John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

This is a substantial clause, covering a number of areas of excise duty for hydrocarbon oils and biodiesel. The hon. Member for Ludlow will have a particular interest in some aspects of it, because it offers opportunities for constituents such as his in rural areas to diversify their production.

The clause changes the rate of excise duty for hydrocarbon oils and biodiesel from 1 September. Our established policy is that as the UK seeks to meet its targets of reducing pollutant emissions and raising revenue to fund essential public services, fuel duty rates rise each year at least in line with inflation. Budget 2006, however, announced that because of continuing oil market volatility, the inflation-based increase would be deferred until 1 September. Not implementing the change on Budget day, but delaying it to 1 September will cost the public purse £275 million in forgone revenue this year—a considerable saving to the motorist in anybody’s terms.

Fuel duty rates were last increased in October 2003, and since there were cuts in rates in 2000-01 to incentivise the delivery of less pollutant fuels, the main duty rates for road fuels are lower in cash terms than they were in March 1999, and 14 per cent. lower in real terms than they were in 2000. That is an equivalent saving of 8p per litre on road fuel for motorists. Even after the September increase proposed in this legislation, duty rates will still be lower in cash terms than they were in March 2000.

Our policy on fuel duty has been to balance a number of competing and complex issues: for example, our environmental improvement objectives and our concern to raise sufficient funding for public services, with the impact on families and businesses when fuel costs may be higher than they need to be. We have weighed the social, environmental and economic  imperatives in the duty decisions in the clause. We have been ready to freeze duty when appropriate and to increase it when circumstances dictated. Through that approach, we have been able to ensure that fuel duty policy supports environmental goals while retaining flexibility at times of high oil market volatility.

Questions have been raised about why we increased duty rates for rebated oils from 1 September in the Budget, after we increased them in the pre-Budget report last year. It is important to stress that the increase merely ensures that the existing differential between rebated oils and main road fuels is maintained and remains unchanged. Our HMRC analysis suggests that even a small increase in the differential offers serious fraudsters appreciable extra profits. Freezing rebated fuel duty while increasing the main fuel duty rates would have widened the differential by 1.25p per litre, significantly increasing the incentive for fraudulent misuse of rebated fuels as road fuel. That could have undermined some of the efforts and pressure that we are exerting on oils fraud through the oil strategy.

However, I am also aware that some industries are heavy users of rebated fuels and that they form a significant proportion of their operating costs. We announced in the Budget that the Government would work with sectors that make heavy use of rebated fuels to examine the wider impacts of the oil strategy, and those discussions have already begun.

We must continue to recognise that transport is the second largest source of carbon dioxide emissions in the UK, and that emissions are likely to continue growing until the end of the decade as the UK economy remains strong. Duty differentials help to encourage the use of more environmentally friendly fuels and to stimulate the development of new technology that can help to reduce greenhouse gases. They can therefore help to reduce the impact that motoring may have on local air quality as well as on climate change.

Therefore, the clause covers the duty rate for biodiesel. It is worth reminding ourselves of the impact of the differentials that we introduced for biodiesel in July 2002 and for bioethanol in January 2005. Several years ago, there was virtually no market for biofuels in the UK. It has grown to 118 million litres, or 0.25 per cent. of the total road fuels market. That is still a low base and there is still a long way to go, but the measures that we are taking will increase usage to 5 per cent. by 2010-11. The 2006 Budget proposes to encourage the wider take-up of biofuels by announcing the extension of the 20p per litre duty incentive for biodiesel and bioethanol until 2008-09, which will add a degree of certainty for those who are planning to invest in and develop the industry.

We also set out in the Budget further details on how we will introduce a renewable transport fuel obligation, which will require transport fuel suppliers to ensure that a percentage of their sales are from a renewable source. It will be introduced in 2008-09 with the obligation level set in the first year at 2.5 per cent. and in the following year, 2009-10, at 3.75 per cent., reaching the target of 5 per cent. in 2010-11.

The renewable transport fuel obligation is a significant new measure that will give long-term certainty to the development of the industry. Hon. Members may be interested to know that it will also deliver savings of some 1 million tonnes of carbon a year by 2010, which we estimate is the equivalent of taking 1.4 million cars off the roads in Britain. I commend the clause to the Committee.

Helen Goodman (Bishop Auckland, Labour)

We acknowledge that the Financial Secretary and the Treasury have to balance several competing demands in this clause. One is in respect of the impact on the environment. If there were no increases in duties, the Treasury would be subject to criticism on that score. Another demand is in respect of the impact on agriculture, about which my hon. Friend the Member for Ludlow is extremely concerned. If there were increases in duty, the Government would be criticised on that score, so it is difficult for them to strike a balance.

