Clause 4 — Rates of Hydrocarbon Oil Duties

Finance Bill – in the House of Commons at 3:00 pm on 13th May 2003.

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The First Deputy Chairman:

With this it will be convenient to consider amendment No. 4.

Photo of Michael Jack Michael Jack Conservative, Fylde

I remind the Committee of my business declarations, which have been properly included in the Register of Members' Interests.

Our debate will focus on important and wide-ranging aspects of the Government's environmental policy against the background of the derogation of duty on diesel produced from oilseed rape, better known as biodiesel. I want to look at whether that derogation is set at the correct level. The farming industry and I do not believe that it is, hence the amendment. I want to examine the arguments that the Treasury have made to back up its position, and I give notice that if the Minister cannot agree with me in substance—either refusing to accept that the matter needs to be re-examined or not accepting my amendment—I will wish to divide the House, as I believe that the matter is of considerable importance.

The background to the issue is the Government's commitment to sustainability. In a section of the Red Book entitled "Protecting the Environment", paragraph 7.2, which is headed "A strategy for environmental taxes", says:

"Taxes and other economic instruments can provide incentives for behaviour that protects or improves the environment".

The former Minister of Agriculture, Fisheries and Food, Mr. Brown, pointed out in the foreword to "Towards Sustainable Agriculture" that that document

"highlights the role of agriculture in helping to achieve sustainable development."

It went on to outline how that role might be fulfilled, stating:

"Agriculture plays an important part in that strategy. It can help society in the quest for a better quality of life for everyone, now and for generations to come."

Those are lofty and supportable objectives, but unless agriculture is properly encouraged to play its part, those objectives of the wider Government strategy on sustainability will not be met.

In their overall approach on energy policy, the Government have made it clear that in the field of electricity generation there are renewables obligations that must be met by those who supply electrical energy. The mechanism for achieving that objective is effectively that all those who are distributors of electricity have to buy a quantity that is renewable and pay a premium for that. The costs of that premium are absorbed in the cost of the electricity.

In advocating a lower rate of duty on biodiesel than that which currently applies, the first challenge for a Treasury Minister is to make it clear that there is a cost attached. I wrote to the Economic Secretary following representations on the matter from Mr. Graham Secker, the managing director of Cargill plc, and in his reply the right hon. Gentleman stated that the Government

"cannot support these fuels at any cost."

That is almost like saying that the Government cannot afford to give anything, but the Economic Secretary knows that a derogation of 20p per litre has already been given. It is a good first defensive line, so let us deal with it straight away.

If the Minister genuinely wanted to encourage the use and the growth of biodiesel from the production of oilseed rape, he could have moved from a derogation of 20p per litre to a derogation of just over 28p per litre, as my amendment proposes, and he could have recouped the entire cost, over the total number of litres of diesel sold in the United Kingdom, by a fractional change in the duty rate charged on other forms of diesel fuel. He could, if he had so wished, have made that an even smaller increment if he had imposed it across the whole range of liquid hydrocarbon fuels derived from mineral sources.

The question is how to pump-prime the exercise to get biodiesel production up to speed. In the same letter, the Minister went on to say that he did not want to

"over-compensate biodiesel producers for bringing their product to market".

The Cargill company has done some detailed analysis to show why, in its judgment, 28.2p as opposed to 20p per litre reduction in duty is the right figure. I shall return to that shortly.

In his interesting letter, the Minister seeks to broaden the logic of the argument in order to justify his position. Instead of staying close to the issue of biodiesel versus other forms of green energy, he states that the reason why a more generous derogation of duty is not possible is that that would interfere with

"the 'price' of other environmental programmes that could also tackle climate change (for example, better home insulation)."

I do not disagree that pound for pound, better home insulation delivers a greater CO2 saving than does biodiesel, but I would have extreme difficulty in running my diesel car on home insulation. The Minister's attempt to compare apples and pears fails the first test of whether there is a logical basis for the Treasury's position on the matter.

Then the Minister goes even wider in his letter. According to him, my proposal

"could affect our ability to provide essential public services such as schools and hospitals."

I did not know that the Government's investment in schools and hospitals rested on the differential of 20p to 28p of duty on biodiesel. Perhaps it illustrates the fragility of the current economic situation that the entire investment rests on that argument. With such fragile and inconsistent logic, the Minister triumphantly states in the letter:

"That is why we decided that a 20 pence per litre duty cut relative to ULSD" that is, ultra-low sulphur diesel—

"is sufficient recognition of the environmental benefits both from biodiesel and bioethanol and provides best value for money."

The Minister has drawn that from a report commissioned by the Department of Trade and Industry and the Department for Environment, Food and Rural Affairs from Sheffield Hallam university. I have a copy of that report, which is quite a thick document. I should be grateful if the Minister would cite the page on which the conclusion is reached that 20p, as opposed to 28p, is the right amount to stimulate agriculturally based biodiesel. In the time that I have had the report, I cannot claim to have read every word of the closely argued economic text, but that is not the conclusion that I have reached from my reading of it.

Although the Minister did not say so in his letter, the document is about comparing different ways of saving CO2. With reference to kilograms of carbon dioxide saved for every pound spent, the Minister would be entirely right in quoting from page ix of the report the figure of 478.5 for loft insulation. One of the other comparators that gives better value for money, electricity from short rotation coppice, saves 19.6 kg of carbon dioxide per pound of public investment. The only problem is that the one power station that burned short rotation coppice has just gone out of business.

