Clause 10 - Bioethanol

Finance Bill – in a Public Bill Committee at 2:30 pm on 6th May 2004.

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Question proposed [this day], That the clause stand part of the Bill.

Question again proposed.

Photo of Michael Jack Michael Jack Conservative, Fylde

It is a great pleasure to have you as our Chairman this afternoon, Sir John. You are a veteran of many Finance Bill Committees on which I have had the honour and pleasure of sitting and I know that you will guide our proceedings with distinction.

At the cessation of business at 11.25, I was just about to say that, in the context of justifying the 20p level of reduction in duty on biofuels, Ministers have often argued that because some of the agricultural land that is used to produce crops for biofuels, for example set-aside land, receives a £45 a hectare payment, that, together with the benefit conferred by the Treasury by means of the duty reduction, is in some way sufficient to ''kick-start'' the industry. There is a flaw in that argument. Even if it were to stack up statistically—it does not in my judgment—the problem is that the benefit is conferred on the grower of the crop and the argument automatically implies that the grower of the crop will be prepared to receive a reduced price from the processor, who would say, ''You've had your £45 a hectare. This is the number of litres of fuel I will get out of your crop contribution to my feedstock, and therefore this is the lower price.'' That is not quite how things work in the real world of agriculture. If we are talking about a market mechanism determining the price between the seller of the crop and the processor, I do not see how the argument holds water in the real world. The £45 a hectare is insufficient in itself to make up for the deficiency between the figure of 20p and the 30p that is argued for.

The benefit of having a break at luncheon is that if one chooses to devote it not to the consumption of food, but to following up what the Economic Secretary said in reply to an earlier debate, one comes to some interesting conclusions. When my hon. Friend the Member for Chichester (Mr. Tyrie) challenged the Economic Secretary about where other calculations of duty reduction came from, he uttered the magic words, ''pre-Budget report—go seek and find!'' We were told that we would find the arguments laid out in that report, which was published in November 2003, and so I went back to it and found box 7.1, entitled ''Alternative Fuels Framework''. I thought that this

was going to be the moment of revelation, but when I came to look in the wonderful box on page 155 for the detailed calculations that set out how the figure of 20p came about, I could not find that information. In fact, the page is completely figureless. There is no calculation.

In fairness to the Economic Secretary, who is a good and straightforward man, he was definitely guiding us, so I went back to the document referred to on page 155: ''Tax and the environment: using economic instruments''. I thought that that would give me the answer that I sought. It is 67 pages long so I did my best to skim-read it during the luncheon interval. I found some reference to biofuels, but no reference whatever to a breakdown of the costs or how the figure of 20p came about. I had gone back to 2002, at the direction of the Economic Secretary, but I could not find that information. I put my hand up and admit to my human frailty, but I look to the Economic Secretary for further guidance.

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

The right hon. Gentleman has obviously had a busy lunch hour. I hope that he does not get too hungry during the proceedings this afternoon. Did he by any chance also go back to the January report of the Environment, Food and Rural Affairs Committee, which he chairs? In that report, the Committee published the memorandum that I submitted that gave the detailed costings and calculations—precisely the sums that he is looking for. He will see the information set out there.

Photo of Michael Jack Michael Jack Conservative, Fylde

I happen to have that document with me, but I would be less than correct if I did not admit that I have not completely refreshed myself with every submission. My recollection is that we did not get the breakdown that we wanted. I found another source. The Economic Secretary made a speech on 4 February 2003, which I am sure, with his assiduousness and memory, he will recall with entire clarity. In that speech he let the cat out of the bag about how the figure of 20p was reached, saying that it was down to the quantification of the environmental benefits. I also checked with British Sugar, representatives of which the Economic Secretary has met. It confronted him with the matter and the impression gained was that when the Treasury calculated the environmental benefits, it got a figure slightly below 20p for bioethanol, but decided that it could not give bioethanol a different deal from biodiesel, so it came up with the figure of 20p.

A Department for Transport consultation document verifies that impression to an extent, and again I apologise if I have misunderstood the information that it contained. On page 15, a table gives an indication of the relationship between fuel usage and the value of the carbon that would be saved by using biofuels. If we take the forecast total fuel sales and divide it into the total annual value of carbon saved, we get a figure of 16.4p per litre. On the other hand, if I have misunderstood that and I divide it by the smaller sum that is supposed to be the direct biofuel, I get a much larger number.

