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Energy: Biofuels (EUC Report)

– in the House of Lords at 4:31 pm on 19th April 2007.

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Photo of Lord Sewel Lord Sewel Labour 4:31 pm, 19th April 2007

rose to move to move, That this House takes note of the report of the European Union Select Committee on The EU Strategy on Biofuels: from field to fuel47th Report, Session 2005—06, HL Paper 267.

Photo of Lord Sewel Lord Sewel Labour

My Lords, the committee presented its report, The EU Strategy on Biofuels: from field to fuel, on 20 November last. Much has happened since. Its purpose was to assess whether the EU biofuels directive was proving effective as a means of increasing the biofuels content of road transport energy. I suppose the short but accurate answer is that it has not.

Our inquiry found that the biofuels directive failed to enable the EU to reach its 2005 target of a 2 per cent market share for biofuels. It will be necessary for additional methods to be in place to meet the higher target of 5.75 per cent of market share by 2010. In our report we recognised in particular the value of the UK's road transport fuels obligation, which will require fuel suppliers to ensure that, by 2010, 5 per cent by volume of their sales in the United Kingdom are from a renewable source.

We suggested, therefore, that the Commission should amend the EU biofuels directive to require member states to use similar biofuels obligations as a tool to achieve national targets. We did not consider that, in present circumstances, biofuel obligations should be imposed at a Community level. Rather, member states should be allowed to select the percentage of the biofuel obligation on a country-by-country basis while retaining indicative targets for market share.

The evidence that we collected demonstrated that there are substantial concerns over whether biofuel production does in fact contribute to a reduction in greenhouse gas emissions. As a response to those concerns, we concluded that we would wish to see the European Commission establish a European-wide system of carbon certification for both imported and domestically produced biofuels and feedstocks. We noted too the potential benefits to the agricultural industry of biofuel production, concluding that there is a genuine prospect of bringing into use more EU land, including set-aside, to grow energy crops while respecting biodiversity policies.

We supported the European Commission's twin objectives of maintaining fair market access for imported biofuels while fostering a successful domestic biofuels industry. While not advocating subsidies, the introduction of economic and fiscal incentives such as the fuel duty differential and the UK's enhanced capital allowance schemes are appropriate ways to encouraging the growth of the domestic industry.

Looking forward, we considered that the EU could add real value in the development of second-generation biofuels such as timber and straw. The European Commission could co-ordinate, finance and organise European research and development as well as facilitate good practice. In that way, the Commission could encourage the market to find and develop new technologies, including the use of by-products and potential feedstocks that are now classified as waste. It is now common ground that the real breakthrough is likely to take place with the second generation of biofuels. We considered, too, that blending limits for biofuels and conventional fuels set at EU level should be revised upwards from the current 5 per cent.

The Government agreed with the vast majority of our report. I am not sure whether that reflects our wisdom, common sense and right thinking, or whether that was in reality a condemnation of our total lack of imagination and innovation. I shall not deal with the Government's response, because I am sure that the Minister will do that more than adequately himself. Perhaps I may make some general points.

The subject of biofuels has been one of much public and political debate since our report was published, notably within the context of Sir Nicholas Stern's report on the economics of climate change. At the EU level, the European Commission published its biofuels progress report on 10 January 2007, concluding that the voluntary targets set for 2010 were unlikely to be achieved. It has proposed a significantly higher and, this time, obligatory target of 10 per cent to be achieved by 2020. In its report, the European Commission recognised the potential benefits of national biofuels obligations, the development of which was recommended in our report.

In general, many of the solutions suggested by the Commission are in line with the committee's report. It recognises that blending limits must be revised, that second-generation biofuels must be developed, that measures must be taken to guarantee the environmental credentials of biofuels and that a balanced approach must be taken to international trade in order that both exporting countries and domestic producers can invest with confidence. The European Council of 8 to 9 March this year endorsed a 10 per cent binding minimum target to be achieved by all member states for the share in biofuels in overall EU transport petrol and diesel consumption by 2020, to be introduced in a cost-efficient way.

The recent Budget contained a package of measures to enhance the supply and use of biofuels; for example, the fuel duty differential was maintained at 20 pence per litre until 2009-10 and an enhanced capital allowance scheme was introduced to ensure that profit-making and loss-making firms had an incentive to invest in the cleanest biofuels plant. So it is an area of policy that is developing very quickly, both at the national level and at the level of the European Union.

The majority of points made in our report have since been supported by the Commission and the European Council. The importance of ensuring lifecycle sustainability of biofuel production is now towards the top of the biofuels agenda; it is recognised as a key issue. Second-generation biofuels are widely seen as the critical way forward. We regret, however, that the European Council adopted a mandatory 10 per cent target. We would prefer to see national biofuels obligations used across the European Union as a tool to achieve a voluntary minimum target.

The Commission identified three objectives that the directive, through the increased use of biofuels, would help to meet: the reduction of CO2 emissions, an increase in energy security, and providing an additional opportunity for income for farmers. The problem is that these three objectives do not necessarily sit happily together. The UK is one of the few member states to have given emphasis to carbon reduction. Others appear to have been more concerned with energy security. There is a danger that biofuel production will be undertaken in ways that lead not only to no carbon reduction overall but to major environmental damage, particularly in the context of the rainforest.

If our primary concern is emission reduction, it is necessary for us to be sure that investment in biofuels is the most cost-effective way of achieving reductions, not just in transport but overall. It would be enormously helpful if the Minister, either today or later, could provide us with some figures on the relative cost-effectiveness of different emission-reduction options.

Finally, the future contribution of biofuels is not unproblematic. Professor William McKelvey, the chief executive of the Scottish Agricultural College, has recently argued that one consequence of the reduction of world poverty and the continued economic development of countries such as China and India will be an increase in the global demand for food. In those circumstances, energy crops will be in direct competition with food production. Unless there is rapid development of second-generation biofuels, it is not clear how far more traditional biofuel production can be expanded, especially in an environmentally sustainable way. It would be a cruel irony if we ended up with an industry which today is seen as something of an environmental saviour but which in time inflicted its own environmental damage. I beg to move.

Moved, That this House takes note of the report of the European Union Select Committee on The EU Strategy on Biofuels: from field to fuel 47th Report, Session 2005—06, HL Paper 267.—(Lord Sewel.)

Photo of The Earl of Selborne The Earl of Selborne Conservative 4:43 pm, 19th April 2007

My Lords, I know that the whole House will wish to thank the noble Lord, Lord Sewel, for the very clear and helpful way in which he introduced the debate on this most important report. I congratulate the chairman of the sub-committee, my noble friend Lord Renton, and all its other members on having presented in clear terms some of the dilemmas that a European Union biofuel strategy might lead us into. As the noble Lord, Lord Sewel, reminded us, it is by no means clear that the three objectives are mutually compatible.

I declare two interests, which pull me in different directions. The first is that I am a farmer. Clearly, all farmers welcome new income-streams, and there is enthusiasm throughout Europe for maximising income from energy crops. I also chair the trustees of the Royal Botanical Gardens, Kew. Of course, Kew, together with other botanic gardens around the world, tries to conserve rainforests, but one of the great problems that we are dealing with is the massive investment in palm-oil plantations and the loss of rainforest thereby. There is a real irony when you think that this loss of biodiversity is encouraged by people trying to demonstrate their green credentials.

Let us look at the three objectives: opportunities for rural areas, a new market contribution to energy security, and a contribution to reducing greenhouse gas emissions. All three have to be tested carefully to see to what extent all of them are valid for setting some challenging targets at the European level.

On benefits for rural areas, I had a lot of sympathy for the representative of the Danish Government who gave evidence to the committee. The Danes were not at all keen to set targets; they pointed out that they could achieve much better ways of reducing greenhouse gas emissions. After the noble Lord, Lord Rooker, gave evidence, Defra submitted supplementary evidence, which is in the second volume of the report. A question was asked about the respective costs of the different fuels. By far the most competitive source at the moment is ethanol from Brazil derived from sugarcane. It comes in at 6p to 11p per litre. If we grow it ourselves from sugar beet or wheat, it is likely to be three or four times that figure. So you need subsidies or tariff barriers, or you need to require people, under the obligation, to use it whether they want to or not. So although we are saying that it would help rural areas, it would put us back on the old treadmill—which the Danes certainly do not want, and I doubt whether the British public want it—of having subsidised European agriculture, and heavily subsidised at that.

The second objective is energy security. Let us briefly consider Sweden, which is well ahead of the rest of Europe in importing ethanol from Brazil. Sweden does not have oil stocks, and undoubtedly it is important to derive energy from another source for energy security reasons, but such imports do not help your security very much if you simply make yourself vulnerable to another source such as Russian oil, gas or whatever. There may be a security element in that reasoning but let us be clear that such an argument is not necessarily very logical.

I think that we will always be dependent on imports for biodiesel, for example. We can always produce more ethanol by not exporting our wheat, using our set-aside and perhaps increasing our area somewhat but there is a problem with biodiesel derived from oilseeds: you cannot grow oilseed rape as you can wheat, crop after crop on the same ground. It will always be difficult to be secure in biodiesel supply. In any case there are always competing demands for biomass crops, for use not in transport but to co-fire power stations. There is already a demand there for willow and other biomass sources such as elephant grass, miscanthus and the like. We can see very little contribution towards energy security from these new biofuel food stocks.

Thirdly, there are the environmental benefits. The noble Lord, Lord Sewel, reminded us that the British have bought into this much more than the other member states have. It is clearly true, as the report makes clear, that biofuels can make a substantial contribution to reducing greenhouse gas emissions. But that is not invariably so, as the noble Lord, Lord Sewel, also said.

Brazilian sugarcane, the best energy performer, yields about eight times the energy for every unit used in its production. Probably the worst example is some of the maize corn ethanol grown in the mid-west of America. It is doubtful whether that energy source yields as much energy as is required to produce it. It source also shelters behind a massive tariff barrier of 54 cents per gallon which is intended to ensure that this burgeoning industry in the mid-west is not undermined by the much more efficient sugarcane ethanol from Brazil.

The committee wrestled with the environmental credentials of biofuels, and I agree with the report that it should be possible to have verification on a European scale. There are assurance schemes but it is much more problematic to roll them out on a global scale. We need only think of what is happening with the illegal felling of timber from the Amazon basin, northern Borneo and many other countries. We know that a large amount of the wood that we import is illegally felled. In other words , the forest stewardship schemes which have been around a long time simply have not worked. I am absolutely certain that it will be just the same with the verification of biofuels. The concern of Kew and others that we will degrade the rainforests as we encourage higher targets for biofuels are a real worry.

What is needed is not so much encouragement to maximise biofuel production in the part of the world where it is most efficient as carbon credits for conserving forests. The EU Emissions Trading Scheme for carbon credits does not include land use. It would be an enormous advantage if you could give credit to Brazil, Malaysia, Indonesia and other countries for conserving what is already there and not giving credits to industries that pollute less than they used to. I am sure that that needs careful examination.

