Rebated Fuel Rules: Construction Industry
(2 years, 3 months ago)
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Mr Peter Bone (in the Chair)
Before we move to the next debate, I remind Members that they are expected to wear face coverings when they are not speaking in the debate. This is in line with current Government guidance and that of the House of Commons Commission. I remind Members that they are asked by the House to have a covid lateral flow test before coming on to the estate. Please also give each other and members of staff space when seated, and when entering and leaving the room. I will have to call the wind-ups for this debate at 5.25 pm. I have been notified of two Back-Bench speakers. I hope that hon. Members can work out the timing. I call Carla Lockhart.
Carla Lockhart (Upper Bann) (DUP)
I beg to move,
That this House has considered the impact of changes to rebated fuel rules on the construction industry.
It is always a pleasure to serve under your chairmanship, Mr Bone. I thank Members for taking the time to attend today’s debate. The broad representation here is indicative of the pan-UK concern that exists around this proposal. I want to make it clear at the outset that the construction industry is supportive of the move towards net zero by 2050.
This debate is not about the need for the industry to play its part in reducing carbon emissions, because that is already recognised and embraced by the industry. Rather, it is about the very negative impact of the change taking effect in April 2022 in the current economic context. It is about the operational and practical ability of the industry to adapt to the change and move to alternative fuels. In the context of Northern Ireland, where we share a land border with another jurisdiction, it is about how local industry will be impacted by handing a competitive advantage to our neighbours in the Irish Republic.
From this debate my hope is that the Government will replace the cliff edge of 31 March, and the potentially disastrous consequences that will ensue, with a transition period and a partnership approach with industry to create alternative fuel sources, reduce carbon emissions and, importantly, support the industry in helping our national economic recovery.
Sir Greg Knight (East Yorkshire) (Con)
I congratulate the hon. Lady on securing this debate. Is she aware that the problem affects not only the construction industry, but the destruction industry—those who carry out mining and quarrying? There is no alternative to using hydrogen-powered or battery-powered machinery, so there is a case for the Government to look again at this matter.
Carla Lockhart
Absolutely. The right hon. Gentleman is stealing my thunder, as I will go on to mention what he has just very eloquently articulated.
The context in which we bring forward significant economic change is vital, whether the desire is to stimulate growth or mitigate negative consequences. Over the past two years many factors, such as covid-19 and world commodity prices, have already severely impacted the UK construction industry, resulting in significant additional costs in materials and an impact on the availability of materials, along with a loss of production and additional escalating costs—and we all know about the energy costs.
The latest Government insolvency data shows that between August and October 2021, 797 construction firms across the UK went bust. That figure is up by more than a fifth compared with the previous three months. It is in this context that I urge the Government to exercise extreme caution in pursuing any policy that will increase costs to businesses that are clearly already struggling under the weight of existing pressures. There is a cold, hard cash reality to this proposal that cannot be ignored.
In preparation for this debate, I met many construction and recycling companies, many of them family businesses, that have given the following stark analysis of the impact of this move. One family company predicts a £300,000 increase in its fuel bill. Another major construction company, which uses 2 million litres of fuel a year, will see its fuel bill increase by £l million. These examples are replicated at companies right across the United Kingdom.
In addition to that increase in cost, companies face significant additional cost pressures in terms of electricity and gas prices. The cumulative impact of input cost rises is more challenging now than at any time in the past 15 years. The question is how the Government see those companies absorb the costs, remain profitable and contribute to our national economic recovery.
In the past 18 to 24 months, the Government rightly put great resource into supporting jobs and businesses. I commend them for that. Now is not the time to jeopardise the tens of thousands of jobs sustained by our construction industry with a policy that is right, but whose timing is wrong. The issue of timing is at the crux of this—timing not just in respect of our economy, but when it comes to implementing change to how we power our construction industry.
The mineral products sector produces 400 million tonnes of material a year across the UK, including 200 million tonnes of aggregate. That all requires extremely powerful equipment to work a quarry all day, which is far beyond the capability of the existing non-diesel equipment in the market. To be an effective replacement, non-diesel equipment will need to match the power, range, torque and payload.
The Government’s main contention in justifying the timing of the tax change was that it will encourage manufacturers to bring forward alternatives, but they are all working on it already, and it seems unlikely that a tax change for some of the users of red diesel in one country will have much impact in a global market. The UK and Ireland are not a huge market for any of the major global manufacturers of our equipment, with Europe in total accounting for as little as a fifth of sales for some suppliers. Removing the existing rebate for UK users will not make a material difference.
Even assuming that the equipment will become available, there are significant challenges in powering it. Many quarries are in remote locations and may not have access to an electrical grid connection suitable for the level of demand that electrifying such equipment would need. Significant and expensive upgrades will be required. Similarly for hydrogen, ensuring adequate affordable supply will be critical to weaning industry off diesel. Neither of those issues has been addressed adequately yet.
I ask the Minister to acknowledge in her response that the Government recognise that there are no suitable alternatives for most users and that the incentive effect of the tax change on development in a global market is tiny. That being the case, how do the Government believe that now is the right time to administer this significant change?
Operational and practical difficulties also extend to adherence to the proposed changes, if they proceed. The small