Select Committee on Environmental Audit Appendices to the Minutes of Evidence


Budget submission by Calor Gas Ltd.

1.  SUSTAINING THE MOVE IN TAXATION FROM ENVIRONMENTAL GOODS TO BADS

  Calor Gas Ltd is the UK's leading supplier of liquefied petroleum gas (LPG). LPG is an environmentally preferable road fuel, and could contribute to UK air quality objectives and Kyoto targets given the right legislative and fiscal framework. The Pre-Budget Statement is to launch a national debate on tax options. The grievances of those who complain about high motor fuel prices are to be considered. One of HMG's major themes has been to shift taxation from environmental goods to bads. This has been helpful in stimulating usage of LPG as a road fuel but it has not given sufficient incentive yet to create a significant self-sustaining market such as exists in the EU and elsewhere. The potential environmental benefits from widespread use of LPG as a road fuel are far from being reached. In examining its broad tax options on motoring that HMG should not reverse the modest progress made so far in incentivising the use of cleaner fuels. Indeed, the Budget process offers an opportunity for HMG to strengthen its green credentials by offering motorists a credible and practical opportunity to drive down motoring costs significantly whilst benefitting the environment.

2.  SHIFTING MOTORING TAXATION FROM GOODS TO BADS

  LPG is significantly better for the environment than petrol or diesel. There is a healthy market for LPG in countries with the right policy framework—there are 400,000 LPG road vehicles in Holland, 1m in Italy, 350,000 in the USA and 330,000 in Australia. In France, with tax exemptions for buses, taxis and company cars running on LPG there are 150,000 LPG vehicles. Worldwide 4 million vehicles run on LPG. Some 16,000 LPG/CNG vehicles are expected to be sold in the UK in 2000 (Source: Powershift)—small in relation to the potential market. In a report in 1998 MarketLine International [MI] an independent, unsponsored research organisation, reckoned the potential market with the right policy framework to be 524,000 vehicles by 2003—a target looking increasingly heroic.

3.  LPG MEANS CLEANER AIR AND BUILDINGS, LESS GLOBAL WARMING, LESS NOISE, AND HEALTHIER LIVES AND CROPS

  LPG is recognised as environmentally friendly. John Prescott, Deputy Prime Minister, saw the commitment of the Government's Car and Despatch Agency to run the majority of its fleet on gas as a "Clear message to motor manufacturers and fuel suppliers that we need to make sure that our transport needs reflect our need to protect the environment" (17 November 97).

(i)  Noise

  The "New Deal for Transport" White Paper stated that, "Noise disturbs sleep and affects performance in school children. It indicated that noise may increase the risk of developing chronic heart disease and psychiatric disorders" (para 2.11). Noise is the aspect of transport that causes the most nuisance to the most people in the UK (Royal Commission on Environmental Pollution, 20th Report). LPG engines are 50 per cent quieter than diesel engines and marginally quieter than petrol engines.

(ii)  Carbon Dioxide

  Kyoto demands reductions in greenhouse gases of 6 per cent below 1990 levels between 2008 and 2012. The protocol covers all greenhouse gases including CO2, methane and NOx. CO2 emissions from LPG are better than from petrol; NO2 emissions of LPG are significantly better than petrol; life-cycle emissions of hydrocarbons (including methane) are far lower for LPG than petrol (Alternative Road Transport Fuels [ARTF] by the Energy Technology Support Unit for the DTI/DoT (1996)). Thus, LPG could help attain the Kyoto targets.

(iii)  Benzene and 1,3 Butadiene

  These dangerous human carcinogens carry risk at the smallest dose. The main source of benzene is petrol. LPG emissions of benzene are about one thirteenth of those from petrol and half of those from diesel. Nine thousand tonnes of benzene is expected to be emitted to air by petrol driven cars in 2000. 1n 1996, three-fifths of 1,3 butadiene emissions (6,310 tonnes a year.) came from petrol vehicles. LPG emits less than half the amount of 1,3 butadiene to the atmosphere.

(iv)  Carbon Monoxide (CO)

  CO concentrations are dangerous for people with existing coronary or neurological disease. 75 per cent of CO emissions come from petrol. Petrol emits about 2.5 times the amount of CO emitted by LPG. The AQS sets new more ambitious targets for CO reduction by 2003.

