That the Grand Committee do report to the House that it has considered the Renewable Transport Fuel Obligations (Amendment) Order 2009.

Relevant Document: 7th Report from the Joint Committee on Statutory Instruments and the 7th Report from the Merits Committee.

The order will give legal effect to changes to an existing scheme that requires suppliers of fossil fuel for road transport to ensure that a proportion of the fuel they supply is renewable.

The legislation before us is of key importance in our efforts to tackle climate change. Biofuels are the most readily available technological alternative to fossil fuels. They will play a key role in meeting our European renewable energy targets and keeping within our forthcoming carbon budgets. It is of both environmental and economic importance that we amend the order today.

The Renewable Transport Fuel Obligation was introduced in April 2008 by the Renewable Transport Fuel Obligations Order 2007, made under powers contained in the Energy Act 2004. The RTFO obligates suppliers of fossil-based road transport fuels to source a certain percentage of their fuels in the United Kingdom from renewable sources. If they do not supply enough renewable fuel themselves, they can buy renewable transport fuel certificates from renewable fuel suppliers or pay a buyout price.

The RTFO is administered by the Renewable Fuels Agency, which operates an internationally acclaimed carbon and sustainability reporting system. In the year from April 2008 to April 2009 the RTFO obligation level is 2.5 per cent of total fuel supplied. “Total fuel” means the total amount of renewable fuel and relevant hydrocarbon oil. In other words, suppliers have to produce certificates for an amount of renewable fuel equivalent to 2.5 per cent of the total fuel that they supply. Under the 2007 order the obligation level increases each obligation year until it reaches 5 per cent in 2010-11.

I take this opportunity to refer to the helpful consideration of this draft amendment order by the Merits Committee. In response to its seventh report, I wrote to the committee on 27 February and provided some additional information about our biofuel policies. I hope that that response has been helpful, and I would be happy to answer any further questions on the points raised in their report.

Three important changes will be made to the RTFO as a result of the draft amendment order. First, it will slow down the rate of increase of the annual RTFO obligation levels. The obligation level will reach 5 per cent of total fuel supplied by 2013-14, instead of by 2010-11. This slow-down is in response to concerns about the current sustainability of existing biofuel production, following the publication of the Gallagher review in July 2008.

The Gallagher review concluded that biofuels have the potential to deliver approximately 338 million to 371 million tonnes of global carbon dioxide savings every year. However, because of sustainability concerns, Gallagher proposed a slower rate of increase for our obligation levels than that set out in the 2007 order. That is why we are amending the RTFO order today: to give effect to the Gallagher recommendations.

Secondly, the draft order will correct a significant problem that we have identified with the definition of “relevant hydrocarbon oil” in the 2007 order. The definition determines whether a supplier is obligated, and, if so, how many certificates the supplier must produce. In short, this means that obligated suppliers have the opportunity to supply lower volumes of biofuels than we intended when we made the 2007 order. Clearly this would have an undesirable effect on the demand for biofuel products.

The order in front of the Committee today corrects this problem, with effect from 15 April this year. It also proposes a higher obligation level than we originally consulted on for the next obligation year, which commences next month. This is to help make up for any shortfall in the levels of biofuel supplied over the past year as a result of the problem to which I have just referred. Accordingly, the obligation level for 2009-10 will be 3.25 per cent of total fuel supplied, instead of the 3 per cent level recommended by the Gallagher review. This problem needs to be corrected now if we are to prevent it continuing into the next obligation year and to avoid any unwanted consequences for the UK biofuels industry. However, we do not have powers under the Energy Act to legislate retrospectively.

Thirdly, we are adding two new fuels to the renewable fuels eligible for certificates under the scheme: namely, biobutanol and renewable diesel. This increases the flexibility for obligated suppliers to meet their obligation in the future.

The changes before the Committee today are intended to balance the environmental concerns about the impacts of biofuel production with the need for greater investor certainty in renewable energy. If left unresolved, the problem with the definition of relevant hydrocarbon oil in the 2007 order could depress demand for biofuels and threaten the future of the UK biofuels industry. It would also be a step backwards in our plans to meet our climate change goals. I therefore commend the order to the Committee.

I am grateful for the Minister’s explanation of the order. I propose to make a few initial observations, and then look forward to hearing other noble Lords. With the leave of the Committee, I may make some winding-up comments.

It is, to say the least, extremely unfortunate that the definition of “relevant hydrocarbon oil” in the original RTFO order was defective. Worse still was the difficulty in rectifying the problems which the Minister described. This is despite all the care that is taken when drafting statutory instruments. I was on the JCSI for a while, and it surprised me how many drafting errors slipped into secondary legislation.

