New Clause 3 - Fuel duty differential for biodiesel

Finance Bill – in a Public Bill Committee at 8:15 pm on 26th June 2012.

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‘(1) The Biodiesel Duty (Biodiesel produced from waste cooking oil) (Relief) Regulations 2010 (S.I. 2010/984) shall be deemed not to have ceased to have effect on 31 March 2012 and shall continue in force.

(2) No further Regulations may be made under the Hydrocarbon Oil Duties Act 1979 which would have the effect of removing or reducing the relief provided for by the Regulations mentioned in subsection (1) until a full impact assessment of the impact of the removal of a fuel duty differential for biodiesel has been laid before Parliament.’.—(Stephen Williams.)

Brought up, and read the First time.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West 8:30 pm, 26th June 2012

I beg to move, That the clause be read a Second time.

It is a great pleasure to move one of the last items of business in this year’s Finance Bill Committee. I am sure that members of the Committee will be pleased that I actually have my notes this time, unlike for my performance on clause 180, which will be remembered as the highlight of our deliberations in recent weeks. I will not be flying entirely by the seat of my pants for the next few minutes.

The new clause gives me and the Minister an opportunity to put on the record our views about the biofuels industry. It relates to the biodiesel produced from waste cooking oil, which is probably better known as chip fat. It is not Friday, so none of us is looking forward a traditional meal of fish and chips this evening. I know that my hon. Friend the Member for North East Somerset is an admirer of British culinary traditions, and—as a man of the people—is frequently to be found outside the chip shop in Midsomer Norton high street with his bag of chips. The new clause is all about making sure that the by-product of that culinary delight is used to meet some of our climate change obligations.

In the 2009 pre-Budget report—the last one given by the right hon. Member for Edinburgh South West (Mr Darling)—the Labour Government announced the introduction of regulations on biodiesel produced from waste cooking oil. Having been brought in by statutory instrument No. 984 of 2010, the regulations were to cease on 31 March 2012. Just for once, a statutory instrument had a sunset clause, and that sunset clause has caused problems for the industry. The statutory instrument introduced a 20p per litre duty differential for biodiesel that has an element of waste cooking oil, but the problem is that the differential ceased on 31 March and the statutory instrument is no longer in force.

The industry is very new, having been brought into being by those regulations. Thirty small businesses up and down the country are now making better use of waste cooking oil and employing more than 1,000 people. One of them is Uptown Oil, which is just across the river in the constituency of my right hon. Friend the Member for Bermondsey and Old Southwark (Simon Hughes). I know that he has met the Economic Secretary and written to the Chancellor about this issue.

In the two years that the statutory instrument was in force up to April 2011, 99 million litres of waste cooking oil was put to productive use. The previous Government’s intention was that, once the 20p per litre differential was abolished in April 2012, the industry would instead be sustained by renewable transport fuels obligation certificates. In practice, however, the industry has found that RTFO certificates have simply not been tradable at sufficient value in the market. They were expected to fetch a price of up to 24p per certificate, but some businesses have not been able to sell them and the industry has predicted that, even after five years, the certificates may be worth only 12p. That means that many of the businesses are now struggling and are making losses, and many of them are predicted to fail unless action is taken.

Photo of Fabian Hamilton Fabian Hamilton Labour, Leeds North East

I assume that the hon. Gentleman is talking about waste cooking oil that is used for automotive fuel, not for generating electricity, which is what REG Bio-Power in my constituency uses it for. Does the duty also apply to the generation of electricity from that waste product or does it apply only to automotive fuel?

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

I believe that it can be used for the generation of electricity. It could also be used more widely. I have met the trade association, and we have had subsequent conversations. I mentioned that perhaps it could be used for trains in the future. I recently had a cab ride with First Great Western from Paddington to Bristol Temple Meads and saw for myself how the company is now saving diesel by coasting at 110 mph from Swindon down to Somerset—it is downhill all the way to Bath and Bristol. It is saving diesel by doing that, and if it were able to use biodiesel from waste cooking oil, that would make a further contribution to the environment.

