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Energy: Biofuels (EUC Report)

My Lords, I begin by declaring an interest. I am a non-executive director of Associated British Foods, which owns British Sugar. I have declared that interest in these debates before. I, too, would like to congratulate my noble friend Lord Renton of Mount Harry and his colleagues on what I regard as an outstanding report, which has already had a significant impact. It is succinct. It covers all the main points well, and Iagree with all its recommendations. Therefore, I shall concentrate on only four issues. From the way in which my noble friend Lord Selborne and the noble Lord, Lord Cameron, were developing earlier parts of their argument, I wondered at one point how they signed up to the final recommendations in the report. It is possible to reconcile that, and indeed the three objectives, provided that some of the warnings they gave are taken into account. I also make the point that the second generation of biofuels will not be fully developed unless we make a start on the first generation and ensure that we are serious about developing them. On the first issue, I agree with all three objectives at the beginning of the report and do not think that they are unnecessarily incompatible. As others have said, the strengthening of energy security is increasingly rising up the agenda in the EU, compared with climate change, which dominated earlier debates. That is no doubt due in part to recent events, to which the noble Lord, Lord Cameron, referred. Of course, we must not exaggerate the impact of biofuels on energy security. I agree with my noble friend Lord Selborne that they are only a partial, perhaps small answer, but they can make a worthwhile contribution to both diversity of supply and home-grown fuel, and it would be folly not to develop them. The environmental benefits are important to capture but, as others have said, it is necessary to ensure that there is a plus, taking account of issues such as deforestation, energy use in producing such fuel and transport costs. Here, I very much agree with the report and with what the noble Lord, Lord Sewel, said, about finding and applying a method—difficult but workable, as I think that the evidence to the committee made clear that it will be—of carbon accounting, getting a system to monitor, evaluate and certify the overall environmental performance of both important and domestically produced biofuels. I want to return to that later. Of course, there is the domestic agricultural impact. I am surrounded in this debate by agricultural experts, but I live in Norfolk and still keep closely in touch with my agricultural community. We all know what a very difficult period farmers have gone through during the past 10 years as income has declined and with the low output prices. This could provide another important income source very quickly, paying farmers for something that has an economic use and value, which set-aside does not. My second point concerns the role of the British Government. The report brings out clearly the impact of incentives in developing biofuel demand and supply. It is no coincidence that the member states with the greatest incentives, Germany, Sweden and Spain, were the ones to develop the market. The UK Government were slow to react. The 20p per litre fuel duty reduction was sufficient to incentivise the industry. The renewable transport fuels obligation came through rather slowly. I pay tribute to the noble Lord, Lord Palmer, and the late and much missed Lord Carter—I played some part myself—on the Energy Bill in 2004, I think it was. We tabled an amendment and the noble Lord, Lord Whitty, to his great credit took it on board and provided the legislative wherewithal to get the RTFO to proceed. I suspect that capital allowances will not have much more than a marginal impact compared with the RTFO. Hence, as the report shows, we have been behind others in developing biofuel prospects. Our sales of biofuel to date have been below target and we are hardly giving a lead up to 2010. By setting our targets by volume, not by energy, as does the directive, our 2005 target was only 0.2 per cent and our target for 2010, measured by energy, is 3.5 per cent, compared with the indicative target in the directive of 5.75 per cent measured by energy. We need to be more ambitious. Above all, the Government need to indicate to industry that they will be robust in insisting on the targets; that the targets will be in place for the long term; and that the incentives will be maintained for a reasonable period. British Sugar has been developing and will openthis June the first bioethanol plant in the United Kingdom, at a cost of £25 million. It will produce 55,000 tonnes of bioethanol each year using 700,000 tonnes of sugar beet. It went ahead only when the Government made clear that they were going ahead with the RTFO. That, and especially the development of second-generation biofuels, will involve industry in considerable capital and R&D investment. The point was well made in paragraph 116 of the report: "““The importance of reassuring the market about public policy towards biofuels should not be underestimated””." Earlier, the report refers to the economically marginal element of biofuel production in the EU, which will require a continued substantial amount of support, and then moves to an analysis of what it calls the great tax giveaway—with a question mark, which I emphasise. I agree with those who say that the mandatory obligation weapon in the policy is by far the most significant and it is that that has driven people to move. However, at present, to give the industry the long-term assurance that it needs properly to develop the market and meet the targets, tax incentives need to continue as part of the package, although I can see that, in the longer term, they can be phased down or out. I have two more points to make on signals and incentives from the Government. When the RTFO comes in in 2008, it is important that the buy-out price is set as high as possible. The Government must also indicate as soon as possible how they intend to implement the binding 10 per cent target for 2020, as agreed by the European Council. If they did so, this would boost investor confidence in the UK biofuels industry and put it on to a more solid basis. Without this element of longer-term market certainty, investment, particularly into second-generation biofuels in the UK, cannot be assured. I said that I would develop the point about carbon measuring a little further. Some have demanded that the Government introduce minimum carbon-savings thresholds and sustainability standards to qualify for certificates under the RTFO from the start of the scheme. They argue that mandatory reporting alone is insufficient to prevent environmental disasters such as deforestation. British Sugar believes, and I agree, that the direct linkage of the kind proposed by those who are arguing for this should be introduced as soon as—this is the qualification—there is a consistent set of robust and reliable data based on globally accepted science. Current accounting systems are developmental, at best, and are not fully understood by global biofuel supply chains. Moreover, the establishment of minimum sustainability criteria must be acceptable, within WTO trade rules, and there must be minimum standardsfor carbon and sustainability reporting, agreed and implemented at EU level. The Government have been right to take the lead in the EU by insisting on mandatory reporting on carbon and sustainability standards, but I encourage them to continue their stance, as announced in the energy review, to develop robust standards before moving to linking support to minimum standards. Finally, there will be many questions of balance, as noble Lords have already made clear in the debate. There is, for example, the balance between food production and fuel production, to which the noble Lord, Lord Sewel, referred. Driven by growing ethanol demand, as we know, and recent signals from the US President and Government, US farmers intend to plant 15 per cent more corn acres in 2007. We have already seen an impact on the price of wheat, and there could be implications for food commodities and a consequent impact on food prices. We live in a global world, and that balance and those possible unintended consequences need to be watched. Some people are already expressing fears about the implications for UK food production, but I believe there is sufficient feedstock and land availability in the UK to enable bioethanol to contribute to meeting the targets of 5 and 10 per cent. We have a current annual exportable wheat surplus of 3 million to4 million tonnes, and 500,000 hectares of set-aside that will, I hope, be available after 2008. The industry will no doubt develop new technology to improvethe yields of existing feedstock, and develop new feedstock and conversion techniques. I note that Clare Wenner was quoted in the report as saying: "““We do not have the land … to go on fuelling this for ever””." That is a sensible warning for the long term, but it is not an issue for the next 10 years. As this excellent report makes clear, the opportunities should be grasped now.