Select Committee on European Union Thirty-Seventh Report


Department for Transport's Response


  The Government welcomes this report from the House of Lords European Union Committee, which makes a valuable contribution to the debate on the European strategy on biofuels. The Government is fully committed to the promotion of sustainable biofuels which have a key role to play in helping to meet the UK's climate change targets, as well as delivering other benefits, including adding to the UK's fuel diversity and generating employment, particularly in rural areas.

  The Government broadly agrees with the great majority of the conclusions and recommendations of this report. Indeed, many of the points made in the report have also been made by the Government to the European Commission in our response to the consultation on the future of the Biofuels Directive.

  Within the UK biofuel sales, production and availability have grown substantially during 2005 and 2006, and biofuel sales are currently running at 0.5% of total fuel sales, a ten-fold increase since 2004. The Government agrees with the findings of the Committee that additional measures will be necessary to ensure a mainstream biofuel market. This is why, in November 2005, the Government announced it would introduce a Renewable Transport Fuel Obligation (RTFO) that will require transport fuel suppliers to ensure that a proportion of their sales are from renewable sources. The RTFO will be introduced in 2008-09 with the obligation level rising to 5% by 2010-11. We estimate that this policy alone will save one million tonnes of carbon in 2010, the equivalent to taking one million cars from our nation's roads.

  The Government is exploring the possibility that the level of the Obligation could rise above 5% after 2010-11, but this will depend on three critical factors being met:

    —  the development of robust sustainability and carbon standards for biofuels to ensure that they are delivering high levels of carbon savings without leading to biodiversity loss or endangering sensitive habitats;

    —  the development of new fuel quality standards at EU level to ensure existing and new vehicles can run on biofuel blends higher than 5%; and

    —  the costs to consumers being acceptable.

  The Government believes. that requiring a 5% share of biofuels, the highest inclusion rate allowable under EU fuel quality standards, will move the UK biofuel market from a minor niche market to the mainstream in the shortest practical timeframe.

  The Government notes the conclusion of the Committee that the RTFO has "great merit". The UK is also committed to developing reliable ways of ensuring that the carbon and wider environmental aspects of biofuel production are properly addressed. To this end, the RTFO will include from day one a requirement to report on the carbon saving and wider sustainability of the biofuels supplied. The Government has commissioned the UK's Low Carbon Vehicle Partnership to develop a robust and user-friendly carbon saving calculation methodology for different biofuel production chains, and a reporting framework and guidance to encourage fuel suppliers to source their biofuels from sustainable feedstocks. These issues will also be considered as part of the Government's Biomass Strategy which will be published later in 2007.

  The combination of measures announced by the UK Government should ensure a strong and sustainable UK biofuel market by 2010-11.

  It is within this context that the following responses to specific points made by the EU Committee are framed.


Chapter 2: Stimulating Demand for Biofuels

    141.  We welcome the initiative shown by the EU in adopting reference value targets under the Biofuels Directive. It is undoubtedly helpful for common targets to have been established to which Member States have agreed to aspire, even though without binding commitment. The Directive provides the Commission with a useful policy instrument through which pressure may be brought to bear on Member States to increase biofuels production. (Paragraph 23)

    142.  We consider that in some measure the targets set within the Biofuels Directives are responsible for the increased use of biofuels in the EU in recent years. But the current Directive has failed to enable the EU to reach the 2005 target of a two% market share for biofuels and additional measures will need to be established if the higher target of 5.75% market share is to be reached by 2010. (Paragraph 24)

  The Government agrees, and has made similar points to the European Commission in its response to the consultation on the future of the Biofuels Directive.

Chapter 3:  Economic Factors in the Success of France, Germany and Sweden

    143.  The governments of Germany and Sweden are to be commended for the initiative and originality they have demonstrated in the incentives and exemptions introduced to encourage the use of biofuels. Implementing a strategy flexible enough to accommodate both high and low level biofuel blends has produced significant biofuels market growth in these Member States. (Paragraph 32)

  The Government agrees on the need for a flexible strategy which will allow the market to decide how best to supply the requisite amount of biofuel. Under the RTFO, obligated companies will be free to decide whether to meet their obligations through the use of high or low level biofuel blends. The Government has also provided support for the use of high blend biofuel applications through, for example, infrastructure grants to assist with the installation of new refuelling points, and fiscal incentives to encourage the purchase of vehicles manufactured to run on high blends of bioethanol.

