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Standing Committee Debates

Promotion of the Use of Biofuels in Road Transport

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European Standing Committee A

Wednesday 1 May 2002

[Mr. Joe Benton in the Chair]

Promotion of the Use of Biofuels in Road Transport

10.30 am

The Chairman: I understand that both Ministers present wish to make an opening statement, as is permitted by the Standing Order. After the statements, questions will be taken as usual, and it will be for the Ministers to decide who will respond to each question.

The Parliamentary Under-Secretary of State for Transport, Local Government and the Regions (Mr. David Jamieson): It is a pleasure, Mr. Benton, to serve under you, and a considerable pleasure to introduce today's debate.

The issue is of great interest to me and to my Department; it has the potential to make a large impact on the United Kingdom's agriculture and transport sectors and it is right that the Committee should focus on it.

The Scrutiny Committee has recommended that we consider three Commission documents, all relating to the encouragement of the use of alternative fuels and, in particular, the promotion of a substantial biofuels sector within the European Union.

The three documents are the Commission's communication on alternative fuels for road transportation and on a set of measures to promote the use of biofuels, which, for ease, I shall refer to as the communication; the draft directive on the promotion of the use of biofuels for transport, which I shall call the targets directive, and the 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, which I shall call the tax directive. My hon. Friend the Paymaster General will address her remarks to that.

The Commission's Green Paper "Towards a European Strategy for the Security of Energy Supply" published in November 2000, highlighted security of supply considerations and climate change as being the two main drivers for energy policy in the foreseeable future. It identified transport as a key strategic sector, concluding that the sustainability of the sector would be greatly improved if 20 per cent. of transport fuel could be supplied by alternative—that is, non-mineral oil—sources.

The communication is, with the two directives, the Commission's reaction to this strategy; it examines which fuels have the potential to replace 5 per cent. or

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more of conventional petrol and diesel supplies. In conclusion, it picks three fuels—hydrogen, natural gas and biofuels—as its winners and recognises the contribution that more energy efficient vehicle technology, such as hybrid electric engines, can make.

In many ways, the communication reflects the approach in the strategy that the Government have pursued for the encouragement of alternative fuels, and that set out in the Government's recently published draft strategy "Powering Future Vehicles". That invites comment on a target of 8 to 12 per cent. of all cars sold to be low-carbon by 2012.

The Government are encouraging the development of alternative fuels in the UK through the green fuels challenge, which enables the piloting of novel fuels and technologies on a largely tax-free basis, to build our knowledge and experience of the widest possible range of potentially beneficial alternative fuels.

We are also committed to the imminent introduction of a 20p duty rebate for biodiesel relative to its mineral diesel equivalent. That will help to encourage the development of a significant market for biodiesel in the UK; a number of firms have already announced their intention to invest in production facilities and we know of at least one supermarket chain planning to use biodiesel in its lorries. The Government will keep a close eye on the outcome of the green fuel challenge pilots and the technological advances taking place in the United Kingdom and abroad to discover whether further incentives for other biofuels such as bioethanol would be beneficial.

Against the background of considerable Government support for the alternative fuel sector in the United Kingdom, the Commission has published the two draft directives on the encouragement of biofuels in Europe. It might be helpful if I and the Paymaster General, who is responsible for the second draft directive on the application of excise duty to biofuels, described the key measures contained in these draft texts and the Government's position.

The draft directive on the promotion of the use of biofuels for transport proposes the setting of mandatory targets for the sale of biofuels for transport in each of the member states, starting at 2 per cent. in 2005 and rising to 5.75 per cent. by 2010.

The Government have several concerns about the Commission's mandatory, one-size-fits-all-countries approach. First, with regard to the directive's narrow scope, the communication stresses the need for greater diversification in Europe's fuel supply. It is perverse that the draft directive specifies only one category of fuel—biofuels—which the Government believe could preclude the development of alternative fuel types such as hydrogen and natural gas. Also, the framework of the directive is fuel specific, not output specific, in stark contrast to the Government strategy of setting incentives in terms of the achievement of the low-carbon outcomes that are wanted, leaving the

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way open for the best and most cost-efficient ways of achieving the outcomes. In considering the proposals in the draft directive, we also need to ensure that the principles of subsidiarity and proportionality are upheld.

It will be clear from my comments that the Government actively support the development of a viable biofuels market in the UK. That is not at issue. We merely question whether an approach built around the imposition of mandatory, uniform targets for biofuels use across the European Union, oblivious to the unique national circumstances of individual member states, represents the best method of implementation. That is why the Government have argued in Brussels for a widening of the scope of the directive to cover renewable fuels as well as biofuels, and the introduction of indicative rather than mandatory targets, so that countries can pursue strategies more appropriate to their own national circumstances.

The UK has not been alone in expressing these concerns. Most member states share our concerns and are making similar noises about the appropriateness of the action. It is clear that the draft as presented to the Committee will be unacceptable to the majority of member states.

Unfortunately, it is difficult to present the detail of the proposals and the Government's position in the time available. However, I hope that I have provided enough information on the areas within my responsibility to help stimulate discussion, and I look forward to answering any questions that hon. Members may have on the documents under my responsibility.

