rose to move, That the draft order laid before the House on 9 October be approved.
The noble Lord said: My Lords, the draft Renewable Transport Fuel Obligations Order 2007, which is before us today, will give legal effect to the Government’s renewable transport fuel obligation, or the RTFO as it has become affectionately known. The draft is brought under Sections 124 and 192 of the Energy Act 2004. The RTFO is an integral part of the Government’s climate change programme and is set to deliver significant and immediate carbon savings from the transport sector. It will do this by reducing the amount of carbon from fossil fuels that is emitted into the atmosphere. The precise amount of carbon that the RTFO saves will, of course, depend on a wide range of factors, about which I am sure we will hear more during the debate.
The RTFO is due to become the Government’s primary support mechanism for renewable transport fuels. Today’s renewable transport fuels are biofuels—in other words, fossil fuels substitutes derived from crops and other forms of biomass. These fuels reduce overall carbon emissions because the carbon that they emit on combustion has recently been captured from the atmosphere during cultivation whereas fossil fuels release carbon that has been trapped under the surface for millions of years.
The RTFO has been under development since 2004, when the Energy Act gave us the necessary primary powers to introduce an obligation along these lines. The detail has been the subject of much discussion with stakeholders over the past three years, including two major public consultations during 2007. This draft order is a culmination of that work and sets out the detail of how the RTFO will work. In brief, the RTFO will require suppliers of fossil-based road transport fuels in the United Kingdom to redeem a certain number of renewable transport fuels certificates with the Renewable Fuels Agency each year, or to pay a buyout price.
The transport fuels suppliers will be able to acquire these certificates either by supplying renewable transport fuels themselves or by purchasing them from other transport fuels suppliers who have put renewable transport fuels on to the market. They may also be able to buy them from traders in certificates. Barring any unforeseen rapid changes in the economics of transportation fuel, we expect transport fuels suppliers to fulfil their obligations without significant resort to the buyout option. The buyout price acts as a safety valve to prevent steep increases in the price of petrol and diesel at the pump as a result of increases in the price differential between biofuels and fossil fuels.
The draft RTFO order sets out a lot of the detail of how this will work. For example, it defines those suppliers who are obligated under the RTFO, primarily UK refiners and importers of fossil fuels; it lists those fuels that are eligible for renewable transport fuel certificates—that is, biodiesel, bioethanol and natural road-fuel gas produced from biomass, commonly known as biogas; it sets the level of the obligation, which is 2.5 per cent in the first year rising to 5 per cent in 2010-11; and it establishes a new non-departmental public body, the Office of the Renewable Fuels Agency, to administer the RTFO, and sets out the powers and duties of that body. Those duties include a duty to report to Parliament annually on the effectiveness of the RTFO. In addition, it sets out how renewable transport fuel certificates are to be applied for and how they are to be used. It provides that certificates can be transferred, banked for later use or revoked. It sets out the level of the buyout price, and provides for the recycling of buyout payments. Finally, it sets out the penalties that may apply in various circumstances. Appeals against penalties may, in the first instance, be made to the administrator. If the appellant wishes to appeal further, the Energy Act 2004 sets out that he may have recourse to the court.
The draft RTFO order should deliver significant and immediate carbon savings from the transport sector. It will provide long-term certainty for the market, and it is, I believe, the right way for us to be supporting renewable transport fuels. I beg to move.
Moved, That the draft order laid before the House on 9 October be approved. 27th Report from the Statutory Instruments Committee and 31st Report from the Merits Committee.—(Lord Bassam of Brighton.)
My Lords, we support enthusiastically and want to see as much biofuel use as possible. It is very important that we reduce carbon emissions and move to different forms of energy, whether it is fuel used in vehicles or electricity or whatever it is. However, we have considerable doubts about the order, and I shall pose some questions to the Minister about the ability to achieve the sort of targets that the Government are setting. At the moment, biofuels account for about 0.6 per cent of fuel that is used. The suggestion is that it could go up to 2.5 per cent in about a year and to 5 per cent by 2010. Those are very laudable objectives but I shall pose some questions as to whether they can be achieved.