    144.  We welcome the Government's plan to introduce Enhanced Capital Allowances to enable those biofuel plants which can demonstrate significant carbon dioxide emission savings to claim 100% first-year capital allowances on their spending on qualifying plant and machinery. This is an innovative and important step towards boosting the growth of the biofuels industry within the United Kingdom. (Paragraph 37)

  The Government has applied for State Aid approval for an Enhanced Capital Allowance scheme to support the most carbon-efficient biofuels plants. Following discussions with the European Commission in summer 2006, the Government launched a further stakeholder discussion process with interested parties in October 2006 to update them on progress and gather views on the best way forward. The consultation process is now almost complete and the Government will update stakeholders on the position very shortly.

    145.  Long-term tax concessions are an effective method of supporting the entry of new biofuels producers. Legal guarantees on the duration of duty exemptions give certainty and predictability to investors in the energy market, thus providing for significant investment and growth. We recommend that the Government should take note of this and consider what further incentives can be given within the United Kingdom. (Paragraph 40)

  The Government introduced an Alternative Fuels Framework in the Chancellor's 2003 Pre Budget Report. The purpose of the framework is to ensure that policy continues to reflect the environmental benefits that alternative fuels can deliver, and establish a clear rationale for decisions on Government support. The principal application of this framework is to policy on duty differentials for alternative fuels. In line with the principles set out in the framework the Government has given a commitment to providing future market stability for alternative fuels, with the Government committing to a rolling three-year certainty on the differentials in duty rates on alternative fuels.

    146.  We note the success of effective partnerships between government, producers and industries in France, Germany and Sweden. These relationships provide security to the biofuels producer that there is a demand for the product and surety to industry investors that the volumes required can be delivered. This mutual cooperation is essential to the growth of any industry and we recommend that the Member States and the Commission consider what steps can be taken to encourage such partnerships throughout the European Union. (Paragraph 46)

  The Government agrees that effective partnerships are an essential component of a successful biofuels strategy. This has long been recognised by the UK Government who have for several years been developing cleaner transport policies through established stakeholder groups including the Low Carbon Vehicle Partnership. The RTFO has, from the outset, been developed in full partnership with stakeholders and we are confident that it will encourage collaboration between biofuel producers and their raw material suppliers.

Chapter 4:  The Three Justifications for Biofuels

    147.  Those Member States which have established a viable and expanding biofuels industry have done so with energy security as their prime objective. As energy security becomes an ever greater political concern, demand for biofuels will grow, but this is likely to concentrate on biodiesel. This will place increased pressure on national governments to ensure demand is met through domestic production or imports. (Paragraph 52)

    148.  The Government place CO2 saving at the top of their agenda in relation to the case for biofuels. If CO2 saving is the primary goal, it is clearly illogical to use biofuels which have caused the emission of more greenhouse gases by their production than are saved by their consumption. We therefore consider some form of carbon certification to be desirable and we would wish to see the European Commission establish a European-wide system of certification for both imported and domestically produced biofuels and feedstocks. (Paragraph 60)

    149.  On the condition that any new environmental regulations do not constitute a barrier to free trade or unfairly restrict the importation of foreign produced biofuel or feedstock, certification will greatly strengthen the policy case for biofuels. However, we believe that in relation to the verification process, the onus should be on fuel companies to account for traceability rather than the exporting countries. A system of certification is a viable means of supporting sustainable development and environmental protection. The EU should draw on best practice and establish a monitoring and assessment programme that encourages the environmental lifecycle performance of biofuels to meet minimum standards. (Paragraph 61)

  The Government agrees that effective and reliable assessments of the carbon and wider environmental aspects of biofuel production need to be developed and have commissioned the UK Low Carbon Vehicle Partnership to develop appropriate calculation methodologies for biofuel production chains, as well as a reporting framework to encourage transport fuel suppliers to source their biofuels from sustainable feedstocks. Given the global nature of the biofuels market, we agree that there is an urgent need for the development of European-wide environmental standards for biofuels. These points have also been communicated by the Government to the European Commission in the response to the consultation on the future of the Biofuels Directive.

