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We hope that the Government have plans to support these developments, particularly in developing the technology from renewable resources and upgrading what are now demonstration products to the commercial

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scale at which they have to operate. Those demonstration projects are best supported on an EU basis, with the prospect of moving forward commercially on a national basis. A commitment to long-term relief on excise duty is something that the Government ought to consider. It is necessary in the long term to encourage investors, and it could be at no net cost to the Treasury. It is the differential that matters. All sorts of other environmental factors can be taken into account in designing congestion charging schemes or implementing the long-awaited lorry charging scheme, when environmental performance can be one of the factors taken into account, covering all lorries—domestically owned and foreign registered—as it does in Germany.

Will the Minister say whether, in his opinion, the incentives for the oil industry to engage fully in the process of adopting biofuels are sufficiently strong? We know that the oil giants are very large and powerful, but they need to be committed to the process. I would like to think that the oil industry is considerably more committed than, for example, the tobacco industry may be to stopping smoking or the drinks industry to combating alcoholism. That is one of the reasons why I was slightly discouraged by the second two paragraphs of the foreword of the report, which talked about things being pursued on a national basis. This is a matter of international significance and it can be effectively pursued by this country only through the efforts of the European economic union.

5.01 pm

Lord Cameron of Dillington: My Lords, I, too, served on the sub-committee that took evidence, and I congratulate those involved in assimilating the huge amount of evidence and writing the report for us.

At first sight, biofuels seem attractive. They seem to promote two important agendas: first, as an energy source, they seem merely to reissue the CO2 absorbed during the growing of the crop and so be carbon neutral; and, secondly, they seem to offer the EU agriculture industry—I declare an interest as a farmer—a much needed extra source of revenue after a decade of very poor returns. Of course, these two agendas need more explanation and after further investigation the picture is not quite so rosy, as the noble Lord, Lord Sewel, and the noble Earl, Lord Selborne, highlighted. First, the growing of wheat and other crops to create bioethanol in the EU is not a carbon-neutral process, nor is it beneficial in terms of other greenhouse gases. Field work for the planting, management and harvesting of crops requires considerable fossil-fuel emissions; just working the soil emits carbon dioxide into the atmosphere, and the application of fertiliser means that nitrous oxide also escapes into the atmosphere. That is the downside of most crop production in the EU.

Meanwhile, in Brazil they are proposing to utilise their vast areas of natural forest and savannah to triple their already huge production of sugar cane for fuel. I cannot see how that process can help global warming. I have witnessed the reclamation of land in the Mato Grosso via a slash-and-burn policy, and the

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short-term effect of that can only contribute to global warming. Although I admit that, as the noble Earl, Lord Selborne, said, sugar cane is one of the best plants in the world for converting solar power into energy usable by mankind, knocking down forests in South America, Africa and Indonesia to grow feed stocks for biofuels from palm oil and sugar cane and then shipping it several thousand miles to Europe does not seem to be environmentally attractive. The idea that Brazil can get carbon credits for doing that seems absurd.

What struck me, like the noble Earl, Lord Selborne, about the evidence we took from Europe is that the biofuel debate did not seem to be driven by global warming arguments, but only by the desire to be free from fuel dependency on Russia in the case of Europe, or other oil and gas-producing countries in the case of the United States. Only Denmark seemed to bring an environmental focus to bear on the biofuel debate, and insisted that there were better ways of extracting energy from biomass which were more environmentally friendly. It is interesting to note from a recent report that it has done a complete U-turn on this and proposes to invest a lot of money to harness new developments in the field.

Having said all that, I very much support our report’s conclusions that whatever the shortcomings of current EU bioethanol and biodiesel production, it is right that the Government should do all they can to promote this embryonic industry through use of the RTFO, the renewable transport fuel obligation. I add that we emphasise—a matter that has been stated before—that the EU should do all it can to encourage a system of environmental audit or certification of the biofuel production, both at home and abroad. Like the noble Earl, Lord Selborne, I am not sure how it might achieve that.

I have two important reasons for supporting the industry at this time. First, transport generally is a growing source of greenhouse gases, and biofuel is one of the few ways attracting investment which could improve the sector’s performances. As I have pointed out, it is not ideal. I think that that reason would not be good enough to support an industry which perhaps could do more harm than good, vis- -vis climate change.

However, the second and main reason for my support of these first-generation biofuels is that second-generation biofuels are almost upon us, as the noble Earl, Lord Selborne, stated. The second-generation process allows the conversion of lignocellulose material—woody material—into fuels; actually, into almost everything, from chemicals to perfumes to medicines and so on. The difficulty is that each woody material—whether it is wheat straw, maize stalks, miscanthus or wood from trees, thinnings and so on—requires a different enzyme to break it down. Once that hurdle has been overcome—the noble Earl, Lord Selborne, reported that there is good reason for optimism—we are into a whole new ball game, where many of the disbenefits of first-generation biofuels evaporate.

