is the Corporate Affairs Director and we have Gary Punter (a genuine Punter!) who is Technical Manager of British Sugar; and from Cargill Ruth Rawling, Vice President of Public Affairs, and Peter Smith who is Commercial Manager, Refined Oils. Welcome to the Committee. When I look at this whole subject of biofuels it seems to me in energy terms to be roughly the equivalent of Kennington in real estate; you are always expecting it to arrive but it never quite does. Is that a fair assessment? Forget the Kennington side of it.

Mrs Shephard: Some of us live in Kennington.

Chairman: That is why I used the example; I do as well.

Mr Jack: It is more a question of Mornington Crescent!

Q1  Chairman: Ignore the Kennington part of the question because it is too controversial. Is it true that we have been talking about this for a long time and it always seems to be almost at the top of the agenda but never quite there? We always think that one more push is going to deliver it but somehow it never quite seems to get over the top of the barricade. Why should we think it might be different this time, if that is the case? Politicians are always terribly unwilling to admit ignorance but if you use any complicated expressions like A bioethanol@ or A biomass@ , would you just define what you mean and that will help us without embarrassing us any further!

Mr Carter: There are two main biofuels which could realistically be used in the medium to short term. One is bioethanol which is made from foodstocks like wheat and sugar beet and could be made from woody foodstocks like straw, and the other is biodiesel. The position at the moment is that the Government has agreed a duty rate of reduction of 20 pence per litre for both of those two biofuels in recognition of the environmental benefits which they bring, which are primarily associated with greenhouse gas and CO² reduction, ie climate change, but there are other benefits as well. That is welcome, but unfortunately, as far as we are concerned, that is not quite enough to stimulate investment in the industry and, as you say, Chairman, that is the very reason why we do not have an industry in bioethanol of any kind at all in the UK at the moment.

Ms Rawling: I speak on behalf of biodiesel which is made out of vegetable oil which would come primarily in UK circumstances from rape seed. There is an extremely small cottage industry, I think I would describe it as, at the moment in the UK producing biodiesel, but in order to have an industry which would really make a difference in terms of environmental benefits, in terms of our farmers or indeed in terms of being able to go into a petrol station and buy something which contained biodiesel wherever you were in the country, we do not yet have an industry and the reason is very similar; we do not think that the duty derogation is large enough to make the investment worthwhile. We have argued consistently for the last three years that we need a duty derogation around 28 pence per litre in total or at least between 26 and 30 pence, depending exactly on the price of vegetable oil, and we still have not got there. We have only got 20 pence and that is why we do not have a biodiesel industry of any size.

Q2  Chairman: We are going to come to those questions in some detail in a minute. If you look round countries which enjoy broadly similar climatic and agricultural conditions to ourselves, which of those have gone further in developing those products and what instruments have they used to get there?

Mr Carter: If you look at Europe to start with, the countries that are directly involved at the moment are Sweden, Spain, Germany and France, they are the main protagonists. All of those except Germany are producing bioethanol. Germany is Europe= s largest biodiesel producer and is about to start producing bioethanol as well. They all have duty reductions considerably higher than 20 pence per litre. They range from 27 pence per litre in Spain and France, to 37 pence per litre in Sweden to 48 pence per litre in Germany.

Q3  Mr Mitchell: This is a reduction?

Mr Carter: They are all duty reductions, that is right. They are all considerably higher than in the UK. Most countries that I am aware of that have substantial industries looking a bit further afield like the US and Brazil which have more than two-thirds of the world= s production in the world and indeed Spain which is the largest producer in the EU all have used a combination of duty reductions plus capital grants and other forms of assistance to get the industry started. The key thing is that the capital investment has got to be supported initially to allow them to be able to compete, otherwise they are competing with some costs in the oil industry at a very, very large scale, which is extremely difficult to compete with.

Q4  Chairman: Really the public in practice is putting in a very large subsidy indeed to deliver this in those countries?

Mr Carter: In all of the countries in the world that have biofuels industries they have had to have government support to get them started in the first place, yes.

Q5  Chairman: Is the purpose of this because it benefits the farmer or benefits the environment or benefits the economy through import savings? What is the strategic purpose behind this?

Mr Carter: Each country has had a different strategic objective. If you take the United States its main objectives were steel security and air quality in towns and cities. If you take Brazil it was fuel security and rural economic development. If you take the EU the main objective was climate change and CO² abatement. In most of the more advanced countries that have biofuels industries it is not necessarily the taxpayer which finances it, it can be equally well done through the consumer by a mandate or an obligation to have a certain volume of biofuels in the petrol or diesel. In Brazil, for example, that is how they do it there.

Q6  Mr Jack: I would like to pursue the question as to why you both think the Treasury do not recognise the validity of your calculations because before the Finance Bill came through Cargill produced a very careful and detailed worked out example of why your 28.8 pence per litre derogation was required and that related to the price of oil seed rape, and it was meticulously worked out. You have now had the chance of reading what John Healey, the Economic Secretary, had to say in the Finance Bill when we had the debate we had about that and when all of the detailed arguments that you have underscored to the Committee were put to him. Why do you think he was wrong?

Mr Smith: I think one of the problems is that since we received the 20 pence duty rebate an industry has started. As Ruth mentioned, at the moment it is no more than a cottage industry with several small plants producing a few hundred tonnes per year and distributing those locally. Production adds up today, according to figures from John Healey, to about 4,000 tonnes per year of biodiesel. That is translated into 400,000 litres per month, which sounds an impressive figure. In fact, 400,000 litres per month is less than 350 tonnes per month. Diesel consumption is something in excess of 1.3 million tonnes per month. Figures of 400,000 litres sound to the layman perhaps as if we have a very significant industry when in fact it is 0.025 per cent of consumption, that is one quarter of one-tenth per cent. If we were to achieve EU targets of just two per cent biofuels we would need to expand the industry today by 80 times.

Q7  Mr Jack: Have the Treasury explained to either British Sugar or to Cargill why they think that 20 pence is the right number and why they do not believe your more carefully calculated alternative?

Mr Carter: We have repeatedly asked the question. The response we have got back has not been entirely conclusive about how the 20 pence per litre was arrived at. All I would say is that the Treasury mention continuously that they are cautious of not over-supporting biofuels, they are concerned about sucking in imports, and perhaps they are putting a nominal figure out to see what happens. But, no, there has not been any quantified explanation of how the 20 pence was arrived at.

Q8  Mr Jack: Have they told given you any breakdown of why the calculation of 28.8 or above, because there is a range above the 20 pence, are incorrect? Have they challenged the calculations, first of all?

Ms Rawling: No, I would say they have not challenged the calculations. All we have heard from them is that they wanted to proceed cautiously and not over-stimulate the industry. We have always said in any case there should be an annual review of the tax rebate because in the biodiesel case it does depend on the price of vegetable oil and the price of Brent crude and you need each year to look at how that is varying in order to make sure that you do not over-compensate the industry, but we have not received any real criticism of our calculations and, indeed, they are based on experience which we have, particularly in Germany, of producing biodiesel and we are as surprised as you are that there does not seem to be an incentive to really get on and make this industry work in the UK.

Q9  Mr Jack: Is there an economy of scale argument, notwithstanding the variabilities of the market place that you have just put before the Committee in determining the annual level of rebate, that says at a certain critical mass both with bioethanol and biodiesel we could start to reduce in absolute terms the amount of duty reduction because we would have got the economies of scale and they will pull the cost of production down?

