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Renewable Transport Fuel Obligation

Volume 485: debated on Tuesday 16 December 2008

I am extremely grateful for this opportunity to discuss biofuels again, and I am pleased that you are in the Chair, Mr. Martlew, given your knowledge and expertise in this area. You will know that there have been substantive debates on biofuels in Westminster Hall and the House in recent years, as biofuels have an important role to play in reducing carbon emissions from transport. That role was reinforced at the European summit last week, when the renewables energy directive was agreed. In broad terms, it is clear that biofuels are the only tool available at the moment with which to reduce carbon emissions. In the longer term, electric cars will come on to the market, and even further into the future, hydrogen cells will play an important role, but, at the moment, biofuels are the real cutting tool.

In the past 18 months, there has been much discussion about whether the use of biofuels is sustainable and whether they affect food production and its cost. That debate is important, but this afternoon I shall focus on the small area of the renewable transport fuel obligation 2007 and something in it that is clearly a drafting error. The biofuels industry has described the drafting error as “catastrophic” to the industry, and I shall give some examples of its consequences shortly.

The background to this issue is familiar and straightforward. The amount of biofuels required under the RTFO is a percentage of the “relevant hydrocarbon oil”. Targets under the 2007 order are 2.5 per cent. for this financial year, 3.7 per cent. for the next financial year and 5 per cent. for the year 2010-11. Unfortunately—this is the crunch point—petrol and diesel are not counted as relevant if they were already blended with biodiesel when they passed the duty point. The problem arose when it became clear, in the autumn, that almost all diesel that was produced in the UK had an element of biodiesel in it and was consequently excluded. The effect has been profound. Diesel makes up just more than half of the UK market, so the amount of biofuel that is required under the obligation has been halved. As a result, the effects, in relation to carbon emissions, are halved.

Until the mistake came to light, the Department for Transport thought that biofuels were included whether they were blended or not. That is what the Government told Parliament when the order was passed in October 2007, and that is what the Renewable Fuels Agency told the industry, non-governmental organisations and the wider public. It is not clear what triggered rethinking, but on 21 October the RFA wrote to all obligated suppliers to say that there were problems.

The DFT and the RFA held a stakeholder meeting on 28 October, at which officials said they were determined to rectify the problem. Some of the people who attended the meeting have told me that they left with the assumption that the issue would be rectified in this financial year. In effect, it was business as usual. On 13 November, however, the Government issued a written ministerial statement saying that the mistake would be corrected not this year but for the year 2009-10. Will the Minister put on the record why it is not possible to correct the error in this financial year? There has been a good deal of debate on that and I understand that precedents are being quoted. We are told that there should be no retrospective legislation, but in fairness to the industry, it faces a retrospective change in the policy framework well into the current year.

It would also help if the Minister told us whether there has been any discussion with members of the Joint Committee on Statutory Instruments or its staff. There is still a view that if it were possible to correct the mistake in this financial year, that would be the best way forward. The consequences of the drafting error are straightforward: this year’s targets have already been met and oil companies do not need to supply another litre of biofuel before April 2009. There is now a glut of renewable transport fuel certificates. They were trading at 6p a litre, but the market has collapsed and there is no value in them. Obligated suppliers can enhance their position by blending small amounts of biofuels into fossil fuels to avoid difficulties next year, because 25 per cent. of the certificates obligation can be transferred into the next financial year.

Let me comment on the problems that have affected the industry. A small company that was established in May 2008 has told me that its plant has produced no biofuels since September 2008. It says that the problem is a

“lack of demand for our biodiesel”,

partly because

“obligated companies are no longer potential buyers due to the error in the wording of the legislation”.

Pessimistically, the company says that

“unless the outlook improves, we expect to be out of business at the turn of the new year.”

Unfortunately, it is not alone. Another company has written to me saying that the drafting error in the RTFO has effectively stopped demand for biofuels in its tracks. Sales have dropped from 500,000 litres to 6,000 litres a month.

What is more, the policy framework could change further. Following concerns about sustainability, the Government have asked Professor Gallagher to look into the issue. He has brought forward proposals, on which the Government are consulting, that would effectively further reduce targets for next year from 3.75 per cent. to 3 per cent., and would delay our hitting the 5 per cent. target, so that it would be hit in 2013-14 instead of in 2010, as planned.

It is absolutely clear that for investment to take place, the industry must know the rules. It will sometimes complain about the rules, but it cannot live with a changing policy framework, the possibility of the Gallagher review changing targets and—more importantly for today’s debate—the retrospective halving of the target for the current year, which is causing problems for many countries.

There will be no investment if the situation is not addressed. We have talked about companies closing in the new year. Paradoxically, that is against the background of the Government, our European partners and others arguing that biofuels have a strong role to play into the future. So, there are real problems now, but there are also long-term prospects. However, there will be no investment until companies that want to invest are clear that the policy framework will be secure into the long-term.

What needs to be done? I shall make three or four suggestions to the Minister. First, the demand from industry is clearly to try to rectify the mistake in the current financial year. I accept that there are difficulties with doing that, but, in fairness, the Minister must say on the record in Parliament today why it cannot be achieved. There is another solution, however. As I have said, the Government are consulting on the Gallagher proposals to reduce the target from 3.75 per cent. to 3 per cent. next year. Incidentally, that consultation closes tomorrow, and the Government must make early decisions about the targets that they expect in the next financial year. I hope that an announcement will be made as quickly as possible. Companies may be able to hang on if they know what the situation will be on 1 April 2009. I hope that the Government will respond to that hope for an early announcement.