Biodiesel from oilseed rape comes top of the liquefied fuels that have a carbon dioxide-saving property. If we compare like with like, biodiesel has a good basis, but the same report goes on to counsel us:

"Currently, there is no agreement on these estimates which provides a sound basis of consensus for setting a justified level of derogation for biodiesel".

In other words, the report admits that there is a flaw in the logic of all this comparative activity. Yet that is the platform on which the Minister bases his argument that his 20p is the right number.

In the interests of greater illumination of the facts of the matter, I tabled a question last week:

"To ask Mr. Chancellor of the Exchequer, if he will publish the calculations which he used to determine that £0.2710 shall be the biodiesel duty rate, as shown in clause 4 of the Finance Bill."

Given all the hard work, justification, letter writing and consideration of the matter in previous Finance Bills, one would think that by now the Minister would have no difficulty in giving me an answer. What was the reply?

"I shall let the hon. Member have a reply as soon as possible."

It is pathetic that the Economic Secretary was not able to share with the House the logic and calculation on which the rate of duty is based, so we are left to make up our own mind. Being a seeker after truth, I moved to the pre-Budget Report 2002 of the House of Commons Environmental Audit Committee, HC 167. I thought I might find an answer there about the basis for the calculation. In paragraph 10 of the report, on page 9, I discovered that the Committee had questioned the Economic Secretary on the level of biofuel duty. He said:

"The dynamics for the intervention that we believe we need to make in the case of bioethanol or biodiesel is different from that of the fuel gases"

—that is, liquid petroleum gas. The Committee made this comment on that arcane and incomprehensible sentence:

"We found his comments arcane, and requested further information on the extent to which the Treasury had carried out a comparative appraisal of the costs and benefits of different fuels."

It went on to state:

"We are concerned not only over the basis of such environmental costings but also at their selective use."

The more we look at the justification for the Treasury's position, the more we find that there seems to be a great secret. Perhaps this calculation falls into the same category as the points made about the Taylor report in respect of the previous amendment. For some reason, a Committee criticises the Economic Secretary for not coming clean and for selective use of information, and a question to which I wanted an answer was not answered.

Paragraph 13 of the report states:

"Promotion of biofuels could provide huge benefits in carbon savings, and indeed a recent report has suggested that a quarter of the UK's agricultural land could in principle provide sufficient biofuel to satisfy total transport demand."

The Committee concludes its observations thus:

"We are also concerned, in this context, at a certain tension between the Treasury's traditional desire for secrecy in relation to tax changes, and its new-found zeal for consultation and long-term signals."

That is a profound finding, as it suggests that there would be potential for an agricultural revolution if the duty rate was right. However, we do not know how the Treasury calculated its figures and some very interesting questions are raised about its conduct in these matters.

I therefore turned to the National Farmers Union for greater solace. It rightly reminded me—this is built on the back of what the Environmental Audit Committee said—of the following:

"Crops sequester carbon from the atmosphere as they grow, and recycle carbon when used as fuels, rather than re-introducing locked-up carbon into the atmosphere as fossil fuels do."

I make that point because it underscores the importance of the carbon cycle and the sustainability of an energy policy that is more strongly founded, certainly in relation to diesel fuel, on the use of biofuel. As I shall demonstrate in a few moments, the economics currently do not add up.

Let me return to the Sheffield Hallam university report, which goes into considerable detail about whether a good return is available for the expenditure involved. Through the arable area payments scheme, oilseed rape growers effectively receive a subsidy under the common agricultural policy. Those arrangements may change, but the status quo is the arable area payments scheme. The duty derogation that I propose in the amendment would give further encouragement on top of that scheme to induce farmers to move to the production of oilseed rape for the purposes of producing biodiesel. The Sheffield Hallam report refers to the oilseed rape contribution in reducing carbon dioxide and greenhouse gases:

"This demonstrates that biodiesel from OSR is more cost effective as a means of saving net carbon dioxide and GHG emissions than CNG".

As you, Mrs. Heal, may recall from discussion of previous Finance Bills, compressed natural gas is also a road fuel. The argument in favour of giving that fuel a duty derogation was sustained on health grounds and not CO2 grounds. Given the problems that the Government may have in meeting their international obligations in future, there is a powerful case to suggest that the production of biodiesel from oilseed rape should be encouraged. The report states that biodiesel gives a better return for the public purse on CO2 and greenhouse gas emissions than compressed natural gas as an alternative road fuel. That powerful finding features in a report that the Government prayed in aid in justifying not doing anything about the issue. As I said, the report also counsels us about the validity of the basis of the Government's arguments on their calculations.

I think that I have undermined the position that the Government have taken in justifying their stance and not doing anything about this matter in terms of the Environmental Audit Committee and Sheffield Hallam university reports. On the duty rate itself, I wish to deal with the effect that the current position would have. In a letter that Cargill sent to me, it gives the following counsel:

"If the Government were to follow EU guidelines targeting 2% biodiesel by 2005, this 400,000 litres per month"— the current rate of production—

"must be expanded some 80-fold to 32 million litres per month".