Mr Smith: In terms of biodiesel we are already making our calculations based on those economies of scale. Cargill is well-known for its methods of production which tend to be large, high volume, high efficiency, low cost plant, and that is what we have on the drawing board for here in the UK biodiesel industry. We have experience of large-scale plants in Germany. We are aware of the costs and efficiencies we can bring and we believe a plant in excess of 100,000 tonnes per year would bring the efficiencies we need to allow us to operate with the 28 pence derogation.

Q10  Mr Jack: Can I ask you whether you have explored any of the territory which exists in the field of electricity generation where, effectively, existing users of electricity pay for the renewables obligation because it is part and parcel of the price of electricity, in other words a zero sum game? Because of the very small proportion, which you indicated a moment ago in your response, that, even enhanced, it would represent of the total diesel usage, the amount per litre of non-biofuel that you would have increase the price by would be infinitesimal if in fact you recycled the money from such a process into your area. Have you discussed such a model with the Treasury?

Mr Carter: Yes, we have discussed it and in the context of the Biofuels Directive, which of course came on the stocks on 8 May last, it becomes a live issue because the Biofuels Directive requires each Member State to come up with target inclusion levels of biofuels, which is biodiesel and bioethanol, by certain guideline dates and those are by the end of 2005 and the end of 2010, so, yes, we have discussed that idea with the Treasury that it would not be the taxpayer that paid for it but it would be part of the consumer price effectively for environmental goods delivered, but so far it has not received a tremendously enthusiastic response. Perhaps that position will change though with the advent of the Biofuels Directive when each Member State will have to modify its position somewhat.

Ms Rawling: I might add a concrete example there. We reckon for our production you are talking about less than a quarter of a penny per litre on top of the ordinary diesel.

Q11  Mr Jack: In terms of where the reduction in price should bite, is it at the pump or is it upstream of that?

Mr Carter: That is a key issue as far as market deliverability is concerned. If we are talking about fuel duty reduction, which is what is on the stocks at the moment, the 20 pence per litre, then if that is paid effectively to the supplier of the petrol - in the main the oil companies and the multiple stores - then clearly those companies are in the driving seat as far as negotiating the price downstream to allow deliverability onto the market. Now that means that those companies are in a very strong position from that point either to encourage it or to block it, whichever way they prefer to operate. So the point of delivery of that is key to its initial introduction. It does not have to be done that way. In Sweden, for example, the duty reduction is allocated not to the end supplier but it is allocated to a number of parties who have bid to the Swedish government for that purpose.

Q12  Mrs Shephard: The questions so far have concentrated on your face-to-face with the Treasury. How many government departments are involved in policy on biofuel?

Mr Carter: Five altogether normally.

Q13  Mrs Shephard: These are?

Mr Carter: They are Treasury, Customs, DoT, DTI and Defra.

Q14  Mrs Shephard: And I think the Cabinet Office which is responsible for joined-up government?

Mr Carter: Indeed.

Q15  Mrs Shephard: Have you gained the impression that there is any one department which is taking the lead and that is the department to which you should be addressing your concerns? Self-evidently the Treasury is not accountable for the Government meeting the Biofuels Directive for the EU, the Department of Transport is.

Mr Carter: The answer to your question seems to be that depending on the issue in hand different departments take lead responsibility so, for example, as you say, if it is the introduction of the Biofuels Directive, it is the Department of Transport; if it is climate change, normally it is Defra; if it is association of the oil industry, it is DTI; and if it is implementation of the duty reduction it is Customs and Excise; and payment is Treasury.

Q16  Mrs Shephard: So your impression I imagine must be the same as mine and that is that no one is in charge?

Mr Carter: Do you want answer that?

Ms Rawling: At this point the question comes to me!

Q17  Mrs Shephard: If you say no I will ask you to identify the lead department in your view. Well, that is good.

Ms Rawling: I would just add that we have had conversations with all these departments.

Q18  Mrs Shephard: It is indeed the Department of Transport that is responsible for making sure that the UK meets its obligations under the Biofuels Directives and I think you gave a date of 2005 when those plans had got to be in place.

Mr Carter: Slightly earlier than that. The Directive which has just been announced states that the targets need to be supplied to the European Commission by 1 July coming, so that is exactly 12 months= time, just to be clear, and the legislation needs to be sorted out by each Member State by the end of next year, so that is just 18 months away.

Q19  Mrs Shephard: I suppose in advance of the legislation one might reasonably expect policy perhaps? Right, are you aware of the report produced by the East of England Development Agency?

Mr Carter: Yes.

Q20  Mrs Shephard: I know Mr Carter is, this is an unfair question, I will ask Cargill if they are.

Ms Rawling: No.

Mrs Shephard: It was made public about two weeks ago. The Committee ought to be given a cop y as well. As far as I know, it is the only cross-departmental look at the policy on biofuels. Last night I questioned a number of Treasury ministers none of whom was aware of its existence although all of their officers had received this document. The proposition in the document is that the Government has a number of options, one of which would be further reductions in duty, another of which is a combination of capital grants to get the policy going and some duty reduction, and then another option is variations in the length of time for which the capital grant would be available. I cannot ask Cargill what they think of this but I would like to ask Mr Carter what he thinks of the options. I am going to put the same question to the NFU representatives when it is their turn.

Chairman: It is 260 pages there, Sir Ben, so you had better get speed reading.

Q21  Mrs Shephard: There really are not and there is a good executive summary.

Mr Carter: We need to make a reply each on this, if that is alright.

Ms Rawling: Although we are not aware of the exact report, we are aware of the issues. What we need to say here is that in terms of capital grant that is not so important for biodiesel because what we are talking about is building an esoterification plant on top of an existing oil refinery, so it is a rather small add-on to an existing plant. A typical plant of this kind would cost between , 10 and , 15 million, so we are not talking enormous amounts of capital here. The capital issue for biodiesel is not so important as the duty derogation.

Mr Carter: We are in exactly the opposite position. Our overall requirement for support coincidentally is almost exactly the same as for Cargill for a similar-sized plant, for about a 100,000 tonnes a year plant, but our capital cost is relatively high and our operating costs are relatively low, so in our case we are in position where, yes, it would be helpful to have a combination of either capital grants or, if it were possible, a length of time for the project of longer than five years and we have had to submit in our business case to government a project life of only five years because that is what we were advised to do which clearly under normal circumstances would be absurd for a large plant of this kind which would normally be written off over 15 or 20 - so both project life and capital grants could be very helpful to us, in addition to the duty reduction, yes.

Q22  Mrs Shephard: This is my last question. I think we all accept there is a different case for what should be done to help biodiesel and what should be done to help bioethanol. However, if I were one of the ministers in one of the departments that is apparently responsible for this policy I would rejoice in the fact that the different protagonists pushing for help for biofuels take different views on what should be done because what I would say is, A If they cannot agree amongst themselves@ - and I am accepting the difference between biodiesel and bioethanol - A what is required, we will not do anything.@ What can be done to make sure that the industry - making distinctions between biodiesel and bioethanol of course - does come down with a unified voice on a set of options that the government should consider?

Ms Rawling: The point is we are unified on the need for a duty reduction between 26 and 30 pence per litre.

Q23  Mrs Shephard: That is quite some variation and then you need to feed in the option of grant-cum-duty reductions, which I believe the NFU (and I shall ask them) would rather favour. The fact is there is not a unified voice.

Ms Rawling: It is true that a capital grant would be of more use for the bioethanol industry than for us ---

Q24  Mrs Shephard: I am leaving aside the distinction between the two products, I am saying let= s look at bioethanol, is there a unified approval of any given option or set of options, has any work been done between the protagonists to identify such a thing?

