Budget 2011 and environmental taxes - Environmental Audit Committee Contents


Written evidence submitted by Agri Energy

1.  INTRODUCTION TO AGRI ENERGY

Agri Energy is one of the UK's largest distributors of fresh cooking oil to the catering industry and is the largest collector of waste cooking oil, collecting from over 60,000 catering establishments in the UK. Agri Energy collects Used Cooking Oil (UCO) from food manufacturers and the retail and catering sectors, preventing it from being dumped illegally, and turns it into biodiesel for use as a renewable transport fuel. It has ten depots across the UK, three bio-refineries capable of processing UCO into renewable bioliquid or industrial oil, and employs 350 people across the country.

2.  SUMMARY

This paper sets out Agri's submission to the Environmental Audit Select Committee's inquiry into the 2011 Budget and environmental taxes. It is comprised of two parts, the first looking at the 20p fuel duty differential for biodiesel made from UCO, which the Budget announced is to be abolished from April 2012, and the second section considering the current fuel duty derogation for producers of biodiesel who manufacture less than 2,500 litres per annum.

Our submission concludes that the 2011 Budget represents a missed opportunity to ensure that the Government's green objectives are being met through the tax system, and makes the following policy recommendations:

—  The Government should adopt a more integrated approach to developing biodiesel policy. Currently, responsibility is spread across four different departments, and this is creating an uncertain regulatory environment for biodiesel producers.

—  As part of this integrated process, the Government needs to look again at the tax incentives and support mechanisms for the sustainable biodiesel industry. It needs to look further than the current consultation on the RTFO and consider the future of the differential alongside a longer-term strategy to support the industry, such as including biodiesel within the scope of the Feed-in-Tariff or tying the Treasury more closely to the certificate trading scheme.

—  In the shorter term, the impact of fluctuating certificate prices in the RTFO should be resolved by the creation of a stability mechanism either through a minimum price for certificates or an extension of some form of duty differential.

—  The fuel duty derogation for producers who refine less than 2,500 litres per year should be abolished. The derogation does nothing to incentivise the use of high-quality, sustainable biodiesel, but poses a health and safety risk and has facilitated the rise of a black market industry and a spate of oil thefts.

3.  THE 20P FUEL DUTY DIFFERENTIAL

3.1  The environmental benefits of biodiesel made from UCO

UCO is a recycled waste product which has, in the past, been disposed of down the drain. The UK has traditionally had a big problem with the illegal disposal of waste cooking oil. It costs utility companies £15 million to clear the estimated 150,000 blockages per year caused by oil and grease that has been poured down the drain.

Biodiesel made from UCO is acknowledged to be one of the most sustainable forms of transport fuel. Figures from the Renewable Fuels Agency suggest it can deliver emission reductions savings of 84% when compared to fossil fuels, and this is considered to be a conservative estimate. Our own measurements using ISO 14064 show savings of 95% for our own biofuel products.

As UCO is a waste product it avoids a host of contentious and negative effects traditionally associated with biofuels, such as Indirect Land Use Change and the displacement of agricultural land for the growth of food crops. Its benefits should therefore be considered independently of any analysis of the environmental impacts of biofuels, which have tended to focus exclusively on first generation fuels made from virgin crops.

3.2  The 20p fuel duty differential for biodiesel made from UCO

Biodiesel produced from UCO currently enjoys a 20p per litre fuel duty differential compared to regular diesel. This has been largely successful in promoting the use of waste derived bioliquids in transport fuel and ensuring that waste oil is not illegally poured down the drain. By creating stability and market certainty it has given investors the confidence to plan new projects, and the clear cost benefit has encouraged many large companies to switch their captive fleets to biodiesel. It has also helped drive waste collection and renewable energy creation, allowing businesses to research new conversion techniques and train employees in the green skills that will be required for future innovation.

3.3  The Renewable Transport Fuels Obligation

This good work is in danger because of the impending abolition of the 20p differential. This is a retrograde step that will have a severe impact on the biodiesel industry and potentially negate much of the investment that has been made in renewable transport fuels.

