Clause 5 - Acquisition of information etc.

Finance Bill – in a Public Bill Committee at 5:15 pm on 14th May 2002.

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Question proposed, That the clause stand part of the Bill.

Photo of Michael Jack Michael Jack Conservative, Fylde

This is an interesting clause. Lest anybody think that a conflict of interest arises here, I remind the Committee that I am chairman of an agricultural consultancy.

Biodiesel is an interesting agricultural development, and I welcome the Government's decision to give it concessionary treatment in relation to hydrocarbon oil duties. However, I want to take a moment or two to explore with the Financial Secretary the Government's thinking behind the revised level of duty.

A little while ago, I received some correspondence from Cargill plc, not only outlining the potential for biodiesel in the United Kingdom, but making some important points about the factors that would affect the company's investment decisions in this area. I say that against the background of a European directive that sets targets for member states' use of biodiesel. Interestingly, I learned from the university of Aberdeen's helpful environmental information note, published on 13 September 1999, that in Germany

''Sales of bio-diesel, a renewable fuel from oilseed rape, increased to 100,000 tonnes in 1998. 800 German petrol stations now sell that

green fuel. Sales have doubled since 1996 when motorists purchased 50,000 tonnes, available from 500 outlets.''

Biodiesel comprises 1 per cent. of German diesel sales.

I gave that example because in Germany biodiesel is not subject to duty, so there is an outright price advantage for that environmentally friendly form of diesel. The same note states that, in addition to the benefits of diesel in terms of carbon dioxide production and its contribution to reducing greenhouse gases, biodiesel produces sulphur-free emissions, which is a better performance than conventional fuel. There is every reason for the Government to encourage in clause 5 further production of biodiesel, but the success—albeit out of date—described in that note, reveals that a more advantageous tax regime than that proposed by the Government had a remarkable effect in encouraging the use of biodiesel in Germany, certainly for road transport use.

Let us examine the position in the United Kingdom. Cargill advocates that in agricultural terms it would be a good idea to do better than at present because we have a surplus of wheat production. That surplus is lower grade wheat, which is often exported and requires export restitutions, costing this country money. As a result and because of the changes in agriculture, a high of some 543,000 hectares of oilseed rape—the source of the raw material for biodiesel—in the 1998–99 planting season has fallen to 395,000 hectares in the last full year for which I have figures. Cargill argues that the agricultural potential is clear and that the amount of oilseed rape grown could be increased substantially to satisfy demand for biodiesel by using some of the land that is currently used for surplus production of wheat to the 1998–99 level of harvested oilseed rape. Cargill states:

''With this scenario in mind, and given a domestic food industry oil need of about 500,000 tonnes, there would be approximately 450,000 tonnes of rapeseed oil available for biodiesel. The conversion of that oil to rape methyl ester would provide 450,000 tonnes of biodiesel for road transport fuel, sufficient to make a meaningful difference to greenhouse gas emissions and to air quality.''

That is powerful advocacy for better use of land and environmental benefits, but the economics of the Government's proposals get in the way. In a further letter to me, Cargill acknowledges the Government's concession in hydrocarbon duty in clause 5 and states:

''Whilst we welcome this move, we have constantly stressed that this rate will not be sufficient to encourage companies like Cargill to produce biodiesel in earnest in the UK on a scale that will realise the full environmental and economic potential. In fact''—

this is important—

''this duty rate will only serve to encourage the production of low quality biodiesel generated from recycled vegetable oil.''

That is important because the Government, in the shape of the Prime Minister, recently held a working group meeting at Downing street with Sir Donald Curry, the author of the report of the commission on the future of farming. As the Financial Secretary knows, part of Sir Donald's report put particular

emphasis on innovation in UK agriculture. It laid stress on the development of new crops and new ways of using land. By and large, the Government have welcomed the Curry report. I should have thought that they would want to embrace, with considerable enthusiasm, the opportunity to deflect land producing an unwanted wheat surplus into something that would clearly produce considerable environmental gains and be to the significant advantage of UK agriculture, at a time when grain prices, as the Financial Secretary knows, have reached an all-time low.

Returning to Cargill, its letter says that

''we would prefer duty rates linked to the world price of vegetable oil, but have been informed by HM Treasury that such a formula is too complex. Therefore a further duty rate reduction of 15p, giving an overall rate of 10p per litre, would be sufficient to ensure that a commercially viable biodiesel industry could develop in the UK.''