It would be helpful if someone were to explain how the figure of 20p came about. Is 16.4p the right number? Have I calculated it the right way? If I have not, I apologise, but please explain how the figure came about.

In the Economic Secretary's speech of 4 February 2003, in which he listed the agricultural benefits, the potential increase in security of supply, the new industry and all the economic benefits, why did he not go beyond 20p? He stated a large number of benefits.

I have given more than five plus points so far, and I will give the Economic Secretary a sixth. He, being an assiduous man who reads Select Committee proceedings with care, will no doubt be aware from the evidence presented by the Royal Society for the Protection of Birds to the Select Committee during its inquiry into sugar regime reforms that one key environmental gain from sugar beet crops is the pink-footed goose; and he will know that the tops of sugar beet are the main food source for that remarkable bird, which comes from Iceland to the United Kingdom in the cold season to feed. There is considerable value in producing a sugar beet crop as the feedstock for biofuels alongside the other environmental gains that I have listed.

There are other pieces of evidence to suggest that the Economic Secretary could, even at this late stage and perhaps on Report, be bolder than the Treasury wants to be. In the multi-faceted world of biofuels, where we have the Department for Environment, Food and Rural Affairs, the Treasury, the Department of Trade and Industry and the Department for Transport all in there mixing it, it would be helpful if he were to tell us who is in charge of biofuels policy in the United Kingdom.

In clause 128 of the Energy Bill, as before the House on Monday, there is a clause entitled, ''Renewable transport fuel obligation''. Its contents follow the line of argument that I put forward during last year's Finance Bill when we discussed this very area. I pointed out to the Economic Secretary that he could, if he was really bold and imaginative, have his cake and eat it. He could have a UK biofuels policy at zero cost to the taxpayer. I am sure that he has read clause 128 of that Bill, which effectively requires targets to be set about how industry will blend biofuel and existing hydrocarbon fuel to achieve the EU objectives of which I spoke this morning. He will understand that following the Department of Trade and Industry's line and giving statutory weight to clause 128 in that Bill would mean that there would be an obligation on industry to show how it was going to meet the EU requirements by blending biofuels and hydrocarbon fuels targets. The price of that fuel would be the price of the fuel. The same logic would operate for biofuel as for the renewables obligation on electricity.

If the Department of Trade and Industry has, for the time being, accepted clause 128 of the Energy Bill, why are we discussing clause 10 in this Bill as cast? Clause 128 delivers, at no cost to the taxpayer, the policy objective that the Treasury is following, at cost to the

taxpayer, in clause 10. If the Treasury decided to blend the duties itself, there would be a modest change in the price of fuel. Blending bioethanol and petrol to meet the 2 per cent. target would require a 0.6p per litre increase in the price of fuel, thereby passing on some of the costs to users and enabling people to pay for the environmental gain. However, we do not have that before us. The Economic Secretary is falling back on clause 10 in a way that does not give sufficient inducement to the industry to make the necessary investments in plant and against a background of the Economic Secretary not justifying the situation properly.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I understand the chemical difference between biodiesel and bioethanol, but why is a 20p per litre differential sufficient to stimulate the biodiesel market, which has grown in the two years since the differential was introduced in July 2002, but not the bioethanol one?

Photo of Michael Jack Michael Jack Conservative, Fylde

That is a fair point. I think that those who seek an oilseed rape-based biodiesel business would argue that 20p is, in its own way, insufficient. What the hon. Gentleman has put his finger on is that there is an embryonic biodiesel industry that uses recycled cooking oils, which is what the Motherwell plant, which has been prayed in aid of the Government's stance on stimulating investment in this area, is all about.

We do not use UK oilseed rape as a feedstock; we send surplus stock to the continent to be reprocessed and returned to the United Kingdom as biodiesel. That goes against the DEFRA pamphlet, which says:

''The production of biofuels from arable crops would provide a useful new market for rural Britain.''

If we were following the Government's own line, as outlined by DEFRA, we would want to see an increase above the 20p per litre derogation to encourage a rapeseed oil biodiesel industry not solely dependent on leftovers from cooking processes. So, I think that the line being taken between the two fuel sources is consistent.

I remind the Economic Secretary of what page 7, paragraph 4.1 of the Department for Transport consultation exercise says. I quote:

''The Energy White Paper . . . identifies liquid biofuels and hydrogen as the most promising candidates for tomorrow's low carbon transport fuels.''

