Select Committee on European Scrutiny Nineteenth Report


PROMOTION OF THE USE OF BIOFUELS IN ROAD TRANSPORT


(23086)

15500/01

COM(01) 547


(a) Commission Communication on alternative fuels for road transportation and on a set of measures to promote the use of biofuels.

(b) Draft Directive on the promotion of the use of biofuels for transport.

(c) Draft Directive amending Directive 92/81/EEC with regard to the possibility of applying a reduced rate of excise duty on certain mineral oils containing biofuels and on biofuels.

Legal base:(a) —

(b) Article 175 EC; co-decision; qualified majority voting

(c) Article 93 EC; consultation; unanimity

Document originated:7 November 2001
Forwarded to the Council:17 December 2001
Deposited in Parliament:18 January 2002
Department:(a) and (b) Transport, Local Government and the Regions

(c) HM Customs and Excise

Basis of consideration:(a) and (b) EM of 25 January 2002

(c) EM of 31 January 2002

Previous Committee Report:None
To be discussed in Council:June 2002
Committee's assessment:Politically important
Committee's decision:For debate in European Standing Committee A; further information requested


Background

  3.1  Because oil production in the North Sea is expected to decline over the next twenty to thirty years at a time when demand is likely to continue to grow, the Community has been concerned at the extent to which its dependence on imported oil, particularly from the Middle East, is liable to increase. Also, any increase in oil consumption is out of step with the recognised need to reduce global emissions of greenhouse gases, and more particularly with the commitments the Community has undertaken in the Kyoto Protocol to reduce these over the coming decade. As a result of these two concerns, the Commission's Green Paper[5] of 29 November 2000, "Towards a European Strategy for the Security of Energy Supply", contained the objective of a 20% substitution by alternative fuels in the road transport sector by 2020. The present document comprises a Communication from the Commission analysing the various issues which would arise in seeking to achieve that aim, accompanied by two legislative proposals — a draft Directive on promoting the use of biofuels in road transport, and a further draft Directive concerning the application of a reduced rate of excise duty on certain mineral oils containing biofuels and on biofuels.

The current document

(a) Commission Communication

  3.2  In its Communication, the Commission observes that the 20% substitution aim in its Green Paper would represent a radical departure for the car and oil industry, going well beyond previous measures, including those to reduce air pollutants and to eliminate lead and sulphur from conventional fuels. It also points out that there would be a number of fundamental factors arising from the relative cheapness and convenience of existing fuels, particularly for domestic motorists, against which any alternatives would have to be evaluated: and it stresses that the take-off of any such alternatives is likely to be difficult because viability depends upon demand, which in turn depends upon ready availability.

  3.3  Against this background, the Communication identifies three main potential fuels, which it believes could each be developed up to a level of 5% or more of the total automotive fuel market by 2020:

  • Biofuels

The Commission says that, ever since the first oil crisis of 1973, biofuels have been considered as an alternative to fossil fuels, and in principle are ideal, since (when based on Community crops) they are practically 100% indigenous and are also carbon dioxide neutral (since their carbon content is captured from the atmosphere). On the other hand, the energy used in their production means that about half of the carbon dioxide benefit is offset, and they are also expensive (costing more than 0.3 euros per litre of conventional fuel replaced): as a result, the Commission says that the oil price would need to increase from around 30 euros per barrel to about 70 euros for them to break even with petrol- derived fuels. Another constraint is the availability of suitable land, given the competing claim of other crops.

However, although the Commission concludes the biofuels should not be seen as a long-term high volume substitute for motor fuels, it does believe that they should be considered in the short to medium term, because they can be used in existing vehicles and distribution systems without the need for expensive infrastructure investment. It adds that any significant increase in the current 0.5% penetration of the overall diesel and petrol market would nevertheless involve substantial costs[6] and hence require Community action, which it suggests could be taken in three different areas. One of these is to support the non-food agriculture sector, but the Commission considers that, in addition to the constraints imposed by the set-aside requirements under the Common Agricultural Policy (CAP), this would not attract much public support, and would in any case come up against the limits on Community agricultural support laid down by the Berlin Summit in 1999. The other two options — requiring a minimum percentage of biofuel in all fuel sold within the Community, and using taxation measures — are dealt with in documents (b) and (c) below.

  • Natural gas

The Commission says this consists primarily of methane, which can be used in a conventional engine, but which requires special storage and injection equipment, meaning that any large-scale use would have to be based on specially built cars enabling fuel to be carried under pressure. Despite this, it points out that the technology concerned is fully developed and proven; that natural gas is cheap and clean, with a 20-25% lower emission of carbon dioxide than the energy equivalent amount of gasoline; and that it offers noise reductions when used in buses. Another advantage is that it would reduce dependency on the oil market in favour of a source of supply which is more evenly distributed throughout the world. On the other hand, the Commission acknowledges that making these supplies available could prove difficult, and that any decision on a large-scale move in this direction would involve a serious analysis of the security of supply aspects. Another consideration is that methane is a powerful greenhouse gas, whose theoretical carbon dioxide advantage over fossil fuels, and particularly diesel, would disappear if only a relatively small proportion were to be lost during distribution, storage and refuelling. The Commission also notes that a recent study proposed an additional 1,450 refuelling stations, costing around 800 million euros, in order to create a proper Community network.

