Government response
Introduction
The Government welcomes the EFRA Select Committee
report about the range of issues affecting biofuels policy.
Biofuels have an important role in supporting the
Government's objectives for sustainable development and protecting
the environment. The Energy White Paper makes it clear that transport
biofuels have a key role to play in reducing carbon dioxide emissions.
Biofuels (especially tomorrow's biofuels) offer the prospect of
moving to a truly low carbon transport economy. Biodiesel and
bioethanol are supported through duty rate cuts because of the
environmental benefit they offer in terms of reducing carbon dioxide
emissions compared to conventional fuels. Biofuels can also make
a contribution to better fuel security, to farm diversification
and supporting rural jobs and areas.
In common with other policies and issues which are
wide-ranging in their impact on the UK, there are a number of
Government Departments with an interest in biofuels. Lead responsibility
depends on the particular aspect of policy. The Treasury and HM
Customs and Excise lead on issues regarding taxation and other
fiscal aspects. Defra has responsibility for the role biofuels
can play in sustainable development, climate change, air quality
and rural issues, and the promotion of agricultural feedstocks
to produce biofuels. The Department for Transport (DfT) has responsibility
for the use of low carbon fuels for transport purposes and is
co-ordinating the assessment of the energy and other implications
of the large scale use of biofuels. DfT is also co-ordinating
the implementation in the UK of the EU Biofuels Directive. The
Department of Trade and Industry is responsible for renewable
energy policy and co-ordinated overall implications of biofuels
for the Energy White Paper.
There is strong liaison across the departments both
at Ministerial and official level to ensure co-ordinated policy.
Ministerial involvement is through the Ministerial Committee on
the Environment, the Ministerial Sub-Committee on Energy Policy,
the Ministerial Low Carbon Group, the Ministerial Group on the
Implementation of the Energy White Paper and ad hoc meetings.
Conclusions and recommendations
Recommendation 1
We too would like to see how Government balances
the considerations of the environment, the economy and society
in developing its policy on biofuels. (Paragraph 13)
In December, the Pre-Budget Report 2003 set out the
rationale underpinning support for transport biofuels in its Alternative
Fuels Framework (see Box 1). This outlined a clear, systematic
set of principles applying to decisions in this sector, with environmental,
social and economic considerations all taken into account in determining
the level of support for these fuels.
The Government has always made it clear that the
overriding consideration when determining fuel duty levels for
alternative fuels was evidence of environmental benefit; the framework
confirms this as the principal basis for decisions placing environmental
benefit at the heart of Government policy on support for alternative
fuels. It also provides an unprecedented level of transparency
to the market about future rates for biofuels with its commitment
to a rolling three-year period of certainty on the differentials
in duty rates for alternative fuels.
Recommendation 2
The Treasury should publish clear data showing
the current and future levels of taxpayer subsidy aimed at promoting
a renewable energy industry. Such information would enable a better
informed debate to take place as to how a broad based renewable
strategy should develop. (Paragraph 26)
As far as duty incentives for biofuels are concerned,
the Government already publishes the costs, in terms of revenue
forgone, in the Financial Statement and Budget Report. The Government
has created a substantial support programme for renewable energy
worth £348m over the four years from 2002-3. Details of these
initiatives are on the Sustainable Energy Policy Network's website
at:
http://www.dti.gov.uk/energy/sepn/index.shtml
Recommendation 3
Although increasing the use of biofuels may not
be the most efficient way to reduce greenhouse gas emissions when
considering the whole economy, we agree with the Treasury that
all sectors should make a contribution towards reducing the United
Kingdom's emissions. Biofuels offer one attractive means of doing
so for transport, although other measures such as engine efficiency
and managing the demand for road transport are also important.