Then there is the question of fraud. The Financial Secretary and I considered the matter previously, during a debate in January on a statutory instrument. I asked him what the impact on fraud had been of reducing the differential between main road fuels and rebated fuels. I wanted to know to what degree any reduction in fraud had been the result of beefing up fraud detection by the recruitment of more inspectors, rather than narrowing the differential. I want to give credit to the Financial Secretary, who said with commendable honesty that he could not answer the question. He went on to say that

“analysing and estimating the scale of fraud generally is a relatively inexact science. Very often, it is not really possible to isolate the impact of individual measures.”—[Official Report, Third Standing Committee on Delegated Legislation, 9 January 2006; c. 10.]

That raises the question of how effective the anti-fraud element of the measures will be.

As the increases will not be implemented before September and will generally be in line with inflation, we shall not oppose them. I return, however, to the question of balance. We are concerned, as is the National Farmers Union, about the effects of rises on agriculture. The Financial Secretary and I know that the NFU announced in the wake of the Budget that it intended to write to the Chancellor seeking an exemption from the increase in the cost of red diesel. I do not think that the Financial Secretary confirmed that he received such a letter, but I should like to know whether he did and, if so, what is the Government’s response?

We shall not oppose the clause. We have serious concerns about the effects of the rises on agriculture, and we will be watching closely what happens in the run-up to next year’s Budget.

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

I begin by commending the Financial Secretary for the clause’s welcome measures to encourage more environmentally friendly vehicle use. I hope that the introduction of greater certainty to the duty differentials on biofuels will make a difference and will encourage more people to make the necessary conversions.

However, I would appreciate it if the Financial Secretary provided clarification on the definition of  biodiesel. Any confusion about the definition could hinder the development of the market. I understand that biodiesel must be “of diesel quality,” which means:

“It must be a liquid—not gaseous at a temperature of 15° C and under a pressure of 1013.25 millibars; and

It must be made from biomass or waste cooking oil;

The total ester content must not be less than 96.5 per cent. by weight; and

The sulphur content must not exceed 0.005 per cent. by weight or be nil.”

According to the Hydrocarbon Oil Duties Act 1979, “diesel quality” means that when blended with ordinary diesel, biodiesel will run an engine that would normally run on diesel. Biodiesel does not have to be used exclusively in the fuel tank, although that is possible.

I understand that vegetable oil is not perfect for cars. In order to make it suitable for car use, the oil must be modified in some ways. One way to do so is through transesterification, which involves cleaning the vegetable oil so that it can be used in a diesel engine. That uses a great deal of energy and some methanol, and leaves glycerine as a by-product that must be disposed of. It is also possible to add certain things to vegetable oil to make it usable. On the other hand, it is possible to make changes to the car so that it can accept vegetable oil as it is.

Does adding chemicals make vegetable oil of diesel quality? If the car is modified, does that make unmodified vegetable oil of diesel quality? There is clearly an element of confusion that could lead to perverse tax incentives for people to use changed vegetable oil, which has to go through a damaging process that could harm the environment, while those who go to the expense of modifying their engines or using additives might have no similar incentives. If such incentives exist, does the Treasury intend to make them clear?

I turn to the deferred increase in hydrocarbon fuel duty rates. I understand that the increase will not take place until 1 September 2006. When the re-valorisation kicks in, it will represent an increase in line with inflation. It will not be a real rise but will prevent a real-terms fall. That is welcome; since 2000, when fuel duty began to decline in real terms, the rate of increase in greenhouse gases has doubled. The take of green taxation as a percentage of national income has also fallen during that time. In 1999, green taxes represented 3.6 per cent. of national income; that has now fallen to 3 per cent. Fuel duty accounts for two thirds of the total take of green taxation, so the rise will help to counter the decline.

However, a question similar to those raised during our discussions of other measures on vehicles arises: what changes will the clause make to behaviour? What other measures is the Department considering to fulfil its environmental obligations? The proposals are okay as far as they go, but is the Treasury considering longer-term ways of producing changes that will impact on behaviour, pollution and the environment?

The changes in the clause will not achieve that; neither will the changes proposed for vehicle excise duty. What meetings has the Treasury had with the Department for Transport, which is considering proposals for road-user charging—a real way of  making the polluter pay and relating vehicle use and the impact that it has on behaviour?