The letter refers to the Motherwell plant, which will make biodiesel, but use waste food and animal products to do so. The Economic Secretary prayed that plant in aid in his letter to me, and implied that, because of what was happening at Motherwell, we did not need to do anything to encourage the production of biodiesel from oilseed rape. However, as I shall show in a moment, that is not the case. Cargill states:

"It is our understanding that the Motherwell plant is adding some 4.5 million litres per month, leaving a further 27 million litres" to meet the European Union target. It goes on to state:

"This is simply not possible from the available quantities of RVO and tallow. At current market prices of rapeseed oil and crude mineral oil, the 20p per litre derogation for biodiesel is insufficient to stimulate the growth of additional UK rapeseed, nor the investment in biodiesel production facilities capable of producing this 32 million litres . . . per month required to meet the near-term targets."

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am listening carefully to the right hon. Gentleman's Cargill figures, but will he repeat them? Perhaps I misunderstood, but I thought that he said that Cargill had suggested that an 80-fold increase was needed on 100,000 litres, but that that produced a figure of 32 million litres, which is not an 80-fold increase. Will he go through the figures again?

Photo of Michael Jack Michael Jack Conservative, Fylde

I apologise if the hon. Gentleman did not hear. Let me read the paragraph again:

"If the Government were to follow the EU guidelines targeting 2% biodiesel by 2005, this 400,000 litres per month must be expanded 80-fold".

I apologise if I misquoted the document and referred to 100,000 litres. Let us put the matter down to acoustics, if we may, but I am grateful to him for asking for clarification.

In further seeking to justify his position, the Economic Secretary said in other remarks to Cargill that the 20p per litre figure for the current derogation was higher than the derogations available in Spain and Austria, but lower than those in Germany, France and Italy. It is interesting to consider the production figures. Cargill kindly sent me a chart showing that Spain effectively does not rate on the same scale in overall production. Austria produced less than 50,000 tonnes of biodiesel in 2002, but the situation is different in areas where there is a better derogation than ours. The figure goes up to 200,000 tonnes in Italy, 350,000 tonnes in France and 450,000 tonnes in Germany. There does genuinely seem to be a correlation between the rate of duty derogation and the amount that is produced.

I turn to an even more detailed analysis of why Cargill feels that the 28.2p per litre derogation that I seek through my amendment is correct. Its calculations show that

"the derogation has failed to create a level playing field between biodiesel and ULSD"— ultra-low sulphur diesel. It continues:

"A derogation of 28.20 pence per litre would be necessary based on current prices for new-crop 2003 rapeseed oil and on a total production cost of £488.05 a tonne for biodiesel (which equates to an ex-tax price of 42.70 pence per litre). This compares with ULSD wholesale price of 14.5 pence per litre before tax. A rate of 28.20 pence per litre would, therefore, compensate for the difference in the production costs of ULSD and biodiesel. If such a derogation was forthcoming, Cargill would anticipate producing between 150,000 and 200,000 tonnes of biodiesel annually. This would initially represent 1 per cent. of total UK diesel sales."

There we have it—a comprehensive argument that illustrates the weakness of the Treasury's case for the current derogation of 20p, and highlights the fact that if the Treasury is convinced of its argument, it has refused to share it with this House and with the Environmental Audit Committee.

My argument is entirely in compliance with the Government's approach to sustainability, both in general terms and in agriculture. I argue it from the point of view of the positive effect that it would have on UK agriculture and on employment in rural Britain. I argue it on the basis of an expert opinion from within grain purchasing—namely, the Cargill company, which has a great deal of knowledge. It is up to the Minister to give the House as much detail as I have given, so that if he intends to stick to 20p, he can justify it. I have suggested to him a way of making a fractional increase in the duty on other forms of liquid hydrocarbon fuels. The policy would cost the Treasury not one penny and is entirely compliant with the approach that has been taken to electricity in relation tothe renewables obligation. That is a sound, powerful, well-argued and sustainable economic case, and I look forward to the Economic Secretary's reply.

Photo of John Baron John Baron Conservative, Billericay 3:30 pm, 13th May 2003

Clause 5 increases the duties on red diesel and fuel oil by 1p per litre in addition to inflation. The farming industry continues to be in crisis, and that measure does nothing to help. Indeed, it can only add to the costs to an industry that already has many problems. Farmers in my constituency have certainly suffered in recent years. In 1996, the total income from farming stood at around £5 billion; by last year, it had more than halved, to £2.4 billion. The average farmer earns about £3.60 an hour, and more than two-thirds of farmers work for more than 60 hours a week.

Photo of John Bercow John Bercow Conservative, Buckingham

Less than the minimum wage.

Photo of John Baron John Baron Conservative, Billericay

As my hon. Friend says, less than the minimum wage.

Farming incomes rose slightly in 2002, but during the foot and mouth outbreak in 2001 they were at their lowest in real terms since the depression in the 1930s. The agricultural industry accounted for 0.7 per cent. of the total economy in 2001, down from 3 per cent. in 1973—quite a steep decline. Agriculture accounts for 15 per cent. of rural businesses. However, in the two years prior to 2002, more than 3,000 VAT-registered businesses closed, with a net loss of 25,000 agricultural jobs. Meanwhile, agricultural borrowing is rising, with an estimated total debt of £10 billion, yet investment is at its lowest for 30 years. It is not a pretty picture. Furthermore, despite the fact that food prices for consumers are rising, the share that farmers receive is static or falling. For example, the average price of a pint of milk in the shops is about 35p, but farmers receive an average of only 9p per pint.