It concludes with a very important point from a major world player in the field of agri-investment, saying:

''Cargill has a myriad of possible investment opportunities worldwide, and will move our investment elsewhere if we do not receive an indication of the Government's intention to further reduce the duty rate.''

In a way, it is disappointing to have a company that is quite clearly enthusiastic for the development of a biodiesel industry in the UK pointing out that, in its judgment, the concessionary rate referred to in clause 5 is not yet sufficient to encourage the investment in the infrastructure needed to give a boost of the type to which I referred in the context of Germany.

I hope that the Financial Secretary can share with us in some detail the discussion that the Government have no doubt had on this occasion with the industry and the thinking that led them to select the rate of duty that clause 5 invites us to approve. If a company such as Cargill is willing to make an investment but feels that the rates are not yet sufficiently advantageous to encourage it so to do, that has implications not only for its investment but for UK agriculture and the Government's backing of the Curry commission report.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon 5:30 pm, 14th May 2002

Will the right hon. Gentleman address the sufficiency or otherwise of rape available for purchase by companies such as Cargill, and the impact of the integrated administration and control system regime on rape production in the UK agricultural sector?

Photo of Michael Jack Michael Jack Conservative, Fylde

The point that I made earlier, to which Cargill referred, was that going back to 1998 and 1999 planting levels of 543,000 hectares brings us, if my memory serves me correctly, within the envelope allowed by the controls in the common agricultural policy on the overall planting levels of oilseed rape.

I appreciate that there are different regional planting amounts, but I do not want to get too entrapped in a discussion of agricultural policy when the major focus of my remarks is the inducement to invest in capacity and to take advantage of what the UK agricultural sector clearly could produce—enough rapeseed oil to meet immediate demand. I do not think that Cargill is saying in any way that there is a shortage, although the hon. Gentleman rightly draws our attention to the fact that there is currently a

constraint, under CAP terms, on the overall planting of oilseed rape.

I hope that the Financial Secretary can share with those of us who support the project the reasons why the Treasury cannot go further at this stage and realise the investment that companies such as Cargill and, no doubt, others would like to put into it.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

The Liberal Democrats welcome the clause too. I am particularly interested in the comments of the right hon. Gentleman, who has, as usual, illustrated graphically and intelligently the problems that Cargill faces. We want, as I am sure do the Government, greater investment in the manufacture, distribution and sale of a product that is environmentally benign and part of a worthwhile provision in the Bill.

I refer the Financial Secretary to ordinary diesel that can be purchased. Can he tell the Committee about the Government's views on diesel duty? We have a high rate on diesel compared with other European countries, although it has been proven for some years that diesel engines produce lower emissions, they are more durable and one generally gets more miles per gallon from them. Diesel should be encouraged. What do the Government have to say about that in formulating their taxation proposals on diesel?

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

I, too, look forward to hearing what the Financial Secretary has to say. Although the clause is a step in the right direction, paragraph 7.30 of the Red Book states:

''There are already signs that this initiative is stimulating activity, including investment in production facilities and plans by one major supermarket chain to use biodiesel in lorries.''

My right hon. Friend the Member for Fylde is on the ball; it is clear that the users of biodiesel do not think that there will be a sufficient financial incentive to switch their vehicles fully to biodiesel. The headline figure of a 20p per litre reduction in fuel duty for biodiesel sounds attractive, but the reality is that it is impossible to put 100 per cent. biodiesel into a vehicle; it must be diluted so that only 5 per cent. per litre of diesel is biodiesel. The effective reduction is therefore only 1p per litre, which means that the cost of biodiesel will be higher because the cost of its production is 2p per litre higher than for standard diesel. That is why the Freight Transport Association says that the reduction will make no impact whatever. Its manager of engineering policy, Geoff Day, says:

''The idea of a 20p per litre reduction in fuel duty for vehicles that may be using many thousands of litres per year is obviously very attractive. However, as no engine or fuel injection equipment manufacturer will approve of pure biodiesel''

it will not make much impact in practice.

If every hon. Member is enthusiastic about the benefits to the environment and agriculture that can flow from the development of biodiesel, we challenge the Government on why they are limiting its reduction in duty. Why are they not going further?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

One of the great advantages of a Committee such as this is that it enables all hon. Members to share experiences of their other lives to better inform our debates—[Interruption]—better to inform. The hon. Member for Buckingham is being

pedantic because both phrases are fit for the purpose. We heard an example from the right hon. Member for Fylde, who has a detailed knowledge of the industry and shared with us the particular views of Cargill, to which I shall come in a minute.