John Thurso (Caithness, Sutherland & Easter Ross, Liberal Democrat)

My hon. Friend is absolutely right to say that road-user charging is the most effective way to tax road use; it impacts on those who create the most environmental problems—in other words, cause congestion. It has the added benefit of reversing the current problem: people who live in far-distant places such as the north of Scotland pay 12p more for their fuel than those in metropolitan centres. Road-user charging puts more tax on people in areas with congestion and therefore with alternatives.

Implementing that will take five or six years at the very least. In the interim, what could my hon. Friend offer my constituents? Would she favour using the EU derogation, which would permit such remote areas to have a lower fuel duty?

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

I can put my hon. Friend’s constituents’ minds at ease; I shall support the use of the EU derogation on that issue. Amendments were tabled in respect of other measures that would ease the burden of those in rural areas who have no alternative but to use a car. Unfortunately, they were voted down.

Rob Marris (Wolverhampton South West, Labour)

The hon. Lady seems to be contradicting herself, as she did during Committee stage in the House. She criticised the Government for the fact that the proportion of green taxes has fallen, but now agrees with the hon. Member for Caithness, Sutherland and Easter Ross that they should fall further through an EU derogation on fuel duty. Her position seems entirely contradictory, although that is not surprising in a Liberal Democrat.

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

I am afraid that the hon. Gentleman may have missed the point. The derogation refers only to a tiny, very isolated, minority of areas. If alternatives such as improved public transport were provided in such areas, they would probably end up being less environmentally friendly than allowing the people there, who have no other option, to continue to use their cars.

If we are to impact on behaviour, we have to change the behaviour of those who have other options. As has been mentioned, any changes would have a massive impact on the pockets of those living in rural areas, but would not influence their behaviour. The only reason for using pricing mechanisms to change behaviour is to make people use an alternative; if they do not have one, they will have to continue to pay and the objective will not be achieved.

John Thurso (Caithness, Sutherland & Easter Ross, Liberal Democrat)

I am grateful to my hon. Friend and shall not intervene on her again. The question to ask the Government is as follows: why should increases in fuel duty be capped when they reach a certain point so that people are not adversely affected, when it is all right for the prices people pay in remote areas—they pay 5 per cent. more—not to be capped?

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

My hon. Friend makes a good point. I shall close my remarks by expressing my hope that the Minister will provide clarity on the time scale  to which he will work with the Department for Transport on introducing road-user charging, so that the changes in the clause represent only a holding measure rather than a long-term strategy.

Helen Goodman (Bishop Auckland, Labour)

I welcome subsections (3) and(4), which maintain the differential that the environmentally friendly biodiesel and bioethanol have in the whole regime. Together with the renewable transport fuels obligation, the provision is providing a significant incentive for both the domestic and European production of these fuels.

In last year’s Standing Committee on the Finance Bill, I referred to the excellent farmers’ co-operative, Farmway, which is on the border of my constituency and that of the Prime Minister. These measures are of environmental benefit. They are of benefit to the farming community because they are providing an alternative outlet for it. They also have significant employment benefits. In fact, as a result of the additional incentives, there is a chain of petrol stations called “One green route” throughout the constituency where people can specifically buy biodiesel and bioethanol.

I have some questions on the capital allowance treatment of biodiesel and bioethanol on which I hope we can have a move to more generous treatment. As for subsection (2)(c) and the ultra-low sulphur petrol rate, I understand from the explanatory notes that it affects the rate of duty on aviation gas as well, which is charged at one half of the rate set aside for light oil.

Earlier, the Financial Secretary explained reasonably that we are constrained in what we can do on aviation fuel due to a network of international treaties. I am sure that he is aware that the fastest growth in aviation fuel is on domestic flights. Therefore, does the hon. Gentleman know whether international treaties apply to fuel bought for domestic as well as international flights?

George Young (North West Hampshire, Conservative)

I want to follow the hon. Lady by focusing on subsections (3) and (4), which maintain the differential rates. The Financial Secretary approached the matter from a number of angles. He mentioned the agricultural angle. Like my hon. Friend the Member for Ludlow, I have a rural constituency where there is enormous interest in diversification—an appetite. They have got to have either a new crop of houses or a new crop of biofuels. Within an appropriate balance, I would prefer to have the biofuels rather than an excess crop of houses in some of the scenery. Two points arise from that.

First, the Minister mentioned enhanced capital allowances. What progress have the Government made in the application for state aids clearance? Is the Minister still confident that he will get the necessary clearance and that the scheme will be up and running by 2007? Because without that, the infrastructure to support the diversification may not be available.