When we agreed the principle of a renewable transport fuel obligation, if we are honest, we must admit that we all thought that it would work just as well as the non-fossil fuel obligation for generating electricity. However, the reality is rather different. We are now suffering under the law of unintended consequences. When I pressed the print button to print one of the department’s publications, little did I realise that I would be printing 71 pages of detailed analysis: a sure sign of serious problems.

I welcome the instigation of the Gallagher review—it is important to be sure that we are taking the right steps to tackle climate change—but, thinking aloud, I have a concern about targeting transport fuels. Given the high proportion of our CO₂ emissions arising from road transport operations, it is an obvious thing to do. However, our overall objective must be to reduce our global CO₂ emissions. To do that, we need to substitute renewable fuels and power for fossil fuels. The problem is that road transport fuels, principally petrol and diesel, have to be produced to a very tight specification, otherwise engine damage or poor fuel economy or performance will result. On the other hand, a thermal steam-raising power station is relatively insensitive to fuel quality; thus the biofuel, or waste carboniferous fuel, being burnt in a thermal power station would not need much processing, so the fuel economy would be much higher. Is there not a horrible possibility that while renewable transport fuels are desirable, it might be better to concentrate our carboniferous fuel substitution efforts on power stations, for all the reasons given in the Gallagher review? Gallagher did not necessarily propose that; I am merely asking whether we are going in the right direction.

Although not all noble Lords may agree, it may be right to slow the rate of increase on renewable transport fuels, but it is very much work in progress and the jury is out.

It has been a busy weekend for rugby but little did I think that, between three orders as Treasury spokesman and four orders as pension spokesman, I was going to get a hospital pass from my noble friend Lord Bradshaw a few minutes ago—he sends his apologies; he has to be at another Committee meeting at four o’clock—to ask if I would also take on this order. I will do my best.

The Minister talked about the helpful report from the Merits of Statutory Instruments Committee. He said he had written a letter about it, although I am afraid I have not seen it. Will he say a little more about the question that the committee properly raised—that is, that Professor Gallagher’s review indicated that it is doubtful whether biofuels will actually reduce greenhouse gases? It commended the Department for Transport on taking a more cautious approach but said that,

“due to the minimal evidence provided”,

the committee,

“can only continue to question whether the commitment under the European Directive of requiring road transport to use 10 per cent of renewable fuels by 2020 is either achievable or desirable”.

The Gallagher committee made the point that the case for biofuel use is not fully proven. I ask the Minister, as that committee did, for more information about how much feedstock is produced domestically and how much is imported. Obviously it is a heavy item that affects the carbon footprint. Where do the Government now stand on the 2020 target?

I have one other, less serious question from reading the report. As I have to admit that I did only one term of physics at school and one of chemistry—there was no national curriculum in those far-off days—will the Minister please tell me what an ester is? I am afraid it means nothing to me.

This is rather a sad moment. I think the Minister is aware that I have been involved in biofuels almost since the word was first spoken, but we are now in the most terrible mess and muddle, not least because the biofuel industry straddles four different ministries: Defra, BERR, the Department for Transport and, not least, the Treasury. I was a member of a “gang of four” who persuaded the noble Lord, Lord Whitty, to accept the principle of a renewable transport fuel obligation during the 2004 Energy Act. From early days we were trying to persuade the Government that a tax rebate for biofuels was essential.

We did that because of the benefit to the UK economy in terms of opportunities for agriculture and manufacturing, and the contribution that renewable fuels could make to reducing the UK’s carbon emission. The oil companies were not going to use biofuels unless it was in their commercial interest to do so or they were forced to do so by legislation. Of course, it took European Union legislation in the form of the biofuels directive in 2003 for the Government to act decisively.

I have a great deal of sympathy with some of the wide-ranging points put by the noble Lord, Lord Palmer, and a certain overlap with my noble friend. However, I would like to come at this subject from a different point of view; that is, with a rather sharp critique of the way the order was presented to the Merits Committee, of which I am a member, and where I think its approach was wholly inadequate to this very important subject. Because of the faulty definition and the reactions of the fuel suppliers to it, we are now faced with a new start, and indeed not anywhere in the evidence presented to us have we had a critique of the way the renewable transport fuel certificate system is working. All we know is that the UK made a pretty slow start on biofuels and is still markedly behind the game. In such an important area as climate change, to miss the opportunity of reviewing the wider Government policy towards biofuels and the progress made against it is, I think, not what we would expect from the Department for Transport.

