Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 260 - 279)



  260. Is there not an argument to say that in the context of the long-term strategy versus short-term expediency debate, it might have been better not to reduce the duty but to ringfence a proportion of the duty and earmark it for research and development into the longer-term strategy? Rather than provide a short-term incentive to move to a slightly less polluting fuel, put the money into the long-term research and development into the hydrogen economy.
  (Mr Mumford) The way to view this is that if we go back ten years the main concern was air quality and tailpipe emissions. What we have had is a collaboration between the fuel manufacturers and the vehicle manufacturers to improve engines, improve fuels, in a partnership which has delivered that improved air quality. We are well advanced on that path. That path is virtually locked in and air quality is no longer a problem. The introduction of ULSP and ULSD was part of that path: it was an established clear strategy for improving air quality. What we are now talking about is the new agenda, which is the carbon dioxide agenda, which has only come to the fore much more recently. This agenda is at the stage of deciding which alternatives are better: investing in research, in some areas actually putting investment into fundamental chemical research, also the engineering development, so the CO2 side is at a completely different stage of development. There is a very strong argument which says that at this phase, investment is what is actually going to make the difference, because that is going to create the opportunities and create the technical solutions. We have seen in this area just how in recent years the efficiencies of certain technologies have just gone through step change after step change. There is an awful lot to play for there.
  (Mr Beckwith) We agree entirely that the long term is important but air quality is an immediate issue as well. There is a role for clean fuels in improving air quality in the shorter term and ultra low sulphur petrol does give useful vehicle emission benefits.

Joan Walley

  261. We were talking just now about duty differentials. Would anyone like to comment to the Committee on the differential between the most common petrol and diesel? It seems a bit of a murky area to us that the Chancellor is maintaining that differential between diesel and whichever is the most common petrol?
  (Mr Mumford) The duty on diesel and petrol is virtually the same in this country and by European standards that is unusual. Normally most countries have lower duty on diesel. To switch between petrol and diesel requires you to have a completely different engine. It is a rather complicated shift. It is an area where long-term fiscal signalling does actually play an important role, as does the differential with LPG, which is again an area where you need to have a significant difference in the engine. When you are looking at those major changes between different fuels, it is extremely important that there is a long-term fiscal policy which can actually give a base for the manufacturer of the vehicles and the purchaser of the vehicles. There is a market there with a long-term future. We saw in New Zealand, which had created very large fiscal incentives for gas and LPG vehicles and actually had the largest penetration in the world of those sorts of vehicles, that they moved away from their fiscal incentives and virtually collapsed that initiative overnight. That long-term policy is very important.
  (Mr Fergusson) It is the case that the UK is the only western European country where diesel costs as much as, if not more than, petrol. That was actually done, at least in part, for sound environmental reasons. A litre of diesel contains more carbon that a litre of petrol, so if it is CO2 you want to tax, then it makes sense to tax diesel more heavily. Obviously also there have been the great concerns about particulates in the past. There was an environmental rationale for that. On the continent, and indeed here historically as well, diesel prices have tended to be kept low because of the interests of national hauliers. There has been a big competitiveness concern there and that is why diesel prices have been so much lower. That ran us into difficulties last year because the differential between the diesel price here and on the continent was obviously what sparked the fuel crisis. In the end the English Channel was not enough to insulate us from that. That said, it is important to have long-term signals and it was a bit disappointing to me that in the budget the rate of duty on diesel was reduced in the same way as the duty on petrol and it was implied that they were the same thing, or there was some sort of parity involved there. There was really no sense in that because you cannot decide to switch from petrol to diesel from one day to another. That equal treatment is not actually necessary in the short-term at all. The truth is that was a modest pay-off for the truckers, no more nor less than that.
  (Mr Beckwith) In the longer term the parity in duty between petrol and diesel is meaning that the passenger car diesel fleet in the UK is small compared to the passenger car diesel fleet in continental Europe. In France for example, approximately 50 per cent of passenger cars are diesel powered. In the UK it is very much lower than that. I do not have any particularly strong views as to whether that is good or bad, but if you want to encourage diesel passenger cars you will need that differential. If you do not, then the current equivalence in duty is appropriate.
  (Mr Fergusson) That is right, but it is worth adding that the French are actually trying desperately to change that parity because of particulates in particular. They are deeply concerned about the size of their diesel car fleet now and that is part of the strategic debate you need to have basically.

