Clause 6 - Road fuel gas

Finance Bill – in a Public Bill Committee at 10:15 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

We have a battery of clauses on hydrocarbons coming up, and I shall not make many general comments about them, except to say that it seems to me that the underlying purpose of virtually all of them is to raise revenue. We had a reminder yesterday that the Transport Minister wants to tax people out of their cars.

I have taken a close look at the clauses and my impression is that, when one scratches the surface, one finds that many of the environmental arguments are slightly less rigorous than they initially appear. We have already had a good canter around clause 5 on the Floor of the House. I should at this point alert the Committee to my interests, which are listed in the Register of Members' Interests. As far as I am aware, none could possibly be said to conflict with the clause or any other clause that will be considered in Committee. I worked for BP some 20 years ago, so I have a vague idea about these hydrocarbon clauses and I have reacquainted myself with some of the terms over the past few days.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. Some 30 years ago I looked after the lines going into the Grangemouth refinery. I do not think that that gives me an interest either.

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

I am sure that we will find out more about your deep knowledge of this subject, Mr. McWilliam, as we examine these eight clauses.

As the Minister will no doubt explain, the clause deals with liquefied petroleum gas. Its main effect is to increase the LPG duty by almost 45 per cent., from 5.4p per litre to 7.82p per litre. My biggest worry is the effect that that will have on the LPG market. The case against the Government's action has been emphatically summed up by the chief executive of the Retail Motor Industry Federation, Matthew Carrington, who said:

''The duty increase on LPG could be the beginning of the end for the fuel in the UK. This anti-green measure is a backward step environmentally. It could be a death-blow for the fledgling LPG market, and could destroy public confidence in the viability of all alternative fuels.''

He went on to say:

''At a time when we are all being encouraged to think beyond conventional fuels, it seems paradoxical that the government would take away any incentive to try alternatives, especially since it was the government that encouraged us in the first place.''

That leads to a number of questions, which I should be grateful if the Minister could answer. What is the Government's long-term intention for LPG? Do they have a long-term policy? Where can we find it in a form that looks credible if the Minister does not present it to us today? Why have the Government reversed the freeze that they introduced in 2001? There has been a complete reversal of policy in four years. I will give the Minister time to think about those.

No doubt a brief has already been prepared for him on the question about 2001; I have been trying to think of some explanations for the change myself. First, the Government might intend to encourage people out of LPG and into biofuels because another effect is to narrow the differential between the two. Another possibility is that the Government believe that the industry has now invested enough to make it self-sustaining to switch to LPG, so they can afford to raise rates. If that is the explanation, it is not the majority view of those who were recently consulted. Finally, I ask the Minister to comment on the fact that the majority of respondents in that consultation wanted to see no change in these key differentials.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 10:30 am, 6th May 2004

I welcome the increase in excise duty on LPG. I am not an expert and the right hon. Member for Fylde will perhaps correct me, but I do not think that LPG is nearly as clean as its proponents claim, particularly in terms of its outputs of carbon monoxide and nitrous oxide. There were some interesting figures in The Sunday Telegraph about two months ago, indicating that LPG vehicles pollute more than petroleum vehicles—not in every case, but there are significant differences. That gap has increased historically to the point where LPG vehicles have been, to coin a phrase, overtaken by petroleum vehicles due to developments in petroleum technology in vehicles, particularly cars.

Those developments include the common rail diesel engine and Volkswagen's FSI high-pressure petroleum engines. LPG vehicles are now passé technology—a road transport dead end in terms of environmental

friendliness, because they burn more fuel per mile. A few years ago, there was an excise incentive for their use, because they were then thought to be less environmentally damaging than petroleum engines. That is no longer the case, and I welcome the increase in excise. It is unfortunate for those who have invested in that technology—whether individuals or the industry—but it is a dead end and the Government have rightly recognised that. They are right to put up the excise duty and should increase it by more.

Photo of Michael Jack Michael Jack Conservative, Fylde

May I at the outset remind the Committee of my business interests, which I fully declared on Second Reading? It is a pleasure to be under your chairmanship again, Mr. McWilliam.