I checked with British Sugar at lunchtime and we have no bioethanol industry or production in this country now, notwithstanding the fact that the industry has known about the 20p derogation for some time. Not a pound has been invested in achieving the Government's objectives. Against that background, I want the Economic Secretary to tell us how industry is supposed to meet the 2 per cent. target that the EU has set on the biofuels directive, never mind the 5.75 per cent. one.

The note from the Department for Transport goes on to say:

''Biofuels also have the advantage that, unlike other potential future low-carbon transport fuels such as hydrogen, they can be used as direct substitutes for conventional fuels without the need for new vehicles or refuelling infrastructures.''

Biofuels are clearly a very good buy, which the Government should be encouraging with all their enthusiasm.

This is where the policy stance falls down, however. The Treasury seems to have made its mind up about the approach. Of the DEFRA Ministers, only Lord Whitty thought that 20p was enough, if I recall correctly the evidence that he gave to the Select Committee. On page 14 of the consultation document we have the magic question asked of consultees by the Government:

''A key question for this consultation is whether, and if so to what extent, the Government should provide additional support to aid the development of the UK biofuels industry.''

That consultation document is months late. The Department for Transport has asked a question to which the Treasury has already given an answer—''It's 20p and we're not going any further''—but we do not have a bioethanol industry. We have no investment and the industry is saying that it does not have enough money.

The policy is a mess, against a background of the DTI including a clause in the Energy Bill that encourages the development at no cost to the taxpayer of a bioethanol business. Where is that in relation to clause 10? Departments are coming at the problem in four different ways. The Economic Secretary should take the opportunity to explain when we are going to have a coherent policy that will deliver one pound's worth of extra investment in bioethanol.

Throughout all the documents, the environmental, farming, industrial and employment benefits all come shining through. However, at a meeting a year and a quarter ago, the Economic Secretary looked British Sugar in the eye and said, ''Will 20p be sufficient for you to build a bioethanol plant?'' It said no. If he was good enough to listen to the liquefied petroleum gas industry, which has said that it does not mind a reduction in the help it receives, I hope he will do the bioethanol industry the service of listening to it when it argues that 20p is the wrong amount if he wants to pump-prime investment in this country. An amount greater than that is required to trigger our bioethanol industry.

Photo of John Healey John Healey The Economic Secretary to the Treasury 2:45 pm, 6th May 2004

I welcome you to the Chair, Sir John. I look forward to serving under you during your co-chairmanship of the Committee's proceedings.

I shall try to respond to the main points of the hon. Member for Chichester and the right hon. Member for Fylde (Mr. Jack), and I shall then speak briefly to the clause. The hon. Member for Chichester was very flattering, but false, in describing me as a leading expert on biofuels. It would certainly be an apt description of the right hon. Member for Fylde, because he is clearly an expert and, as he explained, he

now chairs the Environment, Food and Rural Affairs Committee, which recently considered the issue of biofuels and reported in January.

The hon. Member for Chichester talked about the proposed 20p per litre discount for bioethanol and contrasted it with his own figure of 30p, which he said was needed to kick-start the industry. The danger of considering the duty discount simply as a way of stimulating the development of the industry in the UK is that it makes the UK market more attractive for established producers in other countries, which could encourage imports from elsewhere. That view was shared by the EFRA Committee when it reported in January, having taken evidence. Its report stated:

''We share the Treasury's view that a greater level of duty derogation on biofuels introduced now would be more likely to encourage imports of biofuels than the development of domestic production''.

Nevertheless, he wanted to press me on the question of cost and the 30p differential. I can confirm that our calculations suggest that a 30p per litre differential would cost the Treasury £15 million in 2004-05, as the industry gears up its production, and £65 million in 2005-06 and £70 million in 2006-07.

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

Is that the cost of the increment over 20p or the full cost of 30p?

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

That is the full cost of a 30p differential.

The hon. Gentleman asked what work we had done to underpin the judgment of a 20p per litre discount. The right hon. Member for Fylde did the same but at greater length and in greater detail. I could go over all the ground that I set out in detail in written form for the EFRA Committee, including the figures and the method of calculation. Rather than risking boring members of this Committee, I simply refer them to that document, if they are that interested.