I agree with the noble Lord, Lord Sewel, that the future lies in the second generation. The second generation is all about using cellulose from any biodegradable source, whether it is timber, thinnings or urban waste. It does not matter what it is; provided that it is a plant and you can degrade it with enzymes to its constituent sugars, it is a source of fuel which you can use for transportation or anything. The noble Lord, Lord Rooker, was asked when giving evidence what the potential was. Although he gave rather a long time scale—I think he said it was 2050—he said that it was quite exciting and we might get up to a third of our energy resources from this source. I am not sure whether he was talking about transport or all energy sectors.

Either way, a lot of people in the biofuels sector are wedded to the first generation and say, "No one has ever produced this commercially; it is a long way ahead". Again, one should be cautious about this. It is moving much faster. Since this report was published in February, the United States Department of Energy has announced awards of £385 million for six commercial cellulosic ethanol refineries, with a completion date of 2009-11. The quantities are not enormous—it will produce only 130 million gallons, compared with the 5 billion produced from corn-based ethanol—but it is a significant breakthrough when these commercial schemes are up and running. There is already a pilot scheme in Ottawa which has been running for some time. It must be admitted that the cost is currently uneconomic. It must come down by at least half and probably by two-thirds.

The evidence of this new technology is very promising. The future lies in turning these waste materials—timber thinnings, grass cuttings and the like; all sorts of waste—into transportation fuel. That is enormously valuable. We have the infrastructure for using biofuels because of the present first generation. We must put all our resources into planning for the second generation, not commit ourselves to land use which we might all regret for the first generation.

Photo of Lord Bradshaw Lord Bradshaw Spokesperson in the Lords, Transport 4:53 pm, 19th April 2007

My Lords, I do not have the expertise of the noble Earl, Lord Selborne, on this subject, but the debate is timely and I congratulate the noble Lord, Lord Sewel, on achieving it.

Demand for fuel is growing fast and will continue to do so. A 10 per cent target share for biofuel use in the transport sector by 2020, as proposed by the European Union, is demanding simply because of the rising consumption trend. Meanwhile, the search for energy economy and efficiency must continue apace. That was partly what the noble Earl, Lord Selborne, was referring to. The fact that we are looking for more fuel should not blind us to rapidly rising demand throughout the world. Biofuels are therefore not "instead of" issues but part of a multi-pronged attack on energy use. Can the Minister say whether "the transport sector" includes aviation? If so, it would make the subject even tougher than it already is.

The Select Committee draws attention to many things and while nobody wants over-regulation or over-direction, there are several very important roles that the European Commission should play. We must remind ourselves continuously, despite the noise, that we are an integral part of the European Commission. We have Ministers and Members of the European Parliament there and we should seek to influence policy. I despair sometimes at the continual whingeing that we hear about it. The United Kingdom is not doing as well as some other states. We have to admit that and learn from those other states.

A European-wide system of certification is necessary. The noble Earl, Lord Selborne, said that such systems do not work very well as regards timber, but we are talking about things that are internationally tradable. We do not want to lay waste to the forests of Brazil, Indonesia or elsewhere to feed our appetite for fuel, and lifecycle environmental performance is vital for imported and domestic biofuels.

The taxation system is a very powerful weapon in our armoury. It has to be exercised carefully to avoid transgressing the state aid rules to which the Select Committee drew attention, but it is noticeable that other countries in the EU give greater tax and other incentives without apparently offending EU rules. I sometimes wonder whether this country is often not the victim of EEC rules but a victim of the assiduousness with which we apply them. Those are two different things.

Blending limits, as mentioned by the noble Lord, Lord Sewel, have to be addressed on an EU basis, because the vehicles and the fuel that they use are in common use and are freely traded and the automobile industry really only negotiates with the EU and Japan together. It certainly cannot be done on a national basis. As has been mentioned, the oil and vehicle industries must be persuaded to set higher limits for bio-ethanol and they should consider that alongside other clean technologies.

I give those few examples—and there are others—to show Ministers and officials that they should get in there and seek to drive policy the way that they want it. They should find allies. Just as you do not win sports events from the touchline, you will not win this debate from a passive position.

To return to targets, how does the Minister intend to implement the binding 10 per cent target for 2020 as agreed by the European Council? Often, when energy Questions are asked in this House, they are played back with a dead bat by Ministers answering from the Dispatch Box. However, we are not asking potentially embarrassing questions about nuclear power this time, but constructive, neutral questions about how we move forward to achieve a target that we assume is already part of government policy. I do not think that Ministers can play this back by referring to the Comprehensive Spending Review, for example, which we recognise is off limits; we want positive indications in the Minister's reply. That would be very welcome.

As has already been said, we do not want to see the self-sufficiency policy with the EEC for food abandoned, but we welcome the prospect of more land being productively and intensively used for feedstock, if that is possible. With that in prospect, it is necessary to address issues such as the transport of material to processing plants, because it is no good, for example, growing crops in Scotland if you are going to use lots of fuel getting them to the processing plants wherever those happen to be.

We hope that the Government have plans to support these developments, particularly in developing the technology from renewable resources and upgrading what are now demonstration products to the commercial scale at which they have to operate. Those demonstration projects are best supported on an EU basis, with the prospect of moving forward commercially on a national basis. A commitment to long-term relief on excise duty is something that the Government ought to consider. It is necessary in the long term to encourage investors, and it could be at no net cost to the Treasury. It is the differential that matters. All sorts of other environmental factors can be taken into account in designing congestion charging schemes or implementing the long-awaited lorry charging scheme, when environmental performance can be one of the factors taken into account, covering all lorries—domestically owned and foreign registered—as it does in Germany.

Will the Minister say whether, in his opinion, the incentives for the oil industry to engage fully in the process of adopting biofuels are sufficiently strong? We know that the oil giants are very large and powerful, but they need to be committed to the process. I would like to think that the oil industry is considerably more committed than, for example, the tobacco industry may be to stopping smoking or the drinks industry to combating alcoholism. That is one of the reasons why I was slightly discouraged by the second two paragraphs of the foreword of the report, which talked about things being pursued on a national basis. This is a matter of international significance and it can be effectively pursued by this country only through the efforts of the European economic union.

Photo of Lord Cameron of Dillington Lord Cameron of Dillington Crossbench 5:01 pm, 19th April 2007

My Lords, I, too, served on the sub-committee that took evidence, and I congratulate those involved in assimilating the huge amount of evidence and writing the report for us.

At first sight, biofuels seem attractive. They seem to promote two important agendas: first, as an energy source, they seem merely to reissue the CO2 absorbed during the growing of the crop and so be carbon neutral; and, secondly, they seem to offer the EU agriculture industry—I declare an interest as a farmer—a much needed extra source of revenue after a decade of very poor returns. Of course, these two agendas need more explanation and after further investigation the picture is not quite so rosy, as the noble Lord, Lord Sewel, and the noble Earl, Lord Selborne, highlighted. First, the growing of wheat and other crops to create bioethanol in the EU is not a carbon-neutral process, nor is it beneficial in terms of other greenhouse gases. Field work for the planting, management and harvesting of crops requires considerable fossil-fuel emissions; just working the soil emits carbon dioxide into the atmosphere, and the application of fertiliser means that nitrous oxide also escapes into the atmosphere. That is the downside of most crop production in the EU.

Meanwhile, in Brazil they are proposing to utilise their vast areas of natural forest and savannah to triple their already huge production of sugar cane for fuel. I cannot see how that process can help global warming. I have witnessed the reclamation of land in the Mato Grosso via a slash-and-burn policy, and the short-term effect of that can only contribute to global warming. Although I admit that, as the noble Earl, Lord Selborne, said, sugar cane is one of the best plants in the world for converting solar power into energy usable by mankind, knocking down forests in South America, Africa and Indonesia to grow feed stocks for biofuels from palm oil and sugar cane and then shipping it several thousand miles to Europe does not seem to be environmentally attractive. The idea that Brazil can get carbon credits for doing that seems absurd.

What struck me, like the noble Earl, Lord Selborne, about the evidence we took from Europe is that the biofuel debate did not seem to be driven by global warming arguments, but only by the desire to be free from fuel dependency on Russia in the case of Europe, or other oil and gas-producing countries in the case of the United States. Only Denmark seemed to bring an environmental focus to bear on the biofuel debate, and insisted that there were better ways of extracting energy from biomass which were more environmentally friendly. It is interesting to note from a recent report that it has done a complete U-turn on this and proposes to invest a lot of money to harness new developments in the field.

Having said all that, I very much support our report's conclusions that whatever the shortcomings of current EU bioethanol and biodiesel production, it is right that the Government should do all they can to promote this embryonic industry through use of the RTFO, the renewable transport fuel obligation. I add that we emphasise—a matter that has been stated before—that the EU should do all it can to encourage a system of environmental audit or certification of the biofuel production, both at home and abroad. Like the noble Earl, Lord Selborne, I am not sure how it might achieve that.

I have two important reasons for supporting the industry at this time. First, transport generally is a growing source of greenhouse gases, and biofuel is one of the few ways attracting investment which could improve the sector's performances. As I have pointed out, it is not ideal. I think that that reason would not be good enough to support an industry which perhaps could do more harm than good, vis-à-vis climate change.

However, the second and main reason for my support of these first-generation biofuels is that second-generation biofuels are almost upon us, as the noble Earl, Lord Selborne, stated. The second-generation process allows the conversion of lignocellulose material—woody material—into fuels; actually, into almost everything, from chemicals to perfumes to medicines and so on. The difficulty is that each woody material—whether it is wheat straw, maize stalks, miscanthus or wood from trees, thinnings and so on—requires a different enzyme to break it down. Once that hurdle has been overcome—the noble Earl, Lord Selborne, reported that there is good reason for optimism—we are into a whole new ball game, where many of the disbenefits of first-generation biofuels evaporate.

For a start, we will be able to use perennial crops, such as miscanthus, willow and so on, which cuts out soil disturbance and virtually all fuel and fertilizer use in growing the crop. Secondly, it means that there ceases to be any real competition between fuel and food in terms of land use. For example, with wheat, you would merely use the grain for food and the straw for fuel. The same applies to maize. In other words, we as farmers would start to use the whole crop for commercial return.

Thus, I end where I started. Whereas the current generation of biofuels would only seem to be helpful to climate change, but in reality have some serious shortcomings, I believe that second-generation biofuels will be hugely beneficial, both to climate change and to UK agriculture. Therefore, I strongly support our recommendations that this industry is very worthy of government support. But, above all—I end by making this strong recommendation—we must not at this stage do anything to undermine the research and development of second-generation biofuels. That, with the dramatic cuts Defra is making to its R&D budget, is exactly what the Government are doing.

Photo of Lord MacGregor of Pulham Market Lord MacGregor of Pulham Market Conservative 5:08 pm, 19th April 2007

My Lords, I begin by declaring an interest. I am a non-executive director of Associated British Foods, which owns British Sugar. I have declared that interest in these debates before. I, too, would like to congratulate my noble friend Lord Renton of Mount Harry and his colleagues on what I regard as an outstanding report, which has already had a significant impact. It is succinct. It covers all the main points well, and I agree with all its recommendations. Therefore, I shall concentrate on only four issues.