For a start, we will be able to use perennial crops, such as miscanthus, willow and so on, which cuts out

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soil disturbance and virtually all fuel and fertilizer use in growing the crop. Secondly, it means that there ceases to be any real competition between fuel and food in terms of land use. For example, with wheat, you would merely use the grain for food and the straw for fuel. The same applies to maize. In other words, we as farmers would start to use the whole crop for commercial return.

Thus, I end where I started. Whereas the current generation of biofuels would only seem to be helpful to climate change, but in reality have some serious shortcomings, I believe that second-generation biofuels will be hugely beneficial, both to climate change and to UK agriculture. Therefore, I strongly support our recommendations that this industry is very worthy of government support. But, above all—I end by making this strong recommendation—we must not at this stage do anything to undermine the research and development of second-generation biofuels. That, with the dramatic cuts Defra is making to its R&D budget, is exactly what the Government are doing.

5.08 pm

Lord MacGregor of Pulham Market: My Lords, I begin by declaring an interest. I am a non-executive director of Associated British Foods, which owns British Sugar. I have declared that interest in these debates before. I, too, would like to congratulate my noble friend Lord Renton of Mount Harry and his colleagues on what I regard as an outstanding report, which has already had a significant impact. It is succinct. It covers all the main points well, and I agree with all its recommendations. Therefore, I shall concentrate on only four issues.

From the way in which my noble friend Lord Selborne and the noble Lord, Lord Cameron, were developing earlier parts of their argument, I wondered at one point how they signed up to the final recommendations in the report. It is possible to reconcile that, and indeed the three objectives, provided that some of the warnings they gave are taken into account. I also make the point that the second generation of biofuels will not be fully developed unless we make a start on the first generation and ensure that we are serious about developing them.

On the first issue, I agree with all three objectives at the beginning of the report and do not think that they are necessarily incompatible. As others have said, the strengthening of energy security is increasingly rising up the agenda in the EU, compared with climate change, which dominated earlier debates. That is no doubt due in part to recent events, to which the noble Lord, Lord Cameron, referred. Of course, we must not exaggerate the impact of biofuels on energy security. I agree with my noble friend Lord Selborne that they are only a partial, perhaps small answer, but they can make a worthwhile contribution to both diversity of supply and home-grown fuel, and it would be folly not to develop them.

The environmental benefits are important to capture but, as others have said, it is necessary to ensure that there is a plus, taking account of issues

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such as deforestation, energy use in producing such fuel and transport costs. Here, I very much agree with the report and with what the noble Lord, Lord Sewel, said, about finding and applying a method—difficult but workable, as I think that the evidence to the committee made clear that it will be—of carbon accounting, getting a system to monitor, evaluate and certify the overall environmental performance of both important and domestically produced biofuels. I want to return to that later.

Of course, there is the domestic agricultural impact. I am surrounded in this debate by agricultural experts, but I live in Norfolk and still keep closely in touch with my agricultural community. We all know what a very difficult period farmers have gone through during the past 10 years as income has declined and with the low output prices. This could provide another important income source very quickly, paying farmers for something that has an economic use and value, which set-aside does not.

My second point concerns the role of the British Government. The report brings out clearly the impact of incentives in developing biofuel demand and supply. It is no coincidence that the member states with the greatest incentives, Germany, Sweden and Spain, were the ones to develop the market. The UK Government were slow to react. The 20p per litre fuel duty reduction was sufficient to incentivise the industry. The renewable transport fuels obligation came through rather slowly. I pay tribute to the noble Lord, Lord Palmer, and the late and much missed Lord Carter—I played some part myself—on the Energy Bill in 2004, I think it was. We tabled an amendment and the noble Lord, Lord Whitty, to his great credit took it on board and provided the legislative wherewithal to get the RTFO to proceed.

I suspect that capital allowances will not have much more than a marginal impact compared with the RTFO. Hence, as the report shows, we have been behind others in developing biofuel prospects. Our sales of biofuel to date have been below target and we are hardly giving a lead up to 2010. By setting our targets by volume, not by energy, as does the directive, our 2005 target was only 0.2 per cent and our target for 2010, measured by energy, is 3.5 per cent, compared with the indicative target in the directive of 5.75 per cent measured by energy.

