Environmental Audit Committee - Green EconomyWritten evidence submitted by UK Sustainable Bio-Diesel Alliance (UKSBA)

THE DUTY DIFFERENTIAL AND THE LOW CARBON ECONOMY

The UKSBA believes the duty differential is the most simple, stable and effective incentive for sustainable biodiesel producers in the UK and is calling on the Government to urgently extend the duty differential for Used Cooking Oil beyond March 2012, in order to allow time for the industry to assess the effectiveness of the revised Renewable Transport Fuel Obligation in providing support for the industry.

Modelling and analysis clearly demonstrates that the Government’s double certificate proposals for waste derived bioliquids under the RTFO will not be adequate to support the industry in place of the differential, given the extreme volatility of certificate prices which deters investors; the increased supply of certificates and reduced demand; and the impact on cash flow for producers. The industry are considering a range of solutions to smooth the transition to double certificates, however, these conversations need to happen as a matter of urgency if the Government is to avoid losing a successful industry, upon which it has been able to deliver over and above its greenhouse gas emissions savings target.

1. The Sustainable Biodiesel Industry

There are around 250 million litres of used cooking oil (UCO) produced in the UK every year and a high proportion of this oil is disposed of down the drain or sent to landfill. Whilst there is no concrete data, industry estimates 150-200 million litres of that is from the commercial sector (food factories, restaurants etc), whilst 50-75 million litres of waste oil is produced by domestic households. The vast majority of the UCO used in biofuel production is collected from commercial sources with less than 5% of the domestic UCO available currently collected.

A growing number of local authorities are working with local producers and private waste companies in setting up waste oil collection facilities in household waste recycling centres across the UK. These include, Cheshire East and Cheshire West; Merseyside; Greater London, Greater Manchester; West Midlands; Warrington; Norfolk; Suffolk; Hartlepool; Vale of Glamorgan; South Gloucestershire; Bridgend; Southampton and many more.

Water companies in the UK currently spend £15 million per annum clearing used cooking oil from their sewers and 75% of the 200,000 drain clearance call-outs every year involve used cooking oil.

Biodiesel produced from used cooking oil (UCO) is one of the most sustainable fuels available for transport and heat and power systems, delivering an 83% greenhouse gas saving versus fossil fuels.

As UCO is a waste product it avoids a host of contentious and negative effects traditionally associated with biofuels, such as Indirect Land Use Change and the displacement of agricultural land for the growth of food crops.

The majority of UCO collectors and biodiesel producers are based in traditionally industrial areas of the UK. For example the larger producers are based in Motherwell, Scotland (Argent); Teeside (Harvest); Immingham (Greenergy); the North West of England (Agri Energy and Convert2Green) and London (Uptown Oil). Smaller producers are based in Cardiff, Armagh, Bristol, Mansfield, Southampton, High Wycombe, Chorley, Nottingham, Pembrokeshire and many more towns across the UK.

There are some 30 registered medium and large UCO collectors and biodiesel producers in the UK using waste products such as UCO to produce fully sustainable biodiesel for use in transport and in heat and power generation, employing approximately 1,000-1,200 people.

The industry began in 2006–07 and has experienced growth of 20-30% per annum, although there have been many business failures. More and more vehicle fleets are now using high-blends of biodiesel, but the process of satisfying vehicle manufacturers, fleet managers and tender processes can take two to three years. For example, the Environment Agency runs its fleet on B25-B50. Initially, they ran a trial for one year from one depot to ensure all vehicle types and weather conditions were covered. The ensuing tender process to find a suitable supplier fulfilling all of their criteria took a further year, followed by a roll out to all sites including tank purchases, which took a further year. In addition, whilst UCO biodiesel has the same calorific value as regular diesel, requires no technological adjustments to fleet vehicles, and does not result in any vehicle warranty issues, many fleet managers continue to remain reluctant to switch to biodiesel as a result of perceived costs involved in making the transfer.

Key to further growth in this nascent industry is policy certainty and stability for investors, producers and users, to ensure the necessary long term commitment to growth.