It has been pointed out that there is a difficulty; we keep being told that we have a joined-up Government, but in this instance the joined-up aspect has not been achieved. What did the Explanatory Memorandum tell us? We are due to have a revised one in answer to the point made by the Merits Committee that no reference was made to the impact on the UK biofuels industry, whether the agricultural, processing or distribution parts of it. The memorandum states that we have to conform with the renewable energy directive and that the slowdown mentioned in the opening policy statement is,

“in response to concerns about the sustainability and food impacts of indirect land use change”.

The Minister referred to sustainability, but the EM connects it absolutely to the Gallagher conclusion about the possible impacts of indirect land use change. How does that conclusion affect the United Kingdom? We import 14 per cent of our present biofuels from Brazil in the form of bioethanol, and it all comes from sugar cane. Brazil has been producing bioethanol from sugar cane for the past 30 years, and even 20 years ago a 20 per cent blend was being used in Brazilian motor cars that had nothing to do with climate change, but with substituting for imports. Brazil has no indigenous supplies of oil, so for many years the Brazilians have been interested in producing bioethanol and blending it with petrol. They are also the world’s largest producer of sugar from sugar cane, with Australia coming in second.

I was for a while the chairman of the trustees of Kew Gardens. I heard about deforestation in Brazil for the purposes of cattle and soya, but I am not aware of it having been an issue that has affected the Brazilian sugar cane industry. There is no evidence in the Explanatory Memorandum or the regulatory impact assessment to connect the Gallagher conclusion with Brazil. Secondly, there is a strong conclusion about South-East Asia, Indonesia and Malaysia related to palm oil, which forms 7 per cent of the UK’s consumption of biofuels, in this case biodiesel. It is perfectly true that there are issues about biodiversity and deforestation that relate to the planting of oil palms. However, we have to remember that the oil palm is the most productive vegetable oil plant in the world, and much more productive than soya and oilseed rape. It is much more highly productive than soya oil or oilseed rape. It is dangerous to draw conclusions from the fact that 7 per cent of the UK’s imports relate to oil palm. What about the indirect effects on land use of the rest of the UK’s consumption—75 per cent of it, approximately? That is mainly imported from the United States and produced in Europe, including the UK and, to a degree, in Argentina, which has a temperate climate. There is an analysis in the RFA’s reports about how much of this is from existing cropland. The answer with UK production is that 100 per cent is from cropland. I do not believe that there are any indirect land use effects in the UK. In the Explanatory Memorandum and the RIA, there is absolutely no evidence that there is. I suspect that the issue in the case of the USA is about how much support the US Government should give to their farmers, particularly in relation to soya beans, but that is a different issue—it has nothing to do with the Gallagher conclusion.

We move from the Explanatory Memorandum to the regulatory impact assessment. For the first time, that raises the question of greenhouse gas emissions and gas savings. That is not in the Explanatory Memorandum, although that is the heart of the Government’s policy on biofuels. In the latest RFA report, the savings are calculated at over 40 per cent; so far, so good. It says that if we were able to calculate indirect effects, it might be somewhat lower. I do not think that it would be much lower for the UK. If future calculations show that it is, I hope that we will be presented with it.

Deep in the RIA, after a passage about government intervention, which in essence is a negative intervention—that is to say, “You will pay if you cannot produce certificates”; as the noble Lord, Lord Palmer, said, that is something that people have to live with because of climate change although it is not something that they enjoy—we are told that the 20p duty rollback will disappear at the end of the coming financial year. The government intervention will become all stick and no carrot in April 2010. It is very distressing that throughout this presentation, there is no mention of UK agriculture or UK processors, yet sugar beet provides 16 per cent of our bioethanol usage; it is a UK supply and does not have indirect land-use issues. The hectarage of sugar beet has been going down because although the performance of the beet has been pretty good in terms of yield, the price has been very poor. I do not think that the sugar beet issue has any effect on food supplies in the UK or in the world, where there is—there always has been in my time in tropical agriculture—plenty of sugar.

I turn to the oilseed rape market. The document is silent on the production of diesel from oilseed rape, yet we import 15 per cent of the biodiesel that we use from Germany; we produce only 6 per cent from UK supply. One asks what is going on to make that the situation. I thought that the Common Market was a level playing field and I find it difficult to believe that Germany can produce oilseed rape at a lower cost than the UK.

