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Energy: Biofuels (EUC Report)

My Lords, I start by congratulating my noble friend Lord Sewel on his excellent report. As the noble Earl, Lord Selborne, said, it was very concise and well argued and, as usual, my noble friend delivered a speech thatwas witty and to the point. This has been an extraordinarily interesting debate. I confess that I am a novice on the issue, but I am a willing student who has, on the evidence of this afternoon, fallen among farmers. I am most grateful for their contribution because it has certainly added to my understanding of the subject. The topics covered have been wide indeed. We have had calls for a more beneficial tax approach to biofuels; the Government have been urged to give greater market certainty—the noble Lord, Lord MacGregor, made that point very powerfully and persuasively. The noble Lord, Lord Renton, said that we had a real duty to ensure that the apocalyptic warnings of some who enter the debate do not come to pass. I certainly agree about that. I now look forward to having the opportunity at some point to go to Indianapolis and taste the air. I think that corn fritters were on offer. The noble Viscount, Lord Ullswater, was right to congratulate Sub-Committee D for taking on some of the more extreme views expressed outside your Lordships' House with a very balanced report. The noble Lord, Lord Teverson, said that the report hit the spot. He was absolutely right. The noble Lord, Lord Palmer, was right to say that the report identifies our position has having lagged behind Europe in the past, but we are now playing catch-up. The noble Lord, Lord Cameron, referred to the importance of recognising the value of second-generation biofuels, our moves toward that and the investment required to achieve a positive outcome. I put on record and make it plain that the Government are fully committed to their promotion of sustainable biofuels. Ensuring the sustainability of biofuels is an essential part of our policy, a point to which I shall return, as I picked up on other observations made in the debate. Biofuels have an important and strategic role to play in helping to meet the UK and Kyoto climate change targets. As many noble Lords have said, they offer other social and economic benefits, not least to those in rural areas where there is significant potential for new employment opportunities from this emerging industry. Job creation is a valuable by-product of the development of biofuels. Biofuels offer significant potential for reducing greenhouse gas emissions in transport today where other renewable sources, such as wind, solar and tidal power, are simply not practical. But transport is not the only end-use for bioenergy. The forthcoming biomass strategy, which is due to be published alongside the energy White Paper, will explore how biofuels fit within a wider bioenergy-use context, including for heat and power generation. Let me say a few words about the strength of the biofuels market, which, as many noble Lords have said, is very much an emerging market in the United Kingdom and in Europe generally. As my noble friend Lord Grantchester noted, some member states, such as Germany, France and Sweden, have had domestic biofuels markets for a number of years, which are encouraged by measures introduced to support their Governments’ agricultural and fuel-supply policies. But many EU member states are in a similar position to the United Kingdom in seeing biofuels only very recently coming to the fore. As the noble Lord, Lord MacGregor, said, our market is very young and we entirely agree with the committee’s conclusion that additional measures are needed to ensure a mainstream market. We see the sustainability and environmental policy arguments as fundamental drivers for how we should seek to encourage the more rapid growth of a vibrant biofuels market. That is why, in late 2005, we announced our plans to introduce a renewable transport fuel obligation. Great credit was given to those, such as the noble Lord, Lord Palmer, and the late Lord Carter, for playing their part, along with our Ministers, in ensuring that that RTFO was put in place. That early announcement and the introduction of fuel duty incentives has already led to a step change increase in the UK biofuels market, with new plants coming on stream. We have heard in particular from the noble Lord, Lord MacGregor, about some of those developments today. In 2004, biofuels represented just 0.05 per cent of total fuel sales. But in 2006, 264 million litres were sold—about 0.5 per cent of total fuel sales—which is a tenfold increase. First quarter figures for this year show that this trend is set to continue. The noble Lord, Lord MacGregor, and my noble friend Lord Grantchester said that we should be more ambitious and more robust in our approach. But we should agree that the progress made since 2004 is enormously encouraging. We are confident that,once the renewable transport fuel obligation is implemented in April 2008, the trend will continue upwards so that, by 2010, 5 per cent of all fuel sold in UK forecourts will come from renewable sources. That is the highest inclusion rate possible under current EU fuel-quality standards. It will mean real environmental benefits, equivalent in carbon terms to taking a million cars off the road in 2010. We welcome the committee's support for the approach that we are taking through the RTFO. The Government were already looking beyond 2010 for biofuels before the recent decisions reached at the spring European Council. We have said that we will consider increasing the RTFO level in the future. We are inviting views on what this might look like aspart of the Department for Transport’s current consultation. It might be worth me saying a few words about the impact of the spring