  262. Let us look at how we put all this together and come up with a sustainable way forward. Talking about ultra low sulphur petrol and the actual manufacture of it, if you are looking at the whole process could you tell us whether or not producing it in the long term takes more energy than the advantages you would subsequently get from the lower emissions in the long run from the more efficient usage it has in cars?
  (Mr Beckwith) There is energy consumption associated with removing sulphur from petrol and that means there is an increase in refineries' CO2 emissions associated with removing sulphur from petrol. That is to some extent counterbalanced by the fact that what you produce is a lower carbon fuel. The hydrogen content of the petrol is increased somewhat and the fuel has a higher energy content by weight. The vehicle CO2 emissions are reduced, even though refinery CO2 emissions are increased. Those do not completely balance out in the very short term. In the longer term, ultra low sulphur petrol fuel allows more fuel efficient technology to be introduced into the market.

  263. Has there been any independent research to back that up?
  (Mr Beckwith) Certainly the European motor industry has given a very strong signal that low sulphur fuels are needed for them to introduce more fuel efficient technology into the market. That would not be disputed.

  264. You are not aware of any independent research which has been done to back that up.
  (Mr Frank) The remark was quite correct. If you want to save fuel, you should burn the fuel lean, be it in engines or house heating systems or whatever. The next generation of vehicle direct injection petrol engines are supposed to run very lean, but then they produce nitrogen oxides. So we need a catalyser specially designed to reduce the nitrogen oxides and they will be poisoned by sulphur if the sulphur content is too high. I should like to make clear what we are talking about. If you say your ultra low sulphur petrol is "only" 50ppm, then that is not enough. Our need is 10ppm and there is some debate between the oil industry and the motor industry because if we do not have that low level of sulphur we cannot make use of all the potential we have in future engine technology.

  265. May I move on to the Chancellor's greener fuels challenge? A statement has been made that what the Government really wants to do is actually look at fuel from well to wheel, look at the whole process in terms of extraction, fuel delivery, vehicles etcetera. Do you think that rationale has been applied in respect of the decision which was made about ultra low sulphur petrol?
  (Mr Beckwith) I certainly do not think it is inconsistent. On a well to wheels basis the introduction of ultra low sulphur petrol, coupled with more fuel efficient vehicle technology will lead to lifecycle cradle to grave reductions in CO2 emissions.

  266. As a matter of interest, are any of you on the Chancellor's greener fuels challenge?
  (Mr Carey) We have been asked to respond to it.
  (Mr Mumford) We are participating.

  267. You are obviously all participating in it.
  (Mr Mumford) Yes; absolutely.

  268. You say that right the way across the industry there is this sense of wanting to be part and wanting to contribute to it.
  (Mr Mumford) Absolutely.
  (Mr Fergusson) That is right, but I go back to what I said earlier. Ideally it would be the focus for a broader debate which was not a mud fight between different green-fuel interests and there is a bit of a lottery around who gets what money. It should be a rounded debate at this time and some priorities set at the end of it. I am not yet sure that is what will happen.

  269. Are you then saying that is something which would perhaps ideally be five steps further down the line from something equivalent to the energy consortium to which Mr Frank referred in the German Government?
  (Mr Fergusson) It would take us further down that line, to where the greener fuels challenge became a focus for a proper mature debate involving all stakeholders including independent analysts and so on.

  270. In terms of duty differentials, in terms of fuels—and we have all been talking this morning about the long term—how long do you think fuels need to have a headstart to enable them to get established, if that is the decision which has been made, so that people become used to them and they become common currency?
  (Mr Beckwith) If you look at autogas in the UK as an example, there have been duty incentives to encourage that fuel for about five years, something like that. The market is only now beginning to take off, so it does take some considerable time to achieve those changes.
  (Mr Carey) The greener fuels challenge seems to be asking for an individual response; we shall all make an individual report. It does not involve us talking to each other and looking at what we need to do to create an atmosphere for the longer term fuel solutions like hydrogen to come through. We could not answer the greener fuels challenge with hydrogen. The questions are not framed in a way which would mean hydrogen could be a solution. There is no hydrogen distribution, there is very little hydrogen manufacture. There is very little vested interest in producing hydrogen at the moment, so who is going to answer for hydrogen?