The UK processors—I will finish very shortly—are basically living on used cooking oil and, to a degree, on tallow and sugar beet as domestic supplies of feedstock. Some of their plants are working at well below capacity. Every now and again we are told that there are great hopes for second generation biofuels, which somehow will put all this right, even though in the Government’s view, the primary agriculture market does not seem able to perform. I am very sceptical about second generation feedstocks. It is freely said that they are waste materials, but the great majority of them do not have no use at present. Do we have a United Kingdom policy on biofuels? If we do, what is it, or are we just waiting to be told by Brussels what to do next?

I am extremely grateful for the contributions of my noble friend Lord Eccles and the noble Lord, Lord Palmer, who obviously know far more about the subject than I do. I have one question for the Minister arising from their contributions. Can he alter the RTFO to discriminate between UK biofuels, when he knows that they are not displacing other food crops or having undesirable effects, and those of overseas suppliers which are known to be producing the fuels unsustainably; or is he precluded from doing that by the free market rules?

Before the Minister gets to his feet, I should also like to ask one more question. Obviously the order corrects a government mistake but what really worries me is that all these producers stand to lose 500 million renewable transport certificates according to the latest figures that I got this morning, which amounts to something in the region of £300 million. Will the Government compensate these growers? I hope that the Minister will give a categorical assurance as regards importing ethanol, particularly from South America. When we originally dreamed this up four years ago, it never crossed our mind that we would be cutting down the rainforest, growing sugar, making ethanol and shipping it half way round the world. It was absolute madness. I also look forward to hearing the answer that the Minister will give to the noble Earl.

I think that only 8 per cent of our usage is domestically produced.

I am grateful to all noble Lords who have spoken. A large number of points have been raised and I may respond to some of them in writing. We have submitted further evidence to the Merits Committee. The noble Viscount, Lord Eccles, may be aware that I wrote to that committee on 27 February, and that we have been revising the impact assessment, which I hope has given him more information.

There is a big question and a number of little questions. I shall deal with a few of the little questions first. I welcome the noble Lord, Lord Oakeshott, to our debates. The proportion of UK biofuel coming from domestic feedstock is about 8 per cent at the moment. The noble Lord asked me what ester is. I am afraid that I am coming to the limits of my knowledge here but I am told that it is a chemical compound that mimics, or substitutes for, diesel. I say to the noble Earl that we cannot discriminate between different biofuels suppliers, which is why it is so important for us to ensure that we have a sustainable basis for production at the European and domestic levels. I again put on the record that I agree it is extremely unfortunate that the definition of “relevant hydrocarbon oil” in the 2007 order was inadequate for the purpose. It was precisely for that reason that we regarded it as our duty to come forward with this amendment as soon as we could in order to give the confidence that the noble Lord, Lord Palmer, and the noble Viscount seek as regards the future of the biofuels industry.

I think that I can respond fairly robustly to the major question that underpins the debate. It is not the case that we do not see a strong future for the biofuels industry: we do. Indeed, I have met the noble Lord, Lord Palmer, to discuss his interest in biofuel production, as well as quite a number of biofuel suppliers, and I know that they are doing good work. However, to balance the support and confidence that we must give to the biofuels industry with concerns about the environmental sustainability of certain biofuels, we asked Professor Ed Gallagher, the chair of the Renewable Fuels Agency, to look at the whole issue last year. He produced a report that runs to 90 pages and looks at a large number of the issues that have been raised in the debate.

I took the noble Viscount, Lord Eccles, to be criticising the Government for not supplying sufficient information to the Merits Committee. We took it for granted that the Gallagher report would be available to the committee; indeed, we supplied it. It is the most substantial and in-depth assessment that has been made of issues such as indirect land use and the sustainability of biofuels. Perhaps the most useful thing that I can do to indicate the Government’s stance is simply to quote from the Gallagher report and its conclusions, which, as I say, were published only last July and formed the basis of government policy on biofuels and the course that we are taking in the ongoing negotiations in Brussels.

In the report’s foreword, Professor Gallagher says:

“We cannot afford to abandon biofuels as part of a low carbon transport future. Equally, we cannot continue producing biofuels”—

“we” means not only UK producers but producers globally—

“which are ultimately more environmentally and socially damaging than the fossil fuels they seek to replace”.

The report concluded:

“This review concludes that it should be possible to establish a genuinely sustainable industry provided that robust, comprehensive and mandatory sustainability standards are developed and implemented. It further concludes that the risks of indirect effects can be significantly reduced by ensuring that the production of feedstock for biofuels takes place on idle and marginal land and by encouraging technologies that utilise appropriate wastes and residues. A framework for such policies is proposed, but significant challenges remain in the detailed design, implementation and enforcement … The RFA judgement, based upon the balance of evidence is that if all subsidies and other support for biofuels were removed entirely, this would reduce the capacity of the industry to respond to the challenges of transforming its supply chain and investing in advanced technologies. However, the rate of introduction of biofuels should be slowed until adequate controls are established”.