UCO biodiesel supplied in to high blend fleets is currently priced at the same level as mineral diesel due to the support provided by the differential. This is vital for high-blend users (up to B100 blends), as they will only use the fuel if it remains cost-neutral to them. In the current economic climate and working on a 2% margin, customers cannot afford to support green fuels otherwise.

UCO as a feedstock tends to track the price of virgin cooking oil and the crude oil price, whilst biodiesel production involves a significantly high fixed cost, more expensive than the production of mineral fuels. UCO biodiesel producers therefore work within a tight margin.

2. The Duty DifferentialStimulating the Green Economy

The current 20p duty differential for biodiesel produced from Used Cooking Oil (UCO) has been a tremendous success in providing stability for the sector, promoting investment, training, employment and technical innovation in a vital part of the renewable energy industry.

As a result of the duty differential approximately 99 million litres UK UCO of was collected and turned into biodiesel last year. With approximately 151 million litres still uncollected, the significant potential for growth of this sector is evident.

Latest reports from the Renewable Fuels Agency (RTFO Quarterly report 12: provisional data April 2010 to April 2011) demonstrate that in just over a year, as a result of the stability provided by the duty differential, UCO has become the primary fuel source for biofuel used in UK transport, delivering 50% of the biodiesel and 30% of the volume of biofuel used on our roads. Its widespread use has also helped the Government exceed its greenhouse gas savings target in road transport by 8%.

Biodiesel producers create local employment opportunities and are developing the green skills vital to the UK’s low carbon economy, including green chemistry, research and development and specialist production skills. As customer demand for the retrieval of other waste streams increases, these skills are being adapted to drive future renewable energy development from waste, such as anaerobic digestion from food waste. In addition, producers are working with local authorities to set up waste oil collection and recycling centres for domestic households.

Whilst the Treasury estimated the “cost” of the 20p fuel duty differential at £10 million per annum in the March 2010 Budget, given the significant increase in the amount of UCO biodiesel used in road transport seen in the last year as a result of the success of the differential, this is likely to be closer to £80 million at present capacity, with £19 million as the “cost” in relation to UK UCO biofuels only. However, should the differential be lost, industry estimates suggest that as a result of enforced business closures, some £36 million in VAT, corporate and personal tax revenues could be lost each year if the differential was to be removed. Over the next five years, based on the current growth trend, the expected tax revenues lost to the Government could increase three-fold, meaning £108 million of taxable revenue would be lost each year to the Treasury.

3. The Impact of the Removal of the Duty Differential

In the 2011 Budget the Government announced that the differential is to be abolished from April 2012. The industry is deeply concerned about the potentially catastrophic impact this will have on the sustainable biodiesel industry. The removal of the tax differential means UCO biodiesel will become prohibitively expensive, and high blend users such as McDonalds, 3663, Bidvest Logistics, Stagecoach and Biffa Verdant will have no choice but to turn back to fossil fuels.

With the removal of the differential, the industry estimates that some 3,000 direct and indirect jobs could be lost over a five year period. UKSBA members have built up considerable levels of green skills and expertise, the loss of which could seriously impede the development of the renewable energy sector in the UK, and consequently the growth of the green economy which will be worth an estimated £4 trillion by 2015. As the Environmental Audit Committee’s recent report on Environmental Taxes and Budget 2011 stated, the Government’s decision to remove the incentive is a “strategically retrograde act”.

A recent report by the NNFCC report, Advanced Biofuels: The Potential for a UK Industry, commissioned by the Departments for Transport and Energy and Climate Change warns that the UK is likely to miss its renewable fuel for transport targets without significant investment into second generation biofuels (£895 million) including those made from waste products, which it estimates could save the UK 3.2 million tonnes of CO2 each year while creating 6,000 full-time construction jobs and over 2,000 permanent jobs in the supply and operation of the plants. However, current instability of demand as a result of the removal of the duty differential is preventing this much needed investment, hindering further development of new technologies and the growth of the UK low carbon economy.

