Again, I would have more sympathy with that critique if there had been an average attendance of Conservative Back Benchers that even approached 12 this afternoon. The hon. Ladys argument does not hold good. I stand to be corrected, but I have not noticed any Conservative Member tabling an amendment that sets out exactly what the Conservative party believes we ought to do about vehicle excise duty. Conservative Members have neither set out their policies nor tabled an amendment, so we do not know what their policies are. It is all very well their saying that they do not like the retrospection, that we are discussing a stealth tax
and that they do not like this, that and the other. I have sympathy with that position, but they do not present their policies when they have every opportunity to do that. They simply do not avail themselves of it.
I emphasise to my hon. Friends on the Treasury Bench that I hope that the Chancellor reconsiders, but that he does so carefully and is not stampeded by some of the siren voices around us. The subject is complex and needs to be considered in the round, in the context of not only what we are pleased to call green taxes, but the overall structure of taxes in the United Kingdom, because if we lower one tax, we must raise another.
As ever, the hon. Member for Wolverhampton, South-West (Rob Marris) made an interesting contribution. There is a danger that some Government policies that we have discussed today will give green taxes a bad name and could undermine the necessary shift towards environmental taxation, which must be supported because of the polluter pays principle that the hon. Gentleman mentioned. The hon. Member for South Thanet (Dr. Ladyman) has an interesting article in Progress. He is a Labour Member who, as a former Transport Minister, should know about such things. He makes powerful points and supports our proposal for a fuel duty regulator.
There are three general reasons for needing a moderating mechanism for fuel duty. First, the unprecedented volatility in the price of oil has far-reaching social and economic consequences, and we need a mechanism to dampen the peaks and troughs. Secondly, environmental taxes must be linked to clear environmental criteria; otherwise the public will believe that they are simply a revenue-raising mechanism, and that undermines the broader importance of environmental taxation. Thirdly, surges in fuel prices disproportionately hit some sectors of the economy, some sections of the community and some parts of the country disproportionately that need and deserve Government protection. I shall consider each item briefly.
Volatility is the catalyst for the debate, as it was at the beginning of the decade, when there were also fuel protests. The oil price is historically high. It is the second oil price shock and I think that it is qualitatively different from the first because, if we have not yet reached peak oilthe moment when conventional oil production goes into irreversible declinewe are near the summit. After 1973, non-OPEC countries could expand exploration and production in response to the oil price surge. That eventually broke the power of OPEC and led to a collapse in the oil price in the mid-1980s. We are in a different position now. The growth of the emerging economies, especially that of China, has driven the oil price up in terms of demand, while the supply side is totally different from what it was. Non-OPEC conventional oil production is already in irreversible decline. The North sea may be a special caseperhaps Government policies and tax hold back production there. We will be in a position whereby OPEC has a far stronger grip on the oil market than before. From what we know of demand, OPEC will be able to hold up oil prices in the long term.
There are some counter-arguments about the lack of investment in refining. Some refining capacity will come on stream in India, Sri Lanka and the middle east. That
will have some effect. There are discussions about the long-term prospects of tar sands, oil shale and even coal oil, but most people accept that we are in a period of high oil prices and that we will remain there, certainly until alternative fuels and technologies reach maturityat least 20 years away. The fundamental driver is geological. Supplies are finite and they are running out, which is inevitable. That is the position that we are in.
There may be a fall in the oil price if the Chinese economy goes into recession or if the US economy gets into further difficulties, and it could be a dramatic fall, but that is the point. Even against the underlying trend, which has to be upward, there may be dramatic surges and falls along the way. That is why we need a moderating regulator to provide people with the stability to plan for this new era. We have moved from an era of cheap oil and are now in an era of premium oil, and that will continue.
We need to give people the ability to plan for a post-oil economy, as the Swedes are doing. However, we cannot do that if we are exposed to the vagaries of the international market. We need a planned transition to a post-carbon economy. A fuel regulator would be an important contribution towards enabling companies, families and individuals to do that. Large companies can do that through hedging, but we need to afford smaller companies and families some protection from massive fluctuations in the price of oil.