Council. The endorsement ofthe energy policy for Europe was a significant step forward, which the UK welcomed strongly. The agreement of European targets for renewable energy of 20 per cent and for biofuels of 10 per cent by 2020 was historic and extremely ambitious. Each country will have to work out how it plans to meet its obligations, given its individual circumstances. I am sure that noble Lords will be interested to know that the 10 per cent biofuels target as described in the Council conclusions is closer to a 13 per cent target for UK purposes. That is because, whereas Europe refers to energy content for biofuels, in the UK we use volume sales as our benchmark as it fits better with our national fuel duty arrangements. I think we all agree that this is an ambitious target but I am pleased to say that, in setting the biofuels target, the European Commission took on board several key points made by the United Kingdom, particularly in relation to sustainability, a key issue for my noble friend Lord Sewel’s committee. In our preparations for the RTFO, we have always stressed that there are several big ifs associated with setting higher targets now for the future. We have already set three key conditions that would have to be met before the RTFO level could be increased. These are the development of robust carbon and sustainability standards for biofuels. The noble Earl, Lord Selborne, and the noble Lords, Lord Cameron and Lord MacGregor, were vociferous in arguing for those. There has to be greater certainty that using higher blends of biofuels will not harm vehicles on the road today, and that costs to the consumer have to be acceptable. It is these conditions that have also been recognised as important by the Commission and captured as conditions that need to be met if the spring Council 10 per cent target is to be achieved. Perhaps this is the right moment to say a littlemore about the sustainability aspects. Ensuring the sustainability of biofuels and maximising the carbon benefits they offer are real challenges; we are all agreed on that. We do not yet have agreed sustainability standards for biofuels either internationally or at the European level. The UK is, however, widely regarded as taking a global lead in the area, and a number of noble Lords have acknowledged that and congratulated the Government on taking that lead. It is something I am proud of as well. The Government welcome the support given by the committee to our focus on sustainability issues. Through wide stakeholder engagement and research, we are developing methods for calculating life-cycle carbon savings. We have also developed a clear vision of what sustainability criteria we want to address, such as land use changes, the impact on biodiversity, water resources, soil quality and so on. However, we need to road test this work on the ground throughout the whole supply chain from the farmer in the field to the petrol station forecourt, and crucially we have argued that we need to build an international consensus, particularly among producer countries such as Brazil, in order to move forward internationally those sustainability standards. Acting without international agreements would bring its own difficulties, and the World Trade Organisation rules are a major consideration. We continue to work together with the United Kingdom’s Low Carbon Vehicle Partnership, other member states and international standard-setting bodies to try to hammer out a common set of principles and objectives. In parallel we are developing a reporting mechanism as part of the RTFO implementation strategy. The mandatory reporting scheme called for by a number of noble Lords will ensure transparency on the effect of the policy, and will help to focus obligated companies’ attention on the sustainability and carbon balance of the fuels that they source. This is because the public will be able to find out easily how a particular transport fuel supplier is performing based on the information we will be asking each company to make available. Alongside our RTFO implementation work programme, we are encouraging the European Commission to make use of our own developing knowledge in this area, and we are also pressing the Commission to develop a robust and transparent sustainability assurance regime as a vital and early part of its plans to meet the ambitious new European biofuels targets. I come back to the spring Council and its new targets. The Commission has added one further condition for the biofuels target. It has specifically identified the need for second-generation biofuels to be a commercial reality if the ambitious new targets are to be met. We agree that this is sensible. So-called second-generation technologies will be able to use a far wider range of feedstocks than conventional biofuels, a point made clear by a number of noble Lords. Potentially—and very valuably, I argue—that will include things like green municipal waste, to which the noble Baroness, Lady Byford, in particular drew our attention. That would not only bring higher greenhouse gas savings buthelp to address our waste problem, reduce pressureon land and avoid competition with food. The Government agree with the committee’s conclusion that the European Commission has an important role to play in enabling these more advanced biofuels, including through research and development. Although second-generation biofuels are not yet a commercial reality, there is, as was widely appreciated during this afternoon’s debate, considerable excitement about their development and a great deal of research. There is now a lot of demonstration activity under way in this area. However, it is still unclear how rapidly those second-generation biofuels might become core to the biofuels market. These are exciting times, as we prepare to implement the RTFO next year