Finance Bill

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John Healey: I welcome you to the Chair, Sir John. I look forward to serving under you during your co-chairmanship of the Committee's proceedings.

I shall try to respond to the main points of the hon. Member for Chichester and the right hon. Member for Fylde (Mr. Jack), and I shall then speak briefly to the clause. The hon. Member for Chichester was very flattering, but false, in describing me as a leading expert on biofuels. It would certainly be an apt description of the right hon. Member for Fylde, because he is clearly an expert and, as he explained, he

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now chairs the Environment, Food and Rural Affairs Committee, which recently considered the issue of biofuels and reported in January.

The hon. Member for Chichester talked about the proposed 20p per litre discount for bioethanol and contrasted it with his own figure of 30p, which he said was needed to kick-start the industry. The danger of considering the duty discount simply as a way of stimulating the development of the industry in the UK is that it makes the UK market more attractive for established producers in other countries, which could encourage imports from elsewhere. That view was shared by the EFRA Committee when it reported in January, having taken evidence. Its report stated:

    ''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''.

Nevertheless, he wanted to press me on the question of cost and the 30p differential. I can confirm that our calculations suggest that a 30p per litre differential would cost the Treasury £15 million in 2004-05, as the industry gears up its production, and £65 million in 2005-06 and £70 million in 2006-07.

Mr. Andrew Tyrie (Chichester) (Con): Is that the cost of the increment over 20p or the full cost of 30p?

John Healey: That is the full cost of a 30p differential.

The hon. Gentleman asked what work we had done to underpin the judgment of a 20p per litre discount. The right hon. Member for Fylde did the same but at greater length and in greater detail. I could go over all the ground that I set out in detail in written form for the EFRA Committee, including the figures and the method of calculation. Rather than risking boring members of this Committee, I simply refer them to that document, if they are that interested.

Mr. Jack: I have now had a chance to refresh my memory as to what the figures showed. Can the Economic Secretary confirm that the data that he gave the Select Committee concentrated on the evaluation of the carbon savings only?

John Healey: I can certainly confirm that that was our starting point and central concern. The Government declared in the alternative fuels framework that the principal case for support through fiscal and economic instruments must rest on a calculation of the environmental benefit and gain that would accrue.

Mr. Jack rose—

John Healey: If the right hon. Gentleman will bear with me, I shall explain briefly for the benefit of the Committee the supplementary analysis that was provided on top of that.

The incentives set out in clause 10 to support the development of bioethanol are in fact significantly more than the monetary valuation of the fuel's environmental benefits. The method of calculation that we used produced a quantified environmental benefit for biodiesel of just 2.7p per litre and for

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bioethanol of just 2.5p per litre. Nevertheless, we set the proposed duty discount at 20p per litre. It was introduced in July 2002 for biodiesel and 1 January next year is proposed in the clause for introducing the discount for bioethanol.

The proposed incentives also follow a further assessment that was built in on top of the environmental benefits set out in the alternative fuels framework. As for LPG, we took into account what may be necessary to make the policy economically sustainable, social considerations, and of course what the public purse can afford.

I have to say to the right hon. Gentleman and the hon. Member for Chichester that I remain unconvinced that a duty incentive of more than 20p per litre for bioethanol would be justified. There are still eight months before we introduce the incentive. It is rather early to write it off, although I realise that for many reasons potential producers are keen to ensure that the duty discount is as generous as possible.

By way of encouragement—I believe that the right hon. Gentleman knows and accepts this—I have probably had more meetings about appropriate Government policy on and potential economic instruments of fiscal support for biofuels than on virtually any other subject during my short time at the Treasury. I remain willing to conduct such discussions with colleagues in this House and in the other place and also with the industry. I am always interested, as are Treasury and Customs officials, in new evidence and new research that will help to give us a better analysis of the situation and the policy options. Indeed, it was, in part, better evidence and fresh information from the industry that led us to this proposal. At one time, we were not convinced that there was a role for a duty discount to support the development of bioethanol. Supplementary evidence and further information from the industry helped to convince us of the case, and I would simply leave that invitation and declaration of our readiness to consider further evidence and research for the benefit of the Committee.