From the way in which my noble friend Lord Selborne and the noble Lord, Lord Cameron, were developing earlier parts of their argument, I wondered at one point how they signed up to the final recommendations in the report. It is possible to reconcile that, and indeed the three objectives, provided that some of the warnings they gave are taken into account. I also make the point that the second generation of biofuels will not be fully developed unless we make a start on the first generation and ensure that we are serious about developing them.

On the first issue, I agree with all three objectives at the beginning of the report and do not think that they are necessarily incompatible. As others have said, the strengthening of energy security is increasingly rising up the agenda in the EU, compared with climate change, which dominated earlier debates. That is no doubt due in part to recent events, to which the noble Lord, Lord Cameron, referred. Of course, we must not exaggerate the impact of biofuels on energy security. I agree with my noble friend Lord Selborne that they are only a partial, perhaps small answer, but they can make a worthwhile contribution to both diversity of supply and home-grown fuel, and it would be folly not to develop them.

The environmental benefits are important to capture but, as others have said, it is necessary to ensure that there is a plus, taking account of issues such as deforestation, energy use in producing such fuel and transport costs. Here, I very much agree with the report and with what the noble Lord, Lord Sewel, said, about finding and applying a method—difficult but workable, as I think that the evidence to the committee made clear that it will be—of carbon accounting, getting a system to monitor, evaluate and certify the overall environmental performance of both important and domestically produced biofuels. I want to return to that later.

Of course, there is the domestic agricultural impact. I am surrounded in this debate by agricultural experts, but I live in Norfolk and still keep closely in touch with my agricultural community. We all know what a very difficult period farmers have gone through during the past 10 years as income has declined and with the low output prices. This could provide another important income source very quickly, paying farmers for something that has an economic use and value, which set-aside does not.

My second point concerns the role of the British Government. The report brings out clearly the impact of incentives in developing biofuel demand and supply. It is no coincidence that the member states with the greatest incentives, Germany, Sweden and Spain, were the ones to develop the market. The UK Government were slow to react. The 20p per litre fuel duty reduction was sufficient to incentivise the industry. The renewable transport fuels obligation came through rather slowly. I pay tribute to the noble Lord, Lord Palmer, and the late and much missed Lord Carter—I played some part myself—on the Energy Bill in 2004, I think it was. We tabled an amendment and the noble Lord, Lord Whitty, to his great credit took it on board and provided the legislative wherewithal to get the RTFO to proceed.

I suspect that capital allowances will not have much more than a marginal impact compared with the RTFO. Hence, as the report shows, we have been behind others in developing biofuel prospects. Our sales of biofuel to date have been below target and we are hardly giving a lead up to 2010. By setting our targets by volume, not by energy, as does the directive, our 2005 target was only 0.2 per cent and our target for 2010, measured by energy, is 3.5 per cent, compared with the indicative target in the directive of 5.75 per cent measured by energy.

We need to be more ambitious. Above all, the Government need to indicate to industry that they will be robust in insisting on the targets; that the targets will be in place for the long term; and that the incentives will be maintained for a reasonable period. British Sugar has been developing and will open this June the first bioethanol plant in the United Kingdom, at a cost of £25 million. It will produce 55,000 tonnes of bioethanol each year using 700,000 tonnes of sugar beet. It went ahead only when the Government made clear that they were going ahead with the RTFO. That, and especially the development of second-generation biofuels, will involve industry in considerable capital and R&D investment. The point was well made in paragraph 116 of the report:

"The importance of reassuring the market about public policy towards biofuels should not be underestimated".

Earlier, the report refers to the economically marginal element of biofuel production in the EU, which will require a continued substantial amount of support, and then moves to an analysis of what it calls the great tax giveaway—with a question mark, which I emphasise. I agree with those who say that the mandatory obligation weapon in the policy is by far the most significant and it is that that has driven people to move. However, at present, to give the industry the long-term assurance that it needs properly to develop the market and meet the targets, tax incentives need to continue as part of the package, although I can see that, in the longer term, they can be phased down or out.

I have two more points to make on signals and incentives from the Government. When the RTFO comes in in 2008, it is important that the buy-out price is set as high as possible. The Government must also indicate as soon as possible how they intend to implement the binding 10 per cent target for 2020, as agreed by the European Council. If they did so, this would boost investor confidence in the UK biofuels industry and put it on to a more solid basis. Without this element of longer-term market certainty, investment, particularly into second-generation biofuels in the UK, cannot be assured.

I said that I would develop the point about carbon measuring a little further. Some have demanded that the Government introduce minimum carbon-savings thresholds and sustainability standards to qualify for certificates under the RTFO from the start of the scheme. They argue that mandatory reporting alone is insufficient to prevent environmental disasters such as deforestation. British Sugar believes, and I agree, that the direct linkage of the kind proposed by those who are arguing for this should be introduced as soon as—this is the qualification—there is a consistent set of robust and reliable data based on globally accepted science. Current accounting systems are developmental, at best, and are not fully understood by global biofuel supply chains. Moreover, the establishment of minimum sustainability criteria must be acceptable, within WTO trade rules, and there must be minimum standards for carbon and sustainability reporting, agreed and implemented at EU level. The Government have been right to take the lead in the EU by insisting on mandatory reporting on carbon and sustainability standards, but I encourage them to continue their stance, as announced in the energy review, to develop robust standards before moving to linking support to minimum standards.

Finally, there will be many questions of balance, as noble Lords have already made clear in the debate. There is, for example, the balance between food production and fuel production, to which the noble Lord, Lord Sewel, referred. Driven by growing ethanol demand, as we know, and recent signals from the US President and Government, US farmers intend to plant 15 per cent more corn acres in 2007. We have already seen an impact on the price of wheat, and there could be implications for food commodities and a consequent impact on food prices. We live in a global world, and that balance and those possible unintended consequences need to be watched. Some people are already expressing fears about the implications for UK food production, but I believe there is sufficient feedstock and land availability in the UK to enable bioethanol to contribute to meeting the targets of 5 and 10 per cent. We have a current annual exportable wheat surplus of 3 million to 4 million tonnes, and 500,000 hectares of set-aside that will, I hope, be available after 2008. The industry will no doubt develop new technology to improve the yields of existing feedstock, and develop new feedstock and conversion techniques.

I note that Clare Wenner was quoted in the report as saying:

"We do not have the land ... to go on fuelling this for ever".

That is a sensible warning for the long term, but it is not an issue for the next 10 years. As this excellent report makes clear, the opportunities should be grasped now.

Photo of Lord Palmer Lord Palmer Crossbench 5:18 pm, 19th April 2007

My Lords, my interests are listed in the report on page 46. I, too, would like to put on record how sad it is that we published it on 20 November, and that it has taken five months to find a slot in which to debate it, when the biofuel movement is changing literally daily. I also pay tribute to the noble Lord, Lord Renton, for chairing the committee that produced this important report, and thank our specialist adviser, Peter Clery, who was making the case for biofuels when Whitehall thought that the topic was just a joke and that fossil-based LPG was the CO2-saving fuel of the future. He was one of the first to stress the energy-saving potential of biofuels.

We are debating a report of EU provenance, and noble Lords might wish to note that biofuels were favoured by the European Commission primarily as an alternative energy source, not as a C02-saving policy. The first official announcement of the UK Renewable Transport Fuel Obligation was announced in this House in November 2005. This followed the introduction of the 20p per litre fuel duty rebates for biofuels. Here, I, too, would like to pay tribute to my friend the late Lord Carter who played such a crucial part in persuading the noble Lord, Lord Whitty, who was then a Defra Minister, to accept the principle of an RTFO. I well remember the excitement when the noble Lord originally accepted the amendment to the Energy Act put forward by the British Association for Biofuels and Oils, of which I was then president, and, in particular, the speech of the noble Lord, Lord Ezra, when he thanked the Minister for accepting our amendment. It literally brought tears to my eyes and I am sure that the noble Lord, Lord MacGregor, will remember that occasion.

As other noble Lords have mentioned, the present UK proposal is for a 2.5 per cent biofuel obligation in 2008, rising to 5 per cent by volume by the end of 2010. The EU target is 5.75 per cent by energy by 2010. I make no apology for the complication of all these many figures that we will have to quote throughout this debate. The oil companies have predicted that meeting the EU target will require vast amounts of imports from countries such as Brazil, which has been mentioned by other noble Lords. "We will be swapping oil from Saudi Arabia for biofuels from Brazil and Malaysia. Does that help energy security?", asked Peter Tjan of the European Petroleum Industry Association only last month.

European biodiesel production increased some 33 per cent to more than 4 million tonnes in 2006 from just over 3 million tonnes in 2005. Germany was by far the largest producer. EU fuel ethanol production rose by 71 per cent to 1.5 million litres in 2006 from 913 million in 2005, with Germany and Spain by far the largest producers. Production of biofuels in the United Kingdom in 2006 was approximately 260,000 tonnes—0.53 per cent of total road fuels. That is more than double the 2005 figure, but it is still way below the EU targets. Of this total, 167,000 tonnes was biodiesel, 0.7 per cent of diesel sales, and 93,000 tonnes of bioethanol, which equates to 0.4 per cent of petrol sales, all of which was imported. Virtually all UK bioethanol production went to the high value drinks industry and not, sadly, into road transport fuel.

Our own biodiesel industry relies mostly on imported feedstocks, apart from the successful Argent plant in Scotland, which uses mainly recycled cooking oil and tallows. The Biofuels Corporation plant on Teesside, in which I declare a tiny interest as a very small shareholder, is battling with increased palm oil prices and a crude oil price rather below the $70 a barrel mark.

The UK, unfortunately, continues to lag behind other EU member states in domestic biofuel production and in the proportion of biofuels in the national mix. France, a leading biofuel producer, achieved 1.75 per cent of biofuel incorporation last year and anticipates 7 per cent by the end of 2010. The UK has only a very small but growing biofuels industry, which is to a large extent dependant on imports—chiefly palm and soya oil. No significant amounts of UK oilseed rape are thought to be involved in UK biodiesel production.

The increased world demand for biofuel feedstocks highlights an important matter which I wish to bring to your Lordships' attention. The competition for land between food and fuel is a new phenomenon, which will be of increasing significance. This conflict has already surfaced in the United States where demand for corn for ethanol as a road fuel has driven prices substantially higher, much to the concern of food manufacturers and of course, as a result, their consumer customers. The world price of palm oil has gone up in a year from around $440 per tonne ex-Rotterdam to over $600 per tonne.

In the real world, as the price of fossil fuels rises, the prices of all agricultural commodities are underpinned, as will be the value of land on which these crops are grown. It is a shortage of land and fresh water which could limit economic development if crude oil stays much above the $70 to $80 a barrel mark, although major developments in geothermal energy could improve the picture substantially. This brings me to the crucial point which I wish to make. Compared with many other countries in the EU and indeed outside it, the United Kingdom is relatively short of land in relation to our population. More than in most developed countries, land is a scarce resource. We shall need it increasingly in the future for both food and fuel. Decreasing supplies of fossil fuels, global warming and rising sea levels are the reality that we have to face today, the causes of which will be the subject of debate as more evidence comes forward that man-made CO2 is not the only cause of climate change.