The previous Government said it hoped that the Renewable Transport Fuels Obligation (RTFO) would provide the main support mechanism for the sustainable biodiesel industry after the differential is abolished. However, there are a number of flaws with the RTFO. The system treats biodiesel in the same way as bioethanol, when in fact the supply chain and markets for their feedstock are completely different and so not suited to be transposed onto the same scheme. Certificate prices have been fluctuating considerably in recent years, with some suppliers being unable to redeem their obligation or secure any value for the biodiesel they have produced. The fluctuations in certificate values make it difficult for investors to plan new projects and assess the incomes streams they are likely to derive from the scheme. This is acting as a barrier to investment and a disincentive to take advantages of the opportunities offered by the renewables sector.

The DfT is currently consulting on whether to offer biodiesel made from waste, such as UCO, double certificates under the RTFO. While we welcome this proposal and believe that it will, at current levels, partly negate the loss of the duty differential, the problem is that the fluctuations in certificate prices detailed above make revenue streams highly uncertain. Based on past trading data, double certificates could see biodiesel made from UCO incentivised by anything from 0p per litre to 60p per litre. This will lead to big changes in trade flow and make it more difficult for producers to plan investment in renewable energy projects over the medium and long term.

The RTFO is a complicated and expensive system to run, requiring frequent monitoring and reporting by the Renewable Fuels Agency. It is complex to understand and requires significant time on the part of business to calculate estimated cash flows. The duty differential requires no such time and effort on the part of business and is simple for the Government to administer. It does not require an expensive quango to run it, and at a minor cost of £10 million per annual it is equivalent to the amount spent on empty office space in Whitehall.

When differential is abolished in April 2012, biodiesel from UCO will suddenly become 20p per litre more expensive. This is a huge increase and means that biodiesel produced from waste will become more expensive than regular fossil fuels. As no vehicle modifications are necessary to switch from biodiesel to regular diesel, demand is highly price sensitive and so there could be a huge impact on the sector within a very short space of time. Even with the offer of double certificates, the RTFO as is currently set up is not a suitable incentive scheme due to the wildly fluctuating levels of support that it entails. This clearly demonstrates that the decision to abolish the differential is in stark contrast to the Government's stated green objectives.

3.4  The lack of a joined up strategy on biodiesel tax incentives

The Government's Gallagher Review into the impact of Indirect Land Use Change recommended that biofuels production must target the use of waste and residues as fuel, while the Renewable Energy Directive says that biofuels produced from wastes are especially desirable. The Treasury's Tax Policy Making Handbook notes that the tax system needs "simpler, greener and fairer". The differential meets every one of these requirements, and yet it is notable that there is still some policy uncertainty about sustainable biodiesel.

Although the RTFO is currently under consultation, the paper does not consider the future of the differential or any other tax measures as they fall outside the remit of the DfT, while the flaws in the RTFO remain outside the Treasury's sphere of interest. This approach to biodiesel incentives makes joined-up policymaking difficult and is preventing the industry from reaching its full potential.

3.4  Our recommendations

Agri Energy believes that the sustainable biodiesel industry has the potential to contribute greatly to the UK's diverse energy mix and promote a growth in green jobs and scientific development that can help make our country a world leader in low carbon technology. However, in order to do this the industry requires stability and market certainty. This could best be achieved by:

—  Over the longer-tem, launching a review into the future of the RTFO, which would be wide ranging and include consideration of the various biodiesel tax incentives, with a view to ascertaining the best mechanism for supporting the industry.

—  In the shorter-term, committing to some sort of stability mechanism for the RTFO which will negate the negative impact of certificate price fluctuations. This could be in the form of an extended differential, a minimum price for RTFO certificates, or double certificates plus the 20p differential, with a requirement to provide one of the certificates to the Treasury.

4.  THE FUEL DUTY DEROGATION

In the 2007 Budget, it was announced that motorists who refine or used less than 2,500 litres of biodiesel per year to run their cars would be exempt from paying fuel duty. This was in response to unflattering news reports of police officers and tax inspectors staking out supermarkets and sniffing exhaust fumes to identify drivers that were buying cheap cooking oil and pouring it straight into their tanks.

However, while the benefits for amateur producers of biodiesel were widely promoted, small scale biodiesel has in recent years grown into a lucrative, underground industry, with many small scale producers selling their product illegally and ignoring the 2,500 litre limit, costing the Treasury tens of millions of pounds in lost revenue.

