Budget 2011 and Environmental Taxes

Written evidence submitted by the UK Sustainable Biodiesel Alliance

1. Overview

This paper has been prepared by the UK Sustainable Biodiesel Alliance (UKSBA) as a submission to the Environmental Audit Select Committee’s inquiry into the 2011 budget and environmental taxes. The UKSBA is the representative body of the sustainable biodiesel industry in the UK.

This submission has been put together to help the Committee consider the impact of the Budget on the UK’s sustainable biodiesel industry and to ascertain whether it helps to further the Government’s green objectives and contribute to a ‘modal shift’ from high carbon transport to low carbon alternatives. Our paper provides an overview of the sustainable biodiesel industry and outlines UKSBA members’ concerns about the announcement in the budget that the fuel duty differential, currently available to producers of sustainable biodiesel, is to be abolished in April 2012.

2. Summary

The current 20p duty differential for biodiesel produced from Used Cooking Oil has been a tremendous success in providing stability for the sector, promoting investment, training, employment and technical innovation in a vital part of the renewable energy industry. It has also had the added effect of helping to reduce the UK’s carbon emissions and increase effective waste management. It provides value for money well beyond its modest £10m cost to the Exchequer, and serves as a case study of how well targeted fiscal measures can drive behavioural change, private sector innovation and job creation.

However, the announcement in the Budget that the differential is to be abolished from April 2012 is likely to have a severe negative impact on the sustainable biodiesel industry. While the UKSBA welcomes the proposal to offer double certificates for biodiesel from waste under the revised Renewable Transport Fuels Obligation, the large fluctuations in certificate values under the scheme mean that the mechanism is not adequate or stable enough to replace the tax differential. For many producers future revenue streams would become highly uncertain and many small producers would go out of business under the RTFO alone, negating the investment that has been made in rolling out the use of sustainable and renewable transport fuels.

The UKSBA is concerned that, as incentives for waste derived biodiesel fall under the remit of four different departments – the Treasury, Defra, the Department for Transport and the Department for Energy and Climate Change – there is a lack of policy coordination and joined up thinking on support for the sustainable biodiesel sector. This has created an uncertain tax and regulatory landscape which acts as a barrier to investment in green jobs and growth and poses a threat to the future of the industry.

The UKSBA would like to see a wide ranging review on the best way to incentivise sustainable biodiesel, which would consider the right level of support. This could be Treasury led with input from the DFT, DECC and Defra, and should consider the effectiveness of the RTFO as well as the future of the duty differential, with a view to ensuring that the industry can continue to play its part in the UK’s diverse renewable energy mix.

3 . Biodiesel from Used Cooking Oil: A clean and sustainable form of renewable energy

There are around 250 million litres of UCO produced in the UK every year. The UK currently has no collection of UCO from domestic premises provided by a national body or by a majority of local authorities, and so a high proportion of this oil is disposed of down the drain or sent to landfill. Defra estimates that 150,000 blockages per year are caused by fat, oil and grease being poured into the drains, at cost to utility companies of £15m per annum. Meanwhile, landfill sites produce 40% of the UK’s methane emissions and 3% of the UK’s greenhouse gas emissions.

Biodiesel manufactured from UCO is one of the most sustainable fuels available for transport and heat and power systems. Its use can reduce lifecycle carbon emissions by up to 90%. The use of UCO in biodiesel is already making a valuable contribution to meeting the UK’s stringent renewable energy targets and is helping to reduce the amount of waste disposed of illegally or in an unsustainable manner. Some 34m litres of biodiesel were manufactured from UCO sourced in the UK and then used in road transport in 2009/10, delivering a carbon saving of 82 million Kg of C0 2 . With the potential to access 250 million litres of UCO in the UK, more can be done if the industry is given adequate support.

