Schedule
5
Fuel
duty: biodiesel and
bioblend
Mr.
Browne:
I beg to move amendment No. 66, in
schedule 5, page 139, leave out lines 11 to
35.
Would it be
convenient to talk to amendment No. 65 at the same time, Sir Nicholas,
or shall I do that
separately?
The
Chairman:
Separately, please. They have been selected
separately, so I ask the hon. Gentleman to address his remarks to
amendment No.
66.
Mr.
Browne:
I am grateful for your guidance, Sir Nicholas. The
amendments are related, but slightly
different.
Both
amendments are concerned with biofuels, but amendment No. 66 is
specifically about off-road rebates. It would remove from the schedule
proposed new section 14B of the Hydrocarbon Oil Duties Act 1979, which
would allow mainstream use of duty rebates for biofuels that are used
off-road.
I have
tabled the amendment to explore a few matters, the first of which is
what the Government are trying to achieve with the off-road rebate. The
explanatory notes on the schedule state that they are trying
to
“encourage the wider
use of biofuels in off-road
applications”.
Can
the Minister provide the Committee with a projection of the number of
litres of biofuel that will be
involved?
As the
Committee knows, there are concerns about the sustainability of biofuel
production. For example, the rebate mechanism in proposed new section
14B is completely indiscriminate, meaning that sustainable
biofuel production will not be differentiated from non-sustainable. If
the explanatory notes are accurate,
the Government do not appear to be addressing
sustainability. It would be interesting for the
Committee to learn both how that is factored into the
Government’s deliberations and an estimate of the net carbon
dioxide emission savings that the Government envisage being
achieved as a
result. Will the
Minister also clarify whether the measure is a revenue raiser?
According to the economic and fiscal strategy report, the new rebate
will make money: £5 million in 2009-10 and £10
million in 2010-11. I appreciate that those are not large sums in the
grand scheme of things, but it is confusing to me how the Government
intend to make money from a rebate.
I should be grateful if the
Minister clarified whether the proposal also relates
to non-road transport. Committee members will no doubt recall that
Richard Branson’s first biodiesel train, the Thames Voyager, was
converted to run on 80 per cent. petrodiesel, leading to an estimated
40 per cent. saving on direct emissions. As I understand it, the
Government’s proposal requires only that the fuel not be used
for a road vehicle. There is no specific mention of other forms of
transport, such as planes, trains and sea vessels. I should be grateful
if the Minister touched on that issue; that was my purpose in tabling
the
amendment.
Mr.
Peter Bone (Wellingborough) (Con): I rise to speak on the
mixed signals that the Government are sending about biofuel,
particularly bioethanol. As I understand it, the Government have taken
a decision to end the discount for the use of biofuel on roads, yet the
measure seems to encourage people to use it off roads. The Government
are saying, “Let’s encourage biofuel as long as it
isn’t being used on the roads, but on the roads, we’re
going to restore the duty to the same level as
petrol.”
Huge
carbon savings could be made by using biofuel. The Government have not
quite made up their mind whether biofuel is a good thing, because of
its huge benefit in saving carbon, or whether they are against it,
because of its sustainability and impact on food prices. They are
sending terribly mixed messages, and we need some clarity about what
they are saying. Is biofuel a good thing or a bad thing? Are they
giving in to the petrol lobby, or are they as serious as our European
colleagues in Sweden, who have made a big effort to get vehicles to
switch to
biofuel?
Justine
Greening:
I rise to reiterate the points that
have been made. There seem to be a couple of
inconsistencies. One is the introduction of the off-road rebate at the
same time that the Government are signalling the removal of the road
rebate, although that will not take place for a couple of years. The
Renewable Energy Association has expressed concern about the unintended
consequences: good biofuels might stay within the renewable transport
fuel obligation, which applies to on-road use, but bad
biofuels—those made in a less sustainable way—might be
used off-road. I do not think that that will achieve the
Minister’s aims.