  • Hydrogen

The Commission comments that hydrogen as a potential fuel for motor vehicles has been the subject of intensive research, and that it is extremely well suited to conventional petrol engines (where the only pollutant formed, nitrogen oxide, can be almost totally decomposed without too much of a problem). However, due to its low energy content by volume, storage on board remains a problem because of the large quantities needed. The Commission also stresses that hydrogen is not an energy source, but an energy carrier in that its generation requires sources of energy. Another consideration is that its advantages as a fuel depend largely on how it is produced, and that any assessment involves a number of assumptions on long-term future energy policy developments, which are currently uncertain. It therefore concludes that the potential advantages of hydrogen as a motor fuel will only be achieved after further successful development of storage and fuel cell technology, and costly investment in production and distribution facilities, which — unlike alternatives such as biofuels and natural gas — would have to be developed from scratch.

  3.4  The Communication also considers briefly a number of other fuels and technologies. These include electric cars (where a breakthrough in battery technology is needed to avoid the need for frequent recharging); hybrid cars, with a combustion engine and an electric motor (which in normal running conditions offer little or no advantage); alternative fuels and diesel fuel derived from natural gas (which, again, confer no particular advantages); and liquified petroleum gas (which was previously seen as cheap and environmentally friendly, but is now less so, as petrol and diesel have become much cleaner).

  3.5  The Communication concludes by suggesting the following "optimistic development scenario" for the percentage uptake of biofuels, natural gas and hydrogen over the period to 2020:



Biofuel

Natural gas

Hydrogen

Total

2005

2



2

2010

6

2


8

2015

7

5

2

14

2020

8

10

5

23


The Commission does, however, say that the biofuel figure for 2005 assumes that the current situation in the most advanced Member State can be extrapolated to the other Member States, and that the one for 2010 presumes an active promotion policy; that for natural gas a new distribution infrastructure and change of vehicles will be necessary (and that the figures for 2010 and 2015 appear optimistic, even assuming an active policy); and that substantial market penetration by hydrogen is unlikely before 2015.

(b) Promotion of the use of biofuels in road transport

  3.6  The Communication is accompanied by a draft Directive which would specify the minimum percentage of biofuels[7] of all fuels for transportation sold on the individual markets of Member States from 2005. This would be introduced on the basis of an agreed schedule, rising by 0.75% a year, from 2% in 2005 to 5.75% in 2010 (and including a minimum of 1% in the form of blending in 2009, and of 1.75% in 2010). This schedule could, however, be adapted in the light of experience, environmental evaluation and new technical developments, and in conformity with other energy and environmental objectives undertaken at national and Community level.

  3.7  In putting forward the schedule, the Commission draws attention to a number of factors. These include the current situation in the Community (where the main production takes place in France and Germany, followed by Italy and Austria); the impact on any future production of developments affecting the arable sector under the CAP; predictions on the growth of the transport sector over the coming decade, and economic factors, including the relative competitiveness of biofuels, which the Commission says is highly dependent on the crude oil price. The Commission also touches upon a number of issues which would arise following the adoption of this measure. These include the justification for the additional cost of biofuel use (which it describes as greater security of supply and, to a lesser extent, reductions in carbon dioxide); the beneficial impact on agriculture, not least in developing countries, of encouraging more diverse production and providing a further outlet; and the stimulus given to rural employment.

(c) Excise duty on mineral oils containing biofuels

  3.8  The Commission recalls that Member States decided unanimously in 1992 to introduce a Community system for the taxation of mineral oils, based on two Directives — one (92/81/EC) on the harmonisation of the structures of excise duties, and the other (92/82/EC) on the approximation of the rates of excise duties on mineral oils — which set a minimum rate of tax for each mineral oil according to its use. It also points out that the Directives provide for a number of exemptions and derogations, which have been used — as, for example, in the case of low sulphur fuels — to encourage the introduction of more environmentally friendly fuels. However, the Commission also observes that in practice excise duty is often far in excess of the minimum Community rates, which have not been adjusted since 1992, and differs enormously from one Member State to another.

  3.9  More specifically as regards biofuels, the Commission says that those blended into motor or heating fuel are taxed according to end product use, but that Directive 92/81/EC allows two kinds of exemption. One relates to pilot projects for the development of more environmentally friendly products, and the other to specific policy considerations advanced by a Member State. However, a recent ruling by the Court of First Instance[8] suggests that the interpretation of what constitutes a pilot project will in future be drawn much more narrowly, and any exemption on policy grounds has to be authorised unanimously by the Council following a proposal from the Commission. In view of this, the Commission suggests that the Community should establish a framework which would provide the legal certainty needed to ensure the development of a genuine market in these products by enabling Member States to offer excise duty reductions in order to offset the relatively high cost of manufacturing biofuels. (In this connection, it recalls that a proposal[9] it put forward in 1997 to restructure the Community framework for the taxation of energy products is still with the Council.)