10.38 am

The Paymaster General (Dawn Primarolo): My hon. Friend the Under-Secretary of State for Transport, Local Government and the Regions has covered the broad thrust of the proposals and the Government's approach in encouraging the use of alternative environmentally friendly fuels. He referred to the green fuel challenge. I shall focus on the tax directive, which is currently being discussed within the framework for tax.

I shall briefly explain what progress has been made with the draft directive proposed by the Commission. The directive allows member states to apply a reduced rate of excise duty on some mineral oils containing biofuels and non-biofuels. It proposes that the duty reduction should be 50 per cent. of the normal rate of excise duty on the corresponding fuel. The proposal would make it mandatory for member states introducing reduced rates for biofuels to adjust and take account of changes in raw material prices and, in particular, the price of crude oil. The Commission wants to ensure that in the event of a sustained rise in crude oil prices, the lower tax rate would not overcompensate for the extra cost of manufacturing biofuels.

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The Government believe that the principle of making it easier for member states to set a lower rate of fuel duty on cleaner fuel such as biofuels should be welcomed. As members of the Committee will know, we have already applied for a derogation from the current mineral oils directive for biofuels. It is reasonable to have a lower minimum rate that supports fuels for which there are environmental benefits. Indeed, if the proposed directive were already in force, there would be no need for the UK to have sought the derogation, which we hope to introduce when the Finance Bill is enacted.

As it stands, however, the proposed directive has a number of unacceptable features. In particular, the proposal for a minimum duty rate for biofuels 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. It would constrain the UK's ability to have the same biofuels duty rate as any other member state, should we wish to do so, simply because the UK has a higher standard diesel duty rate.

Linking the duty reduction to the price of oil is also too prescriptive. It would make the system difficult to administer and run counter to the UK policy of deliberately not linking fuel duty directly to the oil price. In view of those concerns, although the Government have welcomed the broad principle of allowing member states to give tax incentives for biofuels, we have questioned the detail of the proposals and are seeking appropriate amendments. I must stress that the UK is by no means alone in having reservations about the current proposal and other member states have far more serious concerns about the draft directive. In fact the majority of member states find it unacceptable.

If there are specific questions with regard to the tax proposals in the draft directive, I will do my best to answer them here this morning.

The Chairman: We now have until 11.30 for questions to the Ministers. I remind hon. Members that these should be brief and should be asked one at a time. There will be ample opportunity for all Members to ask several questions. I have the discretion to extend the time available for questions by a maximum of half an hour, if required.

Mr. Eric Pickles (Brentwood and Ongar): This is the first time that I have served under your Chairmanship, Mr. Benton, and I am sure that I will enjoy the experience.

I should like to ask the Paymaster General a simple question so that we can get an idea of the effects of the proposed directive. By how much per litre would the price of biodiesel have to drop were the Commission's proposals to become mandatory?

Dawn Primarolo: I regret that I do not have the figures for the drop that would occur if the Commission's proposals requiring us to link biodiesel duty to our overall duty rate for

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conventional diesel were implemented. However, that option is not as good as the derogation that we are applying for, which was announced in the Budget. Such linking would also prevent us from making proper assessments of all the fuels in relation to each other in terms of their environmental impact. While we entirely agree that a minimum rate is necessary, putting it at 50 per cent. would constrain the UK to the point where we would be unable to make the kind of environmental assessment that the hon. Gentleman and other members of the Committee have been pushing the Government towards, so such a rate would be less beneficial for us.

Norman Lamb (North Norfolk): I appreciate what the Ministers have said about subsidiarity and the overprescriptive aspects of the proposals. However, I am concerned that progress in this country in adopting environmentally attractive alternative fuels is depressingly slow and slower than in some other European countries. I find it bizarre that the duty differential for liquefied petroleum gas appears to be double that proposed for biodiesel. LPG is a fossil fuel, so why double the differential for a fossil fuel as opposed to biodiesel? The Curry report specifically proposes parity, and the embryonic industry has said that it needs parity if it is to be kickstarted into providing an attractive alternative source of income for farmers.

Mr. Jamieson: I welcome the hon. Gentleman's question. I know that the subject is of considerable interest to him personally, his constituency and that part of the country. He said that we were depressingly slow in moving towards alternative fuels, but I challenge that. A great deal has been done in the European Union in the past five to six years to improve air quality from transport, mainly through directives and agreements on matters such as improving fuels. We have gone from low-sulphur fuels to no-sulphur fuels that will come in during the next year or so, and our work on improvements to engine technology has been spectacular. If we had said six years ago that the level of clean engines would be what it is today, most people would have said that we were being far too optimistic.

We have made great strides on LPG. Three or four years ago, people would have said that the network would never be in place to supply vehicles. We opened the 1,000th filling station about six weeks ago, and I believe that there are 1,100 stations now, so they are opening at a rate of more than one a day. The infrastructure is in place, and we have cleaner fuel.


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Prepared Wednesday 1 May 2002