That is precisely the Government’s policy. It was precisely in response to those recommendations by Professor Gallagher—a good deal of the points raised by the noble Viscount are, as I say, addressed in the 90-page report—that we announced after careful consideration late last year our intention to slow down the rate of growth in the targets for biofuel, to achieve the 5 per cent target by 2013-14 rather than 2010-11, to remain committed in principle to more ambitious targets for 2020, and to have the EU review in 2013-14: all in the cause of establishing a firm and clear policy base on which we could reassure those who have expressed concerns about the environment and give confidence to biofuel producers that we remain committed to the progressive increase in the supply of biofuels—the present generation of biofuels as well as the second generation to which the noble Viscount referred. In doing that we also give confidence to the investors, who, as I well appreciate, are making significant investments in this area.

I thank the Minister. He may recall that I raised the question of the commitment to the 2020 target. I listened carefully to him, and he said, “We remain committed in principle”. Perhaps he could explain the difference between being committed to a target and being committed to it in principle.

I was coming to that point in a moment with regard to the next steps that we will take.

In June this year we will submit an action plan to the European Commission containing indicative trajectories and plans for using biofuels to meet the 10 per cent target under the renewable energy directive, so we remain committed to that target. We have established a cross-sector stakeholder group to help to advise us on how we go forward, and will publicly consult on more detailed proposals later this year, including, I stress again, indicative trajectories of the growth of supply after 2013-14. Having met representatives of the industry over recent weeks, I know it is a concern of theirs that there should be a clear trajectory beyond 2013-14 for the growth in the supply of biofuels and it is our intention, when we submit our action plan to the Commission, to publish indicative trajectories beyond that year. The cross-sector stakeholder group, which includes leading biofuel suppliers as well as environmental groups, will be meeting from next month. I hope that, again, that will help us to establish a consensus on the way forward.

The development of the action plan that I have referred to should provide an opportunity for future debate, but also for greater investor certainty. With regard to the order we are debating today, however, I stress again to the Committee that if we do not support this amendment to the RTFO now, the discrepancy that has caused so much concern to suppliers will remain uncorrected. In effect, that would give fossil-fuel suppliers the opportunity to avoid the obligation in future through blending small quantities of biofuel with their fossil fuel. That outcome would damage both the biofuel industry and our efforts to tackle climate change. While we accept that we need to establish as soon as we reasonably can a clear trajectory for further development of biofuels beyond 2013-14, the order is necessary. As I say, it is part of a clear government policy for the development of biofuels. We could not have sought to address the underlying concerns and evidence more thoroughly than we did with the work of the Gallagher committee that was published last year; it is a comprehensive analysis that is informing our negotiating position in Brussels and has led to clear statements of policy that I believe give confidence to the industry about the development of biofuels over the next five years, while in the summer we will be publishing our further indicative trajectory for meeting the 10 per cent target. Taking all these factors into account, I think the order deserves the Committee’s support.

Before the Minister sits down, I accept that that is the conclusion that Gallagher came to, but if you look at his terms of reference—which I am sure the Minister has—you see that he was asked to look at the issue on a global basis, and that is what he did. He did not study what was happening with sugar beet in East Anglia or what was happening about oilseed rape in Yorkshire. There was no UK focus. There is a question mark about tallow, which is not related to the same issues as the sustainability criteria for normal agricultural crops, but so far as I know there is no sustainability issue with UK-grown oilseed rape, nor with sugar beet. If there is, we should be told about it. If the Minister and his colleagues spend the next three years looking at the global issues, what will happen to the industry in the United Kingdom?

The point is that we cannot separate out the two because we cannot control where biofuels come from. As the noble Viscount rightly says, there are good and bad biofuels. I have met domestic suppliers of biofuels and I am persuaded that they come into the “good” category, but because we cannot control where those fuels come from and this is an international market, it is incumbent on us to see that, as we develop biofuel targets, they take proper account of sustainability concerns, including those about indirect land use. That is no reflection on the domestic suppliers, simply a statement of the necessity that we face to see that the industry as a whole is put on a sustainable basis if we are going to see the significant increase in biofuels that we want so that they can replace fossil fuels. They must do so on a basis that does not have unacceptable negative environmental impacts.