I am involved a lot in my local government capacity in how we can get rid of waste and use waste as energy, as well as how we can encourage farmers, and others, to produce bio-products that might produce energy. Over the past few months, I have done a lot of work on that; in fact, I visited a plant in Germany only two weeks ago that is using agricultural bio-products to produce biofuels. However, coming from a farming background myself, I have seen a dramatic turnaround in the price of corn cereals. I do not benefit from it because I do not farm now, but a lot of those who do farm have seen a considerable increase in the price in the past 12 months. Members of my family—cousins in Norfolk—who were going to produce wheat for biofuels are not doing so because the price that the contractors are able to offer in using wheat to produce biofuels is just not plausible now. In fact, the price of cereals for other consumption has doubled in the year and the contracts that were around to produce biofuels have fallen by the wayside. That is just one problem.
There is also the dilemma of using wheat or corn to produce biofuels given the problems of starvation and food shortages throughout the world. The United Nations recently came out against the use of corn to produce biofuels. The United Nations Special Rapporteur on the Right to Food, Jean Ziegler, stated:
“232kg of corn is needed to make 50 litres of bioethanol. A child could live on that amount of corn for a year. It’s a total disaster for those who are starving”.
The very learned Professor Brown claims that the grain it takes to fill a 25-gallon tank with ethanol just once would feed one person for a whole year. There is a move to remove some of the trade barriers around the world so that cereals can be traded more freely. One is very concerned about the world’s starving people. Five years ago when people began to talk about using cereals and corn to produce fuel, I had doubts about it. More and more doubts are coming to the fore about whether, in order to create fuel, we should use stuff that could be fed to starving people.
If we are not going to use cereals and wheat to produce biofuels, will we then chop down the remaining forests of the world to produce them? There is a real problem as to how we shall tackle this matter. I should like the Minister to comment on that. Although we all want to reach the target, we need to encourage people to produce new crops to achieve it. I believe that miscanthus grass could be harvested to produce these fuels. However, that will not happen in one or two years; a sustained campaign is needed to encourage people to grow these new crops. The farm that I visited in Germany produced sunflowers, which can be grown at various altitudes without ripening and used to produce biofuels. However, we are not yet ready for that. Therefore, some of the targets will be difficult to achieve. I certainly cannot support the idea of using a lot of corn that could be fed to starving people.
This matter will be debated in the Commons tomorrow and my colleagues there may address it more robustly than I have done. I shall certainly not vote against the measure, but I have considerable doubts about it. I have one or two questions for the Minister. Does he accept that the Government’s refusal to commit to maintaining the 20p tax break beyond 2009 will not ease the business climate because we need investors in this area? If we are to grow new crops and implement new initiatives, we need the security of a long-term plan. If biodiesel plants are to be built, investors need a longer-term commitment on the tax regime beyond 2009. I hope that the Minister will address that.
As well as looking at the use of biofuels, which is very important, will the Government also support vehicle manufacturers to produce more fuel-efficient vehicles, thus reducing the aggregate consumption? Improving fuel consumption by 5 per cent would do a lot to reduce carbon emissions, so we should also look at that. Sometimes the whole-life impact of vehicles is important as regards carbon usage. For example, a recent study found that a four-litre V8 Jeep Wrangler had less of an overall environmental impact than a lot of dual-power vehicles being used. Therefore, there are various other ways to tackle this matter. I hope that the Minister will comment on that.
As I say, I have doubts about the order. I totally support the concept behind it but I have doubts about our ability to deliver its requirements. How can the Government help to encourage the production of more biofuels in the way that I described?
My Lords, in introducing the measure the Minister used the word “significant” to describe the effects that it would have on the demand for fossil fuels. I beg to differ. I believe that the demand for fossil fuels, both in this country and abroad, is rising very steeply.
The Minister may have had the opportunity to read the full-page article in the Guardian today; it was the first time that I have read the Guardian for months. It was a very bleak article which quoted expert opinion pointing to a steep decline in worldwide oil production. It talked about the risk of war and unrest, although I am not concerned with that now. It talked about a decline of 7 per cent a year. I also read an article today—I think it was in the Times—in which someone at Virgin Trains talks about people making provision for oil to rise to $200 a barrel within the foreseeable future.
I am not going to contest this measure; it is a good and worthwhile step. The Government may have got their incentives wrong. I endorse what the noble Lord, Lord Hanningfield, said about food crops not being available to convert into ethanol. I do not think that the Swedish Government are being very clever in their boast of burning a lot of ethanol. That has to come from South America where the very forests that the noble Lord, Lord Hanningfield, referred to have to be chopped down and then the stuff has to be transported halfway across the world. It might give other people some sort of warm feeling; it does not give me one.