But what is indisputable is that we shall need all the land we can get for both food and fuel security, and this is why the EU obligatory 10 per cent set aside is such a scandal, as indeed the noble Lord, Lord MacGregor, mentioned. Only yesterday there was a headline in most of the newspapers, including the Daily Telegraph, as well as a slot on Radio 4, from which I quote:

"Growing demand for biofuels 'could lead to food shortages'".

That is according to the leading government adviser, also mentioned by the noble Lord, Lord Sewel, Professor Bill McKelvey, the chief executive of the Scottish Agricultural College in Edinburgh—here I must declare a further interest as a former student. The thought that we will always be able to obtain affordable supplies of food, biofuel and fossil fuels is imprudent. It is short-sighted and it is comforting to know that the anxiety is shared by people of such eminence and expertise as Professor McKelvey, even though sadly it may not be shared by Her Majesty's current Secretary of State for Environment, Food and Rural Affairs. I urge Her Majesty's Government to take this on board.

In answer to a Parliamentary Question I recently put to the Government, PQ 2107, the Minister of State, the noble Lord, Lord Rooker, was, to my amazement, still talking about making space for water, which is Defra shorthand for the organised flooding of our land. May I ask that Her Majesty's Government abandon their present policy of allowing good farmland to be inundated by rising sea levels and substitute it with a policy of strengthening our flood defences against the rising water levels associated with global warming, thus not just maintaining but increasing the land available for food and fuel production?

Climate change is with us. It always has been and it always will be. The world is getting warmer, though there is legitimate reason to ask how much is due to natural solar activity and how much to man-made carbon dioxide. Is an increase of 10 per cent in CO2 levels from 300 parts per million to 330 ppm really the only cause of current warming? What is certain is that while we cannot predict the future, we can and should plan for possible alternatives; hence the importance of biofuels, whether they be first or second generation.

Professor Martin Parry, co-chairman of the Intergovernmental Panel on Climate Change, reported in the Daily Telegraph of 7 April that actions to adapt to climate change such as improved sea defences and new forms of agriculture should take priority over our efforts to reduce greenhouse gases which would take years to have any effect. Global warming for the world could mean cooling for the UK if the warming effects of the Gulf Stream slow, as indeed has happened before in times of global warming, which would give us a climate akin to that of the Hudson Bay. We simply do not know.

Biofuels have a legitimate role to play as alternatives to declining fossil fuels and, in the long term, to reducing atmospheric pollution and CO2 levels. In the context of this debate on the European strategy on biofuels, I ask that the United Kingdom takes a lead on developing a coherent EU policy. This House led the way in establishing the principle of a RTFO, now widely accepted within the European Union. We must do the same for land policies for our future food and indeed fuel needs.

I also ask that Her Majesty's Government decide which department or Minister has overall responsibility for these matters. I know the noble Lord, Lord Ezra, feels very strongly about this, as he raised it at Question Time the other day. The last time I had a Question on biofuels, there was serious uncertainty about whether the Treasury, Defra, the DTI or the Department for Transport were responsible for the Answer. We need a dedicated department with overall responsibilities for these issues, as they will increasingly involve the adjustments to the UK economy, particularly our agriculture, to what could be very rapid changes to our climate. We must be prepared to adapt to what is almost certainly an unstoppable period of global warming allied to a declining supply to what has been our staple form of energy, fossil oil. That is the challenge.

Liquid biofuels have their part to play, along with other forms of sustainable energy, improved sea defences and worldwide changes to agriculture and marine husbandry. I hope the United Kingdom will lead on these important issues. We must not get left behind. I hope the Minister will give us that reassurance today.

Photo of Lord Renton of Mount Harry Lord Renton of Mount Harry Conservative 5:32 pm, 19th April 2007

My Lords, it is a great pleasure to follow the noble Lord, Lord Palmer, in this debate. He was an early prophet of biofuels, and it was the fact that we were about to look into biofuels that made him eager to rejoin the EU sub-committee of which I had the pleasure of being chairman for a few years. I was also delighted that the noble Lord, Lord Sewel, who opened the debate today, was willing to succeed me as chairman of that sub-committee.

One of our problems during our inquiry was to remind ourselves all the time that we were an EU scrutiny committee. There was an obvious tendency to think about what we were doing in the UK, our problems and how we were tackling biofuels in the UK, but not enough about the EU. I shall come to that in the second half of my remarks.

It was a pleasure to be on the committee with so many people with agricultural experience; not only the noble Lord, Lord Palmer, but the noble Lord, Lord Cameron, who has already spoken, and my noble friend Lord Plumb, who is going to speak. The previous chairman of the committee was my noble friend Lord Selborne, who has also spoken already and has a great deal of agricultural knowledge. We brought a good deal of expertise to our subject, but the noble Lord, Lord Sewel, is right to say that our timing was interesting, at least. When we started looking at the whole question of biofuels and we had this rather gentle subtitle, "From Field to Fuel", it was a relatively quiet matter; it was relatively shallow and calm. As others have said today, the six months since we produced our report have seen an almost hectic increase of interest in this matter, fired by the increasing certainty of scientists that climate change is a real danger and that one important way of dealing with it in the future will be to find alternative methods of producing energy that either are not dependent on coal or oil at all or have a very low carbon consequence. My noble friend Lord MacGregor said that this has taken us into some unforeseen consequences already; they were not seen when we wrote our report. This centres on the fact that, even at this stage, people look at other sources of biofuels and energy—sugar cane, palm oil, maize corn, rape seed oil and wheat—and consider how those can be used as quickly as possible.

One rather delightful result of that that I was told about the other day is that cars in Indianapolis, the home of motor racing in the United States, all have to run on ethanol rather than petrol. That means that the atmosphere is now a nice smell of corn fritters rather than petrol. That is a pleasant consequence. But the rush to create facilities to produce eco-friendly alternatives made from crops, plants and animal fats has had consequences that are clearly worrying or at best unclear. The noble Lord, Lord Palmer, mentioned how much prices have gone up. Wheat prices in the UK have increased by approximately one third from below £80 per tonne to above £100 in the course of the past eight months. In the United States, the maize corn price is at its highest for 10 years. In August, the price of a bushel of maize corn was $1.87. At the end of last week, the Chicago futures market quoted a price of $3.74—doubling in six months.

This has led to a lot of alarmist talk in the newspapers about the consequences. The Guardian and the Independent have been the leaders in that, but I was interested to see in last week's Sunday Times a feature by Kathryn Cooper, which states:

"The race for biofuels is not without risks. Already there have been food riots in Mexico, where the soaring cost of corn has pushed the price of the country's staple tortilla beyond the reach of many of its poorest people. And the rainforests of Indonesia and Malaysia are being destroyed at a quicker pace as farmers clear the land to produce palm oil, another biofuel".

The article goes on to quote an investor from a company called Invesco, saying that,

"soaring food prices could be one of the factors that push UK interest rates to 5.75 % or even 6% because food is a big part of the Bank of England's inflation basket".

Such was the effect of that comment, that some of your Lordships will doubtless have noted that when Tesco produced its record profit for the past year of about £2.5 billion, one or two critics said, "Goodness, in the year ahead it is going to be even more, because food prices are going to go up and that will enable Tesco to have a higher profit margin on food". I will not say horror of horrors, but I was interested that that was a reaction to the vast success of Tesco.

This is the other side of the story. I have been thinking about this debate and these worrying comments, and I am reminded of the remarks of Lord Melbourne on the subject of Catholic emancipation. He said,

"What all the wise men promised has not happened, and what all the damn fools said would happen has come to pass".

There must be a great duty on us all to see that that is not the epitaph on the move into biofuels that we are talking about this afternoon. A real duty lies on the developed countries—the USA, Europe, Japan and ourselves—whose carbon emissions have created so much of the problem. We have a duty to see that the apocalyptic warnings that I have talked about are warnings only and not realised in practice.

In that context, I am delighted to see that Defra has created the National Non-Food Crops Centre in York, which is encouraging farmers—to pick up the point made by the noble Lord, Lord Palmer—to use the 1 million hectares of arable land that it considers available in the UK to grow oilseed rape and wheat that is needed to meet our RTFO obligation of 5 per cent of road transport. As noble Lords this afternoon have said, experts at that centre are also investigating the second generation of biofuels and how it must come from a wider range of biomass, straw and forestry residues, for example, than the first generation.

Finally, let us consider the position of the EU in this. The EU set a minimum of 10 per cent to come from biofuels by 2020—and then at the Council at the beginning of March proposed an overarching 20 per cent cut in greenhouse gas emissions by 2020. This led the Financial Times on 10 March to come out with a major article which started, almost in capitals, and with an exclamation mark:

"The European Union has agreed to something! Its deal to cut greenhouse gas emissions by 20 per cent is far from perfect... but reaching any agreement on such a painful measure, in a union of 27 members, is an achievement. Europe has shown that it is serous about climate change".

For those of us on the European Scrutiny Committee, this is at the heart of the matter. There will be huge haggling in the EU as to how that 10 or 20 per cent is divided between the countries, but surely here is a leading role for the European Union to play. No nation can solve the problem of climate change and cutting greenhouse gas emissions by themselves, nor can the EU—but it can give an example. It can persuade other European countries to move in the right direction by a mixture of firmness, co-operation and wisdom and give a vital lead.

I very much hope that this is the challenge to which the EU Commission and Council will rise, as they are offering a carrot to the rest of the world by saying that in Europe we will cut emissions by 10 per cent more if others follow suit. It is in that context that the EU has to show muscle and the stick at times, too. EU action after 2020 will depend on others contributing as well.

As worries about climate change increase, as they certainly will, the EU can in this context convince doubters of the Commission and Council of their usefulness and courage. This is not a challenge that can be avoided. The EU, in my judgment, as a coming together of 27 nations, is in the centre of the biofuels arena. That is where they have to stay—and the EU will be judged by what it achieves in this context.

Photo of Lord Grantchester Lord Grantchester Labour 5:43 pm, 19th April 2007

My Lords, this report is to be commended for its valuable contribution to the debate on renewable energy, carbon emissions and climate change through the increasing participation of biofuels. I congratulate the committee on its inquiry. I declare an interest as a dairy farmer in Cheshire and a director of the farmers co-operative Dairy Farmers of Britain.

It is encouraging that Her Majesty's Government broadly agreed with and supported the conclusions and recommendations of the report. There is universal encouragement for sustainable renewable fuel supplies. However, we must be aware of target inflation, whereby political parties compete for the moral high ground, setting headline targets on a mound of soft aspirations. Targets must be tempered by critical and robust pathways with achievable milestones backed up by real, hard measures.

