ENERGY DUTIES (11167/06, 16190/06, 16528/06)
Letter from the Chairman to Rt Hon Dawn
Primarolo MP, Paymaster General, HM Treasury
Thank you very much for your Explanatory Memorandum
11167/06. This was considered by Sub-Committee A at their meeting
on 17 October. At this meeting the Sub-Committee decided to hold
the document under scrutiny.
We would like to ask you to further explain
the reasons why you wish to maintain those derogations, keeping
in mind current Community environmental, energy and transport
policy. We would also be grateful if you could provide us with
a more detailed account of what would be the consequences were
those derogations not renewed.
18 October 2006
Letter from Rt Hon Dawn Primarolo MP to
the Chairman
Thank you for your letter of 18 October regarding
the above Explanatory Memorandum (EM 11167/06).
You have asked for further explanation of the
reasons why the UK wishes to maintain its derogations from the
Energy Products Directive and asked for a more detailed account
of what the consequences would be if these derogations were not
renewed.
As explained in the EM, the UK currently holds
three derogations from the Directive:
— For air navigation other than that
covered by Article 14(1)(b) of the Directive;
— For navigation in private pleasure
craft; and
— For waste oils which are reused as
fuel either directly after recovery or following a recycling process
for waste oils, and where the reuse is subject to duty.
The Government has recently submitted its applications
for renewal of these derogations to the Commission. Our decision
to apply for continuation of the derogations followed an evidence—based
assessment by HM Revenue and Customs of the effects of losing
the derogations. This assessment made clear that the various costs
of ending the derogations—both in terms of the administrative
and compliance costs of adapting to the new tax treatment and
the negative economic impact on the sectors involved—would
be wholly disproportional to the benefits that could be gained,
for example, a small revenue and environmental gain.
The key arguments we found that justified applying
to maintain the derogations, and which also highlight the consequences
were they not renewed, are as follows:
Our estimate is that the revenue gain from removing
the derogations would be minimal, with a total additional revenue
of £25 million at most. This would represent a poor return
for the extra resources that would have to be deployed to policing
the new regime and preventing possible new opportunities for fraud
(a minimum of 15 staff would be required to collect this extra
revenue; currently each Member of staff working on oils taxation
collects on average £41 million). As well as the increased
administrative cost, there would be significant enforcement challenges
in meeting the increased risk of fraud. There would also be a
high opportunity cost because the UK would have to divert significant
resources away from more effective activity elsewhere that delivers
higher priority objectives both for the UK and EU.
Similarly, our analysis shows that the environmental
benefit of ending the derogations would be almost negligible in
the case of the derogations for private pleasure boating and air
navigation, and in fact negative in the case of waste oils. As
both private planes and boats use just a fraction of the non-road
transport fuel (0.6% and 0.7% respectively) the total carbon savings
would be around 0.005 million tonnes (mt). To place these savings
in context, the UK's Energy Review announced wide-ranging proposals
that would save between 19 and 25 mt of carbon emissions by 2020.
Moreover, losing the waste oils derogation would increase the
risk of waste oil being dumped rather than recycled, with detrimental
impacts on EU environmental and waste reduction objectives.
The costs for business and fuel users of complying
with the new tax treatment if the derogations are not maintained
is estimated to be as great as £110 million. These costs
would include installation of additional engines for boat owners,
and new pumping and storage facilities at airfields and marinas
because of the need to supply different types of fuels. These
costs would be wholly disproportionate to the minimal gains described
above.
As well as significant compliance costs, there
would be further negative economic effects of ending the derogations
and these would have a disproportionate impact on some sectors.
For example, loss of the derogation on private pleasure craft
would hit boat owners on low incomes particularly hard (many live
on houseboats). We also believe that there would be a particularly
severe impact on areas where the EU is investing in regeneration
through EU Structural and Cohesion Funds, such as the many coastal
areas of the UK suffering from the decline of the fishing and
shipbuilding industries. For private pleasure craft and air navigation,
there would also be an adverse effect on small or medium sized
enterprises (SMEs) who risk being driven out of the market, while
ending the derogation on waste oils might make the waste oils
recovery industry in the UK unsustainable.
Finally, there would also be potential unintended
health and safety risks of not maintaining the derogations. For
example, ending the derogation for private pleasure craft would
be likely to reduce the number of ports where boats could refuel
(as some suppliers would no longer choose to supply fuel to the
private market, focusing instead on the commercial market), increasing
the risk of boats being stranded at sea. Similarly, for air navigation
there would be a risk of encouraging use of unleaded petrol with
detrimental impact on engine performance and possible engine failure.
In terms of the impact of maintaining the derogations
on Community policies, this would be minimal. There would be no
material impact on the operation of the single market. In addition,
there is unlikely to be any adverse impact on transport or energy
policy, especially given that the size of the private pleasure
craft and private air navigation sector represents only a very
small fraction of the total UK transport sector and the fuel use
thereof. There would be a very small carbon saving from ending
these derogations but a clear adverse impact on Community environment
policy from increased dumping of waste oils. Furthermore, there
would be potential adverse effects on Community health and safety
policies as detailed above.
Overall, we judged that the burdens imposed
by removal of the derogations would be disproportionate to any
benefits that could be achieved and therefore that ending the
derogations would clearly not be in line with EU Better Regulation
principles.
I hope you find this information helpful.
30 October 2006
Letter from the Chairman to Rt Hon Dawn
Primarolo MP
Thank you for these Explanatory Memoranda (16190/06,
16528/06) which were considered by Sub Committee A on 16 January
and 23 January 2007. The Sub-Committee cleared the documents from
scrutiny, and wished to note that while they were not surprised
that the Commission rejectd the case made for continuation of
the derogations, they were surprised that the Government has accepted
the rejection.
The Committee also noted that the acceptance
is in striking contrast to the forceful justification for the
derogations advanced in your letter of 30 October 2006. The Committee
were, as you will remember, surprised by the original Explanatory
Memorandum's content and wonder whether, on reflection, the terms
of the letter of 30 October were suitable.
24 January 2007
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