and rise to the considerable challenge of the European Union spring Council’s agreement and the targets that have been set. The Government welcome the way that the committee has raised the topic among noble Lords and more generally and stimulated a much wider debate. I was asked a large number of questions. I am more than happy to provide some of those answers now, but if I miss something I promise I will provide a written round robin letter to all who have contributed this afternoon. I shall start with the question my noble friend Lord Sewel drew to our attention, about the figures on relative efficiency and the cost-effectiveness of biofuels compared with other measures. Here I will have to commit to write to the House with the details, but the Government’s detailed economic analysis was provided in our revised climate change programme, which we published last year. The noble Lord, Lord Bradshaw, asked a number of valuable questions. He asked whether the incentives to the oil companies were strong enough to ensure that they will supply the fuel. We have set the level of penalty under the renewable transport fuel obligation at a level high enough to ensure the supply of biofuels. We will keep that level under review to ensure that the policy achieves its objectives. The noble Lord, along with the noble Lord, Lord Grantchester, asked the important question: how will we achieve the 10 per cent target? From next year it is our intention to introduce a renewable transport fuel obligation that will require fuel suppliers to ensure that a percentage of their fuels are renewable. We believe that mechanism will enable us to meet future targets. However, higher targets than 5 per cent are subject to important caveats, and we need to understand those. In particular, the biofuels need to be sustainable. We are inviting views on the longer term for the RTFO in the current consultation, and we will feed the responses we receive into our development of a strategy for responding to the EU targets themselves. It is worth bearing in mind that those EU 2020 targets have some very important provisos, and we will want to consider them with our European colleagues. The noble Lord, Lord Bradshaw, also asked whether the 10 per cent target included aviation. The EU target for biofuels by energy content for 2020 relates to diesel and petrol consumption. Biofuels and aviation are an area of interest, although there are major challenges in our view to finding a fuel that operates efficiently in aircraft. For aviation, we argue that the emphasis and challenge is currently to promote co-operation to stimulate alternative aircraft fuels to kerosene, and the OMEGA project is looking in particular to stimulate that development. The noble Lord, Lord Cameron, was right to draw our attention to the importance of research and development in second-generation fuels and to raise the issue, as he put it, of Defra cuts. The Government recognise the importance of developing new and sustainable sources of biofuels, particularly the importance of second-generation technologies. But that research is not merely supported by Defra programmes; industry is a key R&D source, for example, and the DTI is also a major supporter for government R&D in this area. It is a cross-government activity, reflecting the cross-cutting nature of biofuels in terms of policy development. The renewable transport fuel obligation itself should encourage industry to invest in these advanced technologies. It is worth acknowledging that we are investing something like £1 billion over the next 10 years through the Energy Technologies Institute. An important part of its programme is yet to be developed but it will consider transport and energy issues and look at biofuels in particular. The noble Lord, Lord MacGregor, argued for stronger signals and incentives to stimulate the market and said that tax incentives would play an important part of that. It is worth noting in that context that the Chancellor has committed to maintaining the 20p per litre duty differential until 2009-10. In addition, the buyout price under the RTFO is 15p per litre, providing a total level of support of up to 35p a litre. That should ensure that we meet the targets under the RTFO commitment. The noble Lord, Lord Palmer, made an important point about us lagging behind member states, whichI dealt with in my broader commentary. He alsomade the case for having a dedicated government department for biofuels and bio-energy, and argued that the current situation was too fragmented. That is an interesting idea, but I am not persuaded of the benefits of that at this stage. The Government will shortly publish our energy White Paper and our biomass strategy. They will reassure my noble friend that all government departments with an interest in biofuels are working effectively together to develop a coherent and joined-up strategy. To that end, the noble Lord, Lord Plumb, made a plea for partnership approaches. Of course we agree with that. That is why we have made the progress that we have. I will draw the debate to a close now. Some questions are still unanswered and I know that the noble Baroness, Lady Byford, will no doubt chide me for not getting through all of the points that she asked. I apologise for that, but this is a wide-ranging and complex subject. It is no doubt a subject towhich your Lordships' House will want to return on numerous occasions. I commit this afternoon to providing noble Lords who have participated but not had all their points answered with as full a response as I can. I congratulate the noble Lord, Lord Sewel, again. I greatly enjoyed the debate and embarked at least on the lowest steps of a sharp learning curve on the subject—an extremely important subject for our security in food supply, our environmental benefit and for the long term.