(v)  Particulates (PM10)

  Twenty-six per cent of PM10 emissions come from road transport (the largest single source). Some 75 per cent of these are from diesel engines. Diesel emissions have been growing owing to the increase in heavy vehicle traffic and the move towards diesel cars. Estimates of the total damage from PM10 range from £10.5-£26 billion annually; thus, the external costs of PM10 arising from diesel range from £2-£12.4 billion a year. PM10 emissions from LPG engines are over 90 per cent less than from diesels. Any significant shift of diesel fleets to LPG would reduce external costs dramatically. A 10 per cent switch to LPG across the engine size range would save £200 million-£1.2 billion a year. in external costs. High PM10 levels cause congestive heart failure, ischaemic heart disease, cerebrovascular problems and asthmatic attacks. PM10 is estimated to advance 8,100 deaths a year in Great Britain and to cause an additional 10,500 respiratory admissions to hospital ("Quantification of the Effects of Air Pollution on Health in the United Kingdom", DoH, 1998 [QEAP]). The health gains from reducing particle levels are greater than for those of any other pollutant. Road transport's contribution to PM10 emissions is much higher in urban areas—in London, for instance, traffic contributes 78 per cent of emissions.

(vi)  Sulphur Dioxide

  SO2 causes and aggravates symptoms particularly in patients with pre-existing asthma. In association with particles, it raises mortality both in the short and the longer term. SO2 advances 3,500 deaths a year in Great Britain and provokes an additional 3,500 hospital admissions for respiratory problems (QEAP). Twenty per cent of SO2 in London derives from road transport. LPG emits one fifth of the level of SO2 from petrol vehicles and one ninth of that from diesel vehicles. The estimated cost of air pollution by SO2 in the UK in 1996 was £1.1 billion.

(vii)  Oxides of Nitrogen (NOx)

  N02 advances and increases hospital admissions by 8,700 a year (QEAP). Forty eight per cent of NOx emissions come from road transport—in London this figure rises to 75 per cent. AQS sets a target of an hourly mean of 200b g/m3—more stringent than that originally set for 2005. The EU "Acidification Strategy" is aimed at reducing NOx and SO2 emissions "far beyond existing commitments" by 2010. LPG engines offer a 90 per cent reduction on NOx compared with diesel, and 40 per cent with petrol.

(viii)  Ozone

  Ozone needs to be tackled on a Europe-wide basis. The Community Strategy on ozone (1999) proposed a National Emissions Ceilings Directive. These ceilings will cover NO2, SO2 and VOCs - ozone is created by chemical reactions involving NOx and VOCs. Ozone causes irritation to the airways. For every Wg/m3 reduction on ozone there would be 170 fewer deaths advanced, and 145 fewer respiratory hospital admissions in Great Britain every Summer. LPG engines emit 70 per cent less ozone precursors than diesel and 80 per cent less than petrol.

(ix)  Policy and Sustainability "Gaps"

  "UK Environmental Accounts 1998" (Office of National Statistics) introduced the concept of "sustainability gaps" between the current level of consumption of natural capital and the environmentally sustainable level of same. The output of pollutants contributes to the consumption of natural capital. The report shows sustainability gaps for CO and PM10 in Belfast; benzene and NO2 in London; and SO2 in Belfast and Liverpool.

  Existing policies are insufficient to reach AQS targets. Acknowledged "policy gaps" remain for particulates, SO2, and NO2 and ozone. Widespread exceedences of PM10 against targets set in 1997 are expected in 2005 in large cities and at busy roadsides. Even measures described as "dramatic" involving a combination of low emission zones, road user charging and parking restrictions in London do not deliver the NO2 targets, and are considered "expensive . . . to secure relatively modest health and non-health benefits" (AQS). Achieving the NO2 targets by 2005 is acknowledged as being "very challenging" in London and "difficult" in other major conurbations. HMG will ensure that local authorities should not "feel forced to take extreme measures which would lead to serious disruption or damage to their local economies" (AQS). Even if all vehicles were taken off urban roads in 2005 the 1997 objective would not be met. Exceedences of the ozone objectives are expected across most of southern UK in 2005 and 2010. Some local exceedences of SO2 are expected in 2005. Emissions of ozone precursors would need to be reduced by 50-70 per cent more than EU targets for 2010 across the whole of Europe in order to meet the 1997 objective.

  Over the period 1996 to 2005, reducing PM10, NO2, SO2 and ozone to target levels would reduce the number of deaths brought forward and respiratory hospital admissions in the UK by 18,500 and 22,000 respectively. Over the same period the non-health benefits are estimated at £500 million. AQS modelling specifically takes "no account" of the wider availability of cleaner fuels, such as LPG. Given the policy gaps identified, the lack of factoring in LPG into the solution means that some of these improvements to human health, crops and buildings will not be as available as easily or as quickly as they might otherwise be

4.  HOW TO INDUCE A SIGNIFICANT SHIFT TO LPG AS A ROAD FUEL

  The AQS states, "The refuelling infrastructure for gas vehicles is currently rather limited which tends to restrict the viability of gas-vehicles to depot-based fleets". The investment stream in infrastructure remains disappointing: recent press comment about LPG has downplayed its potential as an alternative fuel on this count. Fleet operators drag their feet waiting to see evidence of demand before they commit themselves without secure return. There are currently some 500 refuelling points, but only about 100 are forecourt sites as opposed to depot-based sites, mostly with restricted hours and inconvenient locations. One Hundred LPG forecourt sites out of a UK total of 13,000 equates to a penetration rate of around 0.8 per cent. Very few refuelling sites are available in rural areas. This clearly remains a "chicken and egg" problem for road fuel gases, addressed by our recommendations below.