Case Study: Germany—Detrimental Impact of the Removal of Biodiesel Tax Incentives

Biodiesel has been produced for the German market since 1999 and Germany has been one of the EU’s top producer of biofuels. In 2006, Germany was the largest European biofuel consumer, with a consumption estimate of 2.8 million tons of biodiesel, which was largely a result of the excise tax exemptions provided for biofuels. Since 2007, firms which market petrol and diesel in Germany are obliged to market a legally prescribed minimum percentage of such fuels in the form of biofuel. In 2008 the quota was set at 4.4% for biodiesel and 2% for petrol. However, following concerns at the European level about the environmental sustainability of biofuels, the German Government started to roll back some incentives.

On 1 January 2008 Germany abolished the full tax exemption for liquid biofuels and replaced it with a blending quota, thus instantly reducing the domestic market, and according to the Federation of Germany Biodiesel Manufacturers, the German biodiesel industry is currently running at less than 60% of production capacity.

The move led to a significant decline of the share of the German biofuels industry in the transportation sector from 7.1% in 2007 to 5.9% in 2008. According to the 2009–10 report on the German biodiesel industry published by UFOP, biofuels consumption has fallen from a high of 4.00 million tonnes in 2007 before the elimination of the biodiesel tax credit, to 2.605 million tonnes in 2010. Overall, the use of B100 (100% biodiesel blend) has also dropped more than 80% from its 2007 high, negating the progress in emissions savings that had previously been achieved. Recent years have seen the closure of several German biodiesel plants following the Government’s decision to raise taxes on green fuels and scale back investment. Germany’s biofuels industry has also said that the market is suffering from great uncertainty as a result of the mixed signals being sent by the Government.

4. The Inadequacy of the RTFO

The Government’s present position is that biodiesel made from waste will receive double certificates under the Renewable Transport Fuels Obligation (RTFO) which will act as a replacement for the differential. However, there are a number of reasons why the double certificates will fail to support the industry:

Certificate values are highly volatile and are affected by many global factors, outside of the Government’s control—for example, the price of biodiesel and bioethanol in the market place. During 2011 a large import of subsidised US bioethanol meant that, for a period of time, certificates had no value in the market.

Government assertions that certificates are trading between 20p and 24p are based on prices from auction houses that only deal with a very small percentage of certificate trading. The majority of trading is carried out by producers direct through brokers and many millions of certificates were traded in year four (2011–12) for far less than 20p. The only known firm bid for next year’s certificates (Year Five) stands at 13p per certificate—a level of deficit against the present 20p tax differential which will have very serious repercussions.

The large fluctuations in certificate values under the RTFO scheme mean that the mechanism will not be an adequate substitute for the targeted, stable, and cost effective duty differential. .

Unlike ROCs under the Renewables Obligation, there is no minimum value for the certificates and it is not possible to fix the certificate price in a narrow band of value.

Double certificates will be offered to all waste derived biofuel, despite the 5% obligation, leading to an increased supply of certificates (minimum 30% increase as UCO contributes 30% of biofuel with one certificate, without other wastes accounted for), a cap in demand and a reduced certificate price.

The proposed certificate validation system will lead to cash flow delays (a predicted £400k cash flow reduction on a one million litre per month production base) and increased cost of administration for SME’s.

Whilst the more stringent sustainability criteria under the revised RTFO could be seen to be of benefit to UCO biodiesel given the significant GHG savings it can achieve, the industry does not believe that the double certificate proposals will help to support the domestic UCO biodiesel industry. The RTFO fails to provide support for UK producers as obligated suppliers are free to meet their biofuel targets from a range of sources, including imported Argentinean soy which delivers much lower GHG savings (36%) in comparison to UCO.

RTFO certificates only apply to biodiesel sold to obligated suppliers, such as BP and Shell, and therefore will not help to support individual consumers and HGV fleets that use high blends of biodiesel. In summary, the RTFO mechanism was designed to deliver a certain percentage of renewable fuel in to the transport sector, and was not intended to support the production of biodiesel in the UK or encourage the use of high blend biodiesel, and is therefore an inappropriate substitute for the targeted differential.