Mr Carter: In the bioethanol sector I think what I have explained holds good, that capital grants, or if it were possible an extension of the period of life of the project, would be of considerable value in addition to a duty reduction. It just so happens between bioethanol and biodiesel they are two slightly different industries and there is no reason at all why the government should not deal in exactly the same way between them.

Q25  Mrs Shephard: Indeed. I keep making this point, but I am asking if what is being done by the protagonists, let us say in favour of help for bioethanol, is going to be speaking with a common voice. And I shall ask the same question of Sir Ben. You are saying A Yes-ish@ ?

Mr Carter: I think for bioethanol it is clear we are speaking with a common voice. Just to repeat for clarification, that is slightly different than the case for biodiesel simply because the industries are slightly different and there is nothing sinister about it.

Q26  Alan Simpson: One technical question about whether you are speaking with a common voice. You will be aware that in May the European Commission came up with a timetable for the ending of the use of used cooking oil in animal feed and the UK has a derogation that exempts us from that until November 2004. That means effectively that the biofuels industry is in competition with the animal feed industry for the purchasing of used cooking oil. Have you made any particular representations to government about whether that helps or hinders the development of a biofuels industry in the UK?

Mr Smith: No, we have not. Cargill= s principal industry is to manufacture biodiesel from domestically grown rape seed. We recognise that used cooking oil has a role to play in this. Today the industry, so far as it exists at all, exists almost exclusively on used cooking oils. There are some difficulties with this, one being the fact that by their very nature used cooking oils vary in quality and a variable quality input inevitably leads to a variable quality of the biodiesel produced. We have concerns about that and its potential effect on consumer confidence in biodiesel. Nevertheless, used cooking oils, as you quite rightly mention, by the end of 2004 will not be able to find any other use. The other alternative will probably be landfill and in small inclusion quantities they have a valuable role to play within the biodiesel industry. We see the industry developing along the lines of significant tonnages of rape seed oils from domestically grown crops being blended either at vegetable oil plants or more likely at the diesel blending plants with biodiesels produced from used cooking oils.

Ms Rawling: If there is no reasonable scale of bio-development from rape seed oil there will be no way of blending in used cooking oil biodiesel to be used as biodiesel proper because, quite frankly, I do not believe the car manufacturers or distributers will be interested in any large-scale product based exclusively on used cooking oil. You need the rape seed oil biodiesel to make that work.

Q27  Mr Mitchell: I just wanted to move away from partisan attacks on the Government in earlier questions into some more practical issues. You emphasised a need for both investment support, capital grants, and a reduction in duty. Are they both essential? Will the industry not go ahead unless it gets both?

Mr Carter: I need to be quite clear on this; on the currently offered duty reduction rate of 20 pence per litre it will not go. So the alternatives are increase the duty rate to 28 pence per litre or in our case, but not Cargill= s, leave it at 20 and offer a reasonable capital grant with it, or if you want to extend the possible life of the project. So that is the position at the moment. 20 pence will not make it work.

Q28  Mr Mitchell: And Cargill= s position is 28 pence would do the job?

Ms Rawling: 28 pence would do the job.

Q29  Mr Mitchell: Without a capital grant?

Ms Rawling: Yes.

Mr Carter: We are in exactly the same position, 28 pence would do the job for us, it is just that instead of increasing by that eight pence you could put in a capital grant instead and it would still work because our capital costs are higher.

Mr Mitchell: You talk about investment in plants; there has to be investment in distributions systems as well unless you are going to have a little boutique organic fuel station somewhere in Norfolk that people have to drive hundreds of miles to find. Is there not a big investment necessary in distribution.

Q30  Mrs Shephard: A partisan attack on Norfolk!

Mr Smith: Certainly in terms of the biodiesel industry our view is that this market will develop in blends with conventional diesel. Indeed, we have had discussions with various of the major petroleum companies who all are in favour of this route. It means that you can distribute biodiesel on a country-wide basis through the existing diesel infrastructure with no additional costs involved

Q31  Mr Mitchell: It is not sold on its own to organic drivers?

Mr Smith: It can be and indeed it is today in very tiny quantities. There is a niche market of individuals or organisations who value or need the environmental benefit that 100 per cent biodiesel brings but that market is so small and so niche that it is willing to pay the premium required. To bring biodiesel to the general public we see the blended option as being the route to go.

Mr Carter: For bioethanol it is exactly the same. All our work has been done on blends of up to five per cent which are allowable now, you can use them in your car and they can be sold at the gas station down the road there without labelling if that is the way the retailer wished to do it. There are some costs associated with blending, although they are relatively low, but of course they would have to allowed for in the overall equation.

Q32  Mr Mitchell: Another simple-minded question; how does it work? Do you establish a plant and then have contracts with farmers to grow the stuff, and they deliver it to you for a price? Is that how the system would work?

Mr Carter: It would, broadly, yes.

Q33  Mr Mitchell: So the growing does not need any subsidy or support?

Mr Carter: Providing ---

Q34  Mr Mitchell: --- Providing your price is right?

Mr Carter: A providing the industry had the level of support equivalent to 28 pence per litre for the duty reduction, then we would be able to contract with farmers at a price which we feel would be reasonably acceptable to them. In our case the price we picked for wheat, which is the main feedstock we have looked at, was , 75 a tonne which is slightly higher than the current UK market price and the world market price.

Ms Rawling: On rape seed what is happening at the moment is that some of the rape seed UK farmers are growing under the existing Common Agricultural Policy is effectively being used for helping the biodiesel industry in other European countries. In fact, some of that rape seed is being exported from the UK. Because of the high duty derogations in those countries there is a pull on UK rape seed, particularly as they have not had terribly good crops this year, into other countries. On the farm level what we would be doing is keeping that rape seed in the UK instead of sending it away.

Mr Carter: Perhaps I should also add that currently the exports of wheat from the UK are about three million tonnes onto the world market,. That three million tonnes would be the equivalent alone to drive a five per cent or one million tonne bioethanol industry.

Q35  Mr Mitchell: Cargill has been producing bioethanol diesel in Germany since 1999. Presumably you have learnt economic lessons on the kind of duty reduction that was necessary. Are there other lessons which come from the German experience that we need to learn in this country?

Mr Smith: Yes, I think there are. First of all, the German bioethanol industry, although much, much greater than ours (450,000 tonnes last year) is essentially a 100 per cent biodiesel market with all the problems that you have already mentioned regarding a new infrastructure required. The Germans themselves are learning that the blended route is the way forward and we have certainly taken that lesson on board and brought it over here.

Ms Rawling: They have in fact just changed their legislation to go down the blending route in Germany away from the 100 per cent biodiesel route.

Q36  Mr Mitchell: Is it premature to talk about a balance between food and non-food crops? Are we very far away, given it is an infant industry, from needing to talk about such a balance?

Mr Carter: Not in the case of bioethanol. A Initially@ perhaps takes you five or ten years down the road because, as I say, we export five million tonnes of wheat and we also, for the record, export an average of a couple of hundred thousand tonnes of sugar onto the world market as well in an average year. Those initially could be used and that would take us towards a five per cent target, ie in 2010. Beyond that, yes, there would have to be land allocation in some way but that is not in any way an obstacle. There is ample arable land available to do that.

Q37  Mr Drew: I want to come on to looking at the relationship with the EU in a moment but may I raise a point with you all on the blending of diesel. I think I have managed to open the first garage that sold it; it would be in Stroud! Is there not a problem with education in terms of the customers because I would have thought that one of the issues you would be faced with is this is going to be fairly marginal for some time and to get the customer to use it they need to recognise that this is not going to affect their car, it is going to potentially give them a slightly lower price (although given the amount of blend that goes into it, it will be very small) I would be interested in what you see in terms of consumer demand because we have talked a lot about supply factors and we have not talked about what the customer might be persuaded to buy.