  271. Is that not a problem if the remit does not include proper consideration of hydrogen?
  (Mr Carey) You cannot knock the greener fuels challenge in the sense that it will encourage people to use alternative fuels.

Joan Walley

  272. We want you to tell us how it should be set up.
  (Mr Carey) It will give incentives to use alternative fuels and in the long run we have to do that: we have to get people used to the idea that cars do not just run on petrol and diesel.

  273. Where is there that that debate can take place? Are you saying there is nowhere?
  (Mr Fergusson) Nowhere.
  (Mr Carey) No, not at the moment; there is not. This is an issue, that there is no real forum, no real industry body which represents hydrogen even as a thought.

  274. That is assuming it will always be the vested interest taking this further forward rather than because it was good for the planet.
  (Mr Carey) Yes.
  (Mr Fergusson) That is the point. Everyone has a vested interest—and with respect I mean that of everyone including the people on either side of me—and some are better established than others. Yes, this speaks to the individual vested interests, and hydrogen, and maybe even in relation to fuel cells rather than internal combustion engines, are interests which cannot speak in this forum because the remit is not sufficient to allow that debate to happen.

Mr Chaytor

  275. We have talked about alternative fuels and engine technology a little bit, but I should like to shift the discussion now to consumer behaviour and the impact of policy change on consumer behaviour. I was interested in the submission by BP to the Trade and Industry Select Committee in their recent inquiry in which BP states that the level of fuel duty does not appear to have much effect on the total quantity of fuel purchased and consumed by your customers. If fuel duty does not have much effect, is there not an argument for increasing fuel duty further, because the customers will absorb it and it could then be reinvested either into pensions or hydrogen research. Could you comment a little more on this as to how you see consumer behaviour affected by fuel duty under the Government policy?
  (Mr Mumford) Absolutely. It comes back to the key question of choice. If the public have choice in terms of good quality public transport, other modes of mobility, then people will switch. If the issue is that they are absolutely locked into the use of a car or whatever and there is no alternative and it is a question of actually doing the journey or not doing the journey at all, it becomes a lifestyle decision. If that lifestyle decision is whether to go to work or not go to work, then you are facing the public with an almost impossible choice. The answer to this point is that yes, fuels, particularly fuels for motor vehicles, are a very easy and soft target for taxation. If your objective is to raise money for schools and hospitals, then there is a good argument for going and taking tax from that source. Whether that is right in a total societal framework is something which is outwith the scope of what we are debating here today. You are absolutely right in your supposition that the consumer would continue to buy even if the duty were higher.
  (Mr Beckwith) There is a long-term and short-term effect as well. What we notice is that if oil prices are very high so fuel prices are high that does not cause an immediate reduction in fuel purchases. If over the long term petrol prices are very high, that will influence people's purchasing decisions with respect to what vehicle they buy. We are seeing that now with people choosing to buy autogas powered vehicles because the fuel price and fuel duty is much lower. You see it in other countries where people choose to buy diesel powered cars. In order to reduce their total fuel bill, people will buy different vehicles, but the absolute price of fuel does not seem in the short term to discourage people from using their cars, at least within the ranges we have been experiencing.

  276. On current levels of fuel duty and current oil prices there is an impact on consumer behaviour, but over a longer period when they come to change their vehicle rather than whether they do such and such a journey over the next few months.
  (Mr Beckwith) Yes, I think so.

  277. Is there a level of fuel duty which would bite harder in the short term and change customer behaviour in the short term?
  (Mr Beckwith) There would be ultimately, but I am not able to say how high it would be.
  (Mr Mumford) If you look back over the past 20 years at where fuel duty has come from and where it is now, if you had asked that question 20 years ago, you would probably have said where it is today. Impossible to answer.