Secondly, given the history of difficulties during the current year, there is a strong case for saying that the original target of 3.75 per cent. next year should remain in place. It would be unfair, unwise and not beneficial to investment in the industry if the target were reduced next year, so I should be keen to hear the Government’s view on that point. More particularly, industry itself would be keen to hear it, because, at last week’s European summit, the renewable energy directive was agreed, and it is clear that we should be looking for a 10 per cent. target by 2020. Given the European context, it would be unwise to reduce the target now.

There is another, third, practical thing that the Government can do. We are now an interventionist Government; we are not afraid of intervening in the market. We have intervened in a big way with the banks, and there is talk of intervention in the energy market, but, at the moment, there are renewable energy certificates hanging around the market and they have no market value whatever. The Government have made a mistake, and one way of rectifying it would be to buy up those currently worthless certificates.

A few days ago, in a very well reported speech, the new Secretary of State for Energy and Climate Change talked about a more interventionist role for the Government in the energy field. He believed that the market, by itself, would not deliver, and that—this is the essential point—there needed to be a strong policy framework for investment. Let me remind the Minister what the Secretary of State said in his speech. He said that we need a strategic energy policy that is

“stable, predictable and attractive to the private sector.”

That is what the Government tried to achieve through the RTFO, and it would have brought new investment, reduced carbon emissions and taken us forward to meet our European targets, but, because the drafting mistake occurred, the amount of biofuels that must be produced to meet the obligation this year has been halved. The consequence of the overall process will be the halving of our carbon emissions, and it is clear to me that we need to make real reductions in carbon emissions, and that biofuels are a way of combating the real and significant problem of carbon emissions from the transport sector.

What the industry asks for is quite simple; it is what the Secretary of State for Energy and Climate Change was arguing for: a secure and stable policy framework that attracts private investment to the industry. I hope that the Minister before us will recognise that there have been problems, that mistakes have been made and that there is a need to rectify the issue. I hope also that he will come forward as soon as possible with a new policy framework that will attract new investment into a new industry that will help us to enhance the environment and stabilise our carbon emissions.

It is a pleasure to see you presiding this afternoon, Mr. Martlew, and I congratulate my hon. Friend the Member for Sherwood (Paddy Tipping) on securing this debate. Biofuels have an important role to play in the development of a renewable energy industry in the United Kingdom, and they also have the potential to help us in our efforts to tackle climate change. Our cars and other forms of transport are the third largest source of carbon dioxide emissions in the UK, and biofuels are a major way to help us reduce our road transport emissions. In fact, the recent Gallagher review estimated that, by 2020,

“biofuels have the potential to deliver annual global greenhouse gas savings of approximately 338 to 371 million tonnes of carbon dioxide”.

That is why the UK has been a pioneer in obligating our fuel suppliers to provide a certain percentage of their transport fuel from renewable sources. However, as my right hon. Friend the Member for Bolton, West (Ruth Kelly) advised Parliament in July, when she was Secretary of State for Transport, we must proceed with caution if we are to ensure the development of a truly sustainable biofuels industry.

We created our biofuels targets to help tackle climate change and promote sustainable development. Yet, over time, more and more questions have been asked about the indirect impact of biofuels on world food prices, on deforestation and on overall greenhouse gas emissions. That is why in February, my right hon. Friend asked Professor Ed Gallagher, the chair of the Renewable Fuels Agency, to whom my hon. Friend referred, to examine the latest available evidence on the indirect effects of biofuels. The Gallagher review concluded that biofuels can play a role in tackling climate change, and that

“there is a future for a sustainable biofuels industry”.

But the review also concluded that there is a risk that the uncontrolled expansion and use of biofuels could lead to unsustainable changes in land use, such as the destruction of rainforest to make way for the production of crops.

The Gallagher report recommended that the introduction of biofuels be slowed until policies were put in place to direct biofuel production on to marginal or idle land, and their effectiveness had been demonstrated. More specifically, the report recommended that, in the UK, the rate of increase in the RTFO should be slowed to 0.5 per cent. per annum, so that the RTFO reached 5 per cent. in 2013-14, rather than in 2010-11, as originally planned.

The Government agreed with the findings of the Gallagher review, and, as my hon. Friend said, we are consulting on our proposal to slow down the increase in the RTFO, as recommended. However, as we have heard today, we are all aware that we also need to recognise the impact of a slow-down on investment and longer-term targets under European Union directives. That is why we are also seeking views on those issues during the consultation, which is due to close tomorrow, 17 December.

On 13 November, again as my hon. Friend said, the Government published an addendum to the consultation, proposing an additional amendment to rectify a discrepancy that was identified in the original 2007 order. Today, my hon. Friend has raised a number of concerns about the problem. The difficulty only recently came to light as a result of work being carried out on the eligibility of new renewable fuels. We are treating the issue very seriously, as he knows, and we have explored all the options available to us to rectify the issue. However, the Government have concluded that, owing to the constraints of the primary legal powers, we will not be able to amend the order retrospectively to change the definition for this obligation year.

That means that we must ensure that legislation is in place to rectify the problem and to deal effectively with the discrepancy from the start of the next obligation year in April 2009. I reassure my hon. Friend that the Government alone decided to proceed in that manner, and that it was not a result of pressure from the oil companies or any other parties, as some have suggested. Failing to deal with the discrepancy by April would mean that it continued for another year.

Although my hon. Friend has outlined some of the outcomes that he believes may be possible, the future impact of what is happening is still unknown. It is possible that some UK oil companies will decide to meet their obligations according to the principles intended in the original legislation. The extent of any shortfall will not be known until after the end of this obligation year.

I am unable to pre-empt responses to the consultation, but I have listened to the concerns that my hon. Friend has raised. The Department has encouraged stakeholders to respond to the consultation on time so that their concerns can be taken into account as we develop our response. I hope that I have addressed the other issues that he raised, and that my explanations offer him some reassurance even if they are not fully satisfactory to him.

Sitting suspended.