Meanwhile, like most small businesses, farmers have been subjected to regulation after regulation. I shall not go into all the detail, but needless to say, since the beginning of the year there have been numerous regulations on various aspects of the industry. It is important to allow farmers to farm free from too much interference and bureaucracy. The current round of common agricultural policy reform is a case in point. There is little doubt that the current round of the CAP keeps prices to the consumer artificially high. Although reform is imperative, EU enlargement means that mid-term review will neither fulfil the need for reform nor allow British farmers the necessary freedom to farm for the market.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Would the hon. Gentleman get rid of milk quotas?

Photo of John Baron John Baron Conservative, Billericay

That should be considered, but the mid-term review is proving a great disappointment to many farmers in my constituency and, I am sure, throughout the country because it does not fundamentally deal with the reforms that are required. That causes consternation, especially about the promises that the Government made or suggested, before the review.

Farming is struggling, and there is burdensome regulation and little prospect of CAP reform. The Government should do what they reasonably can to help farming through a difficult period. Increasing the duties on red diesel and fuel oil by 1p per litre above inflation makes life more difficult for the farmers in my constituency and throughout the country. That cannot be in the national interest. They should do much more here and in the international marketplace to create better conditions for British farming to thrive, so that we produce more domestically grown goods both for the home market and export.

Agriculture accounts for more than three quarters of the management of land in rural areas. The Government tend to forget that. Agriculture has a dual purpose of producing food and overseeing environmental management, which is important to the economy, not least because agriculture generates more than £7 billion of the £9 billion a year that rural tourism generates. Farmers and growers are the custodians of our landscape and we would do well to remember that. The countryside is a resource, but everyone should enjoy it. Agriculture plays a key role, which needs to be better recognised.

The Government should scrap the increase in red diesel and fuel duties and not lumber farming with yet another increase in costs, especially at such a difficult time.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

My right hon. Friend Mr. Jack is very knowledgeable about this subject. I was amazed to learn that 25 per cent. of farmland could fuel the country. It is a remarkable figure, and I do not know how well it is known.

Farming should be greatly encouraged. I recently visited a farmer in my constituency—a Mr. Field—who has devoted one of his fields to the production of a biocrop. I had an interesting time learning about that. Its advantage is that it means winners all round. Farmers—who are currently having a hard time, as other hon. Members pointed out—can use it to diversify. Many are desperately searching for ways in which to diversify while maintaining the quality of their land and doing that in an environmentally friendly way, not only for their land but for the energy that they produce.

The comparatively low duty on biodiesel is still not enough to encourage commercial use of the fuel, which is environmentally friendly but not competitive with fossil diesel under the current tax structure. The British Association for Bio Fuels and Oils wants the rebate to be increased from 20p per litre to 40p per litre. As long as such a rebate was guaranteed over a period of time, it would probably lead to major firms being willing to begin production. However, there are no guarantees over a period of time. I get the feeling that it is a side issue for the Government and they want to get away with paying lip service to the needs of the environmental lobby. We should be more serious about biodiesel. It is environmentally friendly, it provides excellent opportunities for diversification for farmers, and it helps a rural sector that deserves more input than it is receiving from the Government today.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

First, I would like to address the points made by my right hon. Friend Mr. Jack on the amendment tabled in his name, which is fully supported by my right hon. and hon. Friends in Her Majesty's official Opposition's shadow Treasury team. At the same time, I should like to speak to the amendment to clause 5, which has, for the House's convenience, been grouped with this amendment. Both amendments relate to the rates of hydrocarbon oil duties, but they none the less employ very different arguments.

In an attempt to maintain some kind of logic in this discussion on amendments that straddle two clauses which deal with very different sets of circumstances—despite being banded together under a common title—I would like to pay tribute to my right hon. Friend the Member for Fylde. His speech was a lesson to us all in identifying, researching and introducing an original perspective on the deliberations of the House. A Committee of the whole House is one of the few occasions on which we genuinely get the opportunity to consider carefully the effects of measures on which the Government naturally have to take decisions that are all-encompassing, in terms of brackets of categorisation. We discover, however, that those effects can have a direct impact when we drill down into the detail.

It would be an inefficient use of the House's time, and also less than respectful to the fine arguments that my right hon. Friend has deployed, if I were to try to demonstrate that I have understood them, although I like to think that I have. I would, however, like to place it on record that Her Majesty's official Opposition not only fully endorse my right hon. Friend's remarks but congratulate him on his tremendous exposition of the arguments. It will be very difficult for the Minister to resist them.

I note the support that the National Farmers Union has given in relation to this issue. Its chairman with responsibility for alternative crop uses has said:

"The Chancellor recognised in his statement . . . that bioethanol has a valuable role to play in reducing pollution levels. We will continue to press for the necessary duty cut to get the industry off the ground."