  Fleet operators need to pay significant costs of conversion to road fuel gases: typically, it costs £1,500 to add LPG fuel capability to a petrol engine, and up to £30,000 extra for an LPG replacement for or conversion of an HGV diesel engine. A fleet operator also has to bear the cost of installing a refuelling point. Fleet-owners will convert only if it is in their clear economic interests to do so. The AQS states: "Fuel duty differentials have become an increasingly significant way of encouraging cleaner fuels".

  Although the measures taken by HMG to stimulate growth in road fuel gases are welcome they still have not created conditions favourable enough to create a self-sustaining significant market. But, HMG believes that road fuel gases do have a rosy future: "We will become one of the fastest growing markets for gas powered road vehicles across the European Union . . . the British market for LPG for use in road vehicles is likely to experience average annual growth of over 60 per cent between now and 2008 in line with the predicted increase in the number of LPG fuel cars on British roads to 500,000" (Patricia Hewitt MP, Economic Secretary before the Environmental Audit Select Committee, 25 March 99). These targets look increasingly optimistic.

  The Report of the Environmental Audit Committee (HC 326, 1998-99, 20 July 99) made it clear that, "The Budget 1999 did not involve any quantification of impacts to support the decisions to reduce duty on road fuel gas". This is an important point. If the Budget measures to encourage road fuel gases are not calculated to deliver a certain market size, then it will be no surprise if the measures prove insufficient - as appears to be the case, certainly against the optimistic predictions quoted by Patricia Hewitt. The potential benefits of LPG should now be factored into a solution of the accepted problems posed by NOx and particulates etc; factoring in LPG will require a target for the size of the LPG vehicle parc which in turn depends upon an integrated legislative and fiscal regime to achieve it.

  We propose specific measures to encourage LPG usage: we do not pretend that they are the only practical measures available. The important point is that the overall package should actually deliver a self-sustaining market for LPG, and that no more "dead time", sadly now measured in years, is wasted as a result of concessions inching in the right direction but failing to deliver sufficient incentive to change buyers' and operators' behaviour.

  HMG applies a number of tests to tax proposals designed to deliver environmental goods. They must be well-designed without undesirable side-effects; minimise deadweight costs; produce an acceptable distributional impact; and, protect international competitiveness. No undesirable side-effects arise from these proposals; exposure to deadweight is contained; the distributional impact is mainly upon fleet owners—precisely where the greatest environmental benefits are likely to arise. International competitiveness would be enhanced.

(i)  Reduce the duty on LPG to the EU minimum

  The 1998 MI report stated that "True penetration will not occur until the government commits to its development with a greater promise of funds and incentives". The Lords Select Committee on Science and Technology (Nov1996, para 4.18) recommended a duty reduction to the EU minimum (currently 6p/kg [=0.1 Euro/Kg] cf. the actual rate levied of 15p/kg). The abolition of the fuel duty escalator adds to the case for duty on LPG to be reduced to the EU minimum so that progress towards green objectives is maintained. This move would give a welcome strong signal to ordinary drivers and fleet managers. MI identified a "strong government commitment" as a vital factor in encouraging conversion. It is important that the overall policy momentum to encourage the use of LPG is sustained rather than diminished because of a perceived need to lessen the burden of fuel duty generally on motorists. The need for strong signals is recognised: "How and what Governments tax sends clear signals about economic activities that they believe should be encouraged or discouraged", (Dawn Primarolo MP, Financial Secretary, ETRA Select Committee, 29 April 98).

  Any reduction in fuel duty on petrol or diesel must be at least matched by reductions on road fuel gases lest green pricing signals be negated. Otherwise, HMG would be reversing the shift of taxation from goods to bads, and incentivising unnecessary emissions. As a minimum, HMG's commitment at least to maintaining the differential between LPG and diesel for the lifetime of this parliament must not be undermined. It would also help if assurances about the maintenance of any differential favourable to LPG (ideally about its duty remaining at the EU minimum for a reasonable planning period) can be reaffirmed with a longer time perspective.

(ii)  Provide capital allowances for the conversion of vehicles to run on LPG and for the installation of LPG refuelling points.