The long-term scenarios that this country faces are steeply rising oil prices and competition between food and biofuel crops, with possibly some perverse incentives, unless, as we shall hear later, there is the possibility of further biofuel sources that do not deny people food. My view is that we have to harness electricity to do a great deal more than it does now. Electricity can be sourced from wind, waves, barrages and nuclear. None of those has a short lead-time. It will take 10, 15 or more years to bring those sources of power on-stream. I venture to suggest that the price of oil will rise steeply. I should like to know the Treasury’s current forecast for oil prices. If prices are forecast to be very low, then I do not believe that the forecast is at all realistic.
We have to think in terms of having as much public transport driven by electricity as possible. We have to stop pricing people away from public transport. I fully agree with the noble Lord, Lord Hanningfield, about what can be done by the road transport industry. Possibly the best source of immediate power saving is personal energy saving in the home through insulation and the installation of modern equipment. That would give us a much greater dividend than will this obligation. I am not going to vote against it, but I want to draw attention to the very serious problems that this country faces and the potential for conflict if they are not addressed.
My Lords, as one of the gang of four who managed to persuade Her Majesty’s Government to accept the renewable transport fuel obligation, I am delighted to support the order, but with a few reservations. I declare an interest as a failed investor in a biofuel company in the north-east of England and as a producer of oilseed rape, all of which is exported and made into biodiesel.
As the noble Lord, Lord Hanningfield, emphasised, the new energy crop scenario is complicated, to say the least. I strongly believe that this obligation must be kept under constant review, particularly given that crude oil prices are nudging $90 a barrel. If one is to believe the noble Lord, Lord Bradshaw, it might reach $200 a barrel.
According to the European Commission, even a 10 per cent biofuel target will not disrupt agricultural markets. We must not forget that in the United States of America there is already a 10 per cent level for bioethanol in all gasoline sales, which will rise to 15 per cent by the end of next year. It is worth remembering also that the pump price in the United States is a quarter—I repeat, a quarter—of what it is here. It has always worried me that this country is way behind in biofuel production in comparison to most of its European partners.
The recent high fuel prices here have produced a staggering £240 million-a-month windfall for the Treasury, as the AA said at the weekend. Her Majesty's Government must do more to kick-start the home biofuel industry. As other noble Lords have said, it is sheer madness to cut down the Brazilian rain forests to grow sugar and export the ethanol three-quarters of the way around the world.
All noble Lords would agree that biofuels must be produced from wholly sustainable resources and that the fuel duty rebate must be kept at least at 20p per litre for the foreseeable future. I sincerely hope that Her Majesty's Government will look very carefully at the crucial buyout price. I have long advocated that at 15p per litre it is far too low. If we really want to kick-start our home industry, the rebate ought to be increased by at least 5p per litre.
The market desperately needs confidence and I fear that only Her Majesty's Government can create that confidence. I sincerely hope that they will do their best to do that.
My Lords, I seek also to ask a question on this order. Tallow is currently used without subsidies in the oleochemical and soap industries and in industrial heating plants. Can my noble friend respond to that industry’s assertion that the introduction of subsidies to biodiesel fuels to encourage the use of tallow in these products, as envisaged in this order, will produce serious unintended consequences—massively distorting existing markets and possibly leading to the closure of important oleochemical and soap-manufacturing companies in the UK, with no environmental benefits?
My Lords, I am a member of the Merits Committee. I wish to raise two questions; the first is technical. The statutory instrument closely follows Section 5 of the 2004 Act and spells out the effect of Sections 124 to 130, but it leaves out Section 131. The scheme tells stakeholders what the civil penalties might be if they do not conform and what rights to object they have, but fails to spell out the appeals procedure. The Minister may say that everyone knows that they can go to the High Court if they are in any kind of civil penalty procedure, if they have objected and are not satisfied with the response. However, it would have been helpful if the appeals procedure under the same Section 5 of the Act had been spelt out in the draft statutory instrument. Will the Minister consider an amendment to include that, as opposed to assuming that everyone would know that they could go to the High Court if they were dissatisfied, as he said in his opening remarks?
