Finance Bill

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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.
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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.
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.
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.
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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.
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.
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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