Adam Price: To be honest, I would have to pass on the detail of the hon. Gentlemans question, but the principle is vital. [ Interruption. ] Well, I would ask him how big a derogation he is talking about in rural areas. I support that principle, because we take a non-partisan approach to the issue. The Liberal Democrats new clause 14, which deals with remote rural areas, deserves support from all sides of the House. Surely he can recognise that even outside remote rural areas there is a need for a moderating influence when oil price surges cause such distortion and devastation in our economy.
Mr. Russell Brown: The hon. Gentleman and his colleagues have undoubtedly talked in the past about the fuel duty regulator that operates in France. However, if the fuel duty regulator is the panacea for the problems that he is describing, can he explain why President Sarkozy is looking to go to the EU for a reduction in the VAT rate?
I am not familiar with the detail of the history of the French fuel regulator. Fuel regulators exist in various OECD countriesfor example, Canada has regional fuel price regulatorsbut I will have to look into the issue. I understand that Sarkozy proposes looking into not only VAT, but a number of other mechanisms; indeed, the French have in the past supported harmonisation of EU diesel rates, which we might need to consider, given what is happening to our haulage sector. The principle of what President Sarkozy is suggesting is very much aligned with the principle behind new
clause 8. We need a mechanism to smooth out the fluctuations, because they are having a devastating effect on our economy and the French economy.
All Governments get a windfall gain as a result of fuel duties. This Government get a particularly large one, because of the high level of the duty and because we effectively have double taxation, as we levy VAT on the fuel duty element, too. The reason fuel taxes are historically popular with Governments is the inelasticity of demand, as the hon. Member for Dundee, East (Stewart Hosie) said. The estimated elasticity of demand is about 0.4 to 0.5, but is much lower in rural areas, at 0.2, for the reasons that we have heard. The result of the fact that elasticity is less than 1 is that fuel consumption falls in response to higher prices, but expenditure goes up. That is the key issue. There is a windfall gain.
The loss of revenue argument does not hold, because people are transferring expenditure from other goods and services in the economy on to fuel. If we were able to cut fuel prices through a fuel regulator, consumption in other parts of the economy would go up and the Government would get the VAT in that way. I have not even referred to the issue raised by the hon. Member for Dundee, East about the offshore windfall.
We have already heard about the problems of rural areas in relation to hard-pressed sectors and communities. The Government must acknowledge that it is particularly difficult for certain sectors of the economy to respond to rapid rises in fuel prices. Haulage companies, farmers and those in the fishing industry, for example, find it difficult to pass on increases in fuel costs to their customers, the end users, when oil prices are rising rapidly. That is because contracts generally last for an extended period, and there is no provision for additional fuel costs to be passed on until the contracts are renegotiated. The fact that these sectors come under pressure leads many companies within them to cut margins even further, resulting in cut-throat competition within the sectors because the companies have to go after the same contracts. This leads to a vicious circle. We are seeing haulage companies going bust in Wales and in Scotland. A fuel regulator could provide a degree of control over this situation and prevent those sectors from being exposed in this way.
Eventually, we shall have to make the transition to a post-oil economy, and the shift towards environmental taxation is an important part of that. However, if we lose public support for the notion underlying environmental taxation, it will be difficult for a Government of any party to make the necessary changes. I therefore urge the Government to listen carefully to those on their own Benches, and to support this very modest proposal from Plaid Cymru and the Scottish National party, which is backed by many of the sectors that have been affected, in order to bring about a degree of Government protection while we are going through this difficult time as a result of the massive price rises on the world oil markets.
Sir Robert Smith (West Aberdeenshire and Kincardine) (LD):
I echo what the hon. Member for Carmarthen, East and Dinefwr (Adam Price) said about the importance of green taxes not losing their credibility because they are being abused. The Government need to look again at the VED argument, and I hope that they will use this
debate as an opportunity to respond to the concerns that have been expressed across the House.
