Examination of Witnesses (Questions 500-519)
IAN PEARSON
MP
10 MAY 2006
Q500 Mr Vara: Very briefly on that
point, you say it is a bit premature at the moment to look beyond
2010 to see what happens then.
Ian Pearson: No I did not say
that.
Q501 Mr Vara: That is what you more
or less implied.
Ian Pearson: I did not say you
have to see what happens then. I think you have to see what happens
from now on and, as I say, I think the market is rapidly evolving.
The RTFO is not even in yet. It does not come in until April 2008.
We do not know whether there might be any teething problems or
issues with its introduction. Clearly we will plan to make sure
that there are not. I think there is an appropriate time to do
these things and we all have to make judgments about policy. From
reviewing where we are at the moment it seems to me to be not
an unreasonable judgment to make to say we are introducing the
RTFO, we are setting targets of 2.5% for 2008-09, 3.75% for 2009-10
and 5% for 2010-11 and the policy is not even in yet and implemented.
Let us not push it too far too soon.
Q502 Mr Vara: Minister, I hear what
you say. At this stage four years before 2010 the Government has
been able to make a target of 5% in 2010. In 2009, let's say,
will the Government be able, on the basis of the information and
the evolution, to use your words, that is taking place as at 2009,
to give a more firm answer as to how the projection is going to
go beyond 2010? What I am basically driving at, Minister, is we
have a projection of sorts between now and 2010, but at what time
in the next four years will a further projection be made beyond
2010? I hope you will not say it has to be in 2010 because if
you are capable of saying in advance that you know—
Ian Pearson: I am not saying it
has to be in 2010 at all. I am just saying—
Q503 Mr Vara: Can you give an indication
of when?
Ian Pearson: I am just trying
to give you an indication that it would not be appropriate, in
my view, to actually do it now in advance of introducing the obligation
and seeing how the obligation works. If the market builds sufficiently
this year and next year, then it could well be possible, given
the related issues such as infrastructure that I have mentioned,
that the target could be extended beyond 2010, but I think that
the Committee is struggling on a relatively small issue here about
whether we should make a decision to go further on something that
has not been introduced yet at this point in time. We ought to
have ambitions for increasing the target further.
Chairman: With respect, I do not think
my Committee is struggling on the point. Mr Kawczynski?
Q504 Daniel Kawczynski: Thank you,
Mr Chairman. I would like to welcome the Minister to his new position.
I spent a couple of very pleasant days with him in Hong Kong during
the World Trade Organisation talks when we were both representing
our country there and I thought that he was a very able Minister.
I very much hope that now that you have been appointed to this
position you can use that passion and energy to promote this subject
of biofuels, which I think has been very lacklustre to date by
the Government, to be truthful. In your role will you be having
discussions with your counterparts, in China for example and other
leading nations, to encourage them to increase their production
because, of course, you will know that no matter what we do in
this country, if the Chinese do not follow suit we might as well
be blowing in the wind.
Ian Pearson: Firstly, many thanks
for the kind words. As Trade Minister, I visited Brazil which,
as the Committee will be very well aware, pretty much leads the
world when it comes to bioethanol. When you visit Brazil you do
see the real potential that is there to produce renewable fuels.
It is important that the UK Government continues to take a leading
role when it comes to climate change and issues of energy efficiency,
and renewables are part of that picture. Certainly my view very
strongly is that we do need to be influencing China and India
and other rapidly growing economies so that as they expand they
expand in as green and as clean a way as possible. That is certainly
a major part of the dialogue that we have with countries like
China and India at the moment and will want to continue to have
in the future.
Q505 Chairman: Minister, in paragraph
1.3 of your evidence you say: "`Second Generation' technologies
can offer much higher carbon savings, potentially making them
entirely carbon neutral." What is your Department doing to
encourage the uptake of this technology?
Ian Pearson: It is my understanding
that a lot of the second generation technology is not proven at
the moment and that there are a number of research projects that
are taking place. Some of them are supported at an EU level and
some of them are funded and assisted through Defra and I believe
other parts of the Government as well. It is an area where a lot
of research has been going on, and like other areas of policy
actually getting some of this out from the universities, commercialising
it and marketing it and driving the costs down are going to be
important issues for the future.
Q506 Chairman: But I am sure you
will have been briefed about the Shell/Iogen relationship and
the project in Canada and that company's wish to develop a plant
like that in Europe and the fact that the German's are spending
some €500 million encouraging research in this area. If there
is that degree of commitment I ask my question again: what are
we doing? If I turn to Table A on Page 3 of your Department's
evidence, there is some pretty interesting material there which
talks about the degree of CO2 savings depending on
the type of production of biofuel that you use. Why then are you
concentrating so hard on first generation when the second generation
of biofuels and possibly the plant and the bio refinery offers
some quite remarkable steps forward in technology which has been
proven, as witnessed by the Shell and Iogen investment in Canada?
Ian Pearson: I do not think it
is a question of either/or but clearly we want to use the best
proven technology possible that produces the maximum benefits.
The DTI technology programme is supporting research on second
generation biofuels and the recent call for projects under the
£15 million Energies Technology programme includes R&D
on next generation industrial biofuels, so there is work being
funded by Government in this area.
Q507 Lynne Jones: £15 million
is not much compared to €500 million, is it?
Ian Pearson: I cannot deny your
mathematics.
Lynne Jones: And only a bit of it goes
to this area.