I want to raise a second, broader issue. The Minister is maintaining a 20p differential, but what is the logic behind 20p? Why has that figure been chosen? Is there any flexibility or are we stuck with 20p for ever and a  day because that figure was put in initially? Some targets in the Red Book seem to be rather modest against a background of 0.25 per cent. of road fuels being accounted for by biofuels. That does not seem a high base, but the targets are to hit 5 per cent. by using the RTFO by 2011.

The Minister said that the RTFO was a new invention. In a sense it is, but it is a close relative of the non-fossil fuel obligation, which was introduced by the previous Administration and applied to the supply of electricity and fuel. I welcomed that. However, if the Government are serious about reducing carbon dioxide emissions, will a target of 5 per cent. deliver? The higher target of 5 per cent. after 2010 and 2011 is heavily qualified. Page 766 of the Red Book says:

“The Government intends that the target should rise beyond 5 per cent. after 2010-11, so long as infrastructural requirements and fuel and vehicle technical standards allow, and subject to the costs being acceptable to the consumer.”

That is important small print. Should not one approach the matter from the other direction? Given that there is a strong commitment to reduce carbon dioxide emissions and that transport costs account for such a high percentage, should we not find out the percentage reduction that has to be achieved through the RTFO and work backwards through that and, perhaps, end up with a different differential from the one that we have at the moment? Perhaps we should do that, rather than starting from where we are and arriving at a solution that may not enable the Government to hit their carbon dioxide emission target.

I should like to know whether there would be any flexibility in the Government’s approach, if it turned out that their targets were not ambitious enough to deliver the Kyoto targets to which I believe they remain committed.

Stewart Hosie (Spokesperson (Chancellor of the Exchequer; Home Secretary); Dundee East, Scottish National Party)

Some hon. Members may recall that, in last week’s Committee of the whole House debate concerning vehicle excise duty in sparsely populated rural areas, the point was made that the major financial pain felt by people in such areas was from the price of fuel, not the one-off cost of vehicle excise duty. Indeed, with petrol and diesel in the Western Isles today sitting at around £1.06 a litre, the time has come for some form of change to the duty system.

The Financial Secretary said earlier that he had had numerous discussions and consultations and published a large amount of information. I want to question him on how he got to the duty rates that will be implemented from September 2006. I welcome the comments that he made earlier about discussions with those who use rebated fuels. In his discussions on setting this year’s rates, did he consult the haulage industry, particularly, which is continuing to find trading difficult, in no small measure due to the high cost of fuel and not least because, as Committee members know, the largest element of the cost of a litre of fuel—slightly under 50 per cent.—is duty, with the remainder, up to around 65 per cent. of that cost, being VAT?

In the Financial Secretary’s consultations, did he speak to organisations other than the obvious  ones concerned with the production, refining and distribution of fuel and the large motoring organisations? Did he speak to some of the smaller, sectoral and geographic interests, where the high price of fuel is particularly punitive, being based on a high duty regime? Did his review and his consultations and discussions not only lead him to set this year’s duty rates, but will those in any way inform debate in future—perhaps on the need for a more sensitive fuel duty regulation regime? Will he consider in future, notwithstanding the rates set for this year, the EU derogation option, which has been raised on a number of occasions by the Liberal Democrats? I am straying ever so slightly, but do the Financial Secretary’s discussions lead him, perhaps, to changes in subsequent years’ excepted vehicles amendment to schedule 1 to the Hydrocarbon Oil Duties Act 1979 statutory instrument? Those are important questions.

I hope that in the Financial Secretary’s discussions he considered the effectiveness of the fuel duty regime in relation to business competitiveness, not least because a litre of unleaded petrol, at 94.6p, is cheaper in every other European country, with the exception of Denmark, Finland, the Netherlands and Norway, and because a litre of diesel, at 97.8p, is cheaper in every other country reported by the European Road Information Centre, based in Geneva.

I should like briefly to give a few examples: the Automobile Association’s figures from April show that the 97.8p average price in the UK is opposed to 73.2p in Austria, 78.91p in Belgium, 77.84p in France, 69.27p in Spain, and so on. Is the Financial Secretary confident that those increases, delayed as they are until September, remain the only way to proceed, or does he keep an open mind about whether a more sensitive regulatory regime may be appropriate and whether future derogations may be appropriate? Will he consider options to help sectoral and remote geographical interests?