  We propose writing-down allowances of 100 per cent (rather than the standard 25 per cent) for commercial operators on the cost of converting cars, taxis, vans, and buses to run on LPG in the year of conversion; and, for garage owners installing LPG refuelling points. Since the market for LPG remains modest at present the notional loss to the Exchequer would be small. The concession would represent the acceleration of relief that would in any case be given over the following years. Precedents for our proposal include a 100 per cent writing-down allowance on equipment for scientific research; and, the last Budget's proposal for 100 per cent first year capital allowances for energy saving investments.

  New capital allowances for gas powered vehicles and refuelling points may need to be notified to the European Commission as a state aid, and may have to be notified to the code of conduct group on business taxation, but we have no reason to believe that these obstacles are insuperable. We suggest limiting these allowances to a five year period: this would fit with the five year policy commitment by Government, provide a strong priming stimulus towards a self-sustaining market for road fuel gases, and limit the cost of the concessions to the Exchequer.

  To give an idea of costs to HMG over a four year period (the normal writing off period) we calculate a conversion of 400 forecourts and 200 Depots to take LPG pumps (more than doubling the current offering) and converting 6,000 company cars to LPG would mean HMT forgoing revenue of £607,000 (methodology available).

(iii)  Appropriate VED/Company Car Concessions for LPG powered vehicles

  VED and company car taxation is being rebalanced to favour cleaner vehicles. From 1999, cars with engines of up to 1100cc were eligible for a reduced rate of VED. A VED system graduated according to CO2 emissions will be introduced for new cars from Autumn 2000. The Finance Act (No.2) in 1998 made provision for vehicles certificated as producing lower pollution to bear lower VED. Cars, taxis, buses, lorries and vans that have been converted to run on LPG should be able obtain batch certification rather than have to seek individual certification (note that most LPG vehicles are currently converted rather than bi-fuel from new). The administration of this could be simplified by applying the concession to vehicles on the Powershift register. Recognition should also be given through the VED system to vehicles which produce lower emission profiles of pollutants other than CO2. This would help integrate the Government's climate change policy and its AQS.

  From 2002, company car taxation will be graduated partly on the level of a car's CO2 emissions. Car benefit charges should be scaled so as to encourage the use of road fuel gases rather than the traditional fuels of diesel and petrol which are more polluting in terms of CO2 and a range of other unwelcome emissions. The LPGA has submitted evidence to the Inland Revenue requesting that a 6 per cent discount factor be given to drivers of LPG company cars. This will have the effect of incentivising directly the driver—increasingly responsible for vehicle selection—for choosing an environmentally sensitive company car.

(iv)  Boost the Powershift Programme

  The Powershift programme operated by the Energy Savings Trust (EST) currently receives some £16m from the DETR. It has made a massive contribution to advancing fuel technologies and the use of cleaner, alternative fuels. Calor is assisted by the EST to roll out its plan to convert up to 750 black cabs to run on LPG in London which suffers the severest air pollution problem in the UK. Diesel powered cabs are major contributors to the problem. Fifty per cent grants could be made to forecourt operators to install LPG pumps would assist take-up of the conversions. The current rate of installation is about one a weekday; the cost averages £15,000. Providing grants to a year's worth of installations (250) would thus cost c.£1.9 million. This, either in tandem with or instead of the 100 per cent capital allowance mooted above (iii), would overcome the residual chicken and egg problem hampering a real shift to LPG consumption. There is a strong general argument for raising Powershift's funding significantly to undertake initiatives of this nature.

5.  LPG—A PARTIAL SOLUTION TO POLICY CONFLICTS

  Environmental problems from car usage persist. Air pollution, mainly arising from vehicles, causes more deaths in Europe than car accidents. Air pollution accounts for some 6 per cent of all deaths in Europe (Source: University of Basel, 2000). Emissions of GHGs from vehicles in the UK continue to rise (up 9 per cent between 1991 and 1998) in defiance of the Kyoto targets. At the same time, however, partly because of rises in the world price of oil, consumer protests against the price of road fuels at the pumps have been vehement and widespread throughout Europe. It is the hard task of Governments to find the right balance between apparently conflicting policy drivers.

  In this submission, Calor offers a solution—albeit partial—to the dilemma. Concessions to road fuel gases sufficient to cause a significant shift in consumer behaviour and to create a significant and sustained vehicle parc for road fuel gas powered vehicles for the first time in the UK would bring quantifiable benefits to the environment and human health; help make progress towards the Kyoto and AQS targets; and, reduce the price of motoring to that section of the population prepared to respond to firm pricing signals from HMG. It would also enable HMG to respond to protestors by saying that it has created a real, practical, cost-efficient and environmentally-friendlier alternative to expensive traditional and more polluting road fuels.

  In conclusion, Calor would suggest that HMG responds to public unease about road fuel pricing in a way that maintains if not strengthens its green credentials won in successive Budgets to date.

October 2000


 
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