Mr Smith: We think there is significant consumer demand out there already. It is shown by the take-up of some biodiesel which is currently trading at a premium market, as we have already mentioned. Beyond that, at Cargill we receive two or three enquiries every week for rape seed oil for the manufacture of biodiesel. So far all these enquiries have come to nothing because the economics do not stack up but there is interest from several people, including the major petroleum companies who are also talking about it, one of whom has recently been tendering on the Continent for 25,000 tonnes of biodiesel to bring into the UK for what they term a A trial@ , to blend and put into the pumps. Again, they have not purchased it because the economics do not stack up.

Ms Rawling: I think the important point to recognise is that whether you use it as 100 per cent or as a blend the carbon dioxide benefits are there and that is effectively what you are doing by using this in your fuel. From our experience we do not see more than a very small niche market prepared to pay a premium so it would have to be priced with normal diesel. We would not have had all these enquiries from distributers and others if they did not think there was demand out there which could be developed once we had a product.

Mr Carter: What I think is key to the successful introduction, taking your point, is that there need to be clear quality standards and high quality standards accepted and agreed with all the people from the demand end of the business to make sure that it gets off to a flying start and to make sure there are no issues associated with that that give it a bad name at the beginning. That has been the case in one or two countries and it would be important that we did not do that in the UK.

Q38  Mr Drew: Just on that there is nothing to stop all the petrol retailers from rebadging their diesel as A biodiesel@ in the sense they could say we will all put a blend in. How you persuade them is another matter but notionally there is nothing to prevent that happening.

Mr Smith: No.

Q39  Mr Drew: Can I quickly turn to the issue of the relationship with the EU. Are the Directives now coming out of the EU helpful to your cause, given that there are obviously other EU states are ahead of us, and what has the Government got to do to meet these Directives?

Mr Carter: They should be extremely helpful to us. I think they should provide a much needed dynamic into the market. Because they require each Member State to come up with indicative targets and then report very rigorously in an auditable way against their achievement of those targets as the years go by, then I think they should be extremely helpful. It is important obviously that to do that the UK Government takes the matter seriously and sets targets in the future - the medium term and longer term - which are achievable and to which there is a route, because providing there is a route to them then we are going to be in business. That is the way we see it.

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 ten 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 are enormous. If you take just a five per cent level in bioethanol alone, that is a 1.25 million tonne industry 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 ten years= time, so I do think it will play a very valuable role. The supply into the processes, the price of that and the terms and conditions will clearly have to be agreed and negotiated in the normal way but if they are too parsimonious clearly the high volumes will not be there and the terms and conditions would have to be raised to account for that in the normal way. It is an enormous potential opportunity for the UK and particularly for the rural economy of the UK and could be of enormous 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, I think.

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 250,000 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 demand 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 two per cent 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 two per cent 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 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, so we feel that we would be able to compete on a perfectly reasonable basis. The worry is that if there is no domestic industry with which 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 ten years out this could be set up in a normal way, we would see imports as being part and parcel of the commercial mix along with 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 per cent 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 per cent 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, effectively, are equally being applied to any imports that come into the country and 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 ten years, five per cent easily, and just over five per cent 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 round one per cent of the diesel market, so a plant producing round 170,000 tonnes, which is one per cent, 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 one per cent of the market.

Mr Carter: If I can just clarify the numbers for you, because I worked something similar out, to go to 28 pence a litre and stimulate a five per cent bioethanol industry would cost the Treasury roughly about , 120 billion 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 five per cent mix, but you could have ten per cent. I am told in Brazil - members wait with bated breath, we are going there shortly- some cars run on 22 per cent. Are these figures right?

Mr Carter: The typical inclusion level in the United States is ten per cent. In Brazil they have just mandated 25 per cent. In both of those countries they have slight modifications of car engines which allows that to happen. We have chosen up to five per cent initially, and it is a very large number to start with and requires a lot of investment just to get that, but 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 per cent, you can go to 85 per cent if you wish to but you do have to modify the engines then.

Q51  Paddy Tipping: If you go up to 25 per cent 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 permutation 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 a carbon dioxide reduction of 70 per cent for wheat and very similar for sugar beet, that is using fossil fuel in the process when you manufacture it. This is the key to it, if you use the straw, image the wheat goes to fermentation, 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 per cent number goes up to 100 per cent and the contrast is then with the lignocellulos or straw base, woody foodstocks, straw, chopped up wood, things like that. There has been a lot of confusion in the Government generally on this issue over the last few years. The reality of the situation is that the equation is virtually identical. You can chop up wood and extract some bits - that is harder to do, that is more costly - and you can ferment that. The bits you cannot ferment you pop in the boiler to get up to your 80 per cent to 100 per cent. Basically the CO² equation is just the same. The enhancement from about 70 up to about 100 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 amount of feedstock 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 pretty costly and still not fully commercially available.

Ms Rawling: On biodiesel the Sheffield Hallam Report said the net CO² savings were round 72 per cent, 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 per cent.

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 two per cent 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 figures of 70 per cent that assumes you do not burn the straw, the ligno bit, the bit you cannot easily ferment, you do not do that, and then you get a figure of between 3.0 and 3.5 million tonnes of CO² saved. 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 per cent biodiesel, 1.5 million tonnes of CO² saved. If you went to 5.75 per cent 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 sales?

Mr Carter: The duty reduction currently on offer, which is just now subject to a freshly reached consultation, for LPG and road fuel gases is 41 pence a litre as opposed to 20 currently on offer for biodiesel and bioethanol - we are asking for 28. My understanding is that that predicated primarily not on climate change and not on carbon dioxide reduction. The carbon dioxide reduction of LPG is a maximum of 12 per cent, as confirmed in the Energy White Paper just recently released. It was predicated primarily on air quality benefits. The thing is, we have made this point but not, I hope, open over made it, the air quality benefits from bioethanol are pretty much similar to LPG. We are not really very 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 are the same if you were standing by a car in London. The carbon dioxide climate change benefits are very substantially greater by a factor of about six or seven times greater than LPG. The current duty rate 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 two per cent 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, a slightly different comparative, for a five per cent 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 by a five per cent bioethanol industry in the United Kingdom throughout the economy, and 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.

Memorandum submitted by the National Farmers= Union

Examination of Witnesses

Witnesses: SIR BEN GILL, President, MR RAD THOMAS, Chairman, Alternative Crops Committee, MR NICK STARKEY, Alternative Crops Adviser, National Farmers= Union, examined.

Q59  Chairman: Another set of the usual suspects, but this time we have to talk to Sir Ben. I bet that went down a bomb with some of your more militant member, Sir Ben, if I may say so, as it did with your predecessors, but it comes with the job, does it not, in every sense. I may be unpopular with your members. For the sake of the record, Sir Ben Gill you are President of the NFU, Rad Thomas, you are Chairman of the Alternative Crops Committee and Mr Starkey, you are the Alternative Crops Adviser. What is in it for the farmers then?