Since the report's publication, the Government have taken forward many developments. They are to be commended on their commitment to develop reliable ways of ensuring that carbon and wider environmental aspects of biofuels are properly addressed with agreed international standards regarding calculation methodologies, reporting frameworks and sustainability. They are also to be commended for not having slowed down development on the pretext that these standards should be agreed first. However, it is vital that biofuels, especially imported ones, are fully traceable and can be demonstrated to deliver a net carbon saving to qualify for inclusion in the Renewable Transport Fuel Obligation. Biofuels serve no purpose if they do not contribute to reducing carbon emissions; for example, burning rainforest to grow palm oil for biodiesel makes no sense. Fuel produced by such activities should not obtain certificates for use in the UK.

Having recognised the Government's achievement, I believe that they can be pressed to respond quicker and on a bigger scale; for example, they can be challenged to be bolder in the mixture of relative incentives—carrots and sticks. They must set out a clear strategy for the UK beyond 2010. They say that they are exploring the possibility that the level of the obligation could rise above 5 per cent after 2010. However, EU energy policy, through the biofuels directive of 10 January 2007, commits member states to levels of at least 10 per cent by 2020. Growing demand for biofuels will require significant expansion in production facilities. Clearly, investors need long-term security to reduce risk, spread costs and secure returns. The RTFO needs to be made for the same period as the renewable obligation for electricity to 2026. The Government must indicate quickly how they intend to implement this 10 per cent target to underpin investor confidence. Investment, especially in second-generation biofuels, cannot be assured.

Tax incentives could be critically reappraised to draw forward more realistic supplies. A 30p duty incentive—a combined package of fuel duty saving and buyout price—has been proposed. How near are the Government to confirming that figure? Discussions took place last summer with the Commission on the enhanced capital allowance scheme. This announcement in the budget was welcome, bringing uncertainty to an end.

The motor industry needs to be pressed to respond quicker. There has to be a buy-in to a rising percentage use of biofuels backed by manufacturers' guarantees. It is to be noted that the motor industry was initially resistant to the introduction of lead-free petrol. The current 5 per cent limit for biofuel in conventional engines now lies well within safety tolerances and could be extended significantly. Reduced car tax incentives, reduced congestion charging and other innovative incentives could all play a part. Straight vegetable oil could be recognised as a biofuel and not classified as a fuel substitute. Her Majesty's Revenue and Customs guidance needs clarification to remove this confusion.

With the changes to agriculture consequential on the reform of the CAP whereby farm payments are separated from production, land is currently available to meet the 5 per cent RTFO. It is incorrect to contend that the UK does not have the land availability to produce biofuels and food. In practical terms, after allowing for crop residues to be used for other purposes such as cattle feed, the net land requirement for biofuels is less than the area used to produce the current UK exportable surplus of wheat plus the area currently in set-aside. There are 560,000 hectares in set-aside. As part of the CAP, the scrapping of this anachronism with production subsidies needs to be addressed immediately.

The East of England Development Agency predicts that, based on UK current conditions, two to five farming jobs could be sustained or created for each 1,000 tonnes of biofuel production. A 100,000 tonne processing plant could therefore mean 60 jobs, plus 500 jobs in agriculture. The ability to produce renewable energy and feed the nation can only improve agriculture's profitability and restore prosperity to the rural economy.

The report also draws comparisons between the UK and the rest of the European Union. It shows that in many areas the UK is lagging behind other countries, notably Germany, France and Scandinavia. That has primarily been through more aggressive tax policies. The Government are now addressing that competitive element, and I am confident that further strategic developments such as a mandatory reporting scheme and increasing transparency in the market, will help to put the UK at the forefront of the debate. I applaud the steps being taken, but renewable energy will remain a challenge for a long time ahead.

Photo of Lord Plumb Lord Plumb Conservative 5:50 pm, 19th April 2007

My Lords, it is a great privilege to have served on EU Sub-Committee D over the past two years under the chairmanship of my noble friend Lord Renton of Mount Harry. I almost flinched when he said earlier that he had to remind some members of his committee on occasion that we were an EU committee and not just dealing with UK affairs. If I am a guilty party in that respect, I admit that it is perhaps because, having spent nearly 30 years in the European Union dealing with European affairs, I came home and found us so much a lame duck that I fought for the UK on those occasions and therefore referred perhaps more to UK affairs.

The baton has been handed over to the noble Lord, Lord Sewel. It is a pleasure to continue to serve on the committee under his chairmanship. The report refers specifically to the European Union strategy on biofuels, which forms the basis of the plan of action for dealing long term with renewable energy in the interests of reducing greenhouse gas emissions as we face climate change. The noble Lord, Lord Sewel, set it out so clearly that I need add nothing to what he said, but I have no hesitation in supporting fully the whole report, looking at it as we did in the longer term.

Since the report was written—a long time ago, as we were reminded by the noble Lord, Lord Palmer, in particular—much has happened. Targets have been set across Europe, and the European Union has declared that it has significant capacity for energy production from biomass. The European Environment Agency states that, by 2030, bioenergy could provide 15 per cent to 16 per cent—equal to 295 million tonnes of oil equivalent—of the requirements as opposed to only 4 per cent in 2003, without harming the environment. That is, of course, for all bioenergy, of which a substantial part could be feedstock for biofuels. We need, as others have stated, a clear strategy to give investor confidence to meet the mandatory 10 per cent biofuel target by 2020 and the 5.75 per cent target by 2010.

Biofuels, in terms of production from crops such as wheat, rape and sugar and all arable crops are, as we recognise, a new technology requiring a good deal of research, enabling further efficiency along the whole production chain. Changes are taking place far more rapidly than perhaps many of us realise. Plant breeding has to be targeted at improving extractable oil and starch yield. The agronomy has to be considered, and that is changing.

There are reduced inputs in various forms. In looking at processing efficiency, it is good news to hear that British Sugar is making considerable investment in a plant that will deal with a product about which we heard from my noble friend Lord MacGregor. Development is taking place. It requires new skills in marketing techniques and the exploitation of the synergy with bio-energy and food uses. Technology also has to apply to the production of biofuels from wood equivalent, which allows a much greater range of biomass to be used. Again, that requires essential long-term research, but it has an exciting future.

We have heard much of the great Brazilian experience on biofuels, which I have witnessed in that country over the past 30 years. It has shown an average efficiency gain of 4 per cent a year over the production chain. At what expense? We hear of the elimination of many forests, but nevertheless they have done it.

From the evidence and research we studied for the report, our conclusion is that, given sufficient support, there is no reason why the European Union and the United Kingdom cannot ultimately compete. It must be remembered that crops used in the production of biofuels are dual purpose. In wheat, one third of the crop for bio-ethanol is retained as distillers' grains, a high quality animal feed. In oilseed rape biodiesel production, 50 per cent of the product is retained as high-protein animal feed. That can replace protein feed imports, not only to benefit the economy but to reduce carbon emissions.

An alternative is to generate further bioenergy for the United Kingdom. Biofuel co-products can be used to supply biomass for heat and power production, helping to reduce still further carbon emissions. The potential is there. The Minister said earlier that we do not want a lot of whingeing. There is no whingeing on this front; there are tremendous opportunities, and that is seen by those involved in longer-term production.

As stated, the projected area of land required to meet the targets is in the region of 900,000 hectares in the UK alone. We have an average exportable wheat surplus of over 3 million tonnes, as the noble Lord, Lord MacGregor, said, and mandatory set-aside of some 570,000 hectares of land. Those calculations take no account of the production of biodiesel from waste cooking oil or tallow, such as the 50 million litres used by Argent Energy in Motherwell, to which the noble Lord, Lord Palmer, referred.

A market is emerging in renewable energy that provides prudent carbon savings over fossil fuels, which can be supplied by sustainable agriculture. The estimates of that august body, the National Farmers' Union, show that, in practical terms, if we remove the now outdated system of land set-aside and bring that land back into production, we can reach the target and make a real contribution on biofuels from field to fuel.

For years the European Union has been castigated for overproducing food, resulting in the control measures to which we have all been accustomed over those years, stifling potential. Now a new market is emerging in renewable energy that proves carbons savings over fossil fuel. It must not be seen as a threat to the ever-cheaper supply of raw materials that people have become used to under the common agricultural policy.

I hope that, in his response, the Minister can state positively his views on how we can move forward. I hope that he will take note of paragraph 46 of our report, which refers to the importance of joined-up thinking. We state that government partnerships, particularly in France, Germany and Sweden, are showing mutual co-operation. That is essential for success, and I hope that we can join those countries.

Photo of Viscount Ullswater Viscount Ullswater Conservative 6:00 pm, 19th April 2007

My Lords, the noble Lord, Lord Sewel, introduced this debate with his usual flair and wit, and I thank him for introducing the report today. Like many other noble Lords, I regret that there has been a gap of five months between the publication of this topical report and this debate. I declare an interest as a non-executive director of a farming company in Cumbria.

"Say goodbye to your petrol station".

So runs the advertorial from Biomotors Ltd in the November/December issue of The Monitor, Blue Skies. It states:

"A simple upgrade will let most diesel engines run on locally grown rapeseed oil, cold pressed on the farm. It requires no chemical processing, generates no waste, and the co-products of seed cake and straw have multiple uses such as biomass heating".

However, writing in the Sun last autumn, Professor James Lovelock took the oil companies to task when he said:

"The one renewable energy [vehicles] will use is biofuel, which is made from crops. This fuel is heavily subsidised by you and me in taxes and will be a nice little earner for the oil companies while it lasts. Far from being green, biofuel is the most environmentally destructive of all energy sources. Huge areas of land would be needed to grow the biofuel and it can only be taken at the expense of land for food crops and land for natural forests that keep the air clean and breathable".

I congratulate Sub-Committee D on plunging into this debate and bringing some reason and balance to the extreme views that I have just quoted.

The report, The EU Strategy on Biofuels: from field to fuel, treads a careful line between the promotion of biofuels per se and the encouragement of the biofuels industry. It identifies three justifications for biofuels; like my noble friends Lord Selborne and Lord MacGregor of Pulham Market, I should like to look at those. The first is the security of energy supply; the second is the Government's agenda for CO2 saving; and the third is the commitment to agricultural development through growing biofuels in this country.

The UK is taking tentative steps towards committing itself to the target set for 2010 under Article 3 of the EU biofuels directive, although the 3.5 per cent by energy offered by the UK falls somewhat short of the 5.75 per cent adopted by the majority of the other member states. Only Italy has opted for an even lower published target of 2.5 per cent. Without such a target and, as mentioned by the noble Lord, Lord Cameron of Dillington, without the tax incentives that go with it, in my view the industry would not get the kick-start it requires to become a sustainable industry in its own right. A few years ago the tax incentive to encourage motorists to switch from leaded to unleaded petrol had the desired effect. That demonstrates that, with the right fiscal incentive, the buying power of consumers can encourage effective investment by the oil companies and possibly British Sugar. The report is right to state that the EU needs to,

"develop an appropriate policy framework and Member States to provide appropriate incentives to encourage further investment in production facilities".

