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 Treasury Select
Committee's inquiry into the fundamental principles of tax policy.
The UKSBA is the representative body of the sustainable biodiesel
industry in the UK.
Our submission has been put together in response
to the OECD's recommendations that the tax system should distort
economic incentives as little as possible, and in line with the
remit of the committee's inquiry to examine the desirability of
the current arrangements whereby there are currently over 1,000
separate reliefs in the UK tax system. It provides an overview
of the sustainable biodiesel industry, outlines UKSBA members'
concern about the future of the fuel duty differential currently
available to producers of sustainable biodiesel, and provides
evidence of how this essential tax relief has helped to: reduce
carbon emissions; drive employment; increase waste retrieval and
recycling; and develop essential research and development of green
skills in a small but rapidly growing sector of the UK's renewable
energy industry.
2. SUMMARY
The current 20p duty differential for biodiesel produced
from Used Cooking Oil, has been a tremendous success in promoting
investment, training, employment and technical innovation in a
vital part of the renewable energy industry, and 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 estimated £10 million cost to
the Exchequer, and serves as a case study of how well targeted
fiscal measures can drive behavioural change, private sector
innovation, job creation and contribute to the Government's aim
to be "the greenest Government ever".
3. 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.
4. 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.
5. 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 as a waste product 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.
It 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 34 million litres of biodiesel
were manufactured from UCO sourced in the UK and then used in
transport in the last year. With the potential to access 250
million litres, more can be done if the industry is given adequate
support.
6. 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. These concerns do not apply to biodiesel
produced from UCO, which is a waste product that might otherwise
be poured down the drain. Following an extensive campaign by
the UKSBA, it was announced that the differential would continue
until April 2012 for biodiesel produced from UCO.
This paper will demonstrate that the relatively modest
cost of maintaining the tax differential for biodiesel made from
UCO, estimated at some £10 million 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 high-blend fleet managers
to increase their use of biodiesel 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 £150 billion to the UK economy in the coming years.
7. THE BENEFITS
OF THE
DUTY DIFFERENTIAL:
CREATING MARKET
CERTAINTY
The previous Government announced its intention to
replace the duty differential with the Renewable Transport Fuels
Obligation (RTFO), a certificate scheme which obliges the larger
fuel providers to source 5% of the fuel they use from biofuel
by 2014. However, the RTFO is still under consultation in light
of the Renewable Energy Directive (RED) and will not be implemented
until at least the end of 2011. Further EC reviews of the RED
will mean further revisions of the RTFO up to 2014 and continuing
uncertainty. Certificates traded under the scheme fluctuate in
value and revenue streams from the scheme are low and highly volatile.
This 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.
The uncertainty surrounding the RTFO has had a massive
effect on the profitability and cash flow of UKSBA members. RTFO
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.
If the 20p fuel duty differential is removed in early
2012, with the RTFO far from embedded, biodiesel will suddenly
become 20% more expensive, and more expensive than mineral diesel.
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. In turn, producers will 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 £150
billion 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.
8. 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.
8.1 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.
8.2 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.
8.3 Biodiesel production
All production personnel in the biodiesel industry
are required to undergo extensive training to be able 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.
9. 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 East
Cheshire, HW Martin 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 stable support 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.
10. 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".
Chris Huhne, Secretary of State for Energy &
Climate Change, 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.
11. THE BENEFITS
OF THE
DUTY DIFFERENTIAL:
SMALL OUTLAY,
BIG RETURNS
While the Treasury estimated the cost of the 20p
fuel duty differential at £10 million per annum in the March
2010 budget, industry estimates in 2009 suggest that, as a result
of enforced business closures, some £36 million 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.
12. CONCLUSIONS AND
RECOMMENDATIONS
The Treasury's Tax Policy Making Handbook, published
shortly after the emergency budget in June, notes that the tax
system needs to be reformed to make it more competitive, simpler,
greener and fairer. It also noted that tax policy needs to be
proactive, rather than reactive, and that predictability, stability
and certainty should be at the heart of tax reform.
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 change that helps to meet the UK's environmental
objectives and reduces carbon emissions.
The UKSBA fully agrees that the goal of any tax simplification
measures should be to provide transparency and create the conditions
that best allow private sector innovation to drive forward the
recovery from recession, while spearheading efforts to develop
new and transferable green skills in emerging industries.
With these outcomes in mind, UKSBA therefore requests
that the Treasury Select Committee note the effectiveness and
value for money of the 20p fuel duty differential for biodiesel
produced from UCO in driving forward carbon reduction, investment,
training, employment and technical innovation in a vital part
of the renewable energy industry. The UKSBA believes that the
future of the sustainable biodiesel industry in the UK would be
best protected by a commitment from the Government to retain the
duty differential beyond April 2012 until the new RTFO has had
a chance to demonstrate that it can act as a suitable support
mechanism for the industry.
The duty differential is the most simple, effective
and transparent incentive for sustainable biodiesel producers
in the UK, and clearly demonstrates that reliefs in the tax system
can be used to stimulate investment in the high-tech green industries
that will be so vital in securing the UK's economic recovery and
meeting our challenging international obligations for carbon emission
reductions.
January 2011
| 