Photo of Michael Jack Michael Jack Conservative, Fylde

I have now had a chance to refresh my memory as to what the figures showed. Can the Economic Secretary confirm that the data that he gave the Select Committee concentrated on the evaluation of the carbon savings only?

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

I can certainly confirm that that was our starting point and central concern. The Government declared in the alternative fuels framework that the principal case for support through fiscal and economic instruments must rest on a calculation of the environmental benefit and gain that would accrue.

Mr. Jack rose—

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

If the right hon. Gentleman will bear with me, I shall explain briefly for the benefit of the Committee the supplementary analysis that was provided on top of that.

The incentives set out in clause 10 to support the development of bioethanol are in fact significantly more than the monetary valuation of the fuel's environmental benefits. The method of calculation that we used produced a quantified environmental benefit for biodiesel of just 2.7p per litre and for

bioethanol of just 2.5p per litre. Nevertheless, we set the proposed duty discount at 20p per litre. It was introduced in July 2002 for biodiesel and 1 January next year is proposed in the clause for introducing the discount for bioethanol.

The proposed incentives also follow a further assessment that was built in on top of the environmental benefits set out in the alternative fuels framework. As for LPG, we took into account what may be necessary to make the policy economically sustainable, social considerations, and of course what the public purse can afford.

I have to say to the right hon. Gentleman and the hon. Member for Chichester that I remain unconvinced that a duty incentive of more than 20p per litre for bioethanol would be justified. There are still eight months before we introduce the incentive. It is rather early to write it off, although I realise that for many reasons potential producers are keen to ensure that the duty discount is as generous as possible.

By way of encouragement—I believe that the right hon. Gentleman knows and accepts this—I have probably had more meetings about appropriate Government policy on and potential economic instruments of fiscal support for biofuels than on virtually any other subject during my short time at the Treasury. I remain willing to conduct such discussions with colleagues in this House and in the other place and also with the industry. I am always interested, as are Treasury and Customs officials, in new evidence and new research that will help to give us a better analysis of the situation and the policy options. Indeed, it was, in part, better evidence and fresh information from the industry that led us to this proposal. At one time, we were not convinced that there was a role for a duty discount to support the development of bioethanol. Supplementary evidence and further information from the industry helped to convince us of the case, and I would simply leave that invitation and declaration of our readiness to consider further evidence and research for the benefit of the Committee.

Turning to a couple of more specific points raised by the right hon. Member for Fylde, the Committee has a shared interest in greater use of biofuels and the attendant environmental benefits. We also share an interest in the development of a UK biofuels industry, which is currently fledgling at best.

The right hon. Gentleman asked about lignocellulosic materials, and he was right to say that the potential offered by those materials and processes for environmental benefits are significant. There are two areas in which we are considering policy measures to help the development of certain processes of production. First, we are examining the scope for a duty regime, which may be based on the nature of the feedstocks, or the inputs to the process, rather than the nature of the fuel producers, or the output at the end of the process. Secondly, we are constantly examining

the case for enhanced capital allowances to support the development of and investment in some of the best environmental processes.

The right hon. Gentleman tempts me to confirm, for the benefit of the Committee—if you will indulge me, Sir John—the measures that must be seen alongside the duty discount in the clause. We must do so with the recognition that duty differentials are, frankly, blunt instruments. I have explained how I and the EFRA Committee believe that there is a danger that they may encourage imports as well as domestically produced fuel, but alongside the clause, which introduces the 20p a litre discount, the Budget confirmed that that level of discount will be in place for at least three years as part of our commitment to the alternative fuels framework. I hope that that will give the industry some certainty and confidence as it considers future investment plans.

We are examining the potential for input-based taxation, which will allow us to support the development of biofuels and other green fuels in a different way in future. We are examining the possible role for enhanced capital allowances in the way that I mentioned.

Finally, the Department for Transport is leading consultation on the measures that may play a role in helping us to set targets in the UK for the take-up and use of biofuels in the context of the European Union directive. The right hon. Gentleman will know that those targets are indicative and not mandatory. When we have concluded the consultation, we shall be in a position to make a judgment about the appropriate targets for the UK in 2005 and 2010. We shall then publish that and inform the European Commission, as we are duty bound to do.