Will the Minister say whether the excise duty on biodiesel and bioethanol, which was lowered by 20p a litre, effective from January 2005 on this three-year rolling programme, will be continued after 2009-10? What criteria would be used to vary it? If the UK falls short of our target for 2010, surely it would not be sensible to withdraw the incentive to increase production.

The UK Government have pinpointed climate change as the number-one reason for promoting biofuel's use. It is important to understand that the energy consumed in production and transformation into biofuels may be at least nearly equal to, or even more than, the energy they deliver. That warning was given to us by the noble Lord, Lord Cameron of Dillington, and my noble friend Lord Selborne.

That issue has split the environmental lobby, where some leading figures have denounced biofuels as a global disaster. In the USA the Worldwatch Institute estimates that to fill a tank of a typical SUV would use enough grain to feed one person for an entire year. The Government's 2006 energy review proposes a renewable transport fuel obligation to be introduced in 2008-09. It will require suppliers of fuel to ensure that a proportion of their sales are from renewable sources, with the obligation rising to 5 per cent by 2010. The energy review estimates that this will save 1 million tonnes of carbon in 2010. But the report is cautious about that. The committee considered some form of carbon certification to be desirable and would wish the European Commission to establish a European-wide system of certification for both imported and domestically produced biofuels and feedstocks, a point highlighted by the noble Lord, Lord Sewel.

When considering agricultural development and growing crops dedicated to the production of biofuel, one's eyes turn immediately to the USA, where President Bush has given his support to the increase in land use for biofuels. At present I understand that it used 15 per cent of its corn crop for this purpose, and my noble friend has indicated that that will be increased by another 15 per cent. It is the second most important, cost-effective crop for producing biofuels after sugar cane, and 2 per cent of non-diesel transport fuel is biofuel. A report from the Worldwatch Institute, after warning of significant agricultural and ecological risks, finds that the technology has the potential to increase energy security, create jobs, save foreign exchange, reduce local pollution and emissions of greenhouse gases, and create new economic opportunities in rural areas.

I agree with my noble friends Lord MacGregor and Lord Plumb about the land available in this country and in the northern hemisphere. We only have to look at the set-aside policy to understand that that was put in place to reduce the amount of land taken out for food production.

My noble friend Lord Renton of Mount Harry indicated that corn prices have already risen on the Chicago exchanges. We need a careful balance between the increase in corn and wheat prices and the price of food. Nobody would deny that farmers are due an increase in their raw material prices, after decades of stagnation. I am sure that that would be echoed by my noble friend Lord Plumb. It is not for me to judge whether sugar beet or wheat should provide the feedstock of this country, but any increase in production facilities will divert crops away from food and into biofuel production.

The report correctly urges a strong national commitment to agricultural economic development through biofuels. Like other noble Lords, I consider that the future will most likely lie in the second-generation production of biofuels, using cellulose and all the waste mentioned in this debate. Cellulosic ethanol has a potential to replace nearly 23 per cent of the EU25 petrol market, according to a consortium including the European Commission's Joint Research Centre. First-generation biofuels could only provide 4.2 per cent. The Nobel laureate Steven Chu, director of the Lawrence Berkeley National Laboratory in California, said that the potential yield from converting cellulose to biofuel could be five or 10 times greater than that for corn.

The committee's report makes excellent reading. Although it limits itself to dealing with the EU biofuels directive, the evidence taken demonstrates that we have some way to go before it is clear whether biofuels are the future for the transport sector. We cannot escape the fact that global warming is with us, and we should take reasonable and sensible steps to limit carbon emissions without losing sight of sustainable development.

Photo of Lord Teverson Lord Teverson Spokesperson in the Lords (Climate Change), Environment, Food & Rural Affairs, Whip 6:10 pm, 19th April 2007

My Lords, I am a proud member of the EU Sub-Committee on justice and home affairs. I disagree with the noble Viscount, Lord Ullswater, in one area. I, too, am usually critical of how long these reports take to come to this House. On this occasion, however, the report has hit the spot on topicality. The first time I read it, perhaps after a difficult debate in the House, I found it quite difficult to digest. The second time, I found it particularly comprehensive and good at going through the subject.

I live in Cornwall and have a diesel car. Trying to do something practical, two weeks ago I was wondering how I could buy biodiesel to be part of this revolution. I found two outlets in the far south-west, for both of which I would have had to drive some 50 miles on a round trip to fill up the tank. By that time, I would have wasted a 5 per cent obligation just on the trip. That puts some of the debate into context. The Commission's Renewable Energy Road Map, published in January, admitted that this area has been somewhat of a failure of European policy in the past, as many noble Lords have said. Despite the 2 per cent target of 2005, not even 1 per cent was reached. Three member states reached 1 per cent, and one—Germany, of course—accounted for two-thirds of the total production of biofuels. It has therefore been a failure to date. As my noble friend Lord Bradshaw said, the subject is in the much broader context of energy security and climate change.

The report and today's debate are particularly timely, following the troika of announcements by the European Commission last month, which included biofuels. There were only three pronouncements on the great move forward on the European climate change strategy: the 20 per cent reduction in carbon emissions; the somewhat amazing 20 per cent renewable energy proportion of consumption as a whole, not just electricity; and the target of 10 per cent biofuels use by 2020. We are discussing an important agenda.

Since the report was produced, as many noble Lords—particularly the noble Lord, Lord Renton of Mount Harry—have said, biofuels have moved from being an ecological saviour almost to the devil incarnate. That change has been relatively sudden, and we must either resist or adopt a much more balanced approach towards it. A number of issues currently make this such a contentious subject. On sustainability and the energy equation, the figures for corn as an energy crop raise the issue that 20 per cent more energy is required to produce biofuel than it generates. There is the problem of the knock-on effect of deforestation, the headline issue of whether we are feeding cars rather than people and all the emotion surrounding sustainability issues.

There are also the knock-on effects, which many noble Lords have mentioned, of food prices, the possible reintroduction of monoculture in some economies, land use and so forth. There has been particularly bad press recently on biofuels in the United States and the Bush strategy on energy security, which has involved high subsidies for crops, increases in feed for animals and in exported food, and a very protectionist regime, although perhaps the recent agreement with Brazil has moved that on slightly.

The noble Earl, Lord Selborne, mentioned the common agricultural policy and the resistance that we naturally have in the UK to reinvent, or to take a backwards step towards, the CAP. We already have a €45 subsidy per hectare on energy crops. Do we really want to move back, given the time and energy spent and the discomfiture caused to the agricultural community and farmers, to invent another version of the CAP to which we have recently said goodbye?

The other area that is well mentioned in the report and has not been mentioned in the debate directly is the increasingly sweating brow of European Treasuries as they start to lose tax revenue on one of their strongest lines: petrol and diesel. As biofuel consumption increases, Treasury income in rebates will go down. That is only sustainable to a certain degree. That is also true of capital allowances on major capital investments, although that is important in getting this industry established.

I, too, welcome the comments of the noble Lord, Lord MacGregor of Pulham Market, about British sugar. There is also the investment taking place in Grangemouth and other areas.

Then there is the whole area of scale. I find this difficult to understand. I recently read an article in the New Scientist on miscanthus, the total energy of the UK and the fact that it would take 14 million hectares to replace that in bioenergy for the whole energy consumption of the UK. That is an area slightly larger than the land area of England. There are many questions about that and I am not sure that the part answer of set-asides, as raised by the noble Lord, Lord Plumb, is quite as easy as we say it is. In many areas, farmers have rightly and constructively used that set-aside for biodiversity and farm conservation areas, and if we suddenly plough all that up and replace it with biofuel crops—I am not saying that that is necessarily completely wrong—the effect would be far more localised than the effect of what happens in rainforests in Brazil or Indonesia. We should expect local reaction and we need to plan for the potential effects on land use and biodiversity in rural areas.

The noble Lord, Lord Cameron of Dillington, mentioned Denmark. I was interested to hear that Denmark may have started to change its mind. When I was in the European Parliament, the Netherlands and Denmark were looked upon as the most forward-thinking in their understanding of environmental and sustainability issues. The policy of Denmark that says that this is destruction is important.

What are the conclusions? It is important to remember that oil production and oil reserves are going down worldwide. We are past the peak, and we therefore need a substitute. The most obvious substitute is not biofuels; once we are at a certain level of oil pricing, the next easiest form of substitute is the liquefaction of coal resources, which is a far more environmentally damaging technology than biofuels will ever be. We need to start now in this area; we need to take it seriously, but we also need to proceed with caution.

From these Benches, we say that the important area is the sustainable certification of biofuels. That is easy to say, but I find it difficult to understand how it can happen in practice, mainly because of the knock-on effects. We can look at the supply chain, whether through the supplier, as the report suggests, or by other mechanisms, and we can see that these crops are grown in proper places and have not encroached on rainforests, but do the crops that they have substituted or the extra land needed mean deforestation elsewhere? There are knock-on effects through this holistic economic system. It is difficult to be clear about certification, but we must attempt it.

As all noble Lords have said, the second generation of biofuels—cellulose-based biofuels—is the most important. They are clearly the way forward and are perhaps more naturally suited to the European climate and ecology than first-generation biofuels. We should not be overprotective. At the moment, the European Union has 45 per cent tariffs on bioethanol, though not on many of the products that feed into biodiesel. The tariffs need to come down so that we do not have a protective market in the long term.

I agree with the Government's decision, which has been widely applauded in the House, to implement the RTFO. I believe that most things should be done, if at all possible, through market mechanisms, but that is the right way to kick-start the process, ensure that we reach our targets and start this industry, which will become an important part of our economy.

However, because this is a much broader issue, we need a proper price for carbon, whether through real emissions trading systems that work or carbon taxation, so that markets and people can make choices about how CO2 emissions targets are met. I have one question for the Minister: what are the Government's proposals for a credible certification process that goes alongside the EU proposals and the RTFO when it is introduced in 2008?

Photo of Baroness Byford Baroness Byford Shadow Minister (Food & Rural Affairs), Environment, Food & Rural Affairs 6:23 pm, 19th April 2007

My Lords, this has been a wide-ranging and informative debate. I am grateful to the noble Lord, Lord Sewel, for introducing it in his fulsome way. I am also grateful to my noble friend Lord Renton of Mount Harry. I record my sincere thanks to Lord Carter and the noble Lord, Lord Palmer, and other noble Lords who took part in the debates when we took the Energy Bill through. Clearly, when we started on that Energy Bill, the Government had no intention whatever of letting the obligation come into being. It was sheer persistence that enabled it to happen, so I am grateful to all noble Lords who participated in that process.

This report is an important and timely piece of work. It is timely because we are dealing directly with the effects of climate change and are also looking at the diversification of British agriculture. I should remind the House that my family has farming interests. We have a farm in Suffolk where we grow wheat, oilseed rape and, because of our location, this year, we are growing a small amount of sugar beet for the first time.

In his introduction the noble Lord, Lord Sewel, covered four or five of the most important things. Other noble Lords have touched on them. I shall mention them so that people do not think I have not picked up on them. First, the directive has not been effective. Other noble Lords have reflected on that. My challenge to the Minister when he responds is: what will the Government do about it because clearly there is a problem?