The second question arises from our discussion, and the comments of my noble friend Lord Hanningfield, about feedstock to bioethanol plants. The Explanatory Memorandum to the draft statutory instrument says that the Government are considering changes to address the concerns about sustainable feedstock production. How will the Department for Transport go about assessing such sustainable production? I take the example of palm oil, which may indeed affect the feedstock to plants making soap. Palm oil, soya bean oil and rapeseed oil are the chosen feedstocks for biodiesel. I interpolate here that the prospects for biodiesel in the UK market are much more promising than the prospects for bioethanol.
Palm oil raises controversial and complex issues, however, as do so many other things about the obligation. To what extent will other departments than the Department for Transport be involved in assessing sustainable feedstock production? Indeed, will there be a definition of sustainability that can be debated and agreed? Finally, upon what sources of scientific research will the Government rely in what is at the moment a highly disputed area of both science and environmental studies?
My Lords, this has been a useful and interesting short discussion on a subject that raises considerable interest and passion. Like the noble Lord, Lord Bradshaw, I read the Guardian newspaper article today. I confess that I am a daily Guardian reader. I am addicted; I have been since the age of 14 or 15, and I cannot give it up. It is a current and present debate, and I recognise the powerful emotions it generates. The breadth of the debate is quite interesting; the subject generates widespread concerns across the generalised debate about environmental issues. I pay tribute to the noble Lords who have contributed. The debate underlines the benefit of the consideration given by your Lordships’ House to these matters, because noble Lords bring a great deal of knowledge and expertise—greater than mine, I am sure—to the issues involved.
Both opposition Front Benches wanted to support the order, but with qualifications. We need to start from somewhere, and that is what the order tries to do. To take on board the point made by the noble Lord, Lord Palmer, we need to kick-start the industry, which is in essence what the Government intend to achieve in bringing the order to fruition. I pay tribute to him for his earlier role in ensuring that we had an RTFO to consider in the first place, along with other noble Lords such as Lord Carter, who is sadly no longer with us.
We believe that the RTFO will significantly reduce emissions of carbon dioxide from road transport. I have no doubt that that is why noble Lords who support it, even with qualifications, do so. By requiring road transport fuel suppliers to supply a certain amount of biofuel each year, the order is due to save between 7,000 and 8,000 tonnes of carbon a year by 2010. That is a significant contribution to carbon reduction, and it contributes to the Department for Transport’s overall strategic objective of improving the environmental performance of transport.
The RTFO will come into force the day after being made, and will bring the obligation into force from 15 April 2008. The obligation will be assessed over one year. The timing is set to coincide with the requirements of the fuel duty system, to which it has been closely linked to minimise the costs to obligated suppliers and the Government.
The order provides for the administrator to issue certificates as evidence of the supply of renewable fuel, and they can, in turn, be used by a supplier as evidence of meeting its obligation. The certificates are issued in electronic form as a credit to an account maintained by the administrator and may be traded among anyone who has an account with the administrator.
The order provides for those suppliers who have not been able to produce sufficient certificates to meet the remainder of their obligation by paying what noble Lords accurately described as a buyout sum. The buyout price will be 15p in the first two years, and this will be multiplied by the number of litres of fuel by which the supplier has fallen short in order to produce the buyout sum. The buyout price is linked to the duty derogation for bioethanol, which is expected to remain at 20p for the first two years. I heard what noble Lords said about the need for stability in the market. Clearly, that is a consideration and we need to keep both those sums in mind, because one acts as a carrot and the other as a stick.
Thereafter, the amount of the buyout price will vary, depending on the amount of the duty derogation for bioethanol. If the duty derogation is reduced, the buyout price increases. However, for the year beginning 15 April 2010 onwards, the buyout price and the duty derogation will be 30p per litre. The Government have indicated that they expect the RTFO to replace the duty derogation as the support mechanism for biofuels, but the timing and amount of any changes are for future decisions of the Chancellor of the Exchequer. The buyout price, together with the duty derogation, should provide an economic incentive for fossil fuel suppliers to supply biofuels, as it should exceed the additional cost of supplying biofuels.
The order provides that any funds received in buyout payments are recycled to suppliers. Each certificate will be eligible for an equal share of the recycle fund, provided that it has been either presented by a fuel supplier as evidence of meeting the obligation or, in reverse, surrendered by a fuel supplier for the purpose of receiving a share of the recycle fund.