My hon. Friend the Member for Argyll and Bute (Mr. Reid) asked the hon. Member for Carmarthen, East and Dinefwr what the effect of his regulator would be in relation to a 5p rise. My hon. Friend has worked out that the provision would result in a reduction of 1p. A far more important measure for the haulage industry would be an essential-user rebate, which would create a level playing field with the rest of Europe. The hauliers who have been lobbying Parliament are here listening to this debate. Will the Exchequer Secretary tell us how the Government view their ability to achieve a level playing field with the rest of Europe on haulage costs and, in particular, whether they would welcome the introduction of an essential-user rebate as a more targeted way of tackling the industrys concerns?
My hon. Friend the Member for Caithness, Sutherland and Easter Ross (John Thurso) made an excellent case for new clause 14. I, too, strongly support the new clause because it attempts to address in a targeted way the problems of people in rural areas by recognising that they do not have a choice and that they have to use their cars. My hon. Friend made the excellent point that there would be no cross-border issues because the measure would create a level playing field. What would be the point of crossing the border if that were the case?
My hon. Friend also made a good point about working off-road vehicles, and the attempts to reach a compromise regarding the concerns involved. In a rural area, it makes no sense for the farmer, ski centre or forester to own two vehicles. They need to own a 4x4 off-road vehicle primarily for business use, but rather than increasing environmental costs by owning a second vehicle, they should use the same vehicle when they need it for personal use. I very much hope that new clause 14 will gain wide support across the House. It takes forward a constructive way of tackling a matter of rural concern.
I hope that the Exchequer Secretary will address the concerns of hauliers and clarify the Governments view on having an essential-user rebate as a means of levelling the playing field with Europe. One of the hauliers I met earlier told me that his margin used to be 6 to 7 per cent., but that it is now down to 1.7 per cent. He said that if things carry on in the same way for much longer, there will be no margin at all. In that case, he will not be in business and essential transport in Scotland will be damaged. I repeat my hope that the Government will look sympathetically on new clause 14.
The Government recognise the impact that high fuel prices are having on motorists at the moment and they understand the importance of addressing it. High fuel prices are being driven by changes in the international price of crude oil, which has almost doubled over the past year. The UK continues to work with international partners to ensure efficient and effective global commodity markets.
It was in recognition of the impact of high fuel costs on business and families, of which we have understandably heard a great deal today, that the Chancellor took the decision in the Budget to defer the planned 2p a litre
increase in fuel duty. Since October and the last increase in fuel duty, fuel prices at the pump have risen by 20 per cent., even though tax rates have remained unchanged. The Chancellor will look closely at those and all the other factors when considering whether to go ahead with the planned 2p a litre fuel duty increase in October.
Since the fuel duty escalator that we inherited from the Conservative party was abolished in 1999, fuel duty has actually fallen by 16 per cent. in real terms. The current fuel duty rate is 50.35p a litre: had fuel duty gone up in line with inflation since 1999, it would be 61p a litre; and had it gone up in line with the Conservative partys 3 per cent. escalator, as it did prior to 1999, duty rates would now be 79p a litrea full 29p a litre higher. Furthermore, figures from the Office for National Statistics show that the real cost of motoring has fallen by 13 per cent. in real terms since 1999. That is largely because the purchase price of cars has fallen while their fuel efficiency has increased.
I now wish to deal with the new clauses on vehicle excise duty in the context of the reform of 2001, which introduced graduated levels of VED to reflect the environmental impacts of different cars as assessed by their emissions of CO2.. This was welcomed by Conservative Members at the time, although it would be difficult to discern it from their opportunistic behaviour at the moment.
