Select Committee on Treasury Appendices to the Minutes of Evidence


APPENDIX 6

Memorandum submitted by Cargill PLC

1.  INTRODUCTION

  Cargill is an international marketer, processor and distributor of agricultural, food and industrial products and services. We believe that the UK agricultural industry can quickly produce sufficient oilseed rape to supply some 2 per cent of the UK's diesel requirement through biodiesel, by using suitable set-aside land, and, more importantly, land currently used to grow wheat not needed by the domestic market.

  Whilst we welcome the 20p duty rate cut awarded to biodiesel in last year's Budget, which will come into effect as soon as the current Finance Bill has negotiated its way through Parliament, we have constantly stressed that this should only be seen as a first step, and is not sufficient to stimulate industry to produce biodiesel in earnest. Ideally, the duty rate of biodiesel should be linked to the world price of both vegetable oil and fossil fuel, reflecting prevailing conditions in the markets of the main variable cost elements in biodiesel production. However, Treasury officials have informed us in the past that this system is too complex, even though it is in operation in other parts of Europe, notably France.

  In terms of the current duty system, charged at a rate linked to the duty rate for Ultra Low Sulphur Diesel, a further 15p reduction in duty rate, giving an overall rate of 10p, will give the necessary boost to industry. This duty rate need not be permanent, but is needed to give the nascent biodiesel industry a starting boost.

2.  BUDGET 2002 AND ROAD FUEL DUTY

  In Budget 2001, the Chancellor of the Exchequer announced a new duty rate of 25.82 pence per litre for biodiesel, 20p below the duty rate for ultra low sulphur diesel. The justification given for this decision was the environmental credentials of biodiesel, in particular its strong record on greenhouse gas emissions. Biodiesel also has the advantage that it is renewable, requires no conversion costs and is energy positive.

  Cargill welcomed this decision as a first step, but has constantly stressed that the proposed rate was not sufficient to ensure that an economically viable biodiesel industry would develop in the United Kingdom. The Budget Report stated that "There are already signs that this initiative [the 25.82p rate] is stimulating activity, including investment in production facilities and plans by one major supermarket chain to use biodiesel in lorries" (HC 592: 133). However, the quality of fuel that will be produced at the current duty rate is highly questionable. The lower duty rate may bring forward some proposals for modest amounts of fuel produced from recycled vegetable oil (RVO), but will not be sufficient to create a market for biodiesel from arable crops such as rape seed. Any biodiesel produced at this proposed rate will be of doubtful quality and will have little noticeable effect on air quality, Car manufacturers would also be reluctant to promote a fuel predominantly based on RVO, as it could infringe the conditions specified on vehicle warranties.

  In his Budget Statement, the Chancellor announced the following on fuels:

    "To encourage more environmentally friendly fuels, I will, from next year, introduce a fuel duty incentive for sulphur-free fuel. Having already cut fuel duty for projects on hydrogen, bio-gas and methanol fuels, I am now inviting British business to come forward with further proposals for pilots that would encourage new fuels and which we would support with fuel duty cuts and exemptions. "

  In addition, enchanced capital allowances were also announced for vehicle refuelling infrastructure for compressed natural gas and hydrogen. However, there have recently been reports that the Government has concluded that fossil fuels will not be phased out for at least another 50 years, despite its considerable investment into hydrogen cell research. This is a reflection of two facts:

    —  The cost and capital outlay associated with putting a hydrogen infrastructure in place;

—  The high cost of hybrid vehicles, which can be run on both hydrogen and conventional petrol or diesel.

  These problems are also salient for the promotion of road fuel gases. The necessity to build adequate infrastructure means that, even if the Government saw the gas fuels as the major alternative fuels of the future, it would be unable to build the necessary infrastructure in time.

  Biodiesel presents a solution to this problem. It requires no expensive engine modification, and no expensive infrastructure provision. Hydrogen fuels and gas-based fuels both require extensive vehicle modification and refuelling infrastructure provision. The fact that the Government heralds each new LPG plant is indicative of this, especially when existing petrol stations could easily be used for biodiesel. The European Commission recognises all of these arguments, and stated in its recent communication on alternative road transport fuels; "Biofuels are for the short and medium term the only option. Therefore, launching the appropriate policy instruments to promote the introduction of biofuels will give a clear signal that the Community is serious about developing alternatives to petroleum products in transportation" (European Commission Communication on alternative fuels for road transport 2001: p13).

3.  BUDGET 2002 AND THE AGRICULTURAL INDUSTRY

  The aftermath of last year's Foot and Mouth Disease (FMD) crisis has left Britain with a rural economy which urgently needs to diversify if it is to recover. In terms of the economic costs of FMD to the food and farming sectors, farmers have borne

550 million and the food chain and other businesses

300 million (DEFRA research presented at December 2001 FMD conference in Brussels).

  In the 2001 Budget Statement, Gordon Brown stated that, "For farming, an industry essential to Britain which today faces both immediate and long standing difficulties, the Government, over and above its statutory obligations, has made available agri-compensation money worth 150 million pounds." In Budget 2002, it was health, for obvious reasons, that grabbed all the headlines. However, the Chancellor pre-empted the results of the Comprehensive Spending Review by also announcing extra funds for education and crime-reduction measures. No mention was made of the continuing problems being experienced by the agricultural industry, and the fact that the aftershocks of the FMD crisis are still being felt in some parts of the country.

  Cargill was particularly disappointed that the Budget ignored the proposals of the Policy Commission on Food and Farming, which reported earlier this year that alternative crops are one of the best diversification options open to farmers who lack opportunities in tourist markets: "We think that producer collaboration is vital in the non-food crop market ...England needs a long-term strategy for creating and exploiting opportunities in non-food crops, including starch and oils" (Report of the Policy Commission on Food and Farming 2002: 54-55). The report goes on to call for a further reduction in the duty rate for biodiesel "to help convince processors to drive the market forward" (p56).

  A number of other organisations have also stated that energy crops for biodiesel could provide a much-needed boost for the beleaguered UK agricultural industry. The National Farmers' Union remains a strong supporter of the UK biodiesel sector, and has urged the government to further reduce the duty rate charged on the fuel.

  Cargill has undertaken thorough research into the potential size of the UK oilseed rape sector, and we intend to produce our biodiesel from domestically grown oilseed rape crops. Our tight proposed production schedule reflects this and is based on the commissioning of the necessary crops this year to allow biodiesel to be produced to reach the market next year. We have written to ministers on a number of occasions stressing that we need an early indication of the Government's intention to reduce the duty rate to enable us to make the necessary commercial decisions. Such an indication has not been forthcoming.

4.  CONCLUSION

  Cargill believes that, in Budget 2002, the Government missed out on the opportunity to inject significant life into the agricultural industry, and help the environment at the same time. This could have been achieved by a further reduction in the duty rate for biodiesel.

  The Department for Environment, Food and Rural Affairs recently commissioned a report on biodiesel for the Government-Industry Non-Food Crops Forum. We understand that Professor Nigel Mortimer of Sheffield Hallam University, who is conducting the research for DEFRA, will be publishing his findings imminently. This presents the Government with another opportunity to signal its intentions towards the nascent biodiesel industry. Cargill hopes that this opportunity will be taken.

April 2002



 
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