Brooks Newmark (Braintree, Conservative)

I shall take a slightly different focus. I notice from the explanatory notes that the decision to defer the increase until 1 September was expected to cost £275 million to the Exchequer in revenue forgone in 2006 and 2007. Part of the rationale for the delay, as I understand it from the Government’s announcement regarding the 2005 Budget, was that the increases would not go ahead because in the short term uncertainty and the risk of price volatility remained high, with oil trading at the end of the week preceding 6 June at above $59 per barrel. That was a year ago. The price of crude has gone up, and I believe that it is more than £70 now.

Stewart Hosie (Spokesperson (Chancellor of the Exchequer; Home Secretary); Dundee East, Scottish National Party)

Dollars.

Brooks Newmark (Braintree, Conservative)

I am sorry. The price is fairly close to $70, so it has gone up and volatility has gone up. I read from the explanatory notes:

“Changes in oils duty rates would normally take place on Budget day, but, owing to continued volatility in the oil market, the Government has decided to defer increases in fuel duty rates until 1 September 2006.”

Volatility has increased since the production of that document and since the report last year, and prices are even higher than they were in 2005. So, I am curious  about why 1 September 2006 is still the magic date for increasing duty, when the situation has not only remained the same, but gotten worse. I look forward to the Minister’s response.

Rob Marris (Wolverhampton South West, Labour)

It was an interesting exchange with the hon. Member for Falmouth and Camborne, because principles are all right for the Liberal Democrats until they are inconvenient. We heard the principle that the proportion of taxes from green tax should rise until it is a bit inconvenient to her hon. Friend from the north of Scotland, the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso), when the proportion would drop—but we heard that that is all right, because it is only a tiny drop. There go the principles. I understand: it is pragmatism.

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

It is an issue of reconciling principle with fairness. If we are going to take difficult decisions with a view to having an impact on consumer behaviour, we must consider the areas in which the burden will fall heaviest. It will fall heaviest on those who are least able to afford it and have no alternative. I see no contradiction in pursuing fairness and greater environmental measures.

Rob Marris (Wolverhampton South West, Labour)

I agree with the hon. Lady’s general proposition that there is no contradiction. Unfortunately, in the proposition that she set out earlier, there was just that contradiction, which is what I highlight to the Committee.

Secondly, the biodiesel and biofuel chemistry lesson was helpful—esterification and all that stuff. It would be interesting if the hon. Lady explained her party’s view on the E85 fuel, which is being pioneered in her region. I am happy to take an intervention.

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

I thank the hon. Gentleman for his invitation to intervene. Of course we fully welcome the fuel. I was asking for clarification, because there is confusion among consumers about what rebates they may be entitled to and what support may be available to them to make a more environmentally friendly conversion to their vehicle.

Rob Marris (Wolverhampton South West, Labour)

No details on E85 then either.

I have a question for the Financial Secretary. In terms of the renewable transport fuel obligation target of 5 per cent. by 2010-11, to which he and other hon. Members referred, what proportion of arable land in the United Kingdom would be required to provide the bio part of the biofuels? It is all very well talking about such targets, which is very laudable in terms of cutting emissions, but if it means that we will have crops for fuel at the expense of crops to eat, there may be a limit to how far we as a relatively small country can go because of the amount of arable land that we have. Was that availability of land, or lack thereof, taken into account in setting the 5 per cent. target?

Philip Dunne (Ludlow, Conservative)

I will be brief as many of the points that I wanted to raise have been covered by other Members.  

On the level of oil prices and the relationship between duty, VAT and price, which the hon. Member for Dundee, East (Stewart Hosie) went into in some detail, when these measures come into force at the beginning of September we are likely to face a point of extreme political sensitivity. When I filled up my car with petrol over the weekend, I paid 98.9p per litre. Once this duty comes into force the price, assuming everything else stays the same, will tip over the symbolically highly significant £1 a litre point. A couple of years ago, the Chancellor responded to pressures—in particular from the haulage industry, as was referred to earlier—by deferring an increase in duty. However, as my hon. Friend the Member for Braintree said, oil prices have now risen considerably above the point of the 2005 Budget when that deferral was introduced. I confidently predict that we will be living with petrol and diesel prices that will rebound on the Government. That could be good news for those of us who are not members of the Government, but I am more concerned about the consumers who will have to pay these prices to help the Chancellor with his public accounts problems.

I wish to touch briefly on two other points: rebated oils and biofuels. In respect of the rebated oils, I served on the Standing Committee that discussed the last increase in January, when I declared an interest as a farmer and therefore a consumer of red diesel, which I should do again. I expressed the concern that at a time when agricultural incomes are under great pressure we are adding to the difficulties of farming for food in terms of making a profit by raising the Government’s take of that endeavour. Yet again, I plead with the Financial Secretary to consider whether it is really appropriate to maintain a duty differential. I heard his arguments in relation to fraud on rebated oils, but I am unconvinced.