A key potential policy instrument is the biofuels obligation and the sort of figures and debate that the right hon. Gentleman tempted me with are precisely the matters that we are encouraging people to make submissions on during the consultation.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 3:00 pm, 6th May 2004

Will my hon. Friend confirm that the consultation will consider bioethyl tertiary butyl ether? It is a petrol extender often used as a substitute for the much more damaging methyl tertiary butyl ether, and British Sugar has stated that it is absent from clause 9 and possibly from clause 12.

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

If my hon. Friend or British Sugar would like to make a detailed submission to the consultation on that topic, I assure him that we will consider it.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

Order. I appreciate that I was not here when the hon. Gentleman was tempted along this road, but I hope that we will not widen the debate to a discussion of all options that may be available.

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

I appreciate your guidance, Sir John.

Clause 10 introduces a new, reduced rate of duty for bioethanol used as a fuel for any engine, motor or other machinery, set at 28.52p per litre. It supports our environmental objective to promote the take-up of such greener fuels and follows the steps that we have

taken to encourage the growth of a successful biofuels industry in the UK, such as the introduction of a duty differential for biodiesel in July 2002. Before that, only very small amounts of biodiesel were produced in the UK; since the duty incentive, sales have grown to around 2 million litres a month, and it is now available in more than 130 outlets in the UK.

We expect production of biodiesel to accelerate further as new production plants come on stream and other outlets for waste vegetable oils, as part of the feedstocks for biodiesel plants, cease to be available.

Bioethanol is ethanol produced from crops such as sugar beet, and when blended with petrol it reduces tailpipe emissions of greenhouse gases and local air pollutants. With the first commercial plant for the production of cellulose ethanol being built in Canada and ethanol being produced from straw and other lignocellulosic sources, as the right hon. Gentleman stated, there is the prospect of even greater reductions in greenhouse gases in the future.

We hope that, as with biodiesel, the response to the duty incentive set out in the clause will be encouraging, and that the UK will quickly develop a thriving bioethanol industry. In line with our approach set out in the alternative fuels framework, the new incentive for bioethanol will remain in place until at least 2007. We expect that such certainty will be welcomed by the biofuels industry and give confidence to investors. We are, however, considering other options and policies to support the growth of the biofuels market and industry in the UK.

Photo of Michael Jack Michael Jack Conservative, Fylde

May I press the Economic Secretary on whether clause 128 of the Energy Bill is one of those options?

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

That clause, the consultation being conducted by the Department for Transport and the support of diversification of agriculture being led by DEFRA are all potential elements, alongside the strictly fiscal instruments that are my responsibility, that the Government are considering. On that basis, I commend the clause to the Committee.

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

Who is in overall charge of that policy?

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

Clearly, the Departments have their own leading responsibilities for certain policy areas. The liaison between all Departments with an interest and a responsibility in the field under discussion is good. We meet regularly through the low carbon group and separately. It would be difficult to see how one Department could be given a lead responsibility, given the wide range of policy areas that will play a part in the future of the bioethanol market and industry in this country. That would not be the right approach, and it is not the approach that the Government are taking.

Photo of Michael Jack Michael Jack Conservative, Fylde

I found some of what the Economic Secretary said heartening. He has taken a particular personal interest in the matter, and I am glad that he has confirmed that to the Committee.

I do not want to go over all the issues that the Economic Secretary said the Government were still considering, but perhaps I can persuade him to commit the Government to pulling together the results of all of the work on the issue when they publish their response to the Department for Transport consultation paper, or if that is too soon, no later than the pre-Budget report. He is right that people will want to think carefully about what he has said and about the clause, should the Committee agree to it. However, the United Kingdom still does not have a bioethanol plant, and people may want to see further documentation on the Government's thinking on the matter before they consider their investment proposals.

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

As the right hon. Gentleman will know, the pre-Budget report and the Budget rightly concentrate on the economic instruments. However, they are part of a wider context in which the policy instruments that may bear on a particular issue are summarised. That was the case in the most recent pre-Budget report and Budget, in which the Government confirmed for the first time our interest in a potential biofuels obligation. I suggest that he looks to the autumn pre-Budget report for the summary and the overview in which he is interested.

The right hon. Gentleman appeared to be taking me to task when he said that this country did not have a bioethanol plant. This country does not yet have a bioethanol duty discount, and that is precisely what the clause introduces. If the Committee endorses the clause, and it becomes part of the Bill, it will still be eight months away.

Question put and agreed to.

Clause 10 ordered to stand part of the Bill.