Sir Ben Gill: I think, first of all, Chairman I would like to take it a bit further than has been said already. Farmers are as part of their job intimately involved with the environment and the climate. We have seen in our working conditions enormous changes in the climatic pattern in recent years. In the year 2000 I lost all of my wheat crop due to the adverse weather, not to direct flooding but just to sheer water-logging. I am sure as a Committee you are well aware of those affects. Those affects were seen else where in Europe last year with the harvest last summer and of course else where in the world, America last year had the worse wheat harvest since 1973 and Australia suffered severe drought. We found ourselves in a position, which gave me some comfort, where we were sending food aid to America and to Australia at the same time, that was the perversity of the situation. This year we find the severe weather is effecting many parts of Europe at this time. In the Ukraine there was a major distortion of world markets last year, they will probably move from being a significant exporter of grain to an importer of grain, their wheat harvest will be less than 50 per cent of what it was last year. Parts of southern France, through Spain and indeed into central Europe, Germany, are suffering severely from drought. France itself lost probably 100,000 hectares of wheat crop from the severely delayed frosts. These are all the different climatic factors in which we have to work. The benefit is this year in large parts of Britain, not all, we have had exceptionally good weather. Thank you very much for that. We are very grateful for that. We have to do that in undulating circumstances. Climate change is very real to us. We have seen it and we have to work on it. We are concerned that it is not being taken seriously by the Treasury in many of the aspects being looked at. The challenge was made by Mr Tipping about the model that the Treasury have used. I would say this, if I may, at this stage, the model is only as good as the assumptions that you put into it. That needs to be the question that I have not got an answer for, what are those assumptions? I have talked to the Treasury about it. We met with the Treasury, Customs and Excise and the Department for Transport a few weeks ago and they did not demur when I said that to them and they did not come forward with clarity as to what the assumptions were. How you can quantify what the distress to society as a whole would be unless action is taken on climate change now? Although it will probably only benefit my grand children in real terms unless we do something now we will all have a great deal of explaining to do to our grand children in the years ahead. I would also make it clear there have been questions - I do not want to put words in the mouths of your colleagues - do we want both biodiesel and bioethanol? In fact we do want biodiesel, bioethanol, wind energy and solar energy and everything else. I would argue we need every lever we can put our hands on to address this issue, which I think is one of the most fundamental issues that faces society as a whole today. I do not want to seem melodramatic but I cannot over-emphasise the importance that I address to this. For farmers themselves it is an opportunity to address that as well, to be a key part of doing something that will benefit the big environment in which we live. Farming traditionally used to do much more than food production, it was only post war when the message went out to emphasise food production we became totally focused on it. I think we are now looking and perhaps assessing. We can use land effectively to give us better rotations, balanced rotations. We will not have wall-to-wall yellow, we will have a mix of wheat, you can make bioethanol from wheat as well as from sugar beet. You can make biodiesel from rape crops, we have a myriad of opportunities we can develop. We want to see changes that will give us a balance from that market place, particularly with the reformed CAP, we will be allowed to focus much more on that. There were particular questions raised about the balance in the market that I would like to answer in due course that are very, very relevant and very proper.

Q60  Chairman: The crops which you would grow to supply these industries are indeed the same crops you are growing already, perhaps there will be different varieties. I think some of the biotech companies are suggesting they could engineer rape designed specifically for this market place which would have a very high yield. You would be subject to the same sort of climatic accidents with these crops as you would with other crops. Could you envisage circumstances in which you found you were stretched on two fronts and there were markets competing for a crop which had met with some sort of climatic disaster?

Sir Ben Gill: I can envisage that situation and perhaps sooner than many would think at this time. I do not dispute that fact. You are correct to point out the reality that the problems with climate are the same for both types of crops. The point I am seeking to make is this problem is so potentially large the only way to address it is to reduce our dependence on mineral fuels as quickly and as rapidly as possible then the long-term benefits will come through in the decades ahead, it will be decades ahead because it is such a big, forgive the pun, oil tanker to turnaround. The sooner we start the sooner we will make progress.

Q61  Mr Lepper: I was interested in what you just said about the impact of CAP reform, my understanding was part of the agreement that was reached last week might provide less of an incentive for growing some of these crops. I was just looking at some of the figures we have been supplied with, 79,000 hectares of industrial oil seed rape produced in the United Kingdom in 2002, 50,000 of that produce on set-aside land. The agreement last week did include a support payment of 45 Euro per hectare, but the total area of land that can receive that payment has been capped. That did not seem to square with what you were saying, maybe I am only seeing part of the picture.

Sir Ben Gill: You are quite correct to point that out. The 45 Euro per hectare is a limit but is additional encouragement and we believe it is woefully inadequate. It goes on top of where we are at the moment. The second point is the reform of the CAP means that as we move to recover payments - I am assuming for the purposes of this exercise the British Government will honour its commitment to do 100 per cent decoupling - save the gambit of the set-aside bit we will be allowed to grow non-food crops on non set-aside land, sorry that is a double negative. The market will seek to pull that through. There is very clearly a cause and effect, When set-aside was first introduced we were growing non-food crops other than biodiesel at that time and prior to that high risk rape seed. We saw immediately that the market price for those crops dropped by , 30 to , 40 a tonne overnight because of the bureaucracy coming into it. We would have been far happier if the Commission had not got hooked on this business of set-aside and had properly and fully decoupled, got rid of all of the set-aside requirements and allowed the market to work fully. We believe they could have driven it through.

Mr Thomas: Just to reinforce that point from of view from a farmer's point of view and how he plans his farm, from now on under the implementation of the CAP reforms he will be growing for whichever market suits him the best. The opportunities are endless and interchangeable. If it is for the food market it could be on eligible land, if it is for the non-food market it could be on the set-aside land or indeed it could be on the eligible land as well. The opportunities are there for the farmer to aim for the market because he is no longer structured by having to aim for a brown envelope with taxpayers money in it.

Q62  Chairman: Would you envisage the varieties which you grow for the food market and the non-food market could they be used in either market or would you expect them to differentiate according to the end use, so they really became two different crops?

Mr Thomas: At the moment they would be the same and they are interchangeable but as a market developed for non-food crops or biodiesel or bioethanol it may well be that the plant breeders in conjunction with those processes may identify various varieties which would be better suited for that purpose. Because we have had no biodiesel or bioethanol industry to date then there has been no market to develop specially treated varieties. They are interchangeable at this moment in time.

Q63  Chairman: That may well change in the course of time.

Mr Thomas: It may well do. This would be particularly true, of course, not so much in the fuel market but in the niche market for various petro chemical replacers in all sorts of industrial applications.

Q64  Paddy Tipping: Just developing that, if we were to get to the EU biofuels target of 5.75 per cent by 2010 what would the effect be on the landscape? How much extra planting of oil seed rape and cereals would take place? Of course it will depend on the development that you are talking about.

Mr Thomas: The great danger is that in people's minds, which we do not believe to be with foundation, is that suddenly we are going to grow wall-to-wall oil seed rape and every time they drive through the countryside they are going to sneeze, their eyes are going to stream and they are going to feel very uncomfortable. The reality is far from that. In fact there would be remarkably little extra cropping that you would physically see in the countryside. To do the 5.75 per cent we actually believe we need 350,000 hectares of rape, 205,000 hectares of sugar, 150,000 hectares of wheat, 250,000 thousand hectares of short rotation coppice or miscanthas. Those seem very large indeed but put against the backdrop of what we already grow and the land available and what is happening to it now you will not notice the difference other than, yet again, there will be an opportunity for farmers and growers to grow into more diversification of their cropping rather than the existing and past regime, which has tended to concentrate farmers attention into wheat, wheat and more wheat. In reality I think we will see a greater diversity across the country. As we move towards 2010 and the higher level we will see more use made of the previously mentioned cellulose lignostic stocks which open up endless possibilities for different varieties. We are talking in terms of willow, but it need not be willow, it could equally well be poplar, it could even be eucalyptus, there is switch grass, there is reed canary grass, there is miscanthas grass, there is a rich variety of opportunities there to deliver the product we need.

Q65  Paddy Tipping: Some of those are better in bio-diversity terms than others.

