Clause 7 - Sulphur-free fuel

Finance Bill – in a Public Bill Committee at 10:45 am on 6th May 2004.

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

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

The clause separates sulphur-free fuel from other ultra-low sulphur fuels, creating a new class of product that from September will attract duty at half a penny less than ultra-low sulphur fuels. I understand that initially only a few motorists will have access to it, but since it will be mandatory under EU law to use the fuel from January 2005, with a four-year transition period, there will be a major change in respect of sulphur-free fuel.

I have few queries about the proposal, mainly because the policy is already cast in stone; the Government have signed up to it and it would be difficult for them to shift away from it, even if they wanted to do so. However, I was struck by some of the comments made in our previous debate, which are relevant to the clause. I accept that the Government face the problem that the technology of what constitutes environmentally friendly fuels is constantly changing, which makes it difficult for them to develop long-term policies on the issue. On one hand, the industry wants stability, on the other the rates that need setting may have to be varied to encourage use of the right sort of fuel.

For almost 20 years I have been worried that the environmental impact assessments, and the assessment of the costs and benefits of many of the changes, have not been fully examined. There is a cost-benefit analysis of the switch from ultra-low sulphur to sulphur-free fuel, but I am not convinced by it, as it was not a particularly robust analysis. The hon. Member for Wolverhampton, South-West, who is listening carefully to the debate, made a similar point about LPG, which may or may not be correct; neither of us knows for sure. Has the proper analysis been carried out?

I make one general plea to the Minister. It is that he should require much greater attention and resources to be given to such issues by the Treasury. It is vital for better studies to be undertaken than at present.

To bring that point home, it is a fact that sulphur-free fuel is more aromatic, and the more aromatic a fuel is, the more carcinogenic it is likely to be. Probably for that reason, the clause contains a limit on the aromatic content of ultra-low sulphur fuel, whereas it proposes no limit on the aromatic content of sulphur-free petrol. By implication, therefore, that could lead to much higher levels of carcinogens becoming part of sulphur-free fuel. I am not convinced by the documentation that I have seen that a full cost-benefit analysis of those health effects was carried out when assessing whether it was worth moving from very low sulphur fuel to sulphur-free fuel. The Government need to devote more resources to that area. Is the Minister clear that the change will have an overall economic benefit and, if so, what is that benefit?

We will have to implement such a policy sooner rather than later, because we have to obey an EU directive. In that context, will the 0.5p differential introduced by the clause be enough to secure a switch? I believe that, in consultation, most of the industry believed that something nearer 1p would be required. How long do the Government intend that the incentive should last? Do they intend to alter it, if they do not

see immediate effects? Is it intended that the incentive should cover the whole cost of the conversion from ultra-low sulphur fuels to sulphur-free fuels?

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

As the hon. Gentleman mentioned, the clause introduces definitions of sulphur-free petrol and diesel and enables us to introduce the differential for those fuels, as announced by the Chancellor in last year's Budget. The differential will mean that the duty on sulphur-free petrol and diesel will be 0.5p per litre less than that for ultra-low sulphur petrol and diesel.

The movement of the market towards replacing ultra-low sulphur fuels with sulphur-free ones is, in anyone's book, a major undertaking for the oil industry. Since the introduction of the differential was announced in the 2003 Budget, the industry has worked hard to install hundreds of millions of pounds worth of sulphur-removal plants at UK refineries, and to ensure that those more environmentally-friendly fuels will be available to the motorist.

As a result of the efforts made by the industry and the Government, the UK will be leading the way in Europe in this area. The hon. Gentleman said that he understood that very few people would have access to sulphur-free fuel in September, but we expect sulphur-free fuels to be widely available from 1 September. We estimate that sulphur-free diesel should be available everywhere from September and that sulphur-free petrol will fully replace ultra-low sulphur petrol by the end of the year. That estimate has been confirmed by the UK Petroleum Industry Association.

The hon. Gentleman mentioned the European directive. By introducing these measures with regard to the fuel supply in the UK, we will be well ahead of what is required of us by the directive, which requires us to make the switch by 2009.

When we announced the differential for sulphur-free fuels, there was some scepticism about whether that would lead to the kind of market switch that we wanted. However, I am confident, from what the industry is now telling the Government, that those fuels will be available throughout the UK. That was certainly the case when we made the switch—driven similarly by duty differentials—to the ultra-low-sulphur fuels a couple of years ago. We have listened to the industry on implementation and, in particular, on how the definition should be formed in law so that there are no barriers to the fuel coming on to the market. We will pick that up when we consider clause 9.

Motorists will benefit from sulphur-free fuels because they will bring significant improvements in air quality, as well as major savings in carbon dioxide emissions. Above those environmental benefits, sulphur-free fuels will also assist the development of petrol-injection engines in cars. When used in engines such as direct-injection engines, sulphur-free fuels can produce fuel savings of between 2 and 4 per cent., compared with ultra-low sulphur fuels. In the long term, sulphur-free fuels offer not only environmental benefits, but genuine savings to motorists by giving more miles to the gallon through more efficient

engines. The new rates come into effect on 1 September this year, when duty rates will be revalorised and ultra-low-sulphur fuels increased by 0.5p a litre above that level.

Question put and agreed to.

Clause 7 ordered to stand part of the Bill.