(Paragraph 28)
Diversity of energy sources is an important element
of our overall energy policy. In order to meet the Government's
targets to reduce greenhouse gas emissions, we are
| Box 1: Extract from the 2003 Pre-Budget report (Cm 6042, p155), 10 December 2003 Alternative Fuels Framework The Government recognises the contribution that alternative fuels can make in delivering environmental objectives. This is reflected through the significant support that the Government has given to the sector over recent years. With this framework, the Government goes further. The purpose of the framework is to ensure that policy continues to reflect the environmental benefits that alternative fuels can deliver and to establish a clear rationale for decisions on Government support. This approach is based on the principles set out in the Treasury document: 'Tax and the Environment: Using Economic Instruments', published alongside the 2002 Pre-Budget Report. The principal application of this framework is to policy on duty differentials for alternative fuels but the approach is equally relevant to decisions on the full range of potential economic instruments. Statement of principles: Policy must be environmentally sustainable. Levels of support should reflect the full environmental impact of the fuel. Policy must be economically sustainable. The Government should not support an industry whose long-term survival is dependent on excessive levels of subsidy unjustified by environmental benefit. Policy must be socially sustainable. Support should reflect broader considerations of social impact and fairness. Policy must be affordable and provide value for money. Where fuels fulfil the criteria set, support will be given where it is both cost effective and affordable. The Principle of Certainty The Government recognises the importance of providing as much certainty as it can on duty differentials, to help provide the necessary stability, confidence and market conditions for investors. The Government will therefore commit to a rolling three-year period of certainty on the differentials in duty rates for alternative fuels. The Environmental Case: The central priority will continue to be on environmental gains, with the emphasis being on quantified benefits that are based on the life-cycle carbon performance of the fuel. Recognising the comparatively high cost of carbon reduction in the transport sector, the Government will nevertheless seek to meet key environmental objectives in a cost-effective way; and The Government will take account of fuels that have additional environmental benefits by, for example, improving air quality and reducing waste. The Economic and Social Case: The Government will only offer support beyond that justified by environmental benefit if there is clear evidence that this support will result in enhanced future benefit; In assessing the level and types of support available, the Government may also take into account other benefits to the economy arising from the use of alternative fuels; and where there is a direct link to Government priorities, and clear and well-established evidence of benefit. General Application: This framework sets out principles, which can be applied to all types of support for the take up of greener road fuels. Duty incentives alone can be a very blunt instrument, so where there are clear reasons for incentives to be more focused on specific objectives, the Government will also consider other means of support, such as capital incentives, grants or regulatory solutions which may be more suitable, better targeted and better value for money.
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promoting a package of integrated policies supporting a broad
range of renewable energy sources including liquid and solid biofuels
and wind, solar, wave and tidal power.
As the Energy White Paper makes clear, the transport sector has
a key role to play in reducing carbon emissions. Biofuels are
one possible way of improving the carbon efficiency of transport.
As the Alternative Fuels Framework makes clear, the Government
already recognises the high cost of carbon abatement in the transport
sector, reflected in the existing levels of support in place for
biodiesel and bioethanol.
The Government recognises that all sectors of the economy must
play their part in reducing climate change emissions and we welcome
the Committee's endorsement of this approach.
Recommendation 4
There is not yet clear enough evidence of what will be the
impact of expanding biofuels production on habitats and biodiversity
here and elsewhere: but the prospect of greatly increased planting
of autumn-sown oilseed rape or winter wheat causes understandable
concern. We call on the Government to commission a full scientific
study to assess the effects on biodiversity of expanding the cultivation
of biofuel crops. (Paragraph 32)
Defra's Central Science Laboratory has already assessed the impact
of biofuels on habitats and biodiversity in the UK. Their assessment
is that biofuel production from a broad mix of arable crop feedstocks
will have a neutral effect on the farmed environment. Direct replacement
of cereals with oilseed rape would have no effect. Any replacement
of spring sown break crops by an expanding winter oilseed rape
or cereal area would have a negative effect on crop diversity
and farmland birds. Growing biofuel crops on un-cropped land or
replacement of natural-regeneration set-aside with biofuel crops
would on balance be environmentally detrimental, due to the resulting
increase in intensification of nitrogen and pesticide use and
reduction in habitat diversity. Environmental damage could be
minimised by avoiding large-scale block-cropping and introducing
a percentage of non-crop habitat. In the longer term, as technology
improves, cereal straw and other arable crop wastes could provide
raw material for bioethanol production without significantly affecting
the farmed environment.