Secondly, carbon certification was raised by noble Lords. Thirdly, there was the fair access for imported fuels. In view of the implication that has for deforestation, I shall return to it later. Fourthly, there was the question of the use of second-generation fuels and their importance. We support the development of that. Fifthly, there is the question of carbon reduction and energy security. That is crucial in the way we view future strategy.

The UK's current biofuel target stands at 3.5 per cent by 2010. That is well behind many other member states, which set theirs at 5.75 per cent. Why did the Government not set a relative value target of 5.75 per cent, which was set by the EU Commission? Did they feel that they would not achieve it and therefore set a lower target? Indeed, we are not likely to achieve that lower target either. So we are in a lose/lose situation.

Noble Lords will not be surprised to hear me say that UK farmers welcome the opportunities which energy crop production brings. The NFU in its briefing states that UK farming has the ability to meet the 5 per cent demand for biofuel in petrol and in diesel markets. Bioethanol at 5 per cent equates to approximately 3 million tonnes of wheat—a matter to which other noble Lords have referred. That is the approximate annual figure of wheat export surpluses.

The 5 per cent demand on biodiesel equates to 2.7 million tonnes of oilseed rape. In 2005, 1.9 million tonnes of oilseed rape was produced in the United Kingdom. In that year the set-aside was 559,000 hectares, which equates to 1.78 million tonnes and also the 140,000 hectares of fallow land. In addition to the biodiesel, there is the potential for increased use of vegetable waste oil sources and tallow, to which my noble friend Lord Plumb and many others referred. These figures shows that it is possible for the UK to produce enough biofuels to meet the UK's targets set out to 2010 without having to rely on imports.

I believe that it would be naive and wrong to suggest that imports will not play their part as they do now. It is crucial that if we are not careful we will simply meet our target by sucking in ethanol from Brazil and palm oil from Indonesia. And, as other noble Lords have said, we have already watched the deforestation in these countries, I believe with horror, and seen the devastating consequences for endangered species, biodiversity and vulnerable communities, while totally negating support for rainforest contained so recently in the Budget speech.

As my honourable friend Jim Paice said recently,

"We believe that the Government must do more to stimulate competitive, local production of biofuels and guarantee that any imports necessary to make up the shortfall do not threaten the further destruction of rainforest".

Paragraph 82 of the report reflects the committee's concerns, in that,

"steps will need to be taken to ensure that the overall environmental benefits of imported alternative fuels are properly realised".

The following paragraph goes on to talk about the difficulty of accurately monitoring and evaluating imported biofuels, as other noble Lords have highlighted. It recommends needing a certificate,

"of the lifecycle environmental performance of both imported and domestically produced biofuels".

Indeed, the noble Lord, Lord Grantchester, my noble friends Lord MacGregor and Lord Selborne and particularly the noble Lord, Lord Cameron, raised that issue.

In a recent Written Question, I asked what proportion of biofuels in the United Kingdom is sourced from British crops and what proportion from imported commodities. I was surprised that the noble Lord, Lord Rooker, stated that current biofuels sales in the United Kingdom are from both domestic and imported sources. Indeed, but it would be good to know the proportions. Perhaps the noble Lord, Lord Bassam of Brighton, can help us with that today.

Noble Lords have talked about the costings and comparisons. The costings on page 25 compare 30p to 45p for a litre of bioethanol made from wheat and sugar beet in the European Union with 6p to 11p for bioethanol made from sugar cane from Brazil. Do these figures include the cost of transporting the fuel? Do they incorporate a realistic cost for the environmental damage incurred in growing the raw material? And do they reflect adequate compensation for any damage done by the production process? Again, that is not clear.

Allegations abound that it is not possible for us to produce our 5 per cent target given the current availability of land, but I hope that the figures that I and other noble Lords have given today reflect that we can. We can certainly meet the 2010 target. Given the EU policy to increase the target from 5.75 per cent by 2010 to 10 per cent by 2020, the situation can change in the long term. In paragraph 97, the committee recognises the ability to bring in more EU land, including set-aside, to grow energy crops while respecting biodiversity policies, but it goes on to say:

"However, the EU must always remain secure in its food supply".

There could be difficult decisions to take in future years, and I am sure that the committee is right.

That brings us to the issue that many noble Lords have raised: the whole question of second-generation biofuels. If we accept the likelihood of increasing demands, as I do, the scope for second-generation biofuels becomes increasingly important and could bring greater environmental advantages than are currently provided by biodiesel and bioethanol. The committee recognised the importance of advances in engineering and in chemical and agricultural crop technologies. It stressed the importance of co-ordinating, financing and organising European research and development. Indeed, there is no sense in each country doing its own thing when we could do it together much better. My noble friends Lord Plumb and Lord Ullswater referred to this. They also referred to the use of by-products and potential feedstocks that are now classified as waste. Perhaps the Minister will tell us in his reply whether the Government have changed their mind about waste and future second-generation biofuels. At the Oxford farming conference earlier this year, which I attended along with one or two other noble Lords, one of the most exciting contributions came from Professor Diana Bowles, who talked about the breakdown of plants and how we can use the cellulose in the future. The noble Earl, Lord Selborne, mentioned this in his speech. I also understand that Warwick University is undertaking work on creating hydrogen from water and biomass. This work is being funded by Advantage West Midlands. I wonder whether the Minister knows of this and other similar projects that are being undertaken at this stage.

I turn now to where we are and where we might need to seek greater confidence. In its excellent briefing, the NFU made nine key points. I shall not go through them all, but will pick up on five of them. The NFU believes, as other noble Lords have explained, that the Government must set a clear strategy for the UK beyond 2010 to create investor confidence to meet the mandatory 10 per cent biofuel target by 2020. It also believes that the key support policy—obligation level and fiscal support—must be in place for longer than 2010 to give investment greater certainty in the market conditions. It is also unclear as yet—perhaps we shall get clarification—whether the buy-out penalty, at 15p per litre, is sufficiently high to ensure that fuel suppliers will not simply opt out of the obligation. The Government should commit to reassess the rate and alter it to ensure that the "oil majors" address their supply of biofuels.

Fourthly, the carbon saving and sustainability reporting system for biofuels must account for previous land use and, where possible, use existing assurance schemes to reduce unnecessary costs to the industry. The UK biofuel feedstock must use adapted versions of current high food assurance standards and environmental legislation. Imports must prove similar high standards for sustainable production—again, a point raised by other noble Lords.

I turn to another crucial issue. R&D and knowledge transfer must be adequately funded to allow progress in the industry. Straight vegetable oil must be recognised as a biofuel, not classified as a fuel substitute. HMRC guidance must be clarified to remove the confusion with that biofuel.

We have had an extremely good debate this afternoon and I am extremely grateful to all those who worked extremely hard to produce this report. I just add one comment. The Government may well have to provide the right financial incentives, and duties and taxes on fuel may have to be rebalanced at some stage. I wonder whether the Minister would comment on that.

c

It would seem the government the opposition and indeed most MP's continue to live in unreality as far as our farmers producing ethanol. Wheat is far from being the most productive food stock for ethanol. Our nation needs to become educated about hemp.

Submitted by colin preece

Photo of Lord Bassam of Brighton Lord Bassam of Brighton Government Whip, Government Whip 6:36 pm, 19th April 2007

My Lords, I start by congratulating my noble friend Lord Sewel on his excellent report. As the noble Earl, Lord Selborne, said, it was very concise and well argued and, as usual, my noble friend delivered a speech that was witty and to the point. This has been an extraordinarily interesting debate. I confess that I am a novice on the issue, but I am a willing student who has, on the evidence of this afternoon, fallen among farmers. I am most grateful for their contribution because it has certainly added to my understanding of the subject.

The topics covered have been wide indeed. We have had calls for a more beneficial tax approach to biofuels; the Government have been urged to give greater market certainty—the noble Lord, Lord MacGregor, made that point very powerfully and persuasively. The noble Lord, Lord Renton, said that we had a real duty to ensure that the apocalyptic warnings of some who enter the debate do not come to pass. I certainly agree about that. I now look forward to having the opportunity at some point to go to Indianapolis and taste the air. I think that corn fritters were on offer.

The noble Viscount, Lord Ullswater, was right to congratulate Sub-Committee D on taking on some of the more extreme views expressed outside your Lordships' House with a very balanced report. The noble Lord, Lord Teverson, said that the report hit the spot. He was absolutely right. The noble Lord, Lord Palmer, was right to say that the report identifies our position as having lagged behind Europe in the past, but we are now playing catch-up. The noble Lord, Lord Cameron, referred to the importance of recognising the value of second-generation biofuels, our moves toward that and the investment required to achieve a positive outcome.

I put on record and make it plain that the Government are fully committed to their promotion of sustainable biofuels. Ensuring the sustainability of biofuels is an essential part of our policy, a point to which I shall return, as I picked up on other observations made in the debate. Biofuels have an important and strategic role to play in helping to meet the UK and Kyoto climate change targets. As many noble Lords have said, they offer other social and economic benefits, not least to those in rural areas where there is significant potential for new employment opportunities from this emerging industry. Job creation is a valuable by-product of the development of biofuels. Biofuels offer significant potential for reducing greenhouse gas emissions in transport today where other renewable sources, such as wind, solar and tidal power, are simply not practical. But transport is not the only end-use for bioenergy. The forthcoming biomass strategy, which is due to be published alongside the energy White Paper, will explore how biofuels fit within a wider bioenergy-use context, including for heat and power generation.

Let me say a few words about the strength of the biofuels market, which, as many noble Lords have said, is very much an emerging market in the United Kingdom and in Europe generally. As my noble friend Lord Grantchester noted, some member states, such as Germany, France and Sweden, have had domestic biofuels markets for a number of years, which are encouraged by measures introduced to support their Governments' agricultural and fuel-supply policies. But many EU member states are in a similar position to the United Kingdom in seeing biofuels only very recently coming to the fore.

As the noble Lord, Lord MacGregor, said, our market is very young and we entirely agree with the committee's conclusion that additional measures are needed to ensure a mainstream market. We see the sustainability and environmental policy arguments as fundamental drivers for how we should seek to encourage the more rapid growth of a vibrant biofuels market. That is why, in late 2005, we announced our plans to introduce a renewable transport fuel obligation. Great credit was given to those, such as the noble Lord, Lord Palmer, and the late Lord Carter for playing their part, along with our Ministers, in ensuring that the RTFO was put in place.

That early announcement and the introduction of fuel duty incentives has already led to a step-change increase in the UK biofuels market, with new plants coming on stream. We have heard in particular from the noble Lord, Lord MacGregor, about some of those developments today. In 2004, biofuels represented just 0.05 per cent of total fuel sales. But in 2006, 264 million litres were sold—about 0.5 per cent of total fuel sales—which is a tenfold increase. First quarter figures for this year show that this trend is set to continue.