Rather than provide a tax break for those who run their family cars on domestically refined biodiesel, the derogation has had the effect of removing many biodiesel producers from regulatory oversight and the tax system entirely. These small scale producers who "drop out" of the system frequently refine far more than the allowed 2,500 litres, creating unfair competition for larger producers that do pay tax and who must adhere to strict health, safety and environmental standards. This is putting further pressure on legitimate producers in addition to the uncertainty detailed above.

More urgently, the proliferation of domestically refined biodiesel, which contains dangerous combustible elements and by-products, poses a serious health and safety threat to those involved as well as to the environment, unless it is produced as part of a strictly controlled and monitored process. Amateur production of biodiesel is strongly discouraged by the health and safety executive, and so its promotion through a tax benefit is again evidence that the Budget has not benefitted from joined-up thinking in its approach to green taxes.

4.1  The dangers of home produced biodiesel

(i)  The threat to producers

It is possible to buy a small processor for as little as £995, or lease one for £7 per week, which can produce as much as forty litres of biodiesel a day. However, making biodiesel is an extremely hazardous process as it involves the use of dangerous chemicals and the risk of fire and explosion. The Health and Safety Executive recommends that it only be carried out in controlled conditions by people with suitable qualifications and experience. Biodiesel production involves the use of sodium hydroxide and methanol. Sodium hydroxide is extremely corrosive and can cause burning to unprotected skin and potential blindness if used incorrectly. When stirred it produces a fine mist which if inhaled or swallowed can cause major damage to the throat lining and digestive system. Methanol is a toxic chemical and cumulative poison which, if its vapour is breathed, can lead to blindness and damage to the central nervous system.

(ii)  Risk of fire and explosion

There is a serious risk of fire and explosion when refining biodiesel because methanol is highly flammable at just 17ºC and there are many potential sources of ignition in most homes, such as plugs and appliances, open flames and smoking materials. Violent chemical reactions, leading to explosions, have occurred owing to amateur producers making a mistake in the recipe, pouring the chemicals in the wrong order, poor mixing, or making too much at once.

(iii)  The danger to the environment

Black market biodiesel often fails to meet stringent criteria for environmental sustainability and greenhouse gas emissions set out in UK and European law. Biodiesel sold in the UK must meet European standard EN14214—but it is simply not possible to meet this standard using small processors. There is no guarantee that the feedstock used for the biodiesel has been sustainably sourced. The chemicals listed above can cause significant harm to humans and wildlife if they are breathed or touched.

(iv)  Theft of cooking oil

The increase in small scale biodiesel production has seen a corresponding increase in the theft of cooking oil. Agri Energy estimates that theft from its customers and suppliers is equal to the loss of duty on 12.5 million litres of biodiesel per annum. Extrapolating this to the total UK volume of waste cooking oil, thought to be around 120 million litres per annum, means a loss of duty on 30 million litres of biodiesel.

4.3  Our recommendations

As detailed above, Agri Energy believes that sustainably sourced biodiesel has a crucial role to play in helping the UK meet its targets for emission reductions and an increase in the amount of fuel generated from renewable sources. However, biodiesel production is a complex process that should only be carried out by suitably trained professionals. Far from helping amateur producers of biodiesel who wish to run their family cars on vegetable oil, the duty exemption for those who refine less than 2,500 litres of biodiesel has facilitated an underground market in which much larger quantities are sold, avoiding all tax and regulation. This not only creates unfair competition for responsible, larger producers like Agri Energy, but deprives the Treasury of millions in lost revenue, and increases the likelihood of serious accidents that may lead to severe contamination of the environment or health and safety risks to "garden shed" producers.

Agri Energy would like to see a level playing field, where all biodiesel producers are required to pay duty and take their health and safety and environmental responsibilities seriously. We therefore recommend that:

—  The fuel duty exemption for those who produce less than 2,500 litres per year is removed. If it were replaced with an extension of the duty differential mentioned above, then sustainable and reputable producers would still be incentivised for the fuel they produce, but the Exchequer would no longer subsidise poor quality fuel produced from unregistered or stolen oils.

—  This issue should be examined as part of the review of biodiesel incentives detailed above, which would have a remit to examine where tax policy was contradicting the policy approaches taken by other Whitehall departments and agencies.

18 April 2011


 
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