4. The 20p fuel duty differential for biodiesel produced from UCO

Currently, biodiesel produced from UCO enjoys a 20p per litre duty differential when compared to mineral diesel. In 2008, the Government announced that it intended to abolish this differential from April 2010. This was done, not out of economic considerations, but out of a fear that tax incentives for biofuels were encouraging deforestation, land use change and rising food prices in the third world. However, as a waste product, these concerns do not apply to biodiesel produced from UCO. Following an extensive campaign by the UKSBA, it was announced that the differential would continue until April 2012 for biodiesel produced from UCO.

The relatively modest cost of maintaining the tax differential for biodiesel made from UCO, estimated at some £10m in the March 2010 budget, has provided excellent value for money and been successful in providing stability for the biodiesel industry. It has had the effect of: increasing UCO collections and driving the retrieval of other forms of waste; encouraging vehicle fleet managers using high blends of biodiesel to increase their use and so reduce transport emissions; and helping drive employment, research and the creation of a ‘green collar’ skills base in a sector that is expected to be worth some £150bn to the UK economy in the coming years.

5. The Renewable Transport Fuels Obligation

The previous Government announced its intention to replace the duty differential with the Renewable Transport Fuels Obligation (RTFO), a scheme which obliges the larger fuel providers to source 5% of the fuel they use from biofuel by 2014 or buy out of the requirement by purchasing tradable certificates from biofuel suppliers. However, owing to the requirements of the Renewable Energy Directive, the RTFO is currently under consultation. Further EU reviews of the RED will mean more revisions of the RTFO up to 2014 and continuing uncertainty. A drafting error in the initial RTFO meant that an incorrect obligation level was set in 2008, causing certificates to trade at near zero value.

In its current consultation, the DFT has proposed to award double certificates to biodiesel made from waste. This is in order to meet the requirements of the RED that energy from waste be counted twice towards the UK’s renewable energy target. However, certificates traded under the RTFO fluctuate in value, revenue streams are highly volatile and can be as low as zero – double nothing is still nothing. The market value of certificates is affected by a myriad of global factors, for example when obligated suppliers import biodiesel and bioethanol from countries where the fuels are subsidised to meet their obligation, rather than purchasing certificates in the UK.

In the last few years, certificates have been trading at well below expected value, and several UKSBA members have been unable to sell any certificates even through brokers and auctions. One member had certificates relating to production of over 3 million litres of biodiesel, but was unable to obtain any value for them from the obligated suppliers. Another member, who produces approximately 300,000 litres per month, was receiving £25,000 per month in 2008, but nothing at all in 2009, and went from profit to a loss on the production of biodiesel.

An additional impact for producers will be the proposal under the revised RTFO that certificates will only be able to be traded once they have been independently verified. This adds to producer cost, but also impacts cash flow as there will be several month delay on cash received to fulfil that requirement.

The uncertainty surrounding the RTFO makes long-term planning in the industry difficult and creates a lack of market certainty that discourages the capital investment and skills training necessary for renewable energy projects to get off the ground. Without the stability offered by the differential or a minimum certificate price, the investment climate and prospects for the biodiesel sector will be extremely challenging.

Although the proposal for double certificates is currently out to consultation, the consultation paper is very limited in its scope, focusing more on how we can meet the requirements of the RED rather than how the sustainable biodiesel industry can be best supported. The DfT states that the duty differential is a matter for the Treasury, and so is outside the scope of the consultation, while the Treasury has said that any representations on the RTFO are a matter for the DfT. This indicates that policymaking is not being carried out in a holistic manner in cases where environmental taxes cut across different departments.

6. The dangers of removing the fuel duty differential

If the 20p fuel duty differential is removed in early 2012 the impact on obligated suppliers using less than 5% bio-fuel will be minimal. However, for high-blend users – captive fleets such as McDonalds, 3663 and the Environment Agency – who use much higher blends (up to B100), biodiesel will suddenly become 20% more expensive, and so more expensive than mineral diesel. These high-blend users, operating on a 2% margin, will not be able to absorb this huge increase in fuel costs and will be left with no choice but to abandon their green commitments and return to fossil-based fuels. With this fall in demand, the RTFO far from embedded, and with certificate prices fluctuating, many producers will come under cost pressures or close, shedding jobs and reducing the opportunities for practical skills and training in green skills, as demand for fuel expires. As there are no vehicle adjustments necessary for captive fleets, this could happen literally overnight.