Indeed, the hon. Member for Torridge and West Devon brings knowledge of farming, which is valuable, to the Committee.

In bringing the measure forward, we have obviously consulted and worked closely with the Department for Environment, Food and Rural Affairs because we are well aware of the measure's implications for the farming industry and are anxious to get it right in order that it may benefit that industry and contribute towards our international commitments in relation to Kyoto and climate change.

I would caution the hon. Member for Torridge and West Devon about becoming too enthusiastic about diesel, an area in which I was particularly interested when I came into this job. I have considered it in greater detail than at any time since I was a member of the Environment Committee many years ago under the distinguished chairmanship of the then right hon. Member for Hornsey and Wood Green, Sir Hugh Rossi, whom a number of Government and Opposition Members will remember. We looked at some of those issues on the Environment Committee and I revisited them when I came into this job.

At first blush, diesel has the superficial attractions referred to by the hon. Member for Torridge and West Devon because it has some advantages on carbon dioxide emissions. The difficulty is that it has a worse impact on local air quality than petrol. Diesel presents problems for those—there will be many of us in Committee—who have particular concerns about environmental degradation and the impact of road usage on, for instance, children in schools. It is superficially attractive because it produces reduced carbon dioxide emissions and it is undoubtedly more efficient given the sort of engines that are now being produced, but the problem is its environmental impact on local air quality.

That is why we made the policy decision to tax both petrol and diesel at the same rate. The Liberal Democrat party may have come to a different view; it is an area in which one must make a balanced judgment. The view that we took, take and adhere to is that petrol and diesel should be treated alike, which is why we have approached the matter in this way. Clause 5 will introduce a reduced rate of excise duty on biodiesel used as a road fuel to permit the United Kingdom to benefit from its reduced greenhouse gas emissions. The purpose is to help offset the high cost of biodiesel compared with mineral-based diesel.

We launched the Green Fuel Challenge in November 2000 to promote the development of practical alternative transport fuels with environmental benefits, and we invited industry to come forward with practical proposals. In response to the proposals that we received, a series of duty cuts for alternative fuels was announced in the 2001 Budget, including a reduction in duty on biodiesel, which

clause 5 will enact. The reduction will apply to both main types of biodiesel: rape methyl ester—RME—produced from rapeseed oil; and recovered vegetable oil—RVO—produced from waste vegetable oils. In terms of usage, the rate that will apply to biodiesel used as in-road fuel will be 25.82p per litre, which is 20p per litre below the rate for ultra-low sulphur diesel. There will also be a provision for duty paid on pure biodiesel used in certain off-road vehicles and other specified motor engines to be reclaimed. The overall result is that the same amount of duty will be paid on biodiesel as would be paid on road diesel—around 3p per litre. The Committee will discuss road diesel in due course.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

Yes, I will.

I should add that the duty incentive on biodiesel used as a road fuel will apply both to pure biodiesel and to biodiesel blended with mineral heavy oil. In the latter case, the incentive will apply in direct proportion to the amount of biodiesel in the blend. The reduced rate will come into effect on Royal Assent, provided that we have European agreement to our request for a derogation from the mineral oils structures directive. Agreement is expected shortly.

The right hon. Member for Fylde asked whether such an incentive was enough. The good news is that there are already signs that the duty incentive is stimulating activity, including investment and production facilities. As the hon. Member for Christchurch has been good enough to recognise, a major supermarket plans to run its delivery fleet on biodiesel, and we look forward to that announcement.

Some members of the British Association for Bio Fuels and Oils—Cargill is one of them—want a greater differential for biodiesel of up to 35p per litre. We have to make a judgment on that. The Government's climate change programme emphasises the need for cost-effective measures to tackle climate change to ensure that there is no disproportionate cost to society as a whole. We decided that a 20p per litre duty cut relative to ULSD was sufficient recognition of the environmental benefits from biodiesel and provided best value for money.

The Committee will want to give the Government some credit for adopting this form of fiscal instrument to promote environmental good. The hon. Member for Christchurch said that we have taken a few steps down the road. I hesitate to draw his attention to the fact that I was not aware that, when he and his right hon. and hon. Friends had governance of this nation's affairs, they took any steps at all. Therefore, there should be some recognition of the fact that the Government are going in the right direction as opposed to going backwards.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

Perhaps the Financial Secretary can inform Committee members what the state of the biodiesel market was six years ago.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

No. We must encourage, develop and stimulate a market. It always makes me laugh in one sense, because there was a time when Opposition Members were constantly giving us strictures—they do not do it so much now—about the values of the market. Yet it is this Government who have made the market work for the environment, and we should have some recognition for that. I shall not go on and on about it, but we should get some recognition for seeking, through the Green Fuel Challenge, to engage with the industry. No one pretends that it is easy, and there are some fine-balanced judgments to be made. We have drawn upon the industry, and it has been generous in proffering information, advice and assistance, which we have used to inform our balanced judgment. We have decided that 20p per litre is right.