Mr Thomas: In bio-diversity and how we see the countryside as such their credentials are impeccable. Surveys have shown bird life and floral life rising in short rotation crops to levels not seen for many years.

Q66  Paddy Tipping: Perhaps I can just switch tack a little, when we were talking to Cargill and British Sugar we were talking about where the rate of reduction in duty, the public subsidy should go in, should it go in at the pump or are there other places where the public subsidy should look? What is the NFU's view on this?

Sir Ben Gill: As you discussed this afternoon there are a number of options, one would be that you make it obligatory to have the inclusion in there, that is a directional option rather than a voluntary option. I think there is, to my knowledge, a great degree of awareness, particularly amongst the retailers who dominate the petrol market and the diesel market, of the benefits of selling biodiesel. A number indicated to me if the Government were to put in place the sort of incentives needed they would be jumping in there to include biodiesel in a percentage inclusion, not 100 per cent biodiesel, although there is, as you heard from Cargill, there is a very important market for 100 per cent biodiesel in certain sensitive areas. Again you have heard from different perspectives of the biodiesel and bioethanol market and the grant applications within them. There are different options but the sum total of it is if you establish a proper market in the initial phases you need to have 28 pence a litre. One of the critical parts of that in the future is as the plant is developed you will find efficiencies will build in, there will be economies that will come down and indeed you have written the plant off. That is the key factor in there that the Government needs to be aware of, which they seem to ignore. Of course this is against the backdrop, which annoys me, about some of the statements that have been coming from Treasury and particularly from Mr Healey that we are on par in terms of a rebate with other European countries. We are not on a par, not when Germany offers 100 per cent rebate of the fuel duty (from memory that is about 60 Euro) which is a significantly bigger rebate than we have. We are not even asking for that, we are saying that at the practical end it delivers a fair price through. We believe the benefit then is that it would come from the simplest nature, which if it could be agreed 28 pence would make it simple. Get on with it.

Q67  Paddy Tipping: You say that would come down over a period of time?

Sir Ben Gill: We think there is every reason to believe that it would as plant becomes developed in economies of scale, but it would have to be reviewed in due course.

Q68  Alan Simpson: You said that farmers would welcome this shift to non-mineral fuels, do you think that in the context of moving the duty rebates that farmers would then welcome the removal of the rebate on red diesel and a shift of it on to biodiesel?

Sir Ben Gill: I do not see how the two are related, red diesel is used for separate uses itself. If we had sufficient incentives to use the biodiesel on farms that would certainly be the case. The way things go at the moment red diesel is not for specific use just for farmers, it is for all food use and many other industries that have that rebate available, as became obvious when there were questions raised by the use of red diesel in the past. Other countries in Europe have a variety of systems for off-road use. Taxation was conceived as a part of taxation for use on roads in the first instance, and that is why there was a rebate for it. I think it is probably more complex in Germany, they have to go through a complex reclaim system akin to VAT, which means that you pay out all of the money to claim it back. I think it is far simpler to do it in that way, if you do not do that it detracts from the arguments for biodiesel, which I would like to be using on the farm as well.

Q69  Alan Simpson: I hope you accept the principle that if you want to move from environmental bad to environmental good that also means that you shift the duty and subsidy system so that you favour that transition?

Sir Ben Gill: Favour?

Q70  Alan Simpson: Favour that shift, that transition, you do not continue to provide subsidies for part of what you regard as being ---?

Sir Ben Gill: I do not regard it as a subsidy when you are not charging tax because the relevant use of the product is not actually consistent with what the tax was about, which is road use or vehicles.

Q71  Alan Simpson: We are talking about the encouragement of the use of particular types of fuel.

Sir Ben Gill: If you can evolve a systems whereby it makes it comparable then that would, of course, be something that we wish to encourage. The use of biodiesel or biofuels generally in whatever form would be relevant. If you are using it in a blending form, as many countries do, then the five per cent or ten per cent then, the factors which come into that, could make it very close anyway.

Mrs Shephard: I heard you mention the figure of 28 pence and what I would like to ask again is the question that you heard me ask British Sugar and Cargill and it is this, is it possible for the protagonists of the development and encouragement of biofuels to speak with one voice on what would be the most useful move the Government would make? I think you just said, why not let us have a 28 pence duty reduction and get on with it. You heard Cargill and British Sugar also talking about an option which is in this famous EEDA Report, which they have been discussing, and that is a combination of capital grants and duty reduction. Is it possible for all parts in the industry to come together with say two or three options to put to Government?

Chairman: I am going to halt there. Having been given notice of this question earlier you now have even further notice of this question. We will back as soon as we can.

The Committee suspended from 4.00 pm to 4.15 pm for a division in the House

Q72  Mrs Shephard: Rad Thomas.

Mr Thomas: There is unanimity in the industry of what we are asking for, but it is very different products. Indeed EEDA, which you referred to earlier, recognised the need for an increased fuel cut in taxation which would need to be less for one product than the other, and that was to reflect the different nature. They come out with their different products produced in different processing plants with a different capital build cost. I think that is the only difference. Of course the easiest way to do it is to say, if we go for 28.2 pence that is fine we will cut that across the board to everybody, we can all sign up to it, we will get an industry but, of course, we would in reality probably be leaving one section of the industry more exposed to imports than we need to and it may not be the most prudent use of taxpayers money because the capital grant route would suit that sector better.

Q73  Mrs Shephard: This is exactly what I mean, the EEDA document produces four options.

Mr Thomas: Yes.

Q74  Mrs Shephard: They are a straight cut, a cut plus grants and then larger grants with a longer period and a voluntary agreement.

Mr Thomas: Yes.

Q75  Mrs Shephard: It is all too easy for Government departments to say, British Sugar is saying this, Cargill is saying that, the petroleum company say the other and farmers say something yet other, but unless they have all spoken and come forward with a unified proposal why should we. There is an answer to that, of course, but it does weaken the case that you are putting if they can say, A British Sugar take a different view@ .

Mr Thomas: With respect, through you Chairman, they do not take a different view, they take the same view but on different products.

Q76  Mrs Shephard: Yes, all right. Tell me what the unified view is of all the protagonists, because it is not 28 pence?

Mr Thomas: Yes, it is 28 pence, but actually they are trying to be helpful to Treasury and say, A we could get away with less if you give us a capital grant instead@ .

Q77  Mrs Shephard: You could support that?

Mr Thomas: We would happily support both of those scenarios. We would be equally more comfortable with the reduction from 28 for the capital grant for one of them because we would also be concerned about sucking in imports unnecessarily. Of course the danger of sucking in imports not only from a farmer's point of view but also it will not answer the audit trail when that is introduced by the European Commission as a result of the Directive come 2005. Although it is discretionary and not mandatory at the moment they are indicative targets but the only indicativeness of them is that we should have put the methods in place. The only people who will be derogated to supply less than that are those that physically cannot, in other words they do not have the foodstocks to. We do have the foodstocks and therefore we must meet our obligation. We would have no reasonable excuse not to meet those obligations put down in the European Fuels Directive.

Q78  Mrs Shephard: How useful would it be for the agriculture industry to have a range of rather smaller rape seed crushing plants rather than one huge plant, as described by Cargill?

Mr Thomas: There are two crushing plants at the moment. If we get this derogation, this cut in the fuel it will open the way for cold crushing and I think, to a degree, there will be an uptake of that. The disadvantage of cold crushing is that it is less efficient in terms of the total amount of oil that it can drive out. To do the alternative, most efficient method is a very highly technical, highly complex and highly expensive capital build programme. The prospects of building a third, fourth or fifth large plant I do not think really are very practical. However, what we would want to see is that the existing plants are used to a greater capacity because they are not used to the capacity for which they were built. It is no coincidence they are both built on major port inlets and already crush an enormous amount of imported seed. We would like to take the opportunity to replace some of that imported seed with this new industry and the new amount of crush seed that we could provide them with to do it.