This lack of certainty makes business planning impossible and denies the sector vital investment opportunities. In August 2010, the CBI estimated that the UK is missing out on some £150bn of investment owing to a lack of policy certainty, and the Secretary of State for Energy and Climate Change, Chris Huhne, has said that the global, low carbon economy will be worth some £4 trillion by 2015 with 1 million people in the UK potentially employed in the sector by the end of the decade.

7. The benefits of the duty differential: employment, skills and training

The production of and research into biofuels is a new and rapidly changing area. UKSBA members have built up considerable levels of green skills in the workplace, but with the removal of the differential, some 3,000 direct and indirect jobs could be lost over a five year period. The loss of these green collar and low carbon skills from a developing industry with much higher levels of research and development and training than most traditional industry sectors would seriously impede the development of the renewable energy sector in the UK.

7.1 Chemistry skills

The chemistry skills required to produce biofuels and meet quality standards is a complicated and developing area of expertise. Even chemists who have qualified in green and organic chemistry need to be trained for up to six months to operate an on-site laboratory. At present, all training is in-house within the private sector, with only general courses publicly available.

7.2 Research and development

The methods of producing biodiesel and associated products are continually developing. Several companies have research and development arms which are looking to extend the associated products manufactured and types of feedstock capable of being processed into sustainable biofuels. This research is dependent on the cooperation of different organisations and the funding from profitable biodiesel companies to continue. If the duty differential is removed, many companies will no longer be profitable and research and potential advances in new technology will be lost.

7.3 Biodiesel production

All production personnel in the biodiesel industry are required to undergo extensive training to produce biodiesel and understand the factors which affect the quality of production. Almost all employees involved in production are trained in-house as external courses are not available on the specific requirements of the industry. This is unlikely to change any time soon as the specific requirements required by producers can vary dramatically from company to company. The full training of production staff will usually take six to nine months.

8. The benefits of the duty differential: reducing waste and increasing recycling

From an initial base of UCO collection, customers will often demand more extensive waste collection as part of their service – for example, glass, cardboard and food waste. In Cheshire, Cheshire East and Cheshire West local authorities are now offering waste oil collection vessels at their recycling centres for domestic customers to dispose of their waste cooking oil – a scheme which other local authorities are now expressing an interest in developing. The stability offered by the tax differential has created a platform for growth, which allows producers the certainty to invest in new services and respond to market demand.

9. The benefits of the duty differential: meeting carbon reduction targets

The UK is currently ranked 25th of the 27 EU member states in the production of renewable energy and the Public Accounts Committee have commented that meeting EU targets is "unacceptably slow".

The Secretary of State anticipates that sustainable bioenergy, including UCO based biodiesel, could contribute up to half of the UK’s target of 15% renewable energy by 2020 – a greenhouse gas saving of 20 million tonnes of C02 equivalent by 2020. He also states that sustainable bioenergy is vital to the UK’s security of supply, as bioenergy is one of the few renewables that can generate energy on demand.

The tax support offered to UCO based biodiesel is already working to achieve that aim.

10. The benefits of the duty differential: small outlay, big returns

While the Treasury estimated the cost of the 20p fuel duty differential at £10m per annum in the March 2010 budget, industry estimates in 2009 suggest that, as a result of enforced business closures, some £36m in VAT, corporate and personal tax revenues could be lost each year if the differential was to be removed. Over the next five years, based on the planned increase in production capacity, the expected tax revenues lost to the Government could increase three-fold, meaning £100m would be lost to the Treasury.

11. About the UKSBA

The UK Sustainable Biodiesel Alliance is the representative body of the sustainable biodiesel industry, led by waste to energy company Convert2Green Ltd. UKSBA members produce biodiesel from Used Cooking Oil (UCO), widely recognised as one of the most sustainable forms of renewable energy, and must meet the Renewable Fuels Agency’s Qualifying Standard for sustainability, either for the biofuel they use or the biofuel they produce. Associate members must be either producers who have achieved the Qualifying Standard or better for a proportion of the biofuel they produce, and who are committed to achieving the standard for all their fuel, or organisations that actively support the use of sustainable biofuels.