My right hon. Friend mentioned the manufacturing plant that was in administration or, at any rate, in some form of financial distress. I heard from a radio source—I therefore have no documentary evidence to back this up—that the title to and ownership of the raw material of such a plant remains in the hands of the farmers. We should therefore be in no doubt that what is required is, to coin a phrase, the pump-priming facility that the Treasury is uniquely capable of providing. The raw materials, the initiative and the incentive are all there, and the NFU has stated that it wants to be able to get projects such as this off the ground. Previous efforts have not, however, been sufficient to provide meaningful encouragement to Britain's fledgling bioethanol industry.

Photo of Michael Jack Michael Jack Conservative, Fylde

I am most grateful for my hon. Friend's generous words. He has mentioned bioethanol. Is he aware that British Sugar is looking closely at the question of substantial investment in this area, particularly in relation to bioethanol and the use of raw materials derived from the sugar production process and possibly even from potatoes? Does he agree that such developments would be dependent on a more generous derogation on the duty, to pump-prime what could be some very major investment?

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

My right hon. Friend is absolutely right. That information, albeit in summary form, has come in my direction as well. These are large and detailed matters, and the Committee of the whole House gives us the opportunity to ensure that they are put on record and that the Treasury Minister has the opportunity to consider them. None of us necessarily expects or even wants an immediate answer relating to some of the detailed points. Sometimes, following a good discussion, a Minister has to go away and consider—but we expect him to return with a reply that is both responsive and responsible.

I have had to look into these matters in my constituency. One of my constituents is an amazing entrepreneur, Stephen Whittaker, who has been studying the conversion of used vegetable fats into what he calls e-diesel. It has been enormously successful. An old calf-rearing shed has been converted into a number of small vats. He now has a lorry, and has secured contracts with some of the country's major retail chains and hauliers. He has had to contend with all sorts of planning issues, and he naturally called on me for assistance and support. I feel that such initiatives should be supported in all their guises, and that the Treasury and local planning authorities should help whenever they can.

There is a genuine demand for alternative fuels, and they can be provided through incredibly hard graft, dedication and often sacrifice on the part of entrepreneurs and their families. Huge capital risk is needed to get such projects off the ground. We may never hear of the failures: some entrepreneurs, in the cause of what may be the country's best interests over time, and certainly the best interests of the environmental agenda, may well prove to be sacrificial martyrs.

The real opportunities lie in major capital investments such as those mentioned by my right hon. Friend the Member for Fylde, and the possibilities that he says British Sugar is considering. The main barrier in such instances may be not access to capital, but access to confidence in a resulting cash flow in a competitive context. That is the pump-priming opportunity that will persuade a business to make a decision. At present there is not a sufficient incentive. The proof lies in whether the decisions allowing for investments have yet been made. The Treasury should recognise that what we are discussing is both worthy and highly beneficial, and unlikely to cause consternation or controversy between parties.

Clause 5 provides for an increase in duties on rebated gas oil, known as red diesel, of 1p per litre, in addition to a rise in line with inflation of 0.09p per litre. Fuel oil use falls into two main categories. The first—with which we need not concern ourselves here—accounts for about two thirds of total use according to the latest estimates. The caveat relating to statistics has already been issued today. That first category covers domestic heating boilers. The remainder is used in what are currently known as non-road vehicles, which in the past have been used mostly in agriculture—tractors and other farm vehicles. Nowadays, following the collapse of farming as a share of the rural, let alone the general, economy over the past three or four years, plant that is hired and operated on construction sites constitutes a larger element. I understand that it is right to describe such vehicles as "non-road" because they are not used on public road sites, but JCBs are used as tractors and categorised as such, and the same applies to plant hire vehicles, cement mixers and rollers. They use fuel oil that is marked with a dye and chemical markers, which is why it is known as red diesel.

My hon. Friend Mr. Baron ably represented the interests of farmers in and around his constituency. An attempt has been made to justify the additional duty increase on environmental grounds. It has been argued that as red diesel currently has a higher sulphur content than road diesel, it contributes to local air quality problems. That may sound very worthy from a Government who are seeking to put forward yet another of their "green" taxes, but as we have discovered over time, they have always been revenue-raising and highly dubious. That was demonstrated not least in relation to the previous clause and the true vires of a "green" initiative that will deliver the goods.

An increase in the level of duty should therefore lead to a reduction, it is said, in red diesel use, ameliorating the environmental impact. However, agriculture, for example, is an essential user of fuel, and farmers will use only as much fuel as individual activities demand. The industry's current financial difficulties also mean that farmers will be looking towards the most efficient use of fuel on farm, so it is highly unlikely that the increased duty will lead to a reduction in usage.

So the environmental arguments for the increase must also be questioned, given that the duty on rebated ultra-low sulphur diesel is also being increased by 1p. The increase in duty will in fact result in an increase in the industry's fuel bill of about £25 million. This increase in duty comes at the same time as the Government's themselves campaigning against the European Parliament's proposal to harmonise fuel qualities for non-road diesel in line with those for ultra-low sulphur road diesel. I pay tribute to the Government for the UK's successfully arguing that the proposed harmonisation—an ever-present danger of the EU's agenda, as we all know—would impose an unacceptable increase in costs of about 2p per litre on the agricultural industry, with marginal environmental benefit.