I shall take this opportunity
to ask the Government more broadly what their strategy is with regard
to biofuel. Although it is not covered in this Finance Bill, the
Government have signalled in the Red Book that they plan to remove the
fuel rebate in 2010. That will
have no small financial impact: it will prevent the Treasury from losing
£550 million in 2010-11, which means that the renewable
transport fuel obligation will become the Government’s key
fiscal lever for increasing the amount of biofuels blended into the
petrol used on roads. We had a
similar debate when the statutory instrument on the renewable transport
fuel obligation went through Committee. The Conservatives are concerned
that the RTFO does not include fully outlined sustainability criteria
at the moment. In fact, my understanding is that the criteria will not
be put in place until 2010-11. Will the Minister explain, therefore,
why the Government are stepping away from the introduction of two
levers with which to encourage biofuels, instead relying on just one,
which many people do not think will be strong enough, soon enough? I am
sure that we will come on to the issues about the buy-out price in the
next amendment, so I shall conclude my remarks for the time
being.
Mr.
Field:
I, too, hope that we can alleviate the need for a
stand part debate, and join my hon. Friends the Members for
Putney and for Wellingborough in asking the Minister to go into some
detail about the Government’s broader strategy
on biofuels. I appreciate that, from her perspective, the issue has
received a considerably higher profile in recent months, given the
problems with the sustainability of food growth, particularly in the
developing world.
Some Opposition Members have
always been very sceptical about the idea of biofuels being the grand
answer to the entire problem, and I would be interested to have some
sense of the Government’s thinking. In fairness, I do not expect
them necessarily to have a full plan in place; the situation is very
fluid, given the huge increase in the price of staple food commodities
across the developing world. I appreciate that utilising biofuels for
the purposes of carbon-free fuel is likely to become considerably less
desirable, at least in the short term, but it would interesting to have
some sense of where the Government see this going in the decades to
come.
Patrick
Hall (Bedford) (Lab): The hon. Gentleman’s
criticism of biofuels is fair enough, as long as he is talking about
the first generation, which is very land-hungry. Does he not
acknowledge, however, the strong evidence that second generation
biofuels would not fall into the same category and that they could have
a useful future, so they should be
encouraged?
Mr.
Field:
I fear that the hon. Gentleman knows considerably
more about that than I do, and I shall expose my ignorance if I go too
far down this path. As he rightly pointed out, however, the first
generation of biofuels are very land dependent and have had some
perverse effects that were not foreseen at the outset—they were
regarded as the great new idea that would solve many of the problems
resulting from the desire and need for oil and fuel while fulfilling
the equally strong desire to keep carbon emissions to an absolute
minimum. I hope that the Minister will give us some idea of the
Government’s thinking. Few Opposition Members expect grand
answers; we appreciate that it is quite a fluid and volatile situation,
and will remain so
in the future, but it would be useful to have at least some sense of the
pathway that the Government have in
mind.
Angela
Eagle:
I am pleased to say that the hon. Member for Cities
of London and Westminster and my hon. Friend the Member for Bedford are
both right. If their goals could be achieved, second generation
biofuels would certainly be far more sustainable than the first
generation. They are not so land hungry and do not have the
disadvantages of carbon emissions resulting from the production of the
original fuel, whether corn, palm oil, wheat or whatever else people
decide to make fuel out of.
The hon. Member for Cities of
London and Westminster is spot on in saying that the situation with
biofuels is very fluid—forgive the pun. We are trying to develop
policies to incorporate the use of biofuels, which will cut carbon
emissions if they are the right biofuels produced in the right way. The
most obvious example is the fact that clearing a rainforest to produce
corn to make biofuels does not necessarily assist the fight against
climate change or reduce the planet’s carbon emissions. My
understanding is that sugar beet is a far more viable biofuel and is
probably already produced
sustainably.
9.30
am
Justine
Greening:
I thought this would be an
appropriate time to bring in the subject of “splash and
dash”, of which I am sure the Minister is fully aware. The term
relates to shipping the core bio components that go into biofuel over
to the United States and adding them in. The biofuel is then shipped
back to the UK. That is done, because production subsidies mean that
production in the States is so much cheaper. What is the
Government’s position on that?