We need to be more ambitious. Above all, the Government need to indicate to industry that they will be robust in insisting on the targets; that the targets will be in place for the long term; and that the incentives will be maintained for a reasonable period. British Sugar has been developing and will open this June the first bioethanol plant in the United Kingdom, at a cost of £25 million. It will produce 55,000 tonnes of bioethanol each year using 700,000 tonnes of sugar beet. It went ahead only when the Government made clear that they were going ahead with the RTFO. That, and especially the development of second-generation biofuels, will involve industry in considerable capital and R&D investment. The point was well made in paragraph 116 of the report:

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Earlier, the report refers to the economically marginal element of biofuel production in the EU, which will require a continued substantial amount of support, and then moves to an analysis of what it calls the great tax giveaway—with a question mark, which I emphasise. I agree with those who say that the mandatory obligation weapon in the policy is by far the most significant and it is that that has driven people to move. However, at present, to give the industry the long-term assurance that it needs properly to develop the market and meet the targets, tax incentives need to continue as part of the package, although I can see that, in the longer term, they can be phased down or out.

I have two more points to make on signals and incentives from the Government. When the RTFO comes in in 2008, it is important that the buy-out price is set as high as possible. The Government must also indicate as soon as possible how they intend to implement the binding 10 per cent target for 2020, as agreed by the European Council. If they did so, this would boost investor confidence in the UK biofuels industry and put it on to a more solid basis. Without this element of longer-term market certainty, investment, particularly into second-generation biofuels in the UK, cannot be assured.

I said that I would develop the point about carbon measuring a little further. Some have demanded that the Government introduce minimum carbon-savings thresholds and sustainability standards to qualify for certificates under the RTFO from the start of the scheme. They argue that mandatory reporting alone is insufficient to prevent environmental disasters such as deforestation. British Sugar believes, and I agree, that the direct linkage of the kind proposed by those who are arguing for this should be introduced as soon as—this is the qualification—there is a consistent set of robust and reliable data based on globally accepted science. Current accounting systems are developmental, at best, and are not fully understood by global biofuel supply chains. Moreover, the establishment of minimum sustainability criteria must be acceptable, within WTO trade rules, and there must be minimum standards for carbon and sustainability reporting, agreed and implemented at EU level. The Government have been right to take the lead in the EU by insisting on mandatory reporting on carbon and sustainability standards, but I encourage them to continue their stance, as announced in the energy review, to develop robust standards before moving to linking support to minimum standards.

Finally, there will be many questions of balance, as noble Lords have already made clear in the debate. There is, for example, the balance between food production and fuel production, to which the noble Lord, Lord Sewel, referred. Driven by growing ethanol demand, as we know, and recent signals from the US President and Government, US farmers intend to plant 15 per cent more corn acres in 2007. We have already seen an impact on the price of wheat, and there could be implications for food commodities and a consequent impact on food prices. We live in a global world, and that balance and those possible unintended consequences need to be watched. Some people are already expressing fears about the

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implications for UK food production, but I believe there is sufficient feedstock and land availability in the UK to enable bioethanol to contribute to meeting the targets of 5 and 10 per cent. We have a current annual exportable wheat surplus of 3 million to 4 million tonnes, and 500,000 hectares of set-aside that will, I hope, be available after 2008. The industry will no doubt develop new technology to improve the yields of existing feedstock, and develop new feedstock and conversion techniques.

I note that Clare Wenner was quoted in the report as saying:

That is a sensible warning for the long term, but it is not an issue for the next 10 years. As this excellent report makes clear, the opportunities should be grasped now.

5.18 pm

Lord Palmer: My Lords, my interests are listed in the report on page 46. I, too, would like to put on record how sad it is that we published it on 20 November, and that it has taken five months to find a slot in which to debate it, when the biofuel movement is changing literally daily. I also pay tribute to the noble Lord, Lord Renton, for chairing the committee that produced this important report, and thank our specialist adviser, Peter Clery, who was making the case for biofuels when Whitehall thought that the topic was just a joke and that fossil-based LPG was the CO2-saving fuel of the future. He was one of the first to stress the energy-saving potential of biofuels.

We are debating a report of EU provenance, and noble Lords might wish to note that biofuels were favoured by the European Commission primarily as an alternative energy source, not as a C02-saving policy. The first official announcement of the UK Renewable Transport Fuel Obligation was announced in this House in November 2005. This followed the introduction of the 20p per litre fuel duty rebates for biofuels. Here, I, too, would like to pay tribute to my friend the late Lord Carter who played such a crucial part in persuading the noble Lord, Lord Whitty, who was then a Defra Minister, to accept the principle of an RTFO. I well remember the excitement when the noble Lord originally accepted the amendment to the Energy Act put forward by the British Association for Biofuels and Oils, of which I was then president, and, in particular, the speech of the noble Lord, Lord Ezra, when he thanked the Minister for accepting our amendment. It literally brought tears to my eyes and I am sure that the noble Lord, Lord MacGregor, will remember that occasion.