I am simply arguing, on exactly the same ground, that red diesel should not face an unacceptable extra 1p per litre increase in such costs. Sulphur levels in red diesel are set to fall over the next five years, from their current level of 2,000 parts per million to 350 parts per million. If the current duty increase reflects the perceived environmental cost of red diesel, the benefits that lower sulphur levels are adjudged to bring should also be reflected by removing the extra 1p per litre, recognising that lower sulphur red diesel is, or is shortly expected to become, available.

The farming industry continues to be in crisis, and frankly this measure does nothing to help. If the Government are allowed to persist with it instead of accepting this amendment, a further body blow will be struck to the UK's rural economy and to our struggling farmers. Compared with 1995, income from farming in 2002 was down 62 per cent., at £2.36 billion; in 1996, it stood at £5 billion. Britain's rural economy continues to be mired in one of the deepest recessions that it has experienced since the first world war. The Government's inflation-busting increase in fuel duty on red diesel will do nothing to help our struggling farmers, who are still recovering from the Government's mishandling of the foot and mouth crisis and the slump in farm incomes.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

Well, the Chief Secretary will be interested to know, particularly given the reward that he receives—I wonder whether everybody in the country feels that it is fully earned—that in the year to December 2002, UK farmers earned, on average, £11,107. They work some of the longest hours of anyone; 75 per cent. work more than 60 hours per week, and on average they earn just £3.60 an hour. Labour's latest sting on rural Britain will see more family farms go bust, and falling incomes will come under intense pressure, forcing even more farmers to quit the industry. My constituency contains many farmers, whom I seek to represent, and there is a real feeling there and across rural Britain that this measure is yet further proof—if proof were needed—that Labour does not understand the countryside or the wider economic contribution that farming makes to Britain's economy. That ignorance is costing Britain dear. So there is a solution—

The First Deputy Chairman:

Order. I have given the hon. Gentleman some leeway; perhaps he could now relate his remarks to the amendment in question.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I am grateful for your comment, Mrs. Heal, and having made the point I am happy to move on. However, this is a very serious issue for that part of the industry.

It is not just the farming community that is suffering. I have received correspondence from EWS, the rail freight company, which says that it uses rebated gas oil—red diesel—off-road, of course. The cost to EWS alone will be £1.81 million and, when additional costs imposed on other operators are added, the cost to the rail freight industry will be at least £2 million a year. We understand that the increased costs to the passenger rail industry—an industry already in terrible straits—will be more than £10 million, and the Government's measure will make it harder, not easier, to improve an essential public service.

The correspondence continues:

"The Government wishes to encourage the transfer of freight from road to rail. This tax will have the opposite effect. The environmental benefit of rail freight is considerable with significantly lower noxious emissions per tonne moved than by road. Therefore the imposition of an environmental tax that will lead to more traffic on the roads will actually have the reverse effect to that intended by the Chancellor."

The next sentence makes an interesting comparison in the light of the farmer, Mr. Field, in the constituency of my hon. Friend Mr. Djanogly:

"The rail freight industry has a good track record of reducing its environmental impact. The Class 66 locomotive, used by most rail freight operators, produces one-tenth of the polluting emissions of older locomotives; this tax imposition fails to recognise our achievements in this area."

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Will the hon. Gentleman explain why the class 66 was developed to be much less polluting? I would suggest that it was because the cost of fuel increased. Vehicles were then made less pollution-emitting and were built to use less fuel per gallon, thereby lessening the amount of carbon dioxide emitted.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I certainly salute the hon. Gentleman's knowledge of class 66 locomotives, but I hope that his intervention does not signal his belief that operational efforts to produce more fuel-efficiency should be diminished simply because of the genesis of what drove the need in the first place. The current tax imposition will hardly encourage further improvement in that respect.

One important aspect of the red diesel imposition is overall environmental benefits. My hon. Friend Mr. Lidington put it well when he asked:

"Is this Government measure not absurd when balanced against the negative environmental impact it may bring about by forcing more farmers, custodians of our landscape, onto the scrap heap?"

As he rightly says:

"Agriculture is not just important economically; farmers and growers are the custodians of a landscape that is valued by the people in the cities as well as villages and which is a prime asset for our tourist industry."—[Hansard, 16 October 2002; Vol. 390, c. 391.]

Some have argued that the Government's proposed inflation-busting increase on red diesel is an attempt to remove proper cost recognition for farmers and, by diminishing the differential, to remove the incentive for fraud and misuse, thus ensuring anti-avoidance. We all want compliance with proper use; otherwise it penalises farmers who need the product. In any event, Governments have introduced new rules to try to stamp out avoidance.

I shall not take up the Committee's time in reading it out, but a new pamphlet was issued by Her Majesty's Customs and Excise on precisely that point. It is entitled "Buying red diesel, or rebated kerosene/paraffin for your own use" and includes new rules from 1 April 2003. Clearly, the publication of that document is part of the Government's investment in anti-avoidance. In order to buy diesel from 1 April this year, the document insists that people give information on name, address, postcode, phone number, VAT registration and VAT number, vehicle registration number—if the oil is collected—and intended use. That is a serious example of a compliance procedure based on red tape and bureaucracy. To my mind, all red tape is anathema, though it may be necessary for anti-avoidance.