    150.  We believe that governments, farmers, fuel producers, car companies and oil companies must work together to create a stable biofuels market supported by long-term agreements. This in turn will strengthen consumer confidence and lead to greater awareness and acceptance of biofuels. Whether these coalitions are led by farmers, as in France, or large multinationals, such as Abengoa in Spain, the outcome is the same: a strong national commitment to agricultural economic development through biofuels. (Paragraph 65)

  The Government agrees, as noted in our comments on paragraph 146 above.

Chapter 5:  Importing Biofuels

    151.  If energy security is a nation's main concern, those countries wanting to replace fossil fuels with biofuels may understandably seek imports from countries such as Brazil. A strong international market in biofuels is extremely valuable. Equally, a strong and competitive European biofuels industry is strategically and economically important. We thus support the European Commission's twin objectives of maintaining fair market access for imported biofuels whilst fostering a successful domestic biofuels industry. We do not believe that these objectives are incompatible. (Paragraph 73)

    152.  While imports to the EU are likely to constitute a significant proportion of both biofuels and feedstock for the foreseeable future, further steps will need to be taken to ensure that the overall environmental benefits of imported alternative fuels are properly realised. Although biofuel use produces less carbon dioxide emissions. than use of fossil fuels, this may be partly, if not wholly, negated by environmental costs in their country of origin and by transportation to the point of use. (Paragraph 82)

    153.  Even though Member States can seek guarantees from developing countries about the sustainability of the crops they are importing, accurate monitoring and evaluation is notoriously hard to enforce. A system of certification is therefore a viable means of ensuring sustainable development and environmental protection. Both the biofuels and oil industries clearly view this development as both necessary and workable. We wish to see the European Commission begin work on developing a European wide system of evaluation and certification of the lifecycle environmental performance of both imported and domestically produced biofuels. (Paragraph 83)

  The Government agrees with the Committee's recommendations on environmental certification, as noted in our response to paragraphs 147-149 above, and we recognise the benefits of having a domestic industry as well as imports. In the context of the potential cost, carbon saving and development benefits of increasing international trade in biofuels, the Government would encourage the European Commission to consider improving market access for bioethanol imports over time.

Chapter 6:  Building Domestic Industries

    154.  There is an urgent need for biofuels production capacity to increase in order to meet future demand for biofuels. This will require the European Union to develop an appropriate policy framework and Member States to provide appropriate incentives to encourage further investment in production facilities. (Paragraph 88)

  The Government agrees. Growing demand for biofuels will require significant expansion in production facilities throughout the EU. In the UK the Government has been pleased to note industry's positive response with plans to invest in significant new capacity following the Government's announcement that it will introduce an Renewable Transport Fuel Obligation from 2008. We will continue to work at national and EU level to ensure that the policy framework is appropriate to support investment.

    155.  We strongly believe there is a genuine prospect of bringing into use more EU land, including set-aside, to grow energy crops, while respecting biodiversity policies. However, the EU must always remain secure in its food supply. (Paragraph 97)

  The Government agrees that there is further capacity in the EU to grow energy crops, although the effects of expanded production on food markets will need to be monitored carefully. Farmers are allowed to grow oilseeds and other energy crops on set aside land and 76,000 hectares of set-aside land was used for this purpose in England in 2005. However, the Government has signalled its view that constraints on production, such as set-aside, should be eliminated as part of the 2008 CAP reform "health check". If achieved, this will provide a more sustainable base for the development of an EU biofuels industry.

    156.  Our evidence indicates that blending limits impede progress towards the 5.75% target. The European Commission should work together with the European Committee on Standardisation and the oil and vehicle industries to review current fuel quality standards, with the aim of increasing blending limits. We urge the European Commission to support changes to the EU Directive on the Quality of Petrol and Diesel and to set new, higher blending limits for bioethanol. (Paragraph 101)

  The Government agrees, and has made the same points to the European Commission. The decision to make the level of the RTFO 5% in 2010-11 recognises the limitation placed by the blending limit.

    157.  Car manufacturers have a vital role to play in supporting the growth of biofuels and any changes to blending limits must be carried forward in partnership with the industry. Biofuels are not the only solution to carbon dioxide reduction in the road transport sector and should not be seen as a challenge to alternative "clean technologies". (Paragraph 102)

  The Government agrees, and is participating actively in discussions with the European Commission on the review of the voluntary agreements on CO2 emissions from new cars.