Angela
Eagle:
We are dealing with much of that issue via the
European Union and the World Trade Organisation. Of course, I have also
been in touch with the biofuel industry in this country. We are well
aware of the issues. Unfortunately, the WTO is sometimes frustratingly
slow, but I assure the hon. Lady that the Government are well apprised
of the issues, as is the EU Commission. She should not worry about the
matter.
Schedule 5 is
attached to, and introduced by, clause 12. Schedule 5 establishes a new
rebated rate for biodiesel and bioblend that is used other than as a
road fuel. It allows the commissioners of Her Majesty’s Revenue
and Customs to determine the composition of a substance for
certain prescribed purposes. If accepted, the amendment tabled by the
hon. Member for Taunton would prevent the introduction of a rebate on
bioblend used other than as a fuel for road vehicles. It would not
alter any of the other provisions in the Bill that relate to rebated
bioblends. As such, I hope that it is a probing
amendment.
In Budget
2007, the Government announced that they would encourage the use of
biofuels in off-road applications, such as the railways—the hon.
Gentleman finally mentioned that when he talked about Virgin
trains—by permanently reducing the duty rate
for those mixtures. That announcement followed the successful
completion of a pilot trial undertaken by a rail company which, hon.
Members can probably guess, was Virgin. The rail pilot scheme was
successful, but it is not expected that there will be scope for the use
of biofuel in aeroplanes. There has been a well-publicised one-off
short-term experiment with the same company, but we do not expect it to
be used at this time.
Mr.
Bone:
I thought Richard Branson said that all his future
profits would go into the development of biofuels for bioplanes to help
to massively reduce the carbon footprints of aircraft. That is
completely at odds with what the Minister has just
said.
Angela
Eagle:
One of the things for which I am extremely grateful
is the fact that I am not responsible for Sir Richard Branson’s
pronouncements. I do not believe that I have to explain them to the
Committee, so the hon. Gentleman will have to ask Sir Richard Branson
what he
meant.
Justine
Greening:
The Minister said that she does not believe that
aviation will go down the biofuel route. I understand that, but I
wondered whether there was a particular reason why she had reached that
conclusion, and if she could share it with the Committee. Is it based
on an assessment of which models of current fleet can be adapted, or is
it to do with economics? Can she outline her reasons in more
detail?
Angela
Eagle:
The comment that I made is about the short term. It
may well be that in the medium to long term, the redesign of aviation
engines can become as innovative as the redesign of car engines.
Certainly, for the purposes of this rebate in the short term, we are
expecting it to be of much greater use on trains than on other forms of
transport. Marine transport is another issue. We have an aging world
fleet as far as marine goes, and to be able to adapt to the use of
biofuels, the mechanics of ships would need to be re-engineered. I hope
in the fullness of time that that will begin to happen with other forms
of transport, as it has done with cars—we all look forward to
that—but it will not happen in the short term without
re-engineering. We do not expect that the positive introduction of
clause 12 and schedule 5 will drive that, although we hope to ensure
that the carbon footprint of many trains can be reduced. Successful
pilot projects running biofuel mixes have already taken place, and have
demonstrated that with the existing engines it is possible for trains
to reduce their carbon footprint considerably. In essence, that is what
schedule 5 seeks to
do.
The Government
believe that biofuel policy should support only sustainable biofuels,
which is why the Secretary of State for Transport announced that
Professor Ed Gallagher would lead a study on the wider environmental
and economic impacts of biofuels, including their impact on food
prices. The review will publish its report in June. Members who have
read the King report will remember that Professor King spent a great
deal of time on the way in which we define the life-cycle costs of
fuels, in particular biofuels. Understandably, that is an emerging
focus, and we have yet to develop the right methodologies to ensure
that
we can assess whether biofuels are sustainable.
Clearly, that work has to go on in parallel with the development of
potential biofuels, particularly second-generation
ones. We can be
absolutely certain that if we do a great deal of re-engineering of
engines and infrastructure to accept biofuel mixes we will be doing
good rather than bad, and that work is proceeding. Previously, a
mixture of biodiesel and rebated heavy oil was liable to duty at the
punitive heavy oil rate. As announced last year, we are amending the
duty regime so that such mixtures become subject to duty at 9.69p per
litre. That is the same as the rate for red diesel,
which is the fuel commonly used in off-road applications. That is the
point of the schedule. I hope that, given those explanations, the hon.