The order also provides for civil penalties in the event of a breach of the order, the revocation of certificates in the event of issue on the basis of information subsequently found to be erroneous or fraudulent, and other matters relating to the duties of the administrator and the proper operation of the scheme. It also includes a schedule on the composition and functioning of the administrator. Legal and political issues prevented the Government appointing an existing body as the administrator in accordance with the recommendations of the Hampton review of regulation. However, officials have done their best to ensure that other Hampton principles have been fully reflected in the design of the scheme and the organisation of the administrator. That has to include establishing a risk-based framework for inspection, an absence of paper forms and an emphasis on the provision of advice to suppliers.
I want to try to address some of the other points made during the debate and to tackle head-on some of the criticisms of biofuels in general and the RTFO in particular. The noble Lord, Lord Hanningfield, referred to the sustainability of biofuels—a point echoed by the noble Viscount, Lord Eccles. As I acknowledged earlier, it is a concern in the UK and elsewhere. Critics argue that biofuels deliver virtually no carbon savings and cause irreparable damage to the wider environment, as well as forcing up the price of food.
It is certainly true that there are good and bad biofuels, and the Government have consistently highlighted the need for international sustainability standards for biofuels. However, as experience has shown in other fields, these things take time to develop. As a first step, we have developed a sophisticated but robust reporting mechanism to encourage transport fuel suppliers to source only the best biofuels. We have developed this in partnership with stakeholders from the oil and biofuel industries and from environmental and social NGOs. I think it is fair to say that we are rather proud of what we have achieved so far, and we are confident that the reporting mechanism will create a powerful incentive for transport fuel suppliers to focus on the sustainability of their biofuels.
Secondly, there is increasing concern at the high costs of biofuels. Critics argue that we should support other things instead. The noble Lord, Lord Bradshaw, made the point that we should seek to improve the fuel efficiency of vehicles and invest more in public transport. Obviously, those are important issues. We recognise the value of investing in public transport, which we have certainly done. As a Government, we do all that we can to encourage greater fuel efficiency and more efficient use of energy in society generally. The noble Lord, Lord Palmer, made the point that there are variations in biofuel costs and he said that the market is rather different in the United States.
We have never claimed that biofuels are a cheap way of saving carbon. Nor have we argued that biofuels are, in themselves, a complete solution to the problem of climate change. But if we are ever to get to “tomorrow’s biofuels”, I argue that we have to do all that we can now to start towards that new tomorrow. We have the potential to deliver, in the future, much higher carbon savings at lower costs. To do that, we need to start creating a market for them today. The RTFO will do just that without requiring changes to today’s vehicles, without requiring drivers to change their behaviour and without the need for a whole new forecourt infrastructure. The industry is gearing up to meet the obligation and the RTFO could start to reduce carbon emissions, in a concrete form, from next April. That is our objective.
On the concern raised about suppliers buying out rather than supplying biofuels, the Government strongly believe that that will not be the general case, unless there is a significant and totally unexpected change in commodity prices. The major fuel suppliers are investing in the infrastructure needed to deliver the biofuels and have indicated that they expect to meet the obligation with little recourse to buying out. With just the duty incentive in place, biofuel sales have risen to 1 per cent of total fuel sales and the Government firmly believe that the buyout penalty provides sufficient additional incentive for suppliers to reach the obligation amounts. The buyout price will be kept under review to ensure that, in the future, the incentive to supply rather than to buy out remains.
The RTFO has been designed to minimise the number of obligated suppliers and, as far as possible, to minimise the administrative burden on them. We expect that only very large companies will be obligated and the draft order includes a de minimis threshold to avoid obligating small fossil fuel importers. Furthermore, the Government will recommend to the administrator to minimise, so far as possible, reporting requirements for small biofuel suppliers. Fuels that are already eligible for the duty derogation will be eligible for renewable transport fuel certificates, enabling small producers of biofuel to participate in the scheme.
The RTFO will create a market for approximately 2.5 billion litres of renewable fuel per annum in the United Kingdom. British farmers will have every opportunity to compete to supply the feedstocks to meet that demand, as UK-based biofuel producers bring new production capacity online in the coming years.