    158.  With new plants being regularly announced, and with major oil companies becoming more convinced of the need to be active in the biofuel market, the issue of integrating biofuels with conventional fuels is already prominent, and will become more so. We note with particular interest the development of biobutanol and hope that industry is able to take this technology forward. (Paragraph 109)

  The Government has also noted this development with interest.

Chapter 7:  Looking Forward

    159.  Although we do not advocate the use of subsidies to prop up markets, we acknowledge that, in order to stimulate initial growth of the biofuels market, Government intervention and regulation will continue to be necessary in order to provide long-term assurance to investors that biofuels production will be financially viable. (Paragraph 113)

  The Government agrees and recognises the benefit the 20 pence per litre duty incentive has had in increasing biofuel sales in the UK. From 2008, in the UK the RTFO will be the primary mechanism to deliver a mainstream biofuel market. The RTFO will provide a long term stable mechanism to establish and safeguard a healthy UK biofuels market without breaching State Aid rules which preclude overcompensation.

    160.  We believe that the RTFO model developed by the United Kingdom Government is one that has great merit and we are encouraged that the European Commission is considering a similar option. We consider that the European Commission should amend the Biofuels Directive to require Member States to use biofuel obligations as a tool to achieve national targets. The Commission must however ensure that distortions in the Single Market do not arise as a result. If such a situation were to develop, the position would need to be reviewed and the case for Community-wide compulsory fuel obligations examined. (Paragraph 123)

    161.  In present circumstances, however, we do not consider that biofuel obligations should be imposed at Community level on each fuel. Rather, by allowing Member States to select the percentage of the biofuel obligation on a country-by-country basis while retaining a policy framework of indicative targets for market share, it strikes a sensible balance between national rights and responsibilities. Obligations also provide an essential counterweight to the support received by the biofuels industries in Brazil and the United States of America, which currently enjoy a greater degree of Government support than in the EU. (Paragraph 124)

  The Government believes that the RTFO is the best way to ensure that the UK market for biofuels will be amongst the strongest in Europe by 2010-11, However there is a need to recognise that similar obligations may not necessarily work for all Member States who may wish to exercise different options to meet their obligations.

    162.  We believe there is scope for second generation biofuels to become increasingly important and to bring greater environmental advantages than currently provided by biodiesel and bioethanol. Further advances in engineering, chemical and agricultural crop technologies will sustain the progress of biofuels and it is here that the EU can add real value. By co-ordinating, financing and organising European research and development as well as facilitation of good practice, the European Commission should act as the catalyst to encourage the market to find and develop new technologies, including the use of by-products and potential feedstocks now classified as waste. We believe, furthermore, that Commission efforts in this area of research should extend to second generation biofuels for aviation, such as synthetic kerosene. (Paragraph 134)

  The Government agrees that the European Commission has an important role to play in European Research and Development into cleaner and more efficient biofuels and production processes.

    163.  It is appropriate that Member States should have the flexibility to develop bioenergy solutions that best suit their climatic conditions and agricultural sector. We recommend that the current system of voluntary targets coupled with monitoring and assessment by the European Commission be retained. The present process of setting biofuel market share targets at five year intervals should also continue, with new targets being set for 2015 and 2020. (Paragraph 138)

    164.  However, it is unlikely that the European Commission will be able to set ambitious yet achievable targets for these dates until Member States" progress toward the 2010 target has been assessed. As there is a petrol surplus and diesel deficit in the EU, consideration should also be given to separate targets for the two relevant biofuels to ensure balanced development. (Paragraph 139)

  The Government agrees that, for the reasons set out by the Committee, Member States should have the flexibility to decide on the most appropriate mix of biofuels to suit their needs. The Government does not therefore see the need for separate EU-wide targets for different biofuels.

    165.  With regard to obligations, we consider that the European Commission should amend the Biofuels Directive to require Member States to use biofuel obligations, such as RTFOs, as a tool to achieve the national consumption targets they have identified. (Paragraph 140).

  The Government believes that the RTFO is the best way to guarantee a strong and sustainable UK market for biofuels. The Government recognises, however, that similar obligations may not necessarily work for all Member States who may wish to exercise different options to meet their objectives.

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