Member for Taunton will withdraw the
amendment.
Mr.
Browne:
This probing amendment was intended to give the
Committee an opportunity to discuss the issue along those lines. I beg
to ask leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
Mr.
Browne:
I beg to move amendment No. 65, in schedule 5,
page 143, line 45, at end insert—
‘27
In Article 21 of the Renewable Transport Fuel Obligations Order 2007
(S.I. 2007/3072), after paragraph (11)
insert—
“(12) The
Administrator shall undertake an annual review of the effectiveness of
the buy-out price level under sub-paragraph (7), including in
particular its impact on the level of incentive provided to suppliers
to invest in biofuels.
(13)
Within two months of completing any review under paragraph (12), the
Administrator shall submit a report of its findings to the Secretary of
State.
(14) As soon as
reasonably practicable after the Secretary of State has received a
report on a review under paragraph (12) the Secretary of State shall
lay a copy of the report before the House of
Commons.”’.
The
amendment deals with an issue related to that raised by amendment No.
66. It, too, refers to schedule 5, but it deals with the on-road use of
biofuels. Because the wording of the amendment is fairly complicated,
it may be helpful to take the Committee through its intention. Article
21 of the Renewable Transport Fuel Obligations Order 2007 allows fuel
suppliers to pay a buy-out price to discharge their obligation to
replace a certain percentage of their annual fossil fuel sales with
biofuel. The so-called renewable transport fuel obligation, which has
been in force since April, will be run by the newly formed Renewable
Fuels Agency. At present, biofuels receive two forms of support: a 20p
per litre rebate and a 15p per litre buy-out price. If a supplier has a
litre of biofuel, he will get 20p off the duty rate, and avoid paying a
another 15p for not hitting the biofuel target. That creates a total
saving of 35p for the
supplier.
The
Government, however, announced in the Budget that
from 2010-11, the rebate would be scrapped and replaced with a buy-out
price of 30p a litre. Consequently, my amendment would insert three new
paragraphs into the order. Proposed new paragraph (12) would require
the administrator of the buy-out mechanism to undertake an annual
review of the buy-out level, and its effect on incentivising biofuel
investment. New paragraphs (13) and (14) would require the review to be
presented to and approved by the
House.
This is a
probing amendment. Its purpose is to ascertain the Government’s
motivation in respect of
biofuels. How were the figures arrived at, and how will they be kept
under review? Has the Treasury taken account of present and future
rises in oil prices and agricultural commodities? Is 30p enough to
incentivise a sustainable UK biofuel production industry? That area was
touched on in the previous debate. How viable is biofuel production in
terms of our total energy requirements? How sustainable is biofuel
production, and how is its environmental value measured? Given the
EU’s renewable energy directive, which means that 10 per cent.
of transport-related energy must be renewable by 2020, I want to
establish whether or not biofuel production is likely to make a
significant contribution to that target. Finally,
scrapping the 20p per litre rebate and replacing it with a higher
buy-out price is estimated, as I understand it, to net the Treasury a
saving of £500 million a year. I suspect that this
particular schedule and these amendments do not feature
prominently on a list of the highlights of the Finance Bill Committee
for most Members. However, by my estimate, the proposals in this
schedule are the third-highest revenue raiser from the Budget after the
changes to vehicle excuse duty and the revenue raised from increased
alcohol duties. It is therefore worth the Committee examining these
proposals in detail, first to see whether they will achieve the
environmental objectives to which the Government aspire and claim that
they will achieve, but also because, as I understand it, they are a
significant method for raising additional revenue for the
Treasury.
Mr.
Bone:
I should declare an interest at the start, as I
drive a biofuel car. The Minister said earlier that it will take some
time to get engines to adjust to the new biofuel, but the technology is
here already; it is a very simple mechanism and a car can run on
biofuel or petrol.
Angela
Eagle:
The context of those earlier remarks was marine and
aviation fuel, not car fuel. I absolutely accept that the technology is
available for
cars.
Mr.
