Examination of Witnesses (Questions 260
THURSDAY 18 JANUARY 2001
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
(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
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
(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
(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
(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
(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 fuelsand we have all been talking this morning about
the long termhow 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
272. We want you to tell us how it should be
(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
interestand with respect I mean that of everyone including
the people on either side of meand 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.
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
(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
(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.