On biofuels, I wish to make a point that followson neatly from something that the hon. Memberfor Wolverhampton, South-West referred to. The renewable transport fuels obligation is welcome. It is starting from a very low base, as my right hon. Friend the Member for North-West Hampshire suggested. However, what is not included in these measures, and in my view should be, is any suggestion that the percentage of renewable fuels that the Government are rightly encouraging should come from a sustainable source. At present, the cheapest biofuels come from parts of the world where palm oil can be produced, and palm trees, out of which palm oil is extracted, are being planted in areas that hitherto were sources of the greatest biodiversity on the planet—parts of the equatorial forests. We should not put in place measures that will encourage the further despoliation of forests in Brazil and elsewhere along the equator. There should be a measure—if not in this Bill, then in the next Finance Bill, which I look forward to discussing with the Financial Secretary—that ensures that we are only supporting the use of sustainable renewable fuels.

Stewart Hosie (Spokesperson (Chancellor of the Exchequer; Home Secretary); Dundee East, Scottish National Party)

In discussions with the National Farmers Union Scotland last year, I was told that many of its members were desperate, willing and able to grow oilseed rape to turn into biodiesel but the processing capacity simply did not exist. Is the hon. Gentleman suggesting that the processing capacity to  build up secure supply in this country should be addressed in a future Finance Bill, so that we do not have the despoliation of the third world by the growing of trees for palm oil there to provide cheap supply to the west?

Philip Dunne (Ludlow, Conservative)

I am grateful for that intervention but I suspect that the Financial Secretary will respond by saying that that is precisely why he announced the introduction of capital allowances for biofuels in the Budget, a fact that I welcome. Nevertheless, it is a valid point that by insisting on an arbitrary duty differential of 20p per litre the Budget is not providing the right incentives to encourage domestic biofuel production. No reason has been given that bears scrutiny as to why the duty differential should be maintained at 20p, and if there is a logical analysis supporting that figure I should be interested to hear it.

Helen Goodman (Bishop Auckland, Labour)

The hon. Gentleman may not believe that there is any logical reason for it, but I can tell him that industry members fully support it and see its benefits for industry financing.

Philip Dunne (Ludlow, Conservative)

I am grateful for that intervention because I think that the hon. Lady misunderstands my point. I am not arguing that the duty differential should be scrapped; I am arguing that it should be maintained not at 20p but at 21.25p. There should not be an increase in duty on the biofuels that are proposed in clauses 3 and 4. The hon. Lady is acknowledging that from a sedentary position.

I shall make the following final remarks because I take a great deal of interest in biofuels for the purposes of agricultural diversification, as the Minister was kind enough to say. In my constituency there is what I believe to be the very first 100 per cent. biodiesel forecourt pump—I was certainly told that when I opened it. It is in the town of Bishop’s Castle, which is a leading innovator in all forms of green effort. The feedstock for that plant comes from waste rapeseed oil from the catering establishments of local authority schools, which I am told is the only source of waste rapeseed oil that is available in this country and which is clearly a very finite supply. To expand domestic production we must undoubtedly put farmers in a position where they can supply on an industrial scale, and my understanding is that that is beginning to happen, although only slowly. There are sugar beet farmers in my area who would welcome the opportunity to turn sugar beet into bioethanol, but at present the only plant under construction is in Norfolk, and it is probably uneconomic to transport material to Norfolk from Shropshire.

Rob Marris (Wolverhampton South West, Labour)

I caution the hon. Gentleman on his enthusiasm for used rapeseed oil or canola oil deriving from schools. As the Ricardo Associates report for the Department for Transport showed, either last year or the year before, if that fuel is put in unmodified engines, the pollution emitted from unmodified vehicles can be significantly worse than if they were running on diesel or petrol.

Philip Dunne (Ludlow, Conservative)

I am most grateful, and I shall not detain the Committee by discussing with the hon. Gentleman the proportions of fuel that should be ordinary diesel and biodiesel. Biodiesel is being gradually introduced alongside regular diesel in Bishop’s Castle—I am reliably assured that once the tank has been topped up on a sufficient number of occasions it can be used at a 100 per cent. level without engine damage. Fuel efficiency is also improved, and by definition that reduces emissions.