The revenues and costs of the measure will depend on the extent to which the duty incentive encourages the production and use of biodiesel. Obviously, we will watch that closely—I take the point made by the right hon. Member for Fylde. We must ensure that the measure has the desired effect, and we must monitor it carefully. We estimate that the initial cost will be about £10 million a year, which is money well worth spending because the incentive will make a real contribution to the environment.

Several hon. Members rose—

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I had concluded my remarks, but I am always interested in observations from hon. Members.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

Does the Financial Secretary agree that the main revolution in creating a market for environmentally friendly fuels was pioneered by the previous Conservative Government when they introduced a substantial duty encouragement of lead-free petrol? Would he be kind enough to address the specific point made by my hon. Friend the Member for Christchurch about dilution? Will 1p be sufficient, or is it the case that for dilution the equivalent of a 2p cut in duty is necessary?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

Our judgment is that the cut that we have made will achieve the desired result; no further cut is required. We think that the signs are good and promising but, as I have said, we shall monitor the situation closely.

Photo of Michael Jack Michael Jack Conservative, Fylde

I very much welcome the Financial Secretary's comments, particularly his assurance that the Government will monitor the situation closely. As he said, it is a matter of judgment. Commercial interests will seek the best investment opportunity and, therefore, will press for a lower rate than the Government judge is necessary, and the Government must strike a balance between their environmental targets and what they think they can afford to do. However, I wish to press the Financial Secretary a bit further.

The assurance that the Government will keep the matter under review is the sort of standard throw-away line that all Ministers use because they think that it will remove a line of criticism. Can the Financial Secretary assure us that a paragraph about reviewing progress will be included in the next pre-Budget report, which will be issued towards the end of this year, so

that we might formally be informed of the Treasury's approach to the development? I appreciate that all taxes are kept under review, but it would be nice to have something more tangible as the result of the Financial Secretary's useful words of assurance.

The Financial Secretary, with his obvious, in-depth knowledge of diesel engine technology, will be aware of the environmental improvements that are the result of the second generation of common rail engines, which are now coming into greater use throughout Europe. If he is interested in helping the Government to achieve and perhaps even exceed their goals for the reduction of carbon dioxide and other noxious emissions from motor vehicle engines, he should consider the strong case for encouraging diesel cars and the even stronger case for fuelling them with biodiesel, for the reasons that I gave earlier. It would be helpful to have a written review, and the pre-Budget report would be an excellent vehicle, without creating a new one, for putting the information in the public domain.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury 6:00 pm, 14th May 2002

I would not claim for myself an in-depth knowledge of the technology, but I am lucky to work with several men and women who have such knowledge. As the right hon. Gentleman well knows, in this job one often meets—not only in the context of photo calls with various inanimate pieces of technology but generally—people who are real enthusiasts in that field. That is especially true in relation to biofuels, where enthusiasm sometimes borders on obsession. The right hon. Gentleman well knows that phenomenon. I have learnt much about that subject, and am very interested in it.

In the course of my experience in this Committee when in opposition, I learned that Ministers must not, under any circumstances, for one moment allow themselves to be lulled, above party-political consensus, into believing that this is the place to write future pre-Budget reports, or enter into commitments to publish documents of any sort. I do not intend to be lulled by the right hon. Gentleman's blandishments into such a false sense of security. However, I can assure him that, as I think he can sense, such is the interest in that field and in the environment generally, shown not only by this House, in questions, but by the Environmental Audit Committee and others, that the process of review on environmental taxation has of its very nature to be a live one.

There is no hidden agenda here. We all want the same thing: to see the challenging Kyoto targets met. It is in our interests to ensure that we keep the matter under review, to be as open as possible about the processes that make up that review and to invite comment and contribution from as wide a range of informed people as possible. That is the nature of our intention to keep those matters under review. The formula has progressed a little since the right hon. Gentleman's day and now has a meaning that, I fancy, it might not have had when he uttered those self-same words.

Question put and agreed to.

Clause 5 ordered to stand part of the Bill.

Schedule 2 agreed to.