Turning to a couple of more specific points raised by the right hon. Member for Fylde, the Committee has a shared interest in greater use of biofuels and the attendant environmental benefits. We also share an interest in the development of a UK biofuels industry, which is currently fledgling at best.

The right hon. Gentleman asked about lignocellulosic materials, and he was right to say that the potential offered by those materials and processes for environmental benefits are significant. There are two areas in which we are considering policy measures to help the development of certain processes of production. First, we are examining the scope for a duty regime, which may be based on the nature of the feedstocks, or the inputs to the process, rather than the nature of the fuel producers, or the output at the end of the process. Secondly, we are constantly examining

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the case for enhanced capital allowances to support the development of and investment in some of the best environmental processes.

The right hon. Gentleman tempts me to confirm, for the benefit of the Committee—if you will indulge me, Sir John—the measures that must be seen alongside the duty discount in the clause. We must do so with the recognition that duty differentials are, frankly, blunt instruments. I have explained how I and the EFRA Committee believe that there is a danger that they may encourage imports as well as domestically produced fuel, but alongside the clause, which introduces the 20p a litre discount, the Budget confirmed that that level of discount will be in place for at least three years as part of our commitment to the alternative fuels framework. I hope that that will give the industry some certainty and confidence as it considers future investment plans.

We are examining the potential for input-based taxation, which will allow us to support the development of biofuels and other green fuels in a different way in future. We are examining the possible role for enhanced capital allowances in the way that I mentioned.

Finally, the Department for Transport is leading consultation on the measures that may play a role in helping us to set targets in the UK for the take-up and use of biofuels in the context of the European Union directive. The right hon. Gentleman will know that those targets are indicative and not mandatory. When we have concluded the consultation, we shall be in a position to make a judgment about the appropriate targets for the UK in 2005 and 2010. We shall then publish that and inform the European Commission, as we are duty bound to do.

A key potential policy instrument is the biofuels obligation and the sort of figures and debate that the right hon. Gentleman tempted me with are precisely the matters that we are encouraging people to make submissions on during the consultation.

3 pm

Rob Marris: Will my hon. Friend confirm that the consultation will consider bioethyl tertiary butyl ether? It is a petrol extender often used as a substitute for the much more damaging methyl tertiary butyl ether, and British Sugar has stated that it is absent from clause 9 and possibly from clause 12.

John Healey: If my hon. Friend or British Sugar would like to make a detailed submission to the consultation on that topic, I assure him that we will consider it.

The Chairman: Order. I appreciate that I was not here when the hon. Gentleman was tempted along this road, but I hope that we will not widen the debate to a discussion of all options that may be available.

John Healey: I appreciate your guidance, Sir John.

Clause 10 introduces a new, reduced rate of duty for bioethanol used as a fuel for any engine, motor or other machinery, set at 28.52p per litre. It supports our environmental objective to promote the take-up of such greener fuels and follows the steps that we have

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taken to encourage the growth of a successful biofuels industry in the UK, such as the introduction of a duty differential for biodiesel in July 2002. Before that, only very small amounts of biodiesel were produced in the UK; since the duty incentive, sales have grown to around 2 million litres a month, and it is now available in more than 130 outlets in the UK.

We expect production of biodiesel to accelerate further as new production plants come on stream and other outlets for waste vegetable oils, as part of the feedstocks for biodiesel plants, cease to be available.

Bioethanol is ethanol produced from crops such as sugar beet, and when blended with petrol it reduces tailpipe emissions of greenhouse gases and local air pollutants. With the first commercial plant for the production of cellulose ethanol being built in Canada and ethanol being produced from straw and other lignocellulosic sources, as the right hon. Gentleman stated, there is the prospect of even greater reductions in greenhouse gases in the future.

We hope that, as with biodiesel, the response to the duty incentive set out in the clause will be encouraging, and that the UK will quickly develop a thriving bioethanol industry. In line with our approach set out in the alternative fuels framework, the new incentive for bioethanol will remain in place until at least 2007. We expect that such certainty will be welcomed by the biofuels industry and give confidence to investors. We are, however, considering other options and policies to support the growth of the biofuels market and industry in the UK.

 
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