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

I shall try to respond to the points that have been made in a wide-ranging and rich debate that has reflected the different provisions in the clause. I welcome the interest that has been shown on both sides of the Committee in developments in supporting biofuels, including from the hon. Member for Ludlow, the right hon. Member for North-West Hampshire and my hon. Friend the Member for Wolverhampton, South-West. The primary policy purpose of the road transport fuels obligation is environmental impact: the contribution it can make to the UK’s effort to deal with emissions and climate change. To deal with those things we want to expand the UK biofuels market, and that is our principal purpose. The principal purpose is not to expand the UK biofuels industry, although we hope that that will be an important consequence of our approach and we are putting some measures in place to support its development. There are signs that it is expanding. A new biodiesel plant is coming into production and some bioethanol plants are starting to be in process.

My hon. Friend the Member for Wolverhampton, South-West asked whether the 5 per cent. RTFO could be met by domestic rapeseed and crop production in the UK. The short answer is that if he examines the studies that the Department for Environment, Food and Rural Affairs has done, he will see that it is confident that 5 per cent. production could be met entirely from feedstock grown in the UK. That could be done without affecting the production of food crops, which he is concerned about—partly, I guess, because we are a net exporter of wheat. We also have a substantial amount of set-aside land available, which could in theory be turned over to such crops.

The principal purpose of the range of support that the Government is putting in place is to achieve environmental gains by expanding the UK biofuels markets. It is not designed to be a new source of subsidy for UK farmers and agricultural production.

Nia Griffith (Llanelli, Labour)

Does my hon. Friend agree that there is further potential with the reform of the common agricultural policy, particularly in respect of sugar beet? There will be more opportunities for the poorer nations of the world to export sugar cane sugar to the EU. Subsequently, some areas in Britain where sugar beet has been the main source of income will be interested in turning to biofuels in the future.

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

My hon. Friend is right. I do not think that she joined the debate that I was involved in last night in the Commons Chamber about the future financing of the European Union. The imperative to reform the CAP further was a central part of the agreement that was reached under the UK presidency  in December. On sugar, she might be aware that under the UK presidency an historic reform of the EU’s sugar regime took place to remove some of the indefensible levels of subsidy and protectionism that were part and parcel of it.

The hon. Member for Ludlow made the important point that in developing the RTFO we must be concerned about the source of the feedstock, to ensure that there are no unintended consequences that are environmentally damaging. He might be interested to know that as part of the preparation for the introduction and development of the obligation we are examining how we can put in place a carbon assurance system that allows, on a life cycle basis—this is precisely the point that he was making—an assessment of the impact and the contribution that the obligation will make.

You might remember, Mr. O’Hara, that the hon. Member for Braintree promised the Committee this morning that he would never take a view that was different from the view of those on his Front Bench. This afternoon, he has been arguing that the inflation duty increase on road fuels should not go ahead in September. He might have missed the hon. Member for Wycombe saying a little earlier that the Conservatives accepted the provisions in the clause.

Brooks Newmark (Braintree, Conservative)

Ever on the ball myself, I had a feeling that that question would be asked. That is why I began my mini speech with the phrase, “This is merely a probing question”.

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

We are only on our first day in Committee, although it feels a lot longer than that. I look forward to the further probing questions that the hon. Gentleman may ask the Committee that will be directed, I suspect, as much at those on his Front Bench as at those on ours. The serious point is that the Government keep all options under review, but it is our intention to increase rates in line with inflation from 1 September this year. As in the past, we shall take full account of all the economic as well as the social and environmental factors.

If the hon. Member for Dundee, East believes that there is a case for a different fuel duty regulation regime, he may wish—as his colleagues in the Scottish National party did last year—to frame such a proposal as an amendment to the Finance Bill, which we could debate fully in the future. He asked, in particular, whether we consulted beyond what he might regard as the usual and obvious suspects, including those associations that represent some of the essential users of road fuels, including the haulage industry. I have met the Road Haulage Association several times since the pre-Budget report. Immediately before that, in part to examine the findings of the Burns review, officials met the association almost weekly in the run-up to the Budget. That important sector of the industry has had a fair chance to put forward its point of view. It welcomed, as did Roger King the chief executive of the Road Haulage Association, our decision to defer the increase in fuel duty.

My hon. Friend the Member for Bishop Auckland asked me a straight question about whether domestic  aviation turbine fuels are taxable. I shall give her a straight answer: the answer is yes, with the qualification that if the United Kingdom took the unilateral decision to raise significant rates of duty on AVTUR on domestic flights, the consequence might be precisely the opposite to which she wants to achieve. She is worried about environmental impact. Were we to take a unilateral decision, there would not only be a risk to the commercial competitiveness of some of our flights, but a serious risk that airline companies would tanker and refuel outside the United Kingdom and therefore fly extra air miles to service domestic routes, but doing so on fuel that was purchased outside the United Kingdom. Such a proposal might defeat her purpose.

