Examination of Witnesses (Questions 440-459)
MR ANDREW
PERRINS AND
MR MARTIN
JOHNSON
10 MAY 2006
Q440 Lynne Jones: I would be interested
to know about this acid hydrolysis process. I have not heard about
that one. I have heard about the enzymatic process and catalysis.
Mr Johnson: I will do my best.
My understanding of this type of advanced process is that rather
than take the starch or sugar and turn that into ethanol through
fermentation, you use the woody material, the cellulose.
Q441 Lynne Jones: You digest the
cellulose.
Mr Johnson: My understanding is
that you can use enzymes to do that which are organic or you can
use some kind of chemical process. My understanding is that they
intend to use some kind of chemical process and their feed stock
I think would be waste material rather than, say, straw.
Q442 Lynne Jones: The acid hydrolysis
is not a process that we have heard about so we wanted to know
about it. We have heard about cellulosic and Fischer-Tropsch but
not acid hydrolysis.
Mr Johnson: Perhaps again I can
give you a note on that.[6]
Chairman: That would be very helpful.
Q443 Lynne Jones: Based on the capital
allowance expenditure, if you achieve the 5% target for biofuels,
what proportion of that material is going to be manufactured in
the UK?
Mr Johnson: I think it will depend
on market conditions. I think our assumption would be that the
UK share might be of the order of 50 to 60%, something in that
region.
Q444 Lynne Jones: That is manufacture
as opposed to the raw materials?
Mr Johnson: I think so, yes. We
would expect some imports.
Q445 Lynne Jones: And what proportion
of that would be on second generation biofuels?
Mr Johnson: I think if we are
talking about 2010 we would assume a small proportion. I think
Losonoco are the one company we are aware of which has firm plans
which would impact at the 2010 timescale, but you have companies
like Iogen in Canada which are using enzyme hydrolysis. They are
looking to build a plant in the EU somewhere and there are other
companies with interests in this, but if you are thinking about
2010 I think it would be fairly small and it would be Losonoco.
Q446 Lynne Jones: And you have told
us how the RTFO is a central plank of policy because it is designed
to encourage biofuels which are necessary as part of the climate
change programme to reduce CO2 emissions. That is right,
is it not?
Mr Johnson: Yes.
Q447 Lynne Jones: So what carbon
benefits do there have to be for a biofuel to actually qualify
for both the derogation and for being included in the RTFO?
Mr Johnson: There are two separate
answers. The ECA scheme is designed to reward the cleanest—
Q448 Lynne Jones: Which scheme?
Mr Johnson: The Enhanced Capital
Allowances or the ECA scheme.
Q449 Lynne Jones: I am not talking
about that. I am talking about the 20p and the RTFO?
Mr Johnson: The 20p has no carbon
requirement. The RTFO will not have a carbon balance requirement
in the initial phase. However, from year one there will be a reporting
requirement on companies. They will have to report the life-cycle
carbon make-up of the fuel. If the Government's aim is to use
the RTFO mechanism to reward better carbon fuels in the future
then before we can do that we need a robust methodology, one on
which we can base that system, and that is why it is a reporting
requirement.
Q450 Lynne Jones: So you are giving
fiscal incentives for a process which may be of very little betterment
to the environment in terms of CO2 emissions?
Mr Johnson: Our analysis suggests
that typically the savings from biofuels would be around 50% compared
to main road fuels.
Q451 Lynne Jones: Is that well-to-wheel?
Mr Johnson: That is on a life-cycle
basis.
Q452 Lynne Jones: It would be interesting
to see some of those figures because we had Shell here last week
who said that many of the processes may result in as little as
20% or even zero savings from CO2 emissions and they
would still qualify for these incentives.
Mr Johnson: But I think the bulk
of the biofuel that we sold last year, for example, came from
Brazilian ethanol, which I think most people recognise has a very
positive carbon balance. It is a developed industry over 30 years.
They use the straw again as part of the process and Brazilian
ethanol delivers typically 70 or 80% on that basis. I would say
that is the majority of what we saw last year. So I think it is
true to say, depending on the pathways, that there are biofuels
that potentially do not give you the carbon savings that you would
like but, I think, in terms of what has had been producing the
differential, the Brazilian product—
Q453 Lynne Jones: So Brazil is going
to be able to supply the whole of the EU, is it?
Mr Johnson: I think that that
is a difficult question to answer. Going forward it is unlikely
in the medium term that Brazil will be able to. Brazilian domestic
demand has been on the increase due to the flexi-fuel vehicles.
Q454 Lynne Jones: And there is of
course concern about sustainability of agricultural practices
in Brazil?