Bone:
I am grateful to the Minister for making that point
clear.
There is
something that has not emerged in the discussion so far. We have been
talking about the rebate and the fact that the rebate for biofuels will
be raised in due course to a level such that petrol duty and biofuel
duty will be the same. At the moment, a litre of biofuel is roughly 2p
cheaper than a litre of unleaded petrol. Unfortunately, it is 50 per
cent. more inefficient, so when someone drives a biofuel car, they are
paying substantially more to drive it than to drive a petrol car.
At the same time, the
Government are providing grants for forecourts to convert to biofuel
stations. There are only 17 or 19 biofuel stations in the country, so
we are talking about first-generation technology. We have already heard
the remarks by the hon. Member for Bedford and he is absolutely right
that second-generation biofuels will be much better. It is rather like
video recorders; if the first video recorders were what we were going
to end up with, we would never have had a video recorder at
all.
In my opinion,
the Government have got to make up their mind whether or not they want
to go down the
biofuel route. The amendment clearly raises that issue again. I do not
want a detailed explanation; I just want to know whether or not the
Government want to encourage biofuel.
Justine
Greening:
I rise to echo some comments I made in my first
contribution, and also to echo some of what has been said by other hon.
Members. We need to be very careful about what we are doing with the
buy-out price. There is no doubt that the interaction between the
buy-out price and the fuel rebate is absolutely critical to unlocking
this market to its full potential.
As things stand, in 2008-09 we
will have a 20p per litre rebate on biofuel, combined with a 15p per
litre buy-out price if we do not meet the renewable transport fuel
objectives. Effectively that means that if it costs companies less than
35p to produce a litre of biofuel, it will be economical to supply the
biofuel, but if it costs more, it is cheaper for them to buy out of the
obligation. When we reach 2010, however, the buy-out price will
increase to 30p per litre, but the biofuels duty rebate will end. That
means that companies need to produce biofuel for 30p per litre or less
for it to be more profitable than buying out. Furthermore, without the
rebate, all the cost will fall on the consumer. There is a real
danger that if companies buy out of their obligation on biofuels,
customers will pay for the policy, but we will not actually see the
carbon savings. That would be a real double whammy, not only for the
consumer, but for the environment.
9.45
am
How, therefore,
does the Treasury go about setting the buy-out price? How does it
arrive at a price of 30p per litre? To echo the comments of my hon.
Friend the Member for Wellingborough, how does the Minister see this
market developing? Are the Government doing enough to ensure that we
unlock the demand, which I am sure is there, for biofuels and biofuel
cars? At the moment, we are not really doing
that.
Angela
Eagle:
It is good to have such simple questions to deal
with on a Thursday morning. Part of the issue in the re-engineering of
economies to reduce our carbon footprint is that there is no utter
certainty about the most sensible and carbon-efficient way through the
process—as the hon. Member for Cities of London and Westminster
said, this is a fluid situation. We are attempting to
put in place analytical approaches to allow us to establish what a good
or a bad biofuel is, and Professor Gallagher will do some of the work
on that and on the effects on fuel prices.
The hon. Member for
Wellingborough was right to say—as Professor King did in her
extremely good report—that biofuels are less efficient in terms
of the power that they give to the car, so it would need more litres to
do the same number of miles. That is yet another complication that we
must take into account when we analyse whether to incorporate biofuels
into our fuel and what the effect will be. Clearly, the way in which
the biofuel originated also has an impact on whether it is a positive
or negative thing.
There are
therefore many different variables—all potentially moving in
different directions, but the analytical
structure is only just coming into place. That is
the background against which all advanced economies have to see what
they can do to incorporate biofuels in the most environmentally
sustainable way, without that leading to perverse results such as
increased carbon emissions, and without putting food prices up to such
an extent that there are food riots in different parts of the
world. If biofuels are
produced—I used an extreme example earlier—by knocking a
rain forest down, they will definitely not reduce our carbon footprint.
Other sources of biofuels are almost certainly sustainable, and I
mentioned sugar beet. People in academia are doing the work so that we
can identify where different biofuels come in that regard, and we must
try to develop policies in the light of developing knowledge and
analytical capabilities. The road transport fuel obligation is a better
way of taking account of different biofuels than a simple duty, which
does not allow us to distinguish between different biofuels and the way
in which they are produced.