However, the Government recognises the potential value of further
work on biodiversity. We shall undertake this alongside the work
on conservation (recommendation 13).
These issues are also being considered in the Government's assessment
of the overall impacts of significant use of biofuels and/or hydrogen
as transport fuels, which is due to be published in early 2004.
Details are on the Department of Trade and Industry's website
at: www.dti.gov.uk/energy/sepn/futuretransport.shtml. To contribute
to this assessment, the Government has commissioned further research
on the environmental impacts of biofuels from the Institute for
European Environmental Policy (IEEP) and the National Society
for Clean Air (NSCA).
Recommendation 5
While we welcome the development of new markets for crops and
opportunities for farmers to diversify and respond to market demands,
we have not seen enough evidence to allow us to make an accurate
assessment of what impact increasing the use of biofuels would
have on farm incomes. We recommend that Defra, as a matter of
urgency, carry out an economic appraisal of the effect that a
UK-based biofuels industry would have on farming. (Paragraph 40)
The Government accepts this recommendation. Some work has been
undertaken on the production costs of biofuels and the impact
of a range of feedstock prices but we will carry out a fuller
economic appraisal of the effect that a UK-based biofuels industry
would have on farming.
Recommendation 6
Estimates of the number of jobs that would be created by a
UK-based biofuels industry vary widely. The extent to which a
domestic industry would boost rural prosperity is of crucial importance
in determining whether home-grown or imported biofuels should
be used. We call on all parties involved to publish robust models
with which to back up their claims. (Paragraph 44)
The Government fully endorses this recommendation. Defra's Central
Science Laboratory has estimated that about 2 farming jobs are
created or sustained for each 1000 tonnes of biodiesel produced
and 5.5 farming jobs are created or sustained for each 1000 tonnes
of bioethanol produced. In processing and blending, a 100,000
tonne biodiesel plant is estimated to create 62 jobs at the plant
itself. A similar bioethanol plant is estimated to create 66-83
jobs at the plant. We will publish the detailed workings for these
estimates and we look forward to an opportunity to share information
with others.
Recommendation 7
Whatever targets the Government chooses to set under the Biofuels
Directive, it must make firm decisions quickly if farmers and
processors are to be able to plant crops and build processing
plant in time to meet the targets. (Paragraph 46)
The Department for Transport intends to consult in Spring 2004
on the Government's plans for implementing the EU's Biofuels Directive.
The Directive requires the UK to set indicative targets which
the Government believes should be set at a realistic level appropriate
to the UK's own circumstances.
Recommendation 8
We share the Treasury's view that a greater level of duty derogation
on biofuels introduced now would be more likely to encourage imports
of biofuels than the development of domestic production. (Paragraph
49)
Most biofuels are grown for consumption in the country in which
they are produced, and there is consequently a scarcity of supply
for international markets. It is therefore anticipated that there
will be limited international trade in refined liquid biofuels
in the medium term. However, the Government has always considered
that a higher level of duty derogation on biofuels could encourage
imports of biofuels.
Ethanol can be procured cheaply on international markets. However
taxation and distribution costs mean that it is unlikely that
the UK would be flooded with biofuel imports. It has been estimated
that Brazilian ethanol landed in the UK, after accounting for
blending and retail margins, would be in the region of 10p/l cheaper
than UK produced bioethanol from wheat and sugar beet. However,
application of import duty for denatured alcohol (of 6-7 p/l)
would bring costs closer in line with that of UK produced bioethanol.
Other EU Member States with lower duty rates for biofuels than
the UK are likely to be higher priority targets for imported supplies.
This would change should the level of duty incentive in the UK
start to exceed that offered elsewhere in Europe.
Recommendation 9
If the Government decides to increase the support available
for the production of biofuels, any such support must be designed
to achieve the underlying policy goal it has set. For example,
an increase in the duty derogation may encourage imports, but
this may not matter if the prime policy goal is to reduce emissions.