Any counter-argument that the Treasury may have been advised could add to its potential armoury against our proposals today would be wholly misconceived, because anti-avoidance can be achieved through other measures. This is a direct slap in the face of the interests of farmers, who are already suffering enough and are doing their best to bring themselves out of the deepest recession in farming since the 1930s.

I have one other point that most properly belongs in the stand part debate. I leave it to your discretion, Mrs. Heal, as to whether you prefer me to leave it until then or to make it now.

The First Deputy Chairman:

That is entirely a matter for the hon. Gentleman.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General 4:00 pm, 13th May 2003

I shall leave it to the stand part debate. We hope that we will receive recognition for our arguments on behalf of all current users of red diesel, especially the farming community. However, if we are not satisfied by the response from the Economic Secretary, we will press the matter to a vote.

Photo of John Healey John Healey The Economic Secretary to the Treasury

Clause 4 increases the main excise duty rates on hydrocarbon oils in line with inflation with effect from 1 October. The excise duty rate for biodiesel will also be increased to maintain the differential with ultra-low sulphur diesel in cash terms. I shall address the detailed points made by Mr. Jack in a moment.

Last year, the Chancellor described oil prices as high and volatile. In recent months, the military conflict in Iraq has contributed to exceptional volatility in crude oil prices. For example, prices this year have fluctuated from more than $32 a barrel to $24 a barrel, resulting in increases in pump prices for motorists. The oil price has started to fall recently to about $25 a barrel compared with the last few months, but when the Chancellor was making his Budget decisions he saw that there was a risk that international uncertainty could lead to continuing price volatility in oil markets. In those circumstances, instead of increasing fuel duty on Budget day, he deferred the increase until 1 October, by which time the risk of oil price instability should have reduced.

This is the first increase in fuel duty since 2000. The freezes that we have imposed have meant a cut in real terms, and since 2000 fuel duty has fallen by 5p per litre. Indeed, even delaying the introduction of the duty changes until October, for example, will cost £300 million in revenue forgone.

Income from fuel duty enables us not only to provide essential public services but to take account of the environment. Fuel duties and the regimes that we have introduced have contributed to the fall in transport-related emissions and play a continuing role in helping us to meet environmental targets such as those set at Kyoto.

The right hon. Member for Fylde may not agree with my response to his arguments, but I shall attempt to advance the debate in the same spirit in which he introduced it. We introduced the duty incentive for biodiesel of 20p per litre in July 2002, since when the production of biodiesel has increased sevenfold. That is a small beginning, and it is early days, but that sevenfold increase has occurred in only nine months. The incentive was chosen carefully to reflect the environmental benefits offered by the fuel. An incentive above that level—for which the right hon. Gentleman argued—would not offer value for money for the taxpayer, and it would not be right for us to seek those environmental benefits at any cost.

The right hon. Gentleman subjected that point, and others that I have put to him in correspondence, to a forensic examination. I am familiar with the Cargill analysis and I have met the company's representatives personally. Officials have also been in regular contact. The right hon. Gentleman also mentioned British Sugar. I have met representatives of that company and they, too, have had regular contact with officials. British Sugar has been able to supply detailed and high-quality information, evidence and analysis. That has been very valuable to the Government, and the information has helped us to move to a position where we believe that a similar bioethanol duty differential is also justified.

The principal policy purpose of the duty differentials is to secure a contribution to climate change. I am glad that the right hon. Member for Fylde does not disagree with my contention that home insulation, for example, has a more cost-effective impact on climate change, pound for pound. I hope that the right hon. Gentleman will bear in mind the policy purpose that I have outlined. The principal issue when it comes to cost is to set the duty incentive at a rate that reflects the environmental benefits offered by the fuel.

The right hon. Member for Fylde was right to say that the Sheffield Hallam university report looked at the different ways to secure the saving in carbon dioxide emissions that we seek. It assessed the environmental benefits offered by the different methods of securing that saving. That is why the right hon. Gentleman did not find the precise analysis that he was seeking in the report.

However, I know that a number of Labour Members have made arguments similar to the right hon. Gentlemen's. I am the Minister responsible for such matters, and I assure the Committee that the Government remain open to new arguments and evidence. We announced in the pre-Budget report in November that we believed that a duty differential to support bioethanol development could bring environmental benefits that justified that differential. Furthermore, my right hon. Friend the Chancellor confirmed in his Budget that the proposal would come into force in January 2005. That policy development came about because we had new evidence and analysis, and were persuaded of the case.

The right hon. Member for Fylde also mentioned road fuel gases, and gave the impression that the treatment of those gases was unfair and inconsistent with the treatment of biofuels. I reject those arguments, and I have rejected them in correspondence as well.

The duty rates for different fuels reflect the different environmental benefits that those fuels might offer. The environmental benefits of road fuel gases are found principally in local air quality benefits, rather than in climate change emissions. I note that there would need to be additional investment in infrastructure to distribute the road fuel gases.

The wider comments from the right hon. Member for Fylde on the future treatment of road fuel gases, and the benefits that could accrue in terms of carbon dioxide emissions, have their place. He might wish to make his comments more fully, but I shall take what he said today as a contribution to the consultation on the future tax treatment of road fuel gases. My right hon. Friend the Chancellor announced that consultation in the Budget, and we will be undertaking it over the summer, jointly with the Department for Transport.