Q508 Chairman: What about the fact
that the Treasury have just launched the Enhanced Capital Allowances
scheme, although not in the list that you helpfully read out a
moment ago, trying to encourage the best techniques of biofuel
production both of the first and indeed the second generation?
You have seen the numbers on the Enhanced Capital Allowances model.
Has your Department done any work about uptake of that in terms
of encouraging second generation?
Ian Pearson: My understanding
of Enhanced Capital Allowances is that Enhanced Capital Allowances
are not yet in existence.
Q509 Chairman: Could I direct your
attention then to the Budget 2006 Red Book, paragraph 7.69, which
provides a description of the scheme and says: "The Government
has now applied for state aids clearance and, subject to that,
envisages the scheme being in place as early as 2007."
Ian Pearson: Exactly so it is
not existence yet.
Q510 Chairman: No, but the terms
of it are and they are obviously going to be looking at the effect
in terms of affecting people's investment decisions. The numbers
that have gone in there must be informed by something. I just
wondered what input your Department had had in terms of deciding
the amounts of money that were going to be put in hopefully to
encourage second generation projects in terms of bioenergy?
Ian Pearson: I am not sure that
you necessarily understand how the Enhanced Capital Allowances—that
is probably unfair because I am sure you do understand how the
Enhanced Capital Allowances regime works but I am not sure that
from your question you necessarily have demonstrated that. Certainly
my understanding is that the figures in the Budget document will
assume a certain take-up of capital allowances.
Q511 Chairman: Minister, it is in
the Budget document. I am not talking about that. I am talking
about the Regulatory Impact Assessment that was published on 5
December last year on this particular matter. I was interested
to know what input Defra had had in helping the Treasury to determine
the level at which this Enhanced Capital Allowances scheme was
to operate. You must have some idea as a Department what work
is going on in these various areas against the criteria set for
qualification for these allowances. What input did you have?
Ian Pearson: I am sure that discussions
took place between officials in Defra and the Treasury when looking
at the Regulatory Impact Assessment and I have got no doubt that
officials will confirm that. My difficulty in your question is
that you seem to be thinking that this is a budget or a pot of
money that companies bid into; it is not, it does not operate
like that. My understanding of the capital allowances regime is
that it will allow the cost of investment to be written off for
tax purposes at a rate of 100% in the first year of incurring
the capital expenditure and it will be up to companies in the
marketplace to decide how many of them want to take advantage
of that because they are making the relevant qualifying capital
investments. Our best estimates will undoubtedly be there in the
Regulatory Impact Assessment for you to study. We do not know
what the actual take-up will be of the regime and, as I say, the
regime is not actually in existence yet.
Q512 Chairman: That is not quite
what the official from the Treasury who was here earlier told
us. He told us that the numbers had been decided as a result of
discussions with companies who wished to make investments in this
area, so I was interested to know whether you could tell us a
bit about the kind of project work, who might be interested, what
kind of work was going on in this area?
Ian Pearson: I think that is a
question that you can direct at officials who will have been involved
in discussions.
Q513 Chairman: I am directing it
at you, Minister because you told us earlier that your Department
was in the driving seat of this and it is quite evident—
Ian Pearson: I did not tell you
that my Department was in the driving seat when it comes to the
Enhanced Capital Allowances regime.
Q514 Chairman: But you must have
had some input into it because you told us earlier you had dialogue
with other departments when you were sorting out policy in this
area.
Ian Pearson: I have got no doubt
that officials will have discussed details of this regime.
Q515 Chairman: I think what we are
trying to get at is is there actually going to be a second generation
biofuels market or manufacturing capability developed in the United
Kingdom? The reason why Ms Jones asked the question about the
level of grant or the level of allowance or investment in comparing
the United Kingdom with Germany is were we actually putting enough
resource into developing the technique which in terms of biofuel
has the greatest potential to save carbon dioxide emissions compared
with the first generation techniques?
Ian Pearson: Can we be clear that
this is not a government grant and this is not government investment.
Q516 Chairman: I appreciate that.
Ian Pearson: This is a government
allowance that enables a company that makes a qualifying investment
to write it off against tax in the first year.
Q517 Chairman: However you like to
put it, it is a cost to the taxpayer, whether you have it as tax
foregone, which is what an allowance effectively is—
Ian Pearson: I accept that, yes.
Q518 Chairman: We are asking you
a very simple question, we are not trying to trip anybody up,
we are just trying to establish whether this is a sufficient level
of inducement to encourage the next generation. I was hoping that
you might be able to give us some examples of the types of project
that might be on the horizon that have clearly informed the level
of allowance which is in this Regulatory Impact Assessment. The
Treasury told us there is something underneath it. I was hoping
you might be able to flesh it out a bit for us.
Ian Pearson: The Enhanced Capital
Allowances regime is principally a matter for the Treasury. Clearly
there has been input from Defra into the decision-making process
but we would not be introducing an Enhanced Capital Allowances
regime if we did not believe it was going to provide the right
sort of incentive to bring forward capital investment in this
area.
Q519 Chairman: So what discussions
have your Department had with people who might be giving you some
indication of what is in the `forthcoming attractions' column?
Ian Pearson: I am quite happy
to write to the Committee if that would be helpful.
Chairman: It would be very helpful indeed
and you might like to confirm whether normal rollover relief provisions
also apply to the capital allowances here. Lynne?
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