The hon. Member for Wolverhampton, South-West reflected some arguments that I have made in my advocacy of improved fuels for diesel engines, such as biofuels and bioethanol, which we shall come on to later. He is right: it depends where one starts. I should like to ask the Economic Secretary, when he responds to the debate, to justify why 40p was chosen as the rate that will now reduce the inducement for people to run on liquefied petroleum gas.

The hon. Member for Wolverhampton, South-West is right to point out that natural gas-driven vehicles have detriments, particularly carbon dioxide emissions, and are not as good as the best of modern diesel engine technology. In terms of air quality and certain pollutants that have an adverse impact on health, particularly in congested city centres, LPG has a good case to make. It would appear that the Government considered that health improvement objectives have a higher value and that LPG should attract a higher level of discount than biodiesel. When the LPG discount came in, that generation of diesel engines was not as well controlled as modern ones are today.

If we are to understand the logic of the Government's alternative fuel policy, can the Economic Secretary tell us in detail why the rate of 40p has been chosen? What is the logic of the numbers that have been selected, and why is the clause drafted in that way that it is? Has the Treasury done any research to justify the change, and if so, will he lay it in the Library of the House of Commons, so that we can understand with greater clarity the way that the Government are approaching the new fuel world in which we are operating? We are going to debate aspects of bioethanol, and that relates to the question of the future approach towards the hydrogen economy. It also touches on clause 1 of the Energy Bill, which deals with the Government's obligations on national fuel security; it comes before the House next Monday. I look forward to detailed and specific responses to the questions that I have posed.

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

I shall try to respond to the points that have been raised; they are important in helping to set the context for the proposal in clause 6. I should say first to the hon. Member for Chichester that Matthew Carrington has form in the view that he might take of policies originating from the Labour Government. The hon. Gentleman quoted Matthew Carrington, so I shall quote three other sources, which are just as, or arguably more, informed and more

representative of the views of those affected in the industry by the measures that we propose.

Howard Kerr, whom I met in the run-up to the Budget decision, is managing director of Calor Gas Ltd. and chairman of the LPG Association. He said that following the Budget announcement, Calor was looking further to expand the number of refuelling sites in the UK. Clive Mather, chairman of Shell, said that the stability offered will enable it to

''continue investments to further develop this market . . . it sends a clear and welcome signal to industry regarding investment in other cleaner alternative fuels.''

Tom Fidell, director general of the LPG Association, wrote after the Budget decision to thank us for what he described as

''striking the right balance with respect to the duty rate adjustment.''

I submit that the measures are not likely to drive the industry out of business in the way that Matthew Carrington apparently believes.

I caution my hon. Friend the Member for Wolverhampton, South-West against placing too much reliance on figures that he reads in the Sunday papers. The industry is not a dead end in terms of providing road fuel for the future, and we can make environmental gains through greater use of LPG fuel. However, it is relatively less green than it was in 2001, and the environmental gains are relatively less substantial than they were then. In part, that answers the point made by the right hon. Member for Fylde. I refer him and the hon. Member for Chichester to December's pre-Budget report and the Budget documentation. They set out the logic of the policy that we are pursuing and the results of the research and consultation that we conducted in reaching the principal decision in the pre-Budget report and deciding on the specific duty in the Budget and clause 6.

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

Does the Minister believe that the industry has invested enough in the LPG sector for it to be self-sustaining?

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

I will make some specific points about the development of the industry later. However, since we made the commitment on duty rates in 2001, we have seen a sustained increase in investment in the industry, an expansion in the number of retail outlets for LPG and an expansion in the fuel's use and production. Alongside the industry's investment, the Government have made an equally substantial investment in seeing the industry establish itself and begin to flourish.

In the Budget decisions, we were keen to avoid alterations in the duty rate that, although justified on environmental grounds, would have led to the industry taking the sort of nosedive that Matthew Carrington argues it is about to do. We want to see the continued development of, and investment in, the industry, which the chairman of Shell and others clearly see in prospect. The Government will continue to support the development of the industry in several ways, including the PowerShift programme and the duty rate discount.

The comments so far have concentrated on liquid petroleum gas, but in the pre-Budget report last year, we announced that we would treat natural gas differently from LPG. Clause 6 creates a separate rate of duty for natural gas used as a fuel in road vehicles and increases the rate of duty on LPG and other gases used as fuel in road vehicles.