Photo of Simon Kirby Simon Kirby Conservative, Brighton, Kemptown

I hope that my hon. Friend will excuse me mentioning the most excellent Big Lemon bus company in Brighton and Hove, which uses that recycled product to great effect.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

How could I not forgive my hon. Friend? I seem to remember that he gave us all a stick of rock at one point last year, so perhaps one will be forthcoming for that intervention.

In discussing the amendment that I tabled to clause 180, I said that it was all about joined-up government, and this new clause is another opportunity to encourage that—this time between the Treasury and the Department for Environment, Food and Rural Affairs. The latter estimates that waste cooking oil—whether used for chips or something else—causes 150,000 blockages a year, because most of it is poured down the drain, and costs the water companies £15 million a year. Eventually, all of the waste is likely to end up in landfill, which produces 40% of the UK’s methane and 3% of its greenhouse gas emissions.

Instead, we could put that waste cooking oil to better use. Last year, when all those millions of litres of cooking oil were diverted to better use, it enabled the UK to exceed our road transport emission targets by 8%, saving 1 million tonnes of carbon dioxide. In a few short years, the UK became the leading country in the world for using waste cooking oil for road fuel.

The UK Sustainable Biodiesel Alliance has made a proposal to me on the way forward that I would like to put to the Minister. It has suggested that for a cost of just £5 million—which, to put it in context is 1% of the £500 million that the Chancellor spent in Treasury questions this afternoon by deferring the fuel duty rise for six months—heavy goods vehicles and taxi fleets could use high-blend biodiesel, with a 20% mix of waste cooking oil, and that would keep this nascent industry alive for another few years. If the Government do not listen to the representations that I know have been made, the danger is that the industry will simply collapse; more than 1,000 people will lose their jobs; our emissions targets in this area will not be met; and, perhaps just as important, an awful lot of chip fat will be poured down the drain.

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

It is yet again a pleasure to serve under your chairmanship this afternoon and this evening, Mr Bone. It is almost fitting in a way that one of our last debates on this Bill should have ended with the mental image of unpleasant substances going slowly down the plughole—[ Laughter. ] On a more serious note, I shall try to answer the points raised by my hon. Friend the Member for Bristol West.

As hon. Members may know, the fuel duty differential for biofuels derived from waste or used cooking oil was set at 20p a litre. That differential ended on 31 March. The proposed new clause seeks to retrospectively reinstate the differential, and I understand that the industry has expressed a similar wish. Indeed, I have been in correspondence about the issue with, among others, my right hon. Friend the Member for Bermondsey and Old Southwark. Unfortunately, however, we cannot support the proposed new clause tabled by my hon. Friend the Member for Bristol West.

The Government recognise that biodiesel derived from waste cooking oil can be a highly sustainable source of biofuel. However, if I explain some of the history of this differential, that will give the Committee the context for the Government’s decision to allow it to expire.  Until April 2010, all biofuels benefited from a 20p per litre differential. As my hon. Friend has said, in the 2009 PBR the previous Government announced that all differentials were to be scrapped, except for that for biodiesel derived from waste cooking oil, which was extended for two years and expired in March 2012. That was legislated for by the previous Government.

That extension gave additional temporary support to the industry while the Department for Transport amended the RTFO to implement the renewable energy directive in full. The directive requires all European Union member states to achieve 10% renewable energy in transport by 2020. The duty incentive was always intended to be a temporary support mechanism. The planned expiry date was well known by industry for some time, and we believe that the best way to support the biofuels industry in the future is through the RTFO. I shall briefly explain why.

The RTFO requires fossil fuel suppliers to produce evidence that a proportion of their fuel comes from renewable resources. It also rewards biofuels on the basis of their sustainability criteria. Each litre of biofuel produced is awarded a certificate, which suppliers can use as evidence that they have met the obligated proportion. The certificates are tradable. The RTFO has a sharper focus on sustainability than the previous duty differential system, which offered no mechanism for addressing concerns about the sustainability and sourcing of the biofuels supplied, and which treated all biofuels the same.

Photo of Ian Swales Ian Swales Liberal Democrat, Redcar

I was happy to add my name to the amendment. Yesterday, I hosted a reception in Parliament for biofuels producers, and one of their great pleas is for consistency and an understanding of their industry. It is difficult to predict what the profitability or accounting may look like in two, three or more years. I make a plea for this Government not to fall into the same trap as the previous Government, who killed off all the investors in biodiesel.

