Clause 10 - Bioethanol

Finance Bill – in a Public Bill Committee at 11:00 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

This is a much more substantial clause, and it has potential long-term implications for a major section of the market. I am sure that the Economic Secretary has become one of the country's leading experts on the subject, but, luckily, we already have another of the leading experts present in Committee, my right hon. Friend the Member for Fylde. I have no doubt that he will have some thoughts to pass on about bioethanol, as he has in past Finance Bills, so that makes me chary about making too many points that he can make far more forcefully.

The clause creates a new reduced rate of 28.5p per litre for bioethanol when used as any type of engine fuel. It currently attracts about 47p, so the clause creates a 20p differential, which will come into force in January 2005. Its purpose is to encourage a sharp increase in the exploitation of bioethanol as a fuel, and in that respect it is well behind biodiesel, the rates for which we briefly discussed on clause 5 on the Floor of the House.

I am a bit worried about the measure, not because I disagree with the direction of policy in principle, but because I am not sure that the decisions that have been taken relate successfully and directly to the policy intentions. First, where has the justification for 20p

come from? After I consulted the industry, it told me that to get the market going we need a differential of between 28p and 34p—a good deal more than 20p. The industry sometimes overcooks the books, but that is a very big difference in estimated costs, and the Government could have analysed them.

One industry expert told me that the extra cost of refining and delivering bioethanol to the forecourt would be more than the 20p differential, so his company did not intend to develop it at this stage.

A major Government document has been produced on the subject, and it was also briefly discussed on the Floor of the House. Entitled, ''Towards a UK Strategy for Biofuels'', it just so happens to produce a justification for the figure of 20p. If one looks carefully at the justification, they realise that it is not a coherent argument for 20p. Frankly, it is difficult to come away with a view that it does anything other than cook the books.

I wonder why the Government did not decide to kick-start use of the fuel with a figure of at least 30p. One possible explanation is the cost. I have been given several estimates that indicate that that would cost a great deal. We must take into account behavioural effects, but I would be grateful if the Economic Secretary could give an estimate of the cost of introducing it at 30p, given some intelligent behavioural assumptions. I am worried that the measure is much more a sop to the environmental lobby than a fundamental shift in policy that will radically alter the market. I cannot be sure; all of us are guessing, but that is a major concern.

I have another concern that appears to point in the other direction. It relates to what I have consistently said about cost-benefit analyses. I worry that many changes are put through on alleged environmental grounds, yet the environmental arguments are far more complicated than what has been set out in consultation documents made available to the wider public, inasmuch as such documents are available. For example, I have been told that it would be far better if biomass were used for power generation rather than for biofuel, given the overall effect on carbon dioxide emissions.

I do not know whether that claim is true, nor do I know which numbers were involved in working out the overall economic and environmental effects, bearing in mind that CO2 emissions are only one part of the much broader environmental assessment that must be made. Again, the Economic Secretary did not really respond when I raised the point on another clause. Government policy, and public policy more generally, would benefit hugely if the Treasury—this will have to come from the Treasury—would give much more emphasis than it has hitherto to cost-benefit analyses of environmental measures in order to reassure the public that the Government are going in the right direction. Such analyses should be sufficiently robust intellectually and economically to convince doubters.

I do not believe that such information is in the public domain at present. It may be in some cases, but

in many cases it is not. The regulatory impact assessment and cost-benefit analysis process has become a bit stylised and lacks real clarity of thinking from first principles. I would be grateful if the Economic Secretary would comment on that.

There are one or two other points that I could make on bioethanol. I may come back to them, but I suspect that they will be made before very long by my right hon. Friend the Member for Fylde.

Photo of Michael Jack Michael Jack Conservative, Fylde

With a build-up like that, I tremble to address the Committee. I never like it being cast about that I am an expert in anything. However, as Chairman of the Select Committee on Environment, Food and Rural Affairs, I have had the benefit of a fairly extensive investigation of biofuels. As well, with a debate on the Floor of the House on the subject and in this Committee today, particularly on bioethanol, we can say that we as parliamentarians have been exposed to a range of views.

I have a slight difference of opinion with my hon. Friend the Member for Chichester. I do not believe that the Government have yet published the details of the case for 20p. The consultation document ''Towards a UK Strategy for Biofuels'' gives 20p as the number but does not actually produce any analysis as to why it is the right number. That serves only to emphasise the industry's claim that a figure greater than 20p—possibly as high as 34p but more likely 30p—per litre would be required to generate a supply. I wish to spend a few moments outlining why we should take that seriously.

I was struck by an earlier comment that the Economic Secretary made about natural gas and LPG and by how much weight he put on what industry told him. He is clearly a Minister who believes what it says. If we reverse the logic, we have an industry asking for an increase in duty reduction. I am sure that, as a fair man who takes a great interest in these matters, he will, when we put the arguments before him, at least agree to re-examine the case that the bioethanol industry makes for more assistance.