The RFA Qualifying Standard is a carbon and sustainability reporting system for biofuels based on a full lifecycle analysis of emissions throughout the production chain. Fuels meeting the environmental standard must be sourced with regard to protecting biodiversity, carbon stocks, and soil, air and water quality. To meet the social standard, employers’ rights and land rights must be protected.

12 . About the UK biodiesel industry

There are some 37 medium and large biodiesel producers in the UK using waste products such as UCO to produce fully sustainable biodiesel for use in transport and in heat and power generation. Customers include larger petrol companies who use low blend biodiesel, to large organisations such as the Environment Agency, McDonald’s and 3663, who run their captive vehicle fleets on high blends of biodiesel with mineral diesel. Power customers include NHS trusts, which use on-site micro generators, run on UCO based bio-fuels, to power their buildings. These customers are also able to become suppliers of renewable energy to the national grid.

Biodiesel producers create local employment opportunities and are developing the green skills vital to the UK’s low carbon economy, including green chemistry, research and development and specialist production skills. As customer demand for the retrieval of other waste streams increases, these skills are being adapted to drive future renewable energy development from waste, such as anaerobic digestion from food waste. In addition, producers are working with local authorities to set up waste oil collection and recycling centres for domestic households – a new service.

The majority of biodiesel producers are based in traditionally industrial areas of the UK. One example of a larger producer would be Argent Energy Ltd, based in Motherwell, Scotland, with a production capacity of 50 million litres per annum and employment of 88 people, while an example of a medium sized producer is Convert2Green Ltd, with a production capacity of 13.2 million litres and employing 30 people in Middlewich, Cheshire.

13. Conclusions and recommendations

The Government has expressed its desire to be the "greenest government ever", increasing low carbon investment, making progress towards a greener tax base and using fiscal measures to drive behavioural changes that help to meet the UK’s environmental objectives and reduce carbon emissions. The sustainable biodiesel industry, which has been driven by the market certainty and stability of the duty differential, is currently playing a key part in meeting these objectives.

When considering the remit of the Environmental Audit Select Committee’s inquiry, the following conclusions can be drawn from the evidence submitted above:-

· The 2011 Budget does not further the Government’s green objectives. By adding an additional 20p per litre fuel duty onto the greenest and most sustainable form of renewable transport fuel, it threatens to cripple a nascent industry that is driving the way forward in promoting low carbon transport, green skills and growth, and a reduction in carbon emissions.

· Adding an additional 20p per litre fuel duty onto sustainable biodiesel directly contradicts the Government’s stated intention of shifting the burden of taxation from ‘goods’ to ‘bads’.

· The removal of the differential not only fails to create a ‘modal shift’ from high carbon transport to low carbon alternatives, but actually discourages such a behavioural change.

Going forward, the UKSBA believes the duty differential is the most simple, effective and transparent incentive for sustainable biodiesel producers in the UK. However, we are disappointed that the division of interest in sustainable biodiesel policy between the Treasury, Defra, the DfT and DECC continues to inhibit coordinated policy development, and that decisions on the best tax regime for the industry are not being taken due a lack of joined-up working between the Treasury and the DfT.

With this in mind, the UKSBA would therefore suggest that the Environmental Audit Committee make the following recommendations to the Government:-

· The Government should commission a Treasury-led, wide ranging review of sustainable biodiesel incentives, which seeks to identify the role that waste derived biofuels can play in the UK’s renewable energy policy and the right form and level of incentives for the industry.

· This review would encompass stakeholders from the DfT, Defra and DECC and consider the effectiveness of the RTFO alongside the future of the duty differential.

· To provide stability following the implementation of the new RTFO in December 2011, the Government should consider an extension of the differential beyond April 2012 until the new RTFO has had a chance to prove itself as a viable support mechanism for the industry.

19 April 2011