Clause 7
Finance (No. 2) Bill
5:30 pm
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.