I will put the matter into context by explaining why it is important to have a bioethanol industry. We chuck around the names of new and alternative fuels and it sounds as though they are for those who are keen on different green things, but what we are really concerned about is the availability and price of mainstream hydrocarbon fuels. All kinds of problems could be solved if we concentrated on those.

Here is the background to bioethanol. First, the Government have made laudable attempts to reduce the amount of carbon dioxide in the atmosphere. They have just increased their own targets for said reduction. Against that is the background that CO2 emissions have been going up in the past few years. The Government acknowledge that one principal difficulty is the transport sector. One can but hope that our arguments in favour of bioethanol will persuade them that now is the time to be bold if they wish to achieve their policy objectives. Bioethanol would offer up to 70 per cent. reductions in CO2 emissions. If, in fact, we used straw or wood, as

lignocellulistic materials, as a feedstock for bioethanol, we could get a 100 per cent. reduction in CO2. The clause talks effectively about biomass, but I am not clear whether that, in definitional terms, takes into account those lignocellulistic materials.

The reason that is important is that it gives the Government the opportunity to achieve a further policy objective—that is, the reuse for beneficial purposes of waste materials. They have enough difficulty in meeting recycling targets under the European Union directives. Here is something that could be of benefit, in addition to the agricultural benefits that I will come to in a moment. So, one gets two hits for the price of one.

Let us consider for one moment bioethanol production in the United Kingdom compared with the rest of the world. The United Kingdom effectively does not have any recognisable large-scale production of bioethanol. Brazil, which exemplifies the most extreme use of that fuel, produces 125 million hectolitres of it. The European Union produces 3.3 million hectolitres, and Canada produces 2.38 million hectolitres. Europe, as a whole, is substantially behind leading countries such as Brazil and the United States in the use of that fuel.

Why does Brazil use it? It uses it as a way of taking up surplus sugar, which it is good at producing—its climate is excellent for growing cane sugar—but, more important, to give it not only an environmental gain but an element of fuel security. I remind the Minister that clause 1 of the Energy Bill, which the House will consider on Monday, tasks the Government with an obligation to secure the fuel of the United Kingdom. I do not want to be accused of alarmism because, at the moment, we are adequately supplied with hydrocarbon fuel, but if we wish to achieve the objectives of favouring the bioethanol industry, we need to recognise that we can get a third hit of helping fuel security by moving towards the generation of an indigenous industry. We have certainly got sufficient land on which to produce the raw material.

We have to move forward in that direction. The Economic Secretary will be aware of the United Kingdom's obligations under the European Union's biofuels directive. By 1 July this year, the Government must notify the European Commission of the volume of biofuels that the UK will use by the end of 2005. By 2006, they must give a further indication of the volume of biofuels that will be used by 2010. He will be aware that the targets are 2 per cent. by 2005 and 5.75 per cent. by 2010 and it is important that bioethanol is encouraged. As my hon. Friend the Member for Chichester said on the Floor of the House, we have discussed biodiesel during previous Finance Bill debates but it cannot, by definition, be used in petrol-driven vehicles as an element in a combined fuel stock. Bioethanol is the dilutant and must be used.

If we are to meet the target for 2010, the United Kingdom will be required to produce 1.2 million tonnes of bioethanol. British Sugar advises me that, from a standing start, that would require us to have 10 plants, each of which was capable of producing 100,000 tonnes of biofuels. A fourth hit is that, if the industry can be encouraged, it is estimated that for every one of those plants 970 jobs would be created. That could be an agricultural new deal—the Government are fond of new deals. The Opposition may disagree with the current, but I shall go with the flow of Government thinking and give the Economic Secretary as many reasons as possible for looking again at the clause.

I did not table an amendment to the clause to revise the duty rates because I want to hear in detail the Government's argument for their current position. The industry has made it abundantly clear that at 20p—the effective derogation of duty that the clause confers on biofuel—the industry will not be able to go forward and, with confidence, start production of bioethanol in this country.

What are the alternatives? British Sugar is considering a bioethanol plant in Poland where labour costs are much lower. There may be other inducements. There is an opportunity within the single market to sell bioethanol to a Europe that is starved of the raw material, but why is British Sugar thinking about making a substantial investment in a bioethanol plant in Poland? I have nothing against investing in Poland, but there are some imperative agricultural arguments in favour of a bioethanol industry in the UK. It is worth looking at those for a second or two.

The Economic Secretary will be acutely aware that the European Union has put forward proposals to reform the sugar regime. That presents a challenge to our sugar industry. Variations could open the European market to considerably increased importation of cane-based sugar products, which is a challenge to sugar beet producers in the United Kingdom. The one thing that is clear is that we can produce sugar beet, which is a fundamental raw material for bioethanol. If we met the 1.2 million tonne figure associated with the 5 per cent. target by 2010, we would need 300,000 hectares of land. That is not a problem. The Economic Secretary could have a fifth hit of benefit because land that is set aside under the new revised common agricultural policy could be used productively to produce sugar beet for the basic feedstock of the United Kingdom's bioethanol industry.

The only problem, which Ministers have offered as their line of defence to their current position—

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.