We have also had a problem with bioethanol. This country’s earliest investor in bioethanol is in my constituency, but it has been shut down for a year because the numbers have gone adrift. I make a plea for the Government to continue to understand what is happening in the new industries, and not necessarily to stick to the figure that they may have predicted two or three years ago.

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

I thank my hon. Friend for his passionate and well-informed plea. I am well aware of his work with the industry and pay tribute to it. He makes a sensible point. I was just about to talk about how the RTFO certificates work and are tradable. I acknowledge that the demand for and the prices of those certificates will fluctuate for a range of reasons and it is important to understand that that will happen. That might be partly behind one of my hon. Friend’s comments.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

Has the Minister—has the Department—assessed the payback period on the capital investment required to produce biodiesel from waste fat products?

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

Let me return to that point in due course to be sure that I can answer satisfactorily.

The key point about certificates is that they are given a double value for that particular biofuel. Giving twice the financial support to biofuels derived from waste compared with conventional biofuels provides a clear incentive for sustainability in the system, in particular for biodiesel derived from waste cooking oil.

A further important point is the fluctuation of behaviour in the system. The Department for Transport’s view is that a few months’ data on certificate prices cannot give a clear forecast of prices to come. This year is somewhat unique because of the transposition of the renewable energy directive and it is too soon to tell whether the recent crisis reflects a longer-term trend. However, we have committed to reviewing the double certificate system to ensure that it is having a positive effect on the biofuels industry, and I strongly believe that it is the right time for the RTFO to support and incentivise that industry.

Let me briefly consider the costs associated with the new clause and reinstating the duty differential. The previous Government estimated the costs of the duty differential to be £10 million a year, but here is the rub: the cost was much greater—£80 million in 2010-11, increasing to £160 million in 2011-12. Although domestic production of that sort of biofuel increased from April 2010, the majority of the supply was imported as international producers took advantage of the UK’s tax relief. Our analysis suggests that, if the rebate were continued, it could cost around £200 million in 2012-13 and continue to increase in future.

Photo of Fabian Hamilton Fabian Hamilton Labour, Leeds North East 8:45 pm, 26th June 2012

I assume that the clue is in the title, “Transport”. Earlier, I asked the hon. Member for Bristol West whether the duty applied exclusively to transport fuels. I opened a project on 14 October, the North Leeds power station, which exclusively uses recycled cooking oil. Does the duty apply to that fuel? It drives diesel turbines—they do not go anywhere, but they are engines. Is the fuel classed in the same way as transport fuel?

Photo of Peter Bone Peter Bone Conservative, Wellingborough

Order. Before the Minister replies, it was remiss of me not to say at the beginning of the sitting that the programme motion calls for our proceedings to end at 9 o’clock.

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

If I may, Mr Bone, I shall read into your words the suggestion that the question should be tackled in correspondence, which I am happy to do, because it does not refer to the subject of the new clause. Mr Bone is nodding at me, which means I will have to leave that there.

Clearly, costs ballooning out of control on a differential system would be a problem and value for money is particularly important at this time. Given that biodiesel derived from waste cooking oil is already incentivised through the RTFO, re-providing a differential in tandem would not represent the value for money that we seek.

The Government strongly believe that the RTFO delivers effective and sustainable market-based support to the biofuels industry. I thank my hon. Friends the Members for Bristol West and for Redcar, who spoke about the new clause, and, indeed, my right hon. Friend  the Member for Bermondsey and Old Southwark, who does not serve on the Committee, for their interest in the subject and their work on behalf of the industry to promote its success. I greatly hope that we can provide for that success through the system that is in place.

I reassure all members of the Committee, including in response to the question about capital assessment, that where further assessment or data-seeking is required, the Government are constantly talking to industry, and that dialogue will continue.

With that, I ask my hon. Friend not to press the motion.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

I introduced the new clause to put some remarks on the record on behalf of the industry that made representations to my right hon. Friend the Member for Bermondsey and Old Southwark, and we have heard the Minister’s response. Because she ended on a positive note, saying that she intended to continue to have dialogue with the industry, I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.