4 February 2003
SPEECH BY THE ECONOMIC SECRETARY TO THE TREASURY, John Healey MP, on bio fuels at the Fabian Society
I'm very pleased to be here.
I welcome the Fabian Society's contribution both to the wider environmental debate, and to our thinking on environmental taxation.
The Fabian Society seems to have an unerring instinct for current policy issues. I don't know how you do it but I gauge the importance of a particular issue by the number of letters and meeting requests I receive and I've had more than 100 on this in the last couple of months.
I've been asked to talk about the way the Treasury thinks about issues, and so set the framework for the debate, and our approach to environmental taxation generally and biofuels in particular.
In his first Budget, back in 1997, the Chancellor said:
"The tax system sends critical signals about the economic activities a society wishes to promote and deter."
Alongside that Budget we published our Statement of Intent on Environmental Taxation.
That speech and that statement sent out a powerful message on the environmental policy of Labour in Government. And, for the first time, the terms under which they were to be considered were clearly defined.
We have developed and extended our early approach in the document we published alongside last year's Pre-Budget Report: 'Tax & the Environment - Using Economic Instruments.'
We stated five years ago and I restate now: the essential purpose of our policies is to confront the market failures which send the wrong signals and support the wrong behaviour over the use of environmental resources.
So we are:
tackling negative externalities, in line with the 'polluter pays' principle: for instance by ensuring market prices reflect the environmental costs;
promoting investments which have positive externalities: for example by remediating contaminated land and bringing investment to run-down areas with 150% tax credits;
protecting public goods; for example by new funding for agri-environment schemes in SR2002; and,
correcting information failures: for instance by the information schemes run by the Carbon Trust set up as part of the CCL system.
You might expect it - but not always have seen it - from the HM Treasury, but we insist the intervention should be underpinned by a rigorous analysis of costs and benefits.
So our new document defines the terms on which the Government will make and implement decisions on economic instruments.
One expert who saw an early draft said: "… it reads like a first year environmental economics text book … it will invite ridicule from the environmental movement and from academics."
We were able to reflect these comments in the final draft, and the document has now been welcomed as an excellent contribution to the policy debate. Because it sets parameters for future debate and policy decision-making:
first, early signalling of intent, providing certainty for business and others;
second, rigorous economic analysis, ensuring environment savings delivered cost effectively;
third, consultation, so all stakeholders have a fair and equal chance to contribute to the debate;
fourth, revenue recycling so we achieve more efficient use of environmental resources rather than saving revenue for the Treasury.
I thank the involvement of officials; DfT, DEFRA, Customs & Excise, Treasury. It underlines Government commitment to opening up the process of decision-making - in this case taxation decisions - in an unprecedented way.
What does all of this mean for the fuel duty incentive on biofuels?
it means we have to retain a focus on the central objective of the policy: encouraging cleaner road transport;
it means we have to identify the market failure and design effective instruments for addressing it;
it means we have to think clearly about the benefits and costs of intervention - we cannot support environmental savings at any cost.
I know that you have already heard from the Department for Transport and the Department for the Environment, Food, and Rural Affairs, and their attempts to quantify the benefits of biofuels - both in environmental terms and in other areas.
It is complicated. The environmental benefits differ according to how the fuel is produced. Biodiesel produced from waste oils is more beneficial than biodiesel produced from rape-seed. Bioethanol produced from ligno-cellulosic feedstock is better than bioethanol produced from sugar and wheat.
With both biofuels we need to make sure that potential producers in the UK are in a position to take advantage of any incentives offered, so that they are able to compete with producers abroad. This complex matrix of costs and benefits - environmental, social and economic - poses interesting challenges for us as we flex the fuel duty system to achieve ends for which it was not originally designed.
The key point for the Treasury is that the environmental benefits need to be considered in relation to the costs of achieving them. DfT and DEFRA analysis suggests that the benefits of biofuels are worth a 20 pence per litre incentive.
It is possible to quantify many of the environmental benefits of biofuels. But the 20 pence per litre incentive also reflects other considerations:
- agricultural benefits, including the diversification of market opportunities for arable crops - although as DEFRA have pointed out, support for biofuels is not the most effective way of achieving the Government's agricultural objectives;
- the potential to increase the security of fuel supplies over the longer term;
- the incentive for bioethanol also recognises the potential benefits for the UK of being in a position to develop the technology and capacity to produce bioethanol from ligno-cellulosic feedstocks;
- finally, the incentive recognises the additional costs associated with the production of biofuels, although it is not generally Government policy to use economic instruments to offset companies' production costs.
We therefore believe that a duty incentive of 20pence per litre represents good value for money relative to other potential environmental policies in the transport sector.
Will we give a bigger incentive? At present, all the evidence suggests that 20 pence is the right level and so the short answer is 'no'.
The longer answer is that if we were persuaded that the environmental benefits are bigger than we previously imagined, then of course we would consider a bigger incentive.
We have been responsive to such evidence in the past - for example, it was on the basis of new evidence last year that we decided to announce a duty incentive for bioethanol. Twelve months ago, evidence did not suggest that a duty incentive was justified for bioethanol at all.
But since then new evidence has been brought to our attention, through colleagues in DfT and from discussions with stakeholders. We acted on that evidence in last year's Pre-Budget Report.
Where does this leave the UK industry? There are good signs that biodiesel production is taking off. A multi-million pound investment in a biodiesel plant by Argent has been announced for Motherwell, and Asda have announced that their delivery trucks will soon be run on biodiesel. Total biodiesel sales are now over 425,000 litres. It is clear that the incentive we introduced last July is driving the market forward.
On bioethanol we want to ensure that industry in the UK will be in a position to benefit from the incentive - so we are discussing with potential bioethanol producers when it should be introduced.
We are also keen to support the development of bioethanol from ligno-cellulosic feedstocks and are keen to hear stakeholders' views about how to give this technology further support.
I hope this has been sufficient to meet the brief I was given. It indicates the way the Treasury works. Thanks for this opportunity - let's stick to this framework for further debate this afternoon and beyond.