  278. What are your views, Mr Fergusson, on the Europeanwide experience?
  (Mr Fergusson) I would take a slightly more positive view. Without disputing what you say about the need for choice and alternatives being an important part of behaviour, it is known that there is an elasticity of demand with respect to price and that is one of the few numbers we really do understand quite well from research. If you put up the price of fuel by X per cent, then there will be a reduction in the demand for fuel and that will come from a lot of different things. It is not only a question of modal split. Yes, people will change modes for the odd journey, for example start to walk to the paper shop or whatever. During the fuel crisis we saw people driving more slowly, which is actually a rather important way of saving fuel but it is very rarely used. People can make choices about where they live, the sort of cars they own, the size of car, etcetera. It is also right to say that the long-term effect is much larger than the short-term effect. The short-term elasticity is quite small but the medium to longer term one is bigger. In other words, if people have time to adjust, they do. As long as they have a long-term signal that this fuel is going to stay expensive or indeed get more expensive then they will actually factor it into their decisions. When you get a sudden spike in the price of fuel, then people just throw their hands in the air and feel rather helpless about it. There has been a bit of a tendency it seems to me to say we have had this high fuel duty and fuel use keeps increasing, which is true. That does not prove that fuel duty does not work. We know that it does work to an extent in suppressing fuel demands. If we had not had the fuel duty escalator, we would be burning a great deal more fuel and emitting a great deal more CO2 than if we had had it.
  (Mr Frank) Consumer behaviour as far as we know is a very complex thing. First of all, what consumers consider is not the tax but the fuel price, the complete price. They do not consider the different components which led to the price, unless there is a change and then they complain that there has been a tax increase but it is the change. Even if raw oil becomes more expensive and the tax is constant there may be complaints. What is most important is that the behaviour of the people depends on whether there are alternatives or not. If the increase is too steep and there are no alternatives, be it public transport, be it better cars with lower fuel consumption, then they compensate in other areas. We have had this experience in Germany. We had complaints from the tourist industry, from restaurants and others that people were not spending as much money as they did in the past because they needed so much money for fuel and they could not reduce their fuel consumption because they have to go to work, take children to school and so on. So there is a compensation. If you ask for the borderline, the threshold, it unfortunately depends on what social level is being talked about. It always hits the lower income social levels much harder. Last spring there was a petition from the German association which looks after one-parent families to the Government that because fuel had become so expensive they should give compensation to such families. At least there, we in Germany have reached that threshold but only for those who are not so well off. It is so complex that as an engineer I do not dare to give an answer on where the threshold is and how to manage the fuel price, except at least that the changes should not be so great that the consumer has no real alternative. Then he compensates in other fields.

  279. Is that an argument for a more subtle use of fuel duty in relation to oil prices? For example, should the Government not be looking at an escalator in terms of the pump price within which the duty would be in proportion to the price of crude oil? When crude oil was low the duty would rise and when the price of crude was high the duty would fall, but the pump price would remain fairly stable or there could be targets for annual increases in the pump price over a ten-year period so there was some stability in the market. Do you see it as a case for a more subtle use of the taxation system to compensate for fluctuations in crude oil prices?
  (Mr Frank) Yes, in theory this has a certain charm. But if you need the revenues for backing up the pension fund, as we do in Germany, then there is no alternative for the Finance Minister, that is the problem.
  (Mr Fergusson) The second point is that it is naturally a bit of an encouragement to the oil companies to keep the price up if they know that the duty will completely compensate. There could be scope for some flexibility which might have avoided some of the problems we had last year, but you could not fully interlink the two or you would encourage bad practice.
  (Mr Carey) There is another way of looking at this. When a consumer is buying and running a car, they look at a total cost of ownership. You buy a car, you take out a loan, you run the loan, you run the fuel, you run the vehicle excise duty, whatever. That whole package is the consumer's view of what the car is costing them. If you put up the price of fuel, one response could be putting off the cost of buying a new car until the year after because you cannot afford it. You cannot look in isolation at one tax and ask whether that is going to change consumer behaviour. It may well make them drive slightly less, shorter trips, but it may well make them put off buying a new car, so they will be driving a more inefficient car for longer. What we need to understand, and perhaps there has not been enough research done on this by the industry or Government, is how all of these taxes together, vehicle excise duty, company car tax, actually change the cost of ownership and therefore change behaviour. You cannot look at them in isolation and expect it to make people change their behaviour and drive in a greener fashion or drive greener cars. It just is not as simple as that.

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