If the Government wants to further its rural development objectives
as well, a combination of other instruments such as grants to
support capital investment may be necessary. (Paragraph 50)
As the response to recommendation 1 makes clear, capturing the
environmental benefits of biofuels is the principal policy reason
for Government support with duty incentives. Other considerations
such as economic and social factors, though secondary, are also
taken into account in the Chancellor's fiscal decisions.
It is not the Government's intention to establish industries based
on excessive Government subsidy not justified by clear and well-established
evidence of environmental, social and economic benefits. Where
fuels fulfil the criteria set, the Government is determined to
achieve the best outcome for both the tax-payer and the economy
as a whole. Support will therefore be given where it is both cost-effective
and affordable.
The Government welcomes the Committee's recognition that simply
increasing the duty incentive might not encourage the development
of a UK biofuels industry and could simply attract more imports.
Support for producers of biofuels and feedstocks already exists:
Regional support grants for capital investment in production plants
are already available through the Regional Development Agencies
(RDAs). It is largely a matter for the RDAs about how these are
spent;
Payments of €45 per hectare will also be available to UK
growers of energy crops following the agreement for reform of
the Common Agricultural Policy.
One of the other key issues that the Government has focused on
is the importance to the industry of future certainty on duty
rates for alternative fuels. Recognising this need for certainty
and reflecting the commitment the Government has to the biofuels
sector, the Alternative Fuels Framework published in the Pre Budget
Report 2003 included an unprecedented commitment by the Government
to a rolling three-year period of certainty for duty differentials.
Subject to affordability, this approach is designed to strike
the right balance between providing a high degree of future certainty
for these fuels and ensuring that adequate medium term flexibility
is possible to reflect the fuels' environmental and other benefits.
Recommendation 10
If the Treasury is not prepared to subsidise the biofuels industry
directly, it should evaluate different strategies for minimum
cost introduction of biofuels, while making the price attractive
to consumers. (Paragraph 54)
The Government has already made it clear that it is only prepared
to subsidise the industry up to the point justified by the fuel's
full range of benefits. The Government will only offer support
beyond that where there is clear and well-established evidence
that this support will result in enhanced future benefit.
The Government continues to explore innovative options for supporting
these fuels, including the option of focusing the duty regime
on input taxation in addition to product-based taxation. This
would allow the Government to tax different fuels according to
the type of feedstock or process used, allowing support to be
better focused on the most economic and environmentally beneficial
production plants.
The Government fully agrees that fiscal incentives should always
be considered alongside alternative methods of support, such as
capital incentives, grants or regulatory solutions. The Government
keeps all types of support under review.
It is also important to note that the Energy Products Directive
forbids the granting of fuel duty incentives in excess of a biofuel's
additional production costs, meaning that retailers will have
limited opportunity to price biofuels below the cost of conventional
fuels. In such instances of price neutrality, evidence from the
market suggests that consumers find the environmental properties
of biofuels sufficiently attractive to influence their purchasing
decision.
Recommendation 11
It is clear from the evidence we took from Defra and the Treasury
that the departments involved do not speak with one voice. In
a policy area such as this it is inevitable that different departments
will each have a legitimate interest and perhaps different priorities.
However, we deplore the fact that the Government has not nominated
any one Department to lead on biofuels and consider that this
is a prime reason for the slow progress that has been made in
this area. (Paragraph 56)
As the Committee notes, it is inevitable that different Government
Departments have, and will continue to have, an interest in various
aspects of biofuels policy. This is not unique to biofuels - there
are other policy areas where no single Government Department has
overall lead responsibility. The Government does not accept that
current arrangements have slowed down progress. Government Departments
work extremely closely in developing policy on this issue, helping
to ensure that the multi-dimensional nature of the biofuels sector
is properly reflected in policy, and that proper consideration
is given to the full range of relevant environmental, social and
economic factors.
Recommendation 12
The debate about the need for Government support for domestic
biofuels production has been going on for some time without reaching
a firm conclusion. The Government's biofuels policy still appears
to be muddled and unfocussed: it has expressed support for biofuels
but the mechanisms used to promote their use have had little effect
so far. (Paragraph 57)
The Government does not accept that its policy is muddled and
unfocused or that its support for biofuels has had little effect.