As other noble Lords have mentioned, the present UK proposal is for a 2.5 per cent biofuel obligation in 2008, rising to 5 per cent by volume by the end of 2010. The EU target is 5.75 per cent by energy by 2010. I make no apology for the complication of all these many figures that we will have to quote throughout this debate. The oil companies have predicted that meeting the EU target will require vast amounts of imports from countries such as Brazil, which has been mentioned by other noble Lords. “We

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will be swapping oil from Saudi Arabia for biofuels from Brazil and Malaysia. Does that help energy security?”, asked Peter Tjan of the European Petroleum Industry Association only last month.

European biodiesel production increased some 33 per cent to more than 4 million tonnes in 2006 from just over 3 million tonnes in 2005. Germany was by far the largest producer. EU fuel ethanol production rose by 71 per cent to 1.5 million litres in 2006 from 913 million in 2005, with Germany and Spain by far the largest producers. Production of biofuels in the United Kingdom in 2006 was approximately 260,000 tonnes—0.53 per cent of total road fuels. That is more than double the 2005 figure, but it is still way below the EU targets. Of this total, 167,000 tonnes was biodiesel, 0.7 per cent of diesel sales, and 93,000 tonnes of bioethanol, which equates to 0.4 per cent of petrol sales, all of which was imported. Virtually all UK bioethanol production went to the high value drinks industry and not, sadly, into road transport fuel.

Our own biodiesel industry relies mostly on imported feedstocks, apart from the successful Argent plant in Scotland, which uses mainly recycled cooking oil and tallows. The Biofuels Corporation plant on Teesside, in which I declare a tiny interest as a very small shareholder, is battling with increased palm oil prices and a crude oil price rather below the $70 a barrel mark.

The UK, unfortunately, continues to lag behind other EU member states in domestic biofuel production and in the proportion of biofuels in the national mix. France, a leading biofuel producer, achieved 1.75 per cent of biofuel incorporation last year and anticipates 7 per cent by the end of 2010. The UK has only a very small but growing biofuels industry, which is to a large extent dependant on imports—chiefly palm and soya oil. No significant amounts of UK oilseed rape are thought to be involved in UK biodiesel production.

The increased world demand for biofuel feedstocks highlights an important matter which I wish to bring to your Lordships’ attention. The competition for land between food and fuel is a new phenomenon, which will be of increasing significance. This conflict has already surfaced in the United States where demand for corn for ethanol as a road fuel has driven prices substantially higher, much to the concern of food manufacturers and of course, as a result, their consumer customers. The world price of palm oil has gone up in a year from around $440 per tonne ex-Rotterdam to over $600 per tonne.

In the real world, as the price of fossil fuels rises, the prices of all agricultural commodities are underpinned, as will be the value of land on which these crops are grown. It is a shortage of land and fresh water which could limit economic development if crude oil stays much above the $70 to $80 a barrel mark, although major developments in geothermal energy could improve the picture substantially. This brings me to the crucial point which I wish to make. Compared with many other countries in the EU and indeed outside it, the United Kingdom is relatively

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short of land in relation to our population. More than in most developed countries, land is a scarce resource. We shall need it increasingly in the future for both food and fuel. Decreasing supplies of fossil fuels, global warming and rising sea levels are the reality that we have to face today, the causes of which will be the subject of debate as more evidence comes forward that man-made CO2 is not the only cause of climate change.

But what is indisputable is that we shall need all the land we can get for both food and fuel security, and this is why the EU obligatory 10 per cent set aside is such a scandal, as indeed the noble Lord, Lord MacGregor, mentioned. Only yesterday there was a headline in most of the newspapers, including the Daily Telegraph, as well as a slot on Radio 4, from which I quote:

That is according to the leading government adviser, also mentioned by the noble Lord, Lord Sewel, Professor Bill McKelvey, the chief executive of the Scottish Agricultural College in Edinburgh—here I must declare a further interest as a former student. The thought that we will always be able to obtain affordable supplies of food, biofuel and fossil fuels is imprudent. It is short-sighted and it is comforting to know that the anxiety is shared by people of such eminence and expertise as Professor McKelvey, even though sadly it may not be shared by Her Majesty’s current Secretary of State for Environment, Food and Rural Affairs. I urge Her Majesty’s Government to take this on board.

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