---

Renewable Transport Fuel Obligations Order 2007

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.