The noble Lord, Lord MacGregor, and my noble friend Lord Grantchester said that we should be more ambitious and more robust in our approach. But we should agree that the progress made since 2004 is enormously encouraging. We are confident that, once the renewable transport fuel obligation is implemented in April 2008, the trend will continue upwards so that, by 2010, 5 per cent of all fuel sold in UK forecourts will come from renewable sources. That is the highest inclusion rate possible under current EU fuel-quality standards. It will mean real environmental benefits, equivalent in carbon terms to taking a million cars off the road in 2010. We welcome the committee's support for the approach that we are taking through the RTFO. The Government were already looking beyond 2010 for biofuels before the recent decisions reached at the spring European Council. We have said that we will consider increasing the RTFO level in the future. We are inviting views on what this might look like as part of the Department for Transport's current consultation.

It might be worth me saying a few words about the impact of the spring Council. The endorsement of the energy policy for Europe was a significant step forward, which the UK welcomed strongly. The agreement of European targets for renewable energy of 20 per cent and for biofuels of 10 per cent by 2020 was historic and extremely ambitious. Each country will have to work out how it plans to meet its obligations, given its individual circumstances. I am sure that noble Lords will be interested to know that the 10 per cent biofuels target as described in the Council conclusions is closer to a 13 per cent target for UK purposes. That is because, whereas Europe refers to energy content for biofuels, in the UK we use volume sales as our benchmark as it fits better with our national fuel duty arrangements.

I think we all agree that this is an ambitious target but I am pleased to say that, in setting the biofuels target, the European Commission took on board several key points made by the United Kingdom, particularly in relation to sustainability, a key issue for my noble friend Lord Sewel's committee. In our preparations for the RTFO, we have always stressed that there are several big ifs associated with setting higher targets now for the future. We have already set three key conditions that would have to be met before the RTFO level could be increased. These are the development of robust carbon and sustainability standards for biofuels. The noble Earl, Lord Selborne, and the noble Lords, Lord Cameron and Lord MacGregor, were vociferous in arguing for those. There has to be greater certainty that using higher blends of biofuels will not harm vehicles on the road today, and that costs to the consumer have to be acceptable. It is these conditions that have also been recognised as important by the Commission and captured as conditions that need to be met if the spring Council 10 per cent target is to be achieved.

Perhaps this is the right moment to say a little more about the sustainability aspects. Ensuring the sustainability of biofuels and maximising the carbon benefits they offer are real challenges; we are all agreed on that. We do not yet have agreed sustainability standards for biofuels either internationally or at the European level. The UK is, however, widely regarded as taking a global lead in the area, and a number of noble Lords have acknowledged that and congratulated the Government on taking that lead. It is something I am proud of as well. The Government welcome the support given by the committee to our focus on sustainability issues. Through wide stakeholder engagement and research, we are developing methods for calculating life-cycle carbon savings. We have also developed a clear vision of what sustainability criteria we want to address, such as land use changes, the impact on biodiversity, water resources, soil quality and so on.

However, we need to road test this work on the ground throughout the whole supply chain from the farmer in the field to the petrol station forecourt, and crucially we have argued that we need to build an international consensus, particularly among producer countries such as Brazil, in order to move forward internationally those sustainability standards. Acting without international agreements would bring its own difficulties, and the World Trade Organisation rules are a major consideration.

We continue to work together with the United Kingdom's Low Carbon Vehicle Partnership, other member states and international standard-setting bodies to try to hammer out a common set of principles and objectives. In parallel we are developing a reporting mechanism as part of the RTFO implementation strategy. The mandatory reporting scheme called for by a number of noble Lords will ensure transparency on the effect of the policy, and will help to focus obligated companies' attention on the sustainability and carbon balance of the fuels that they source. This is because the public will be able to find out easily how a particular transport fuel supplier is performing based on the information we will be asking each company to make available.

Alongside our RTFO implementation work programme, we are encouraging the European Commission to make use of our own developing knowledge in this area, and we are also pressing the Commission to develop a robust and transparent sustainability assurance regime as a vital and early part of its plans to meet the ambitious new European biofuels targets. I come back to the spring Council and its new targets. The Commission has added one further condition for the biofuels target. It has specifically identified the need for second-generation biofuels to be a commercial reality if the ambitious new targets are to be met. We agree that this is sensible. So-called second-generation technologies will be able to use a far wider range of feedstocks than conventional biofuels, a point made clear by a number of noble Lords. Potentially—and very valuably, I argue—that will include things like green municipal waste, to which the noble Baroness, Lady Byford, in particular drew our attention. That would not only bring higher greenhouse gas savings but help to address our waste problem, reduce pressure on land and avoid competition with food. The Government agree with the committee's conclusion that the European Commission has an important role to play in enabling these more advanced biofuels, including through research and development.

Although second-generation biofuels are not yet a commercial reality, there is, as was widely appreciated during this afternoon's debate, considerable excitement about their development and a great deal of research. There is now a lot of demonstration activity under way in this area. However, it is still unclear how rapidly those second-generation biofuels might become core to the biofuels market. These are exciting times, as we prepare to implement the RTFO next year and rise to the considerable challenge of the European Union spring Council's agreement and the targets that have been set. The Government welcome the way that the committee has raised the topic among noble Lords and more generally and stimulated a much wider debate.

I was asked a large number of questions. I am more than happy to provide some of those answers now, but if I miss something I promise I will provide a written round robin letter to all who have contributed this afternoon. I shall start with the question my noble friend Lord Sewel drew to our attention, about the figures on relative efficiency and the cost-effectiveness of biofuels compared with other measures. Here I will have to commit to write to the House with the details, but the Government's detailed economic analysis was provided in our revised climate change programme, which we published last year.

The noble Lord, Lord Bradshaw, asked a number of valuable questions. He asked whether the incentives to the oil companies were strong enough to ensure that they will supply the fuel. We have set the level of penalty under the renewable transport fuel obligation at a level high enough to ensure the supply of biofuels. We will keep that level under review to ensure that the policy achieves its objectives. The noble Lord, along with the noble Lord, Lord Grantchester, asked the important question: how will we achieve the 10 per cent target? From next year it is our intention to introduce a renewable transport fuel obligation that will require fuel suppliers to ensure that a percentage of their fuels are renewable. We believe that mechanism will enable us to meet future targets. However, higher targets than 5 per cent are subject to important caveats, and we need to understand those. In particular, the biofuels need to be sustainable.

We are inviting views on the longer term for the RTFO in the current consultation, and we will feed the responses we receive into our development of a strategy for responding to the EU targets themselves. It is worth bearing in mind that those EU 2020 targets have some very important provisos, and we will want to consider them with our European colleagues.

The noble Lord, Lord Bradshaw, also asked whether the 10 per cent target included aviation. The EU target for biofuels by energy content for 2020 relates to diesel and petrol consumption. Biofuels and aviation are an area of interest, although there are major challenges in our view to finding a fuel that operates efficiently in aircraft. For aviation, we argue that the emphasis and challenge is currently to promote co-operation to stimulate alternative aircraft fuels to kerosene, and the OMEGA project is looking in particular to stimulate that development.

The noble Lord, Lord Cameron, was right to draw our attention to the importance of research and development in second-generation fuels and to raise the issue, as he put it, of Defra cuts. The Government recognise the importance of developing new and sustainable sources of biofuels, particularly the importance of second-generation technologies. But that research is not merely supported by Defra programmes; industry is a key R&D source, for example, and the DTI is also a major supporter for government R&D in this area. It is a cross-government activity, reflecting the cross-cutting nature of biofuels in terms of policy development. The renewable transport fuel obligation itself should encourage industry to invest in these advanced technologies.

It is worth acknowledging that we are investing something like £1 billion over the next 10 years through the Energy Technologies Institute. An important part of its programme is yet to be developed but it will consider transport and energy issues and look at biofuels in particular.

The noble Lord, Lord MacGregor, argued for stronger signals and incentives to stimulate the market and said that tax incentives would play an important part of that. It is worth noting in that context that the Chancellor has committed to maintaining the 20p per litre duty differential until 2009-10. In addition, the buyout price under the RTFO is 15p per litre, providing a total level of support of up to 35p a litre. That should ensure that we meet the targets under the RTFO commitment.

The noble Lord, Lord Palmer, made an important point about us lagging behind member states, which I dealt with in my broader commentary. He also made the case for having a dedicated government department for biofuels and bioenergy, and argued that the current situation was too fragmented. That is an interesting idea, but I am not persuaded of the benefits of that at this stage. The Government will shortly publish our energy White Paper and our biomass strategy. They will reassure my noble friend that all government departments with an interest in biofuels are working effectively together to develop a coherent and joined-up strategy. To that end, the noble Lord, Lord Plumb, made a plea for partnership approaches. Of course we agree with that. That is why we have made the progress that we have.

I will draw the debate to a close now. Some questions are still unanswered and I know that the noble Baroness, Lady Byford, will no doubt chide me for not getting through all of the points that she asked. I apologise for that, but this is a wide-ranging and complex subject. It is no doubt a subject to which your Lordships' House will want to return on numerous occasions. I commit this afternoon to providing noble Lords who have participated but not had all their points answered with as full a response as I can. I congratulate the noble Lord, Lord Sewel, again. I greatly enjoyed the debate and embarked at least on the lowest steps of a sharp learning curve on the subject—an extremely important subject for our security in food supply, our environmental benefit and for the long term.

Photo of Lord Sewel Lord Sewel Labour 6:57 pm, 19th April 2007

My Lords, I think that our cut-off time is seven o'clock, which is quite nice. That enables me to have sufficient time to thank everyone who has participated in the debate. I particularly thank those who are not actually members of Sub-Committee D. It is always quite rewarding to see a subject such as this at least stirring interest among noble Lords who are not particularly members of the anorak brigade of the sub-committee. It has been a debate where there has been a lot of common understanding and common perspective, and I would not have predicted that a few months ago.

I particularly thank my predecessor the noble Lord, Lord Renton of Mount Harry, who chaired the sub-committee during the period of the inquiry. What was his contribution? In a way, the sub-committee has been rumbled: it was rumbled first by the noble Earl, Lord Selborne, and then by the noble Lord, Lord MacGregor of Pulham Market. There were a number of different voices on the committee. The noble Lord, Lord Renton, brought those voices together and we finished up with a unanimous report. That was quite an achievement.

When we look at biofuels, the important thing to realise is that it is not a quick fix. The case is not open and shut by any means; it is more complex than many of us thought at the outset and the more we look at it, the more complex it becomes. I am glad that the Government, in their response and in what my noble friend said this evening, are seized of the importance that we attach to ensuring that real environmental gains are secured in the development of biofuels. Quite honestly, the whole argument disappears if that is not achieved. Then there is the importance that we attach to moving as quickly as possible to developing technologies for second-generation biofuels. Again, there is widespread acceptance that it is through the second generation that the real jump forward will take place. We have to go through the first step, putting the investment into first-generation biofuels, but the big breakthrough will take place with the second generation.

Finally, I thank all those who put in so much work to make the report possible, including our witnesses and our staff, who have produced a very well written and coherent report.

On Question, Motion agreed to.

House adjourned at 7.01 pm.