I had not mentioned the enhanced capital allowances for biofuel plants, but the right hon. Member for North-West Hampshire asked me about them. We submitted the application for state aids clearance on Budget day. As he would expect from his knowledge of how the Government work, we had discussed it in detail with the European Commission before we put in our formal submission. I therefore remain confident that we shall gain the clearance that we seek for the enhanced capital allowances. I hope that we can start the scheme early in 2007.

The right hon. Gentleman and the hon. Member for Ludlow questioned the 20p per litre duty discount and support for biofuels. We set it at that rate because we believe that it is a sufficient incentive to help support the development of the biofuels market. Furthermore, because it is a significant source of tax forgone to the taxpayer, we do not want the public purse, in a sense, to be paying over the odds for that form of support. If the right hon. Gentleman and the hon. Gentleman consult the Budget document, they will see that, alongside the duty discount support for the development of biofuels, we have announced that, with the obligation, there will also be a buy-out mechanism. That combination of duty incentive on the one hand, and penalty or discipline through our buy-out level on the other, will give the obligation the kick-start that it requires. It will also give the industry and prospective investors the certainty for the long term that they require from Government policy.

In response to the hon. Member for Falmouth and Camborne, I point out that biodiesel is eligible for duty discount if it meets the specifications set out in the Hydrocarbon Oil Duties Act 1979. That is it. However, we announced in the Budget that the HMRC would review the definition of biodiesel and how it operates. I aim to report back from that review by the time of the pre-Budget report this year, so if there are specific points that she wishes the review to take into account, I suggest that she lets me have them and I will ensure that they are properly considered.

On the hon. Lady’s broader argument, we know that she wants to whack up environmental taxes and price people out of their cars, but the hon. Member for Wycombe reiterated my point that, when making decisions about duty, there is inevitably a balanced judgment to make and a balance of factors that have to be taken into account. Although the hon. Lady is concerned for duty to be used as a way of raising prices so as to discourage people from driving, I point out that when we made our decision on the 2005 Budget,  the pump price that motorists were paying for petrol was 82p per litre. We proposed a duty increase of just over 1p per litre, being conscious that that might contribute to achieving our environmental ends, but also balance the other factors. By the time of the pre-Budget report, we decided that we would not go ahead with a duty increase, because the pump price was 6p per litre higher. In those circumstances, because of demand, the market had the environmental impact that the she advocates that we should seek through duty. In the circumstances, we were right not to go ahead with the duty increase and not to load those extra costs on to motorists and hauliers; and for those concerned about the environmental impact, the market and the price mechanism were doing far more of the heavy lifting than the Government could or should do through duty increases.

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

The point that I was making was that we are talking about a very blunt instrument. If the Government are serious about changing behaviour—and their stated intention is that they are—this is not an appropriate structure; hence my call for the Government to consider other mechanisms and structures, such as road-user pricing, which is being investigated by the Department for Transport.

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

Interestingly, my right hon. Friend the Paymaster General has just told me that the Liberals opposed road-user charging in Bristol, which is my right hon. Friend’s area. That is an interesting contradiction between the views that the party seems to take nationally and locally, but perhaps that is not terribly new. I say to the hon. Lady that, in the end, there is not one, single policy solution to the challenges that we face. Road-user charging may well help on one front, but it is not the single solution—the silver bullet—in policy terms.

George Young (North West Hampshire, Conservative)

The Financial Secretary made an interesting point a moment ago. Should we therefore assume that if the petrol price goes up by more than 6p between Budget day and 1 September, the Government will once again defer the increase?

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

No, I was explaining the situation that we faced in 2005. I explained, in response to the hon. Member for Braintree, the difficult and complex balance of factors that we had to take into account and the judgment that we arrived at.

Finally, on the concerns raised by the hon. Members for Ludlow and for Wycombe about those sectors of the economy that are heavy users of red diesel or rebated fuel, I understand the concerns of the National Farmers Union, which I met before the Budget. We will examine the impact of the oil strategy with the NFU, as we will with other heavy using sectors. During the discussions, the NFU will have the opportunity, which I encourage it to use, to help us assess the strategy’s impact and put forward its view on what consideration the Government should give to future policy in the agricultural sector.

By way of warning, though, I say that it is not just the agricultural sector that is asking for preferential treatment. It is quite difficult to see a unique case for treating any of the sectors that make heavy use of rebated oil in a way that differentiates them significantly from other sectors.