Mr Johnson: And that is a concern
that the Government has made very clear it shares as part of RTFO.
That is another area where companies will have to report from
day one of RTFO on the carbon but also on the sourcing and the
sustainability of the fuels.
Q455 Chairman: Mr Perrins, is your
Department going to provide any irrefutable benchmarking process
for this assessment in terms of being able to give the kind of
quantifiable assurance that Ms Jones has just been talking about
in terms of well-to-wheel?
Mr Perrins: Yes, in terms of the
well-to-wheel assessment of the carbon balances, there is assessment
which is shared between all of our departments and which will
be developed further as part of the development of the RTFO to
ensure that we have a robust methodology for calculating the carbon
balances on the life-cycle basis as you have described. On the
wider environmental aspects of biofuels, which I think was also
in your question, Chairman, the answer is absolutely yes, we would
certainly intend to have by the time that the RTFO comes into
place in 2008 the best achievable method of assessing and reporting
and answering on environmental effects, which would include issues
which have been mentioned on the risks involved in tropical countries,
for example, if forest land is converted into agriculture. That
is recognised very much as a potential serious risk to biofuel
development around the world.
Q456 Chairman: I am a little bit
worried that you are going to have to wait until 2008 before this
assessment mechanism is in place. We have just been discussing
the system of enhanced capital allowances which begins in the
financial year 2007-08 so if anybody is applying for help I presume
they have got to give the Treasury some plans during 2006-07.
So how are you going to decide which is going to be the cleanest
and best and most environmentally friendly process upon which
to visit an ECA if there is potentially an 18-month to two-year
delay in Defra in providing this irrefutable benchmarking operation?
Mr Johnson: The way the ECA scheme
will work is that Defra will run the scheme. Defra will appoint
an administrator and the administrator will have to certify plants
who would like to apply for the ECA. Put simply, if you want to
apply to get the ECA you have to go to the administrator and convince
the administrator to give you the certificate you need to qualify.
You would not have to do this necessarily in advance in the way
that you have described.
Q457 Chairman: If you were going
to invest the kind of money that potentially we are talking about,
and you quite rightly used the word "certainty" in your
responses to our questioning, you would want to be pretty certain
that you were going to get your advance enhanced capital allowance
before you set off spending your money?
Mr Johnson: I agree you would
like as much certainty as possible.
Q458 Chairman: But it is the investor
who wants the certainty. All I am saying on the basis of Mr Perrins's
helpful response and timetable for the incurrence of expenditure
there could potentially be a hiatus from an investor's point of
view where he could not be absolutely certain to tick all the
Defra boxes before your system clicks in.
Mr Perrins: Yes, Chairman, I would
say that there is a range of environmental factors which we are
discussing here. The Enhanced Capital Allowance scheme focuses
on the production process. It is an investment incentive for the
construction of manufacturing capacity within the UK of the most
environmentally beneficial production methods and therefore covers
the biofuel production process itself. The criteria for that scheme
are envisaged as set out in the documentation which is now available.
For example, a qualifying criterion would be the use of combined
heat and power, which is an energy-efficient process for manufacturing
biofuel. This is a different range of issues from some of the
other factors of concern which have been raised, for example,
on the effects on land use in tropical countries. The rules for
the UK's capital allowance scheme will not go into the area of
the sustainability of the raw material supply and it is particularly
that area which does need to be worked out further. The Government
readily recognises that further work is needed on working up a
viable scheme for reporting on these wider environmental issues
and potentially social issues as well, so this could cover the
social effects on employment, for example, in countries exporting
to the EU in the future. These issues are not particularly straightforward.
For example, on the land use point, what would you count as a
qualifying criterion? Would it be that you only use land which
has already been used for agriculture for the last five years
or 10 years or maybe 100 years? Or maybe you should have a rule
that any land which in the past was primary forest land of high
biodiversity value should not be converted to agriculture to qualify
for these incentives which the UK is putting in place. Those are
all extremely important issues. They are not straightforward although
work is proceeding with expert consultants to expand this scheme.
Q459 David Taylor: Very briefly to
Mr Johnson from the Treasury, I am sorry to ask a question which
may have been raised but it is about the Enhanced Capital Allowance
scheme. My analysis of it is that the amounts that it might produce,
not in terms of biofuel but in terms of financial incentives,
to those considering investment in biofuel production plants,
are tiny. It is a bit tokenistic, is it not? Why was it even incorporated
in the Budget?
Mr Johnson: I think the first
point to make on that is that the RTFO, in combination with duties,
is the fundamental driver of biofuels development. I think everyone
has always been very clear on that.
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