In particular, the Government emphasises that the duty incentive
for biodiesel was only introduced in July 2002 and the duty incentive
for bioethanol will not come into effect until January 2005 when
it is hoped that British companies will be ready to produce it
for the UK market. It is too early to judge how far the policy
has been a success but there have been some encouraging results
from biodiesel already. Since the duty incentive was introduced
in July 2002, production has risen steadily to over 2 million
litres a month at present and the market is still growing. Production
is expected to accelerate further, both as the new production
plants which are currently planned come on stream, and as other
outlets for waste vegetable oils cease to be available. Companies
are now looking to produce biodiesel from UK-grown oilseed rape.
From 31 October 2004, the UK will be introducing a ban on the
use of used vegetable oils as animal feed, which will lead to
a further sizeable increase in the quantity of economically priced
waste vegetable oil being made available to biodiesel processors.
There are well-developed plans to build more production plants
to take advantage of this and other opportunities, such as the
use of tallow as a feedstock, made possible by Government support
for the sector.
The Department for Transport will shortly be seeking views on
a draft transposition strategy for the Biofuels Directive. This
will include targets for the level of biofuels use in the UK for
2005 and 2010, giving further clear signals about what the Government
believes is an appropriate level of biofuels consumption taking
all factors into account.
Recommendation 13
We encourage Defra to work closely with the statutory conservation
agencies to find ways to maximise the benefits biofuels can offer
to conservation and to minimise the negative impacts associated
with some biofuel crops. If imported crops, or fuels derived from
them, are to furnish a significant proportion of the biofuels
used in the United Kingdom, we encourage Defra to develop cost
effective ways of auditing their environmental impact in the countries
in which they are produced. (Paragraph 60)
The Government accepts that its aim should be to put in place
measures, where practicable, to encourage best environmental practice.
The Government will therefore consider, together with the statutory
conservation agencies, ways to maximise the benefits biofuels
can offer to conservation and to minimise the negative impacts
associated with some biofuel crops.
However, auditing the environmental impact of biofuels in the
countries in which they are produced is extremely problematic
and it is unlikely that a cost-effective and robust system of
regulation could be introduced. The Government therefore does
not accept this recommendation. It would be very difficult to
assess the environmental impact of imported fuels in sufficient
detail to give an accurate picture or a comparison between different
systems. Any biofuel shipped to the UK would be bulked from a
range of individual sources and producers. It would not be possible
to guarantee any environmental impacts for a particular imported
batch of fuels or raw material without auditing every individual
producer. In any case, any attempt to refuse imports on the basis
of perceived or measured environmental impacts could be seen as
a barrier to free trade and would almost certainly lead to conflict
with the World Trade Organisation.
Recommendation 14
Defra has responsibility for championing sustainable development
within Government. The development of a sensible biofuels policy
could provide a good showcase for the Department's thinking in
this area. Defra should set out how the various environmental,
economic and social costs and benefits represented by the different
options have been weighed against one another. This would allow
the Department's stakeholders to judge the policy fairly. At present
it appears that the Government is still testing the waters with
regard to supporting the development of a domestic biofuels industry
and the current level of support reflects this ambivalent attitude.
The Government should recognise that compared to other forms of
renewable energy, either imported or domestically produced, agriculturally
derived biofuels do represent a predictable and secure source
of energy and this fact should be given due weight in deciding
future policy in this area. (Paragraph 61)
The Government accepts this recommendation and Defra will set
out the various environmental, economic and social costs and benefits
that Defra has taken into account in formulating its policy on
biofuels as part of its sustainable development programme.
The area of biofuels policy has been the subject of a great deal
of well informed research and a considerable body of work has
been undertaken in recent years, both by Government and outside
bodies, into the environmental, economic and social impacts of
biofuels. Building on this, further research is underway to inform
the Government's policy for implementation of the Biofuels Directive
in 2004.
Department for Environment, Food and Rural Affairs
January 2004
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