The previous Government understood that removing the stable mechanism of the tax differential before the RTFO had been fully tested as a means of support going forward, would pose a serious risk to this developing industry. The tax differential was originally extended to provide a safety net during the implementation phase of the RTFO, anticipating at least a one year overlap between the two systems.

Under EU law, the Renewable Energy Directive was expected to be incorporated in UK legislation through the revised RTFO by the 5 December 2010. However, due to delays in the RTFO consultation process, there will now only be a matter of a few months between the implementation of the RTFO on 15 December 2011 and the removal of the tax differential on 31 March 2012, leaving little time for producers to adapt their business models and assess the effectiveness of the revised RTFO, gambling the very future of the sustainable biodiesel industry on the immediate success of the revised scheme.

Further EU reviews of the Renewable Energy Directive will mean further revision of the RTFO up to 2014 and continuing uncertainty. This makes long-term planning in the industry difficult and creates a lack of market certainty that discourages the capital investment and skills training necessary for renewable energy projects to get off the ground.

Without the stability offered by the differential or a minimum certificate price, the prospects for the biodiesel sector—a key contributor to the low carbon economy—will be extremely challenging. The net result is that the stable, efficient mechanism of the duty differential will be replaced with a highly uncertain and volatile system which will act as a barrier to the very industry it is meant to support.

Case Study: FranceTax Exemption for Biodiesel Consumption

France is one of the leading EU Member States in terms of the production and use of biofuels in transport. The Government’s energy strategy has focused on improving environmental assessments and developing second-generation biofuels, such as UCO biodiesel, which they hope will enable a more diverse raw material choice to be developed and competition for production with foodstuffs restricted.

France has been using tax reductions for bio-fuels since 1998 as well as capital grants for about 20 years. The French Government unveiled ambitious measures to encourage the production of biofuels and accelerate their development in 2004. Consequently, the target to include 5.75% of biofuels by 2010 was brought forward to 2007, and the 2010 target increased to 7%. The Finance Law 2005 introduced a general tax on polluting activities for biofuels, aimed at encouraging oil companies and distributors to incorporate a certain percentage of biofuels into the fuels made available for consumption in France. By way of an incentive, the Government has maintained a system of partial tax-exemption for internal consumption tax (TIC) which allows for the offsetting of the additional cost of manufacturing biofuels in comparison with fossil fuels. Other incentives include a tax exemption for ethanol incorporated directly into petrol, tax reductions on company cars that run on biofuels, and a 50% exemption on the additional tax for registration certificates.

As a result of these incentives, France continues to be the second largest European producer and consumer of biofuels in transport. Recent figures demonstrate it produced 2.5 million tonnes of biodiesel this year in comparison to only 0.4 million tonnes in the UK.

5. Conclusion

The UK Sustainable Biodiesel Alliance (UKSBA) is increasingly concerned about the Government’s decision to the remove differential for biodiesel produced from used cooking oil (UCO) in March 2012. We are now just months away from losing a burgeoning industry that is uniquely well placed to help the UK deliver significant carbon reduction savings required of it from transport emissions by 2020 and to drive economic growth through the creation of green collar skills for the low carbon economy.

Industry modelling suggests there may be a range of solutions to smooth the transition to double certificates, including a minimum certificate value, a reduced duty differential or a split of the biodiesel and bioethanol obligations under the RTFO. The Government might consider underwriting the 20p or the differential could be applied only to UK UCO biodiesel at much lower cost to the Treasury. However, as responsibility for waste derived biodiesel falls under the remit of four different departments – the Treasury, Defra, the Department for Transport and the Department for Energy and Climate Change – there is a lack of policy coordination and joined up thinking on support for the sustainable biodiesel sector, preventing meaningful discussions about the potential policy solutions from taking place with industry representatives. The UKSBA believe that these conversations need to happen as a matter of urgency if the Government is to avoid losing a successful industry, predominantly made up of SMEs, that is uniquely well placed to help the UK deliver significant carbon reduction savings required of it from transport emissions by 2020.

6 December 2011

Prepared 18th May 2012