Since the 2001 reforms, carbon emissions from cars have fallen and VED is recognised as having had an impact. Total CO2 emissions from car use have fallen by 4.8 per cent. since 1997, but road transport still comprises nearly a quarter of UK carbon emissions, so we must go further in encouraging both the manufacture and purchase of low-carbon vehicles. That is why my right hon. Friend the Chancellor announced a package of measures in the Budget to support the decarbonisation of road transport, and it is in that broader context that the VED changes must be seen. However, the proposals we announced at Budget 2008 are not actually legislated for in the Bill. All we have to consider today are the Opposition new clauses and amendments, to which I now turn.
New clause 3 is designed to provide the Treasury with the power to alter VED rates by statutory instrument at any time during the financial year, but only for cars purchased after 23 March 2006. The new clause is undesirable for a number of reasons. The Government currently have two systems of VEDone for cars purchased prior to 2001, for which comprehensive data on CO2 emissions are not available; and one for cars purchased after 2001, for which data on CO2 emissions are available.
The new clause would create at least three systems of vehicle excise duty, and would further complicate the system by ensuring that rather than being based purely on carbon dioxide emissions, VED rates would be based on both carbon dioxide emissions and a new criterion, the tax age of the car. That would create huge confusion, and would blunt, if not completely eliminate, the overall environmental signal that the 2001 changes to VED were designed to introduce. For example, in the second-hand car market consumers would need to confirm not only the carbon dioxide emissions of a used car when making their purchase decision, but the year in which it was manufactured to determine which VED system it would then be allocated.
The new clause would also create the potential for further fragmentation of the VED system by allowing the rate to be set at any time throughout the year. It makes it possible for the Treasury to change certain VED rates, although not all, throughout the year, and potentially on multiple occasions in each financial year. That would lead to consumer confusion and uncertainty for manufacturers, and uncertainty for customers too. It would also create serious administrative challenges for the Driver and Vehicle Licensing Agency .
If, as new clause 3 would allow, VED rates were to be set for a financial year but could be changed at any point during that year, whenever they changed, it would be necessary for the DVLA either to provide refunds or to collect additional taxes from people who had already paid their annual car tax bills. It would also be strange to take the decision-making process for the new third VED system outside the Budget and Finance Bill cycle in which other tax decisions are made, creating uncertainty for the public finances. In particular, the system would separate the VED rate decisions from those on all other VED ratesfor example, on motorbikes, vans and heavy goods vehicles, as well as all cars purchased before 2006. Under new clause 3, the Government would still be able to choose to increase or decrease those rates, affecting existing motorists, through the normal Budget process. Whatever views there may be on the proposals for future VED changes announced in the Budgetand I have listened carefully to what my hon. Friends have saidnew clause 3 is undesirable, unworkable and downright peculiar.
The hon. Member for Taunton (Mr. Browne) spoke very entertainingly for nearly 40 minutes, and managed to mention his amendment No. 7 on VED in the last sentence. The amendment poses problems similar to those posed by new clause 3. It calls for changes to the 2008-09 VED rates to apply only to new cars registered after 13 March 2008, a different date from that suggested in the Conservatives new clause.
The amendment at least refers specifically to the changes in VED rates that took effect from 13 March this year and that were debated and voted on in the Committee of the whole House. Unfortunately, it would disrupt them in a way that I cannot believe the hon. Gentleman intended. His amendment would apply the new rates only to cars purchased since this years Budget, rather than to all cars. The DVLA would need to contact and provide refunds for all the millions of people who have renewed their tax discs since 13 March.
Put together, new clause 3 and amendment No. 7 would create a nightmarish double whammy of administrative complexity and confusion. They would lead to a fragmented, confusing and unworkable system of VED. If both were passed, multiple systems of VED would be created for cars purchased on different dates. There would be one system for cars purchased before 2001, another for cars purchased between 2001 and 2006, and yet another for cars purchased between 2006 and 2008, for which rates could be changed at any point throughout the year. Amendment No. 7 would introduce a fourth system operating from 2008.