Select Committee on Environment, Food and Rural Affairs Minutes of Evidence


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.


6   Ev 185, D. Back


 
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