It was not clear whether the right hon. Member for Fylde was advocating that 25 per cent. of the British countryside should be covered in rapeseed. However, in pressing the case for widespread rapeseed cultivation, he was arguing not just for greater biodiesel production but, in effect, for a production subsidy on non-food crops. Agricultural support is not the principal policy purpose of the biofuels duty differentials. Our reference point for decisions in this policy area are the environmental gains to be achieved through reduced carbon dioxide emissions, at a reasonable cost to the public purse.

The contributions from Opposition Members were rather confused. On the one hand, the Government are urged to support—more strongly and at greater cost— biodiesel as a cleaner fuel; on the other, we are urged to maintain support for red diesel, which is a relatively dirty fuel. That is rather mixed logic from the Opposition.

The second amendment is designed to limit the duty increase on rebated gas oil, or red diesel as it is commonly known, to 0.9p a litre. In other words, the increase would be limited to what is needed to revalorise the duty. I am glad to note that the Opposition endorse the principle of revalorising that duty, and I hope that they will therefore support the revalorisation contained in clause 4, but I am puzzled by the rationale behind the amendment. It is limited to rebated gas oil. It does not seek to mitigate increases on fuel oil, light oil used as furnace fuel and ultra-low sulphur gas oil, which are also provided for in clause 5. Since each of those fuels is, to some degree, in competition with others, the purpose of the amendment is confused and obscure. If accepted, it would lead to a larger duty increase being applied to the ultra-low sulphur version of gas oil, which is less polluting and more environmentally friendly than the higher-sulphur forms of gas oil. That would be perverse.

Let me explain the rationale behind the Government's proposals. In the UK air quality strategy, published in February, we set challenging new targets for local air quality. Rebated fuels can have much higher sulphur levels than the made road fuels, as the hon. Member for Eddisbury recognised, and their use continues to contribute to local air pollution.

The hon. Gentleman laid special emphasis on the interests of farmers, and it is important to put that into perspective. Red diesel is used in many sectors of the economy, both as a motor fuel and as a heating fuel. The measure is not specific to farmers, and farming groups have welcomed many of the Budget's proposals, including the freeze in lorry excise duty, extension of the capital gains tax business asset taper relief to landowners and the proposal that stamp duty should not be paid on leases where the net present value is less than £150,000.

There are no fully reliable figures for the amount of red diesel used by farmers, but oil industry estimates, which are probably the best we have, suggest that the cost of the duty increase to the farming and food-producing industries should be around £10 million in real terms. That is £10 million out of an additional revenue from the measure of £80 million.

We understand the value of the rebate to those who depend on it, but we are keen to pursue and meet our environmental objectives. That is why we will consult over the summer, as the Chancellor announced in the Budget statement, to establish whether preferential duty rates for such fuels would offer worthwhile environmental benefits. In doing so, we will consider, as we always do for questions of environmental taxation, the economic impact, social benefits and social redistributive costs.

At the moment, I see no justification for the amendment. I do not accept it and urge my hon. Friends to vote against it and to support the clause.

Photo of Michael Jack Michael Jack Conservative, Fylde

My apologies, Sir Nicholas. Thank you for calling me.

I appreciate the kind words of my hon. Friend Mr. O'Brien about my earlier comments. I thank the Minister for his characteristically courteous and careful reply to many of my points. He bent somewhat in the direction of our arguments, and I welcome the fact that he has spoken extensively with industry representatives and that he plans further consultation during the summer. That is encouraging.

However, although the Minister was critical of some of my logic, I sensed something of a tortured nature to his own remarks. Instead of looking within the transport fuels section to find comparisons on the environmental benefits of biodiesel and ultra-low sulphur diesel, conventional diesel and other road fuels, he chose to deploy the wider argument of value for money in terms of carbon dioxide saving.

If I were to follow that thin line of logic to its ultimate conclusion, as the Member of Parliament for the constituency in which nearly all Britain's nuclear fuel is made, I might say that it suggests the interesting thought that the Treasury really wants to spend a great deal of money on enabling us to have more nuclear power stations, thus producing more of our electricity with zero carbon dioxide. I suspect that if I were to advance that argument in too broad terms, Sir Nicholas, I should rightly be ruled out of order and, secondly, that the Economic Secretary would not be persuaded. However, that is the logical intent of what he said.

There is an incontrovertible argument on vehicle fuels. I remind the Economic Secretary of what the National Farmers Union said about the role of oilseed rape in carbon sequestration. The NFU pointed out:

"Crops sequester carbon from the atmosphere as they grow, and recycle carbon when used as fuels."

If we do not encourage the production of more biofuels now, the fuel that will be used will come from mineral sources. By definition, it will not be sustainable and extra carbon dioxide will be emitted.

If the Minister wants to remain true to the Government's intention to reduce carbon dioxide, he should, even at this late hour, accept our amendment. He is not rising to agree with me, but the arguments put by the Opposition are sustainable and I wish to push the amendment to a Division.

Question put, That the amendment be made:—

The Committee divided: Ayes 175, Noes 289.

Division number 189 Finance Bill — Clause 4 — Rates of Hydrocarbon Oil Duties

Aye: 175 MPs

No: 289 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly negatived.

Clause 4 ordered to stand part of the Bill.