  3.10  It now proposes:

  • that Member States should be allowed to reduce excise duties in proportion to the percentage of biofuel incorporated in the fuel or end product;

  • but that, in order to mitigate the revenue loss, the actual amount of tax on the end product should not be less than 50% of the normal rate of excise duty for the corresponding propellant; and

  • that, in order to limit distortions of competition, and to maintain an incentive for producers and distributors of biofuels to reduce costs, Member States should ensure that, in the event of a sustained rise in crude oil prices, the lower tax rates do not over-compensate for the extra cost of manufacturing biofuels.

In addition, Member States would be able to exempt from duty biofuels used by local passenger transport, including taxis, and by certain public authority-operated vehicles.

  3.11  As well as these two specific legislative proposals, the Commission suggests a number of other steps which might be taken. These include the establishment of a formalised contact group to give advice on the further introduction of alternative fuels, particularly natural gas and hydrogen over the next 20 years; the monitoring of other alternative fuels and technologies; the provision of advice to consumers on the use of biofuels; and the establishment of fiscal measures to encourage greater efficiency in car manufacture as regards carbon dioxide emissions

The Government's view

  3.12  We have received two Explanatory Memoranda from the Government on these proposals. The first, dated 25 January 2002, from the Parliamentary Under-Secretary of State at the Department of the Transport, Local Government and the Regions (Mr David Jamieson) deals with the Communication and the proposal on the use of biofuels. It says that, in terms of subsidiarity, Community action at a strategic level and in defining outputs, can be appropriate in this area, but that the use of such action to define specific measures, particularly where these could be seen as preferring one technology or fuel over another, can be more problematic. However, he also says that the Government has been keen to promote environmentally friendly alternative fuels, and that the principles of the Communication fits in well with the UK's approach to a low carbon transport system, though he adds that the proposals in the draft Directive are rather more narrow, and do not focus on outputs or longer term issues. He adds that a Regulatory Impact Assessment of the proposal is being prepared, which will seek to identify and quantify costs, but that these could arise for the oil and gas industry, fuel retailers, vehicle manufacturers and consumers. There would also be revenue implications for the Government.

  3.13  The second Explanatory Memorandum, dated 31 January 2002, from the Paymaster General (Dawn Primarolo) deals with the proposal to allow reduced rates of excise duty for biofuels and certain mineral oils containing them. She says that the Government believes that the principle of making it easier for Member States to set a lower rate of fuel duty on cleaner fuels is to be welcomed, and that it is reasonable to have lower minimum rates which support fuels for which there are environmental benefits. However, she also says that, as it stands, the proposed Directive has a number of unacceptable features. In particular, she considers that the proposal for a minimum duty rate linked to Member States' current duty rates for the relevant conventional fuels is inconsistent with the general approach of having a common minimum rate for each product across the Community; and she adds that this would constrain the UK's ability to have the same biofuel duty rate as in other Member States if it wished to do so. She also points out that linking the duty reduction to the price of oil is too prescriptive, would be difficult to administer, and would run counter to the UK policy of deliberately not linking fuel duty directly to the oil price. Consequently, although the UK proposes to welcome the broad principle of allowing Member States to give tax incentives for biofuels, it intends to question the detail of the proposal.

Conclusion

  3.14  Although the proposed Directive on excise duties appears to be less wide-ranging than the proposal which our predecessors considered in 1997, the combined effect of the current proposal and that on promoting the use of biofuels for transport is nevertheless significant. We are therefore recommending this document for debate in European Standing Committee A. That debate should take place well before the June Energy Council at which the Presidency wishes to achieve a Common Position, and we expect the Department for Transport, Local Government and the Regions to make available before it the Regulatory Impact Assessment which it has promised.

  3.15  In the meantime, we would be grateful if the Minister could clarify one point in his Explanatory Memorandum of 25 January as regards the subsidiarity implications of the proposal to promote biofuel use. Whilst in general terms he suggests that Community action in this area "can be appropriate", he goes on to give instances where this might be "more problematic". The inference we draw is that this latter description would apply to aspects of the present proposal, but it would be helpful if the Minister could confirm that this is the case, and, if so, indicate which aspects of the proposal would be open to that criticism.


5   (22096) 5619/01; see HC 28-xi (2000-01), paragraph 2 (4 April 2001). Back

6   The Commission puts these at around 5 billion euros annually to achieve a substitution of 5% or more. Back

7   This term covers bioethanol, biodiesel, biogas, biomethanol, biomethylether, bio-oil, and bioETBE (ethyl-tertio-butyl-ether). Back

8   CFI judgement of 27.9.2000, Case T-184/97, BP Chemicals v CommissionBack

9   (17983) 6793/97; see HC 155-ii (1997-98), paragraph 8 (22 July 1997), HC 155-xi (1997-98), paragraph 1 (17 December 1997) and Official Report, European Standing Committee B, 27 October 1999. Back


 
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