I hope that noble Lords find those points to be of interest and that they satisfy some of the issues raised in the debate. I shall work through some of the other issues as quickly as I can. The noble Lord, Lord Hanningfield, raised the conundrum of corn for fuel versus food when people are starving, as mentioned in the report by the UN rapporteur. As I think I have made clear in the past, not all biofuels are from food crops. Jatropha, which is inedible, is a good example of one that is not. There are many global factors affecting crop prices, of course, including the Australian drought, the Chinese food demand and, indeed, biofuels. Currently, the UK has surplus production of wheat, so there is capacity within the UK market. We believe that the market will respond and that increased prices are already leading to an increasing level of supply. Ultimately, crop prices are only a small part of food pricing; the cost of labour and production will obviously have an impact. The new body will monitor the impact on other sectors, and there is of course the reporting obligation to which I referred earlier.
The noble Lord, Lord Hanningfield, raised some other issues that merit a response this evening. He cast doubt on whether there could be an achievement of growth in volumes. The price of biodiesel ensures that it is still economic in terms of UK fuel prices. The industry is confident of delivery. I am delighted to hear that the noble Lord has started visiting plants—I certainly intend to make some visits myself—and that the feasibility study confirmed availability of sustainable biofuels up to 5 per cent. The noble Lord also made a point about the 20 pence tax break needing to continue past 2009, which was echoed by others. We have guaranteed the 20 pence incentive until spring 2010. As I said, thereafter it must be a matter for the Chancellor to review.
I have responded in part to the issue of making cars more fuel efficient and taking other remediation measures on CO2 emissions. The Government have never said that biofuels are the only thing required to reduce CO2 emissions. There must be consideration of that in a wider package of measures. Of course, many of those measures have been set out in the energy White Paper, aimed at reducing carbon emissions from the transportation sector.
The noble Lord, Lord Palmer, raised a question about the obligation being kept under review and encouraged us to ensure that the quantity of biofuel rises, as it is doing in the USA. We have said that the level of RTFO should increase, but only if a number of conditions are met: certainty that the biofuels are sustainable, on which I seem to hear support from all over your Lordships’ House; the resolution of a number of technical and infrastructure issues, which is key to RTFO increasing; and ensuring that the costs to consumers are reasonable and acceptable within the market.
The noble Lord, Lord Bradshaw, made a point about promoting electric vehicles and greater energy efficiency. I cannot disagree with those points; they are given goods. It is important to encourage use of the right sort of biofuels—as I said, there are good and bad—including those produced from non-food crops. We all want to see the second-generation biomass, but we need to get there. We argue that we must make a start with the first-generation biofuels. I have said several times that we cannot solve all our problems through biofuels, but it is an important part of the picture.
I have covered most of the points raised, with the exception of that on tallow. The noble Lord, Lord Bilston, kindly gave me advance knowledge of his question. In response, I see and understand entirely the noble Lord’s concerns, but we must look at this as part of a broader picture. We will—I give this commitment—ask the Renewable Fuels Agency to monitor the impact of the RTFO on other sectors; I made that point earlier. In particular, we will ask the Renewable Fuels Agency to devote considerable thought and scrutiny to its potential impact on the tallow industry, which I recognise is of considerable value and could have some impact on certain parts of our economy. The Renewable Fuels Agency certainly has an obligation to publish regular reports on these issues, so we will be able to take them fully on board when they arise.
I had two further points from the noble Viscount, Lord Eccles, who mentioned appeals procedures. The appeals procedure is set out in the Energy Act 2004, so it would not be appropriate to repeat it in the draft order. The noble Viscount also asked about the department assessing the sustainability of biofuel feedstocks, in particular palm oil. We have developed a comprehensive programme looking at sustainability and a reporting mechanism is to be put in place in partnership with stakeholders, including the relevant government departments, the industry and NGOs. We are getting good advice on the mechanism for making an assessment of sustainability, which is not easy, and we think that our model for measuring sustainability will be robust.
I doubt that I have answered all the points raised to everyone’s satisfaction, but I have tried to cover as much ground as I can. If I have missed things, I apologise to the House and to the noble Lords who raised them. This debate does not stop here and I have no doubt that it will continue. I am grateful to all noble Lords who have contributed to this evening’s discussion.
On Question, Motion agreed to.