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John Healey: The clause enables the Treasury to amend the fiscal definition of fuel oil by statutory instrument. The Government intend to use the measure to extend the scope of the duty on fuel oil to encompass a class of hydrocarbon oils known as atmospheric residue. I confirm that its principal effect will be on PULSAR.
In taking this step, we are following the principle of internalising environmental costs into prices, or, in other words, making the polluter pay. From 1 September 2004, duty on fuel oil, which is a high-sulphur fuel used in electricity generation and in industry, increases to 6.24p a litre, but there is a loophole in the current fiscal definition that allows fuels classed as atmospheric residue to escape duty altogether. Since atmospheric residue is in direct competition with conventional fuel oils, there is a clear distortion of the marketplace as well as a resulting loss in revenue to the Exchequer. Before we use the power to remove that anomaly, we must ensure that the revised definition of fuel oil is robust, clear and does not result in any unnecessary regulatory burdens.
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I can confirm to the Committee that Customs officials will be speaking to the industry during the coming months to find the best solution. The process will require consultation with the industry, drafting of regulations and formal consideration in Parliament. Therefore now is not the time to examine the drafting
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of regulations, but I can confirm to the hon. Member for Chichester that our intention is to deal with this single fuel. The provision will allow us to do so with other fuels in the future because we want to have the capacity to respond to new fuels as they are developed and come on to the market. We have no other products in mind at present.
If we conclude that a duty differential for lower sulphur fuel is justifiable as a result of further discussions with the industry, we shall use the power under the clause to amend the definition to coincide with the introduction of a differential. I anticipate that the time scale will take us into the autumn. We shall conduct the consultation with industry with all possible speed and minimum delay. On that basis, I commend the clause to the Committee.
Question put and agreed to.
Clause 8 ordered to stand part of the Bill.
Clause 9
Mixing of rebated oil
Question proposed, That the clause stand part of the Bill.
Mr. Tyrie: This is a concession to allow the mixing of fuels, and deal with the excise on the mixing of fuels. It gives oil companies certainty about the duty rate and is welcome for that reason. The clause need not detain the Committee for long. It replaces provisions that were made in legislation in 1996, which charged duty when two road fuels of differing duty rates were mixed. The clause removes those provisions in an attempt to simplify the introduction of new, more environmentally friendly fuels. We shall not oppose it on this side of the Committee.
I have only one question of substance, and I would be grateful if the Minister answered it. Is the clause intended to provide a permanent concession in the rules or will it apply for only a short, transitional period? Will the Minister give us some confidence that this concession on the mixing of fuels will remain on the statute book unaltered?
John Healey: The clause underlines our continuing commitment to promoting the use of cleaner, environmentally friendly fuels. It is designed to aid the smooth introduction of sulphur-free fuels. Those cleaner fuels will come on-stream in the UK well ahead of the EU imperative to do so, as we discussed under clause 7.
At first glance, the clause may appear to be more substantial than it is. It replaces and updates an entire section of the Hydrocarbon Oil Duties Act 1979. In doing this, the sections covering road fuels are omitted, thereby allowing the mixing of fuels and aiding the introduction of sulphur-free fuel. The problem we faced and the problem raised by the industry, to which the clause is a response, is that under the current duty system for hydrocarbon oils duty is charged when two road fuels of differing duty rates are mixed together. The rules were originally introduced as an incentive to make new fuels available to the consumer and ensure that environmental benefits were not lost by mixing cleaner fuels with
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lower-grade alternatives. However, in reality, the mixing provisions have hindered the introduction of new fuels. Some mixing will inevitably and always occur at filling stations, and the additional duty has discouraged oil companies from making a rapid changeover.
In September, with the introduction of sulphur-free fuels, the UK faces its biggest changeover of fuel since the introduction of ultra-low sulphur petrol and diesel. We have therefore reviewed the measures that may be required to ensure a smooth transition.
I have discussed the matter at least twice with the Association of UK Oil Independents and received representations from it in the in the run-up to the Budget, as it felt that the change in clause 9 was needed to enable its members to make the switch. The clause removes the hindrance of the mixing provisions and it will ensure a smooth changeover to sulphur-free petrol and diesel.