Justine
Greening:
I fully understand what the
Minister is saying, but the critical issue is the relationship between
the buy-out price and the cost to manufacturers of producing a litre of
biofuel. The Treasury must surely be talking with the industry, and it
must have made some assessment of how much it costs a manufacturer to
supply a litre of biofuel. That is the key question. If the buy-out
price is set above the cost of production, it will create one
incentive, but if it is set below it, it will create an entirely
different incentive. The modelling has as much to do with the future
costs to manufacturers of supplying biofuels as with anything else.
What is the Treasury doing to understand what those costs will
be?
Angela
Eagle:
We do a great deal of work to understand what they
will be, and to make the road transport fuel obligation buy-out price
bite at the appropriate place, but again, prices move up and down all
the time. The costs of alternatives to biofuel, as we
can see from the price of oil, move up and
down—mainly up, if we are talking about oil. The Treasury is
keeping the price of the buy-out under review as evidence emerges of
the environmental and economic impacts of biofuels. We will consider it
with respect to the Gallagher report and make decisions on whether the
buy-out price is too low or too high as we go
on.
There are no easy
answers to those questions. I can only reassure the hon. Lady that the
buy-out price is meant to provide an appropriate incentive. The
Treasury is not particularly interested in having a completely
ineffective system. Nor, I suspect, is the Department for Transport,
which is responsible for the road transport fuel obligation, so work is
under way to set an effective buy-out price. If evidence emerges that
it has been set wrongly, I am sure that the Renewable Fuels Agency will
have some words to say about it. The Government will certainly
be open to emerging evidence of that kind. I am not sure what else I
can say, but I will give way to the hon. Lady if she wants to ask
another
question.
Justine
Greening:
I appreciate the
Minister’s response. As this is an opportunity to discuss the
issue in the context of the Finance Bill, I have a further question. It
looks as if the tipping point will be reduced in two years’ time
from 35p, which includes the rebate and the buy-out price, to 30p when
the rebate is gone and the buy-out price has risen. That suggests that
the Treasury suspects that the cost of producing biofuel will gradually
decrease over time, and that the buy-out price therefore will not need
to be as high, but that is set against a backdrop of rising food
prices. There might be a different world view about the price inflation
of many foodstuffs used to produce biofuels than when the Treasury
first worked out the buy-out price. I wanted to put that on record.
Does the Minister accept that it suggests that the proposed 30p buy-out
price for 2010-11 will need to be carefully
considered?
Angela
Eagle:
I have said that we are keeping it under constant
review as all those changes happen. The road transport fuel
obligation provides much more scope for reflecting
sustainability than a duty differential between different biofuels, and
without the risk of fraud. That has an impact on the sustainability
argument, which is why we want to shift the weight of delivering the
policy to the road transport fuel obligation rather than having the
duty differential.
The
RTFO’s effectiveness will be monitored, as the
hon. Member for Taunton rightly said, by the
Renewable Fuels Agency, which administers the scheme. The agency will
be responsible for providing regular reports to Ministers and
Parliament on its implementation. Under the Renewable Transport Fuel
Obligations Order 2007, the Renewable Fuels Agency is duty-bound to
publish an annual report including details of the extent to which the
obligation has been met by buy-out payments. The Government will take
the reports into account when deciding on matters such as the future
level of the buy-out price. Any change to the buy-out price will
require a new road transport fuel obligation order, which will be
subject to consultation and debates in both Houses of
Parliament.
The hon.
Gentleman is trying to put into the Finance Bill something that already
exists in the order that set up the road transport fuel obligation. The
arrangements will come back before Parliament in a report, not from Her
Majesty’s Treasury, but by the agency. I would ask him not to
press the amendment to a Division, because the arrangements that it
would put in place already exist, albeit not in a
Bill.
Mr.
Browne:
That was a useful discussion and I beg to ask
leave to withdraw the amendment.
Amendment, by leave,
withdrawn.
Schedule 5 agreed
to.
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