In the pre-Budget report in December, we published the alternative fuels framework, which included our principles for setting duty differentials for environmentally friendlier alternative fuels. At the heart of that is the principle that support for fuels from the Government and taxpayer will be based primarily on the environmental benefits that they offer. Reflecting that, we announced in the Budget that the duty differential for LPG would have to be reduced over time towards a level that is more commensurate with its environmental benefits, and that the duty differential for natural gas would be frozen at its current rate until at least 2007.

Photo of Michael Jack Michael Jack Conservative, Fylde

Is the Economic Secretary prepared to place in the Library the detailed formulations that show how the environmental benefits to which he has referred are calculated? Clearly, there is a range of alternative fuels. The Department for Transport is running a consultation exercise on these matters, and it would be helpful to know how the value of the gains is calculated.

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

I will undertake to look back at the pre-Budget report and the Budget documentation. We have published the results of the consultation and of the research and analysis that we have done on the environmental benefit and the implications for duty changes. Those judgments and analyses underpinned the production of the alternative fuels framework. If I believe that they do not answer the right hon. Gentleman's question, I will certainly do as he suggests.

I recognise that clause 6 marks a departure from the policy that we established in 2001, but it reflects our desire to assess and respond to the changes that have occurred over the past few years and to set tax rates accordingly. When we made the commitment in 2001, few vehicles used natural gas or LPG. Since then, the market has developed. Natural gas vehicles need large fuel tanks, so the fuel is typically used by larger vehicles, such as delivery vehicles and buses. The fuel does not generally lend itself to private motorists and cars. Natural gas vehicles can deliver significant environmental benefits as compared with diesel vehicles, particularly in terms of noise reduction in urban areas late at night and early in the morning.

LPG is used differently: it is more commonly used in cars. As I hope the Committee will recognise, the UK can be proud of the growth in the industry since 2001. More than 100,000 such vehicles are on the road, and drivers throughout the country have access to the fuel. LPG vehicles still offer some environmental benefits, but traditional petrol and diesel vehicles—the benchmark against which we measure them—have got cleaner, as the right hon. Member for Fylde said. There have been genuinely impressive advances in engines and vehicle technology. Today's vehicles have

a much lower climate change and air quality impact, even compared with the situation four years ago.

As I hope I have explained, we are no longer comparing like with like. We have decided to treat the two fuels differently, because the vehicles in which they are used are different. The differential for LPG will be reduced to reflect better the environmental benefits that it offers. In line with the alternative fuels framework, we have set out how that will happen. There will be a reduction of 1p a litre in 2004 and a further reduction on the same scale in 2005 and 2006.

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

Can the Minister clarify whether the reduction in the differential is driven entirely by a reassessment of the relative environmental benefit derived from LPG?

Photo of John Healey John Healey The Economic Secretary to the Treasury 10:45 am, 6th May 2004

Our starting and principal point is an assessment of the environmental benefit that the fuel delivers, relative to alternative fuels. However, a number of other factors come into play in such decisions. A concern to see continuing investment and the industry flourishing is part of our Budget judgment. A concern to see a continuing expansion in the number of drivers using LPG vehicles and in the number of refuelling stations at which it is available is also an element. However, our principal point of judgment revolves around the environmental gains that may come from LPG, precisely as we set out in the alternative fuels framework in the pre-Budget report in December.

The changes in clause 6 mean that the rate of duty for LPG will be 13.03p per kilogram from 1 September this year, which is equivalent to a differential of 40.7p per litre between LPG and main-rate road fuels. The rate is still almost 2p per litre lower than it was in 1997.

I emphasise that the decision was taken after extensive and detailed consultation with the industry. I am therefore confident that it is the correct decision, which strikes the right balance, as the director general of the LP Gas Association said. We cannot support the fuels at any cost, but we must appreciate that some certainty and stability in the industry is necessary to allow it to plan its expansion and to invest for the future. Setting out the differentials three years ahead goes a long way to giving firms the certainty that they need.

Government and industry have invested heavily in the LPG industry in the past four years, and with the UK's manufacturing expertise, a good-size fleet and the infrastructure, the industry is well placed to meet new challenges in the period ahead and set for further expansion in the years to come. I commend the clause to the Committee.

Question put and agreed to.

Clause 6 ordered to stand part of the Bill.