The clause also rationalises the existing rules on mixing non-road fuels, which remains prohibited. The clause is permanent. It is introduced to aid the changeover and it will smooth and accelerate the transition to sulphur-free fuels from September. Its main use will be in the transition period, but it will remain on the statute book if the Committee agrees to it. The Government believe that the clause will assist the oil industry and help to meet consumer demand for sulphur-free fuels, which we all want, more quickly. On that basis, I commend it to the Committee.
Question put and agreed to.
Clause 9 ordered to stand part of the Bill.
Clause 10
Bioethanol
Question proposed, That the clause stand part of the Bill.
Mr. Tyrie: This is a much more substantial clause, and it has potential long-term implications for a major section of the market. I am sure that the Economic Secretary has become one of the country's leading experts on the subject, but, luckily, we already have another of the leading experts present in Committee, my right hon. Friend the Member for Fylde. I have no doubt that he will have some thoughts to pass on about bioethanol, as he has in past Finance Bills, so that makes me chary about making too many points that he can make far more forcefully.
The clause creates a new reduced rate of 28.5p per litre for bioethanol when used as any type of engine fuel. It currently attracts about 47p, so the clause creates a 20p differential, which will come into force in January 2005. Its purpose is to encourage a sharp increase in the exploitation of bioethanol as a fuel, and in that respect it is well behind biodiesel, the rates for which we briefly discussed on clause 5 on the Floor of the House.
I am a bit worried about the measure, not because I disagree with the direction of policy in principle, but because I am not sure that the decisions that have been taken relate successfully and directly to the policy intentions. First, where has the justification for 20p
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come from? After I consulted the industry, it told me that to get the market going we need a differential of between 28p and 34p—a good deal more than 20p. The industry sometimes overcooks the books, but that is a very big difference in estimated costs, and the Government could have analysed them.
One industry expert told me that the extra cost of refining and delivering bioethanol to the forecourt would be more than the 20p differential, so his company did not intend to develop it at this stage.
A major Government document has been produced on the subject, and it was also briefly discussed on the Floor of the House. Entitled, ''Towards a UK Strategy for Biofuels'', it just so happens to produce a justification for the figure of 20p. If one looks carefully at the justification, they realise that it is not a coherent argument for 20p. Frankly, it is difficult to come away with a view that it does anything other than cook the books.
I wonder why the Government did not decide to kick-start use of the fuel with a figure of at least 30p. One possible explanation is the cost. I have been given several estimates that indicate that that would cost a great deal. We must take into account behavioural effects, but I would be grateful if the Economic Secretary could give an estimate of the cost of introducing it at 30p, given some intelligent behavioural assumptions. I am worried that the measure is much more a sop to the environmental lobby than a fundamental shift in policy that will radically alter the market. I cannot be sure; all of us are guessing, but that is a major concern.
I have another concern that appears to point in the other direction. It relates to what I have consistently said about cost-benefit analyses. I worry that many changes are put through on alleged environmental grounds, yet the environmental arguments are far more complicated than what has been set out in consultation documents made available to the wider public, inasmuch as such documents are available. For example, I have been told that it would be far better if biomass were used for power generation rather than for biofuel, given the overall effect on carbon dioxide emissions.
I do not know whether that claim is true, nor do I know which numbers were involved in working out the overall economic and environmental effects, bearing in mind that CO2 emissions are only one part of the much broader environmental assessment that must be made. Again, the Economic Secretary did not really respond when I raised the point on another clause. Government policy, and public policy more generally, would benefit hugely if the Treasury—this will have to come from the Treasury—would give much more emphasis than it has hitherto to cost-benefit analyses of environmental measures in order to reassure the public that the Government are going in the right direction. Such analyses should be sufficiently robust intellectually and economically to convince doubters.
I do not believe that such information is in the public domain at present. It may be in some cases, but
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in many cases it is not. The regulatory impact assessment and cost-benefit analysis process has become a bit stylised and lacks real clarity of thinking from first principles. I would be grateful if the Economic Secretary would comment on that.
There are one or two other points that I could make on bioethanol. I may come back to them, but I suspect that they will be made before very long by my right hon. Friend the Member for Fylde.
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