Q79  Mrs Shephard: Some argue that it is environmentally more friendly to have a range of smaller cold crushing plants because there would be less travelling for the seed. It is self-evident.

Mr Thomas: This is a view. Our opinion is that small, local energy production is best suited and accommodated for in the biomass market rather than the biofuel market.

Sir Ben Gill: With any new operation you obviously have to do a trade-off between the cost of haulage against economies of scale. All of the indicators are, what you really need to do if you are siting a new plant is look at where your concentration of production is and site the plant in that concentration. In the main there are significant efficiencies from the economies of scale and we would be foolish to ignore those in this equation.

Q80  Mrs Shephard: What contacts do you have with the petroleum industry?

Mr Thomas: Remarkably poor I have to say. Unlike other countries in Europe where the major players in the petroleum industry have seen fit to involve processors and farmers and reach agreements and cooperative ventures to date in this country, largely speaking, the petroleum companies have seen it as competition which they did not welcome. I think the historical reason for that is of course the petroleum companies are pumping their raw material out of United Kingdom waters which, largely speaking, is not true in France, Austria or Spain. I regret that.

Q81  Mrs Shephard: Would it be helpful for the Committee to hear from the transport fuels market?

Mr Thomas: Not in the context I believe of the reasons and the rights of actually getting a liquid biofuel market going in this country.

Q82  Mrs Shephard: We do not need to hear why they might not agree with you?

Mr Thomas: I think we know why they do not agree.

Q83  Mrs Shephard: We do not.

Mr Thomas: Perhaps you do need to hear it from them. In reality they will be pegging their hopes on the hydrogen cell technology, which is 20 years away and will make better use of the product they already have exclusive rights to. However, they will be involved, very heavily involved, because this industry is going to go down the blending route, it is not going to be pure biodiesel, it is going to be blend and the most efficient way of distributing those blends is going to be in co-operation with the existing major fuel companies. I am surprised that they have not made more approaches to us and we regret that there is not more co-operation at this moment.

Chairman: As they are going to be sitting where you are sitting before very long we will be able to ask them the questions.

Q84  Mrs Shephard: We can send them your messages. Do you think this is a role for the Government to bring you together?

Mr Thomas: The Government has a role in facilitating and getting the industry going. I do not see it as a stumbling block. If the Government see fit, as I believe they should, to grant the additional duty cut to get a biofuel industry coming in then the fuel companies will come running.

Sir Ben Gill: I have had dialogue with a number of major retailers and, as I said earlier, they indicated to me they wish to stock a blended biodiesel as soon as is practically possible. They believe it would sell in significant quantities.

Q85  Chairman: Timetables, if say Cargill or British Sugar are going to build a plant they want to make sure they have the fuel to put in their plant. If a farmer is going to change his planting pattern he is going to want to make sure there is a market place for that planting pattern. The barely will start coming off soon in parts of the county this year and therefore farmers will have their planting plans already down for next year, so they are not going to take account of any potential new industrial outlet for their 2004 harvest.

Mr Thomas: Correct.

Q86  Chairman: I do not now how long it takes to build a plant but it seems to me we have probably missed the 2005 deadlines already.

Sir Ben Gill: We could hit the 2005 harvest deadlines, bearing in mind the plant could come in to service two years on from now, because that would be putting in plantings in 12 months= time. You are correct to point out we have missed this year's planting deadlines.

Q87  Chairman: You would be confident that once it became clear the investment was being put in by whichever company the crop would be there to meet the needs of those farmers.

Sir Ben Gill: There is an enormous amount of interest. I think we need to follow up from the point you are making. The Biofuel Directive gives a two per cent target by the end of 2005, what we are saying is that unless decisions are made very soon it will be impossible to achieve that because the planning permissions and all of the procedures of the plant will be difficult to fit in, even if we start growing crops in significant quantities, so it is a bit of a nonsense.

Mr Starkey: I understand that the Government is looking to consult on the introduction of measures for a Biotech Directive.

Q88  Mrs Shephard: It is, but what we do not know is the timetable consultation, maybe you do?

Mr Starkey: I have been told it may be as late as towards the end of this year. If it is too late it may determine what the answers could be.

Mrs Shephard: We can find that out.

Q89  Mr Lepper: Do we know which is the lead Department?

Mr Starkey: I understand it is the Department for Transport.

Q90  Mr Lepper: You think it is Transport.

Mr Starkey: For the Biofuels Directive, yes.

Q91  Mr Wiggin: Just on the 2005 target, we are not going to make it, are we, therefore are there any penalties?

Sir Ben Gill: I was alarmed when I had discussions a few weeks ago at the laid back approach that seemed to be prevalent in some Government departments to this whole issue and there seemed to be no sort of urgency addressed to it. There was almost the approach that if we miss these targets we miss these targets. That gives us enormous concerns.

Q92  Chairman: Mrs Beckett will be here in fortnight's time, so that may be one of the questions we may wish to pursue with her on that occasion.

Sir Ben Gill: You will notice I did not specify the Government department.

Chairman: As she happens to be in front of us we will wish to take the opportunity.

Paddy Tipping: Could I talk to you a little bit about the plant where we have had some experience already, which is Arbre, which was not a very successful experience?

Chairman: As you know, I think.

Q93  Paddy Tipping: What are the lessons to be learned?

Sir Ben Gill: Project Arbre, in which I declare an interest. I have grown coppice for Arbre and it is ready for cutting very soon! I think the lessons to be learned here are, first of all, the management needs to be right. I am horrified that we as growers here had no inkling that there was anything wrong with this project until only a matter of weeks before the whole thing collapsed. That is quite horrific. We were being led along, everything was going all right. Yes, there were problems but these were normal problems and we were going to get over them. My woodchips had been harvested and gone off to the plant and I was not told anything otherwise. The second thing is that when you are looking at new technologies you have to be prepared to carry it through and that requires a degree of stomach and nerve on all sides. I am exceedingly alarmed that the out-turn might be that the whole plant is effectively demolished. I understand there are other potential markets available, which gives me some comfort, but that would be a disaster because the Government and the EU have wasted money on something that should have been seen through. It comes back to the major lesson, is there proper management, proper accountability and proper sharing of information? Indeed it underlines the point that we as growers missed out, and came to be aware of rather late in the day, we should have formed a growers group, which picks up the theme you made earlier, will we be any better off in the arena where the market is going to be dictated to by a relatively small number of processors, be it our good friends at British Sugar or Cargill or anybody else for that matter? That is a common problem we face in the food industry at the moment. It is absolutely critical that we as farmers do manage to work together as we are advocating in the food sector to form selling groups that gives us a balance of understanding and power in that chain to ensure there is a fair and equitable distribution of the value along that chain. We have done that in Arbre now, rather late in the day, but we have a very effective group, called the Renewable Energy Group and I think that is something that we need to learn from.

Q94  Paddy Tipping: You use biomass and biofuels as different market things.

Sir Ben Gill: Essentially they are unless something happens to link them, like cellitic digestion ,which is I think an interesting concept but I think some way off. We do have very clear prospects for rape, bioethanol and biodiesel. One of the problems of transporting wood is that essentially it is a much more bulky commodity to transport.

Q95  Paddy Tipping: What is the notion of the grower's group in the equity in the plant?

Sir Ben Gill: The same principles apply here as in the food situation. We believe it is critical, whether it is the food industry or any other sector, that it is in the interests of all to make sure the chain is as short as possible. Equally there needs to be real, effective partnerships. We have touched on the thread of imports from Brazil, that is a real threat, whether we are in food or non-food, aided and abetted by the fact that Brazil has been allowed to get away with a further 80 per cent devaluation, which they have used aggressively in their trading position in the world market, not least of which in sugar, which has caused a lot of distress. We need to be aware therefore that we need to have sufficient groups in the chain to give us real partnership in that chain so that we can evolve understanding of what the market wants so that we can match ourselves to it, and particularly in these new markets as they evolve, because there are changing markets I am quite sure.

Mr Starkey: Can I add something to that, I think it is easier for farmers to become involved in shared ownership and moving further up the chain when we are looking at small-scale, particularly for biomass heat and power. I think Government policy has been quite caught up on large-scale electricity until very recently and there is some move towards heat and power which we think is particularly environmentally efficient and in the interests of farmers.

Q96  Chairman: About three years ago there was a great deal made about the Anything but Arms proposal and the implications that might have for sugar beet farmers in Britain. On the ground the sugar beet view was one of the few crops that was washing its face at that time. We are also facing the reform of the sugar regime, which Commissioners put forward. Does your interest in the development of fuels from sugar beet influence your concerns about the way Anything but Arms and the import of sugar from developing countries might evolve? Does it influence your preferences as far as the reform of the sugar beet regime is concerned?

Sir Ben Gill: The suggestions that have been put by certain parties that the alternative use of sugar beet or sugar to be refined into bioethanol as a sub to changes in the sugar regime and the Anything but Arms Treaty is a mistaken assumption. You have heard from British Sugar today that the economics of it at the moment tend to favour the creation or production of bioethanol from wheat as opposed to sugar beet. I think that is very important. The other thing is the Arms Agreement is a separate agreement and we have real concerns about that, not least which have been shown by the events that have happened in the bilateral agreements that have taken place in the Balkans, where the level of sugar that is being sent to the European Union in one case in particular exceeds the amount of sugar produced in the home country, simply the because the home country does not produce any effective sugar. We do know while other countries are trading sugar out that they are producing they are creating an internal deficit and replacing that sugar with very cheap Brazilian sugar coming into those countries, effectively leaving the European Union with a multi-million Euro bill to dispose of the sugar they import in from those countries. There is nothing at all to suggest to me that as Anything but Arms evolves that picture will not evolve to the detriment of everybody, including the taxpayer very significantly. That does not detract from the realisation that we need to look at the reform of the sugar regime having reformed the CAP, that will have to be done. Confusing all of these issues does not help. A final point on that, who is benefiting from the extra trade in Anything but Arms? If it is the intent to benefit the individual farmer in the least developed countries I would urge anybody who thinks that to go and visit the countries and see for themselves at firsthand, they will find, as I believe a past secretary of state for trade and industry recently said following a visit to many of these least developed countries, that that is not the case. It is the big, international sugar processes who benefit by trading and they take the money out of those countries. I think people need to distinguish been the increased GDP of a country as a whole and the increased GDP of disposable income to the individual people there. They would do better to do that than advocate theoretical improvements that may benefit from free world trade.

Q97  Alan Simpson: Can I just say for the record I do not have a great deal of sympathy with that final view that was expressed. It seems to me one of the things we need as a Government is to have some ideas from you, it is a point I made to Cargill and British Sugar, about the ecological footprinting. It seems to me that we have to ask questions about broader global impacts of the development of alternative fuels that we are seeking to promote. As yet we do not have a clear idea about how we would seek to measure that impact of ecological footprinting, it is a plea to you, it would help us in Government if you were to pursue the points that you made as a way of indicating to us how we might structure the support and encouragement that we want to see in terms of the development of domestic biofuel industries in ways that do not compound other problems worldwide? That would be my first question. My second was a question on something you said earlier, I am sorry I missed the answer to the question about what lessons you learned from the failings of Arbre Plant, I have just come back from looking at a project in Camden, which is the Bed Zed Project, and one of the things that surprised me there was that their biomass comes from the borough, Camden has a designation as a sustainable forest as a result of using the tree cuttings from within the borough to provide the biomass for the housing estate that uses it. I just wondered before you go down the path in terms of the Growers Group whether you have begun to do modelling about the context in which biomass would make sense and in a sense the infrastructure that would be best placed to support it?

Sir Ben Gill: In terms of the broad ecological footprint I think it is terribly important we address this issue. You may be interested to know that my opposite number in Portugal at the request of the Portuguese Government has headed up a party of 50 Portuguese farmers who have been encouraged to emigrate to Northern Brazil. They have been given a long lease by the Brazilian Government of 100,000 hectares of land. The Brazilian Government has put in road access and electricity free of charge, road access covering 300 kilometres, and they will build three factories on that 100,000 hectares, one to process rice, one to process maize and one to process soya. This is not rainforest, this is the scrub land. The cost of production they have there is off the Richter scale on the costs we have in Europe. When you have that sort of free application of land to start with, that free application of infrastructure to start with and the climatic factors where even to grow rice they do not have to create paddy fields because the rainfall at that time of year is so tropical it will do so you can see the problems we have. I have no concept of what that ecological footprint is and I think we need to know what that is. There is a real cost there in some form and I think whether you call it food or whatever the transport of moving that product round the world is very, very real. I get particularly upset about the import of strawberries from California in June and July, which they can do cheaper than us, because they abuse the use of water - I am sorry I am digressing, but it is ecological footprint. We need to do much more work on that. The issue of recycling is one that is also very important. In my introduction I made the point that I believe the size and magnitude of the problem of climate change is such that we will need to do everything we can on recycling. In terms of using biomass I think the logical place to use it is to try and be innovative. I think there is a particular use in remote areas where there is not access to pipe gas where you can use wood burners as an alternative energy source, where the cost is generally expensive anyway, and you can use that as a ready source because there are probably forests nearby and you can do that. Put in that context of course what one should not forget is that the highest average density of forest in England is in the South East, in the Home Counties, something not many people appreciate, where in excess of 20 per cent of the land is under forestry. I am also very keen we look and take examples from else where in Europe. There would be a lot to look at in multi-purpose boilers attached to hospitals and other public utilities where they have a need for heat and power 24 hours a day, 365 days a year, where they have a need to dispose of waste through incineration. One can see the concept of multi-purpose boilers taking in forestry waste as well as woodchips and biomass as well as other waste from thinning on the plantations and you are actually creating a social good then to create a virtuous cycle. There is a lot of work that could be done to benefit that had sort of thinking, which I think is consistent with your line of approach.

Q98  Chairman: I believe in finishing on virtuous cycles where possible. I have learned the expression ecological footprint, which I thought is what happened when you got weed killer on your wellies. Thank you very much indeed for coming in front of us today. If there are things that you would like to say which you have not you will, no doubt, let us know. This already promises to be a very, very interesting inquiry,

Sir Ben Gill: Can I add one comment I should have made at the start, that was the question from Mr Lepper about the CAP reform, of course the sequitur to the CAP reform is the World Trade talks in Cancun, I hope now as a result of the substantive progress we hope has been made in the CAP reforms the Government and the EU will see it as axiomatic that they tackle what is a technical point but is called the Blair House Agreement that restrains the use of oil seeds on set-aside land at this time, and the removal of that point is very critical. If we had not had the set-aside requirement that point would have been removed. I know several of the committee are very well aware of this point and it is something that I would like to place on the record now so the Government are made aware of this point as a priority for the future of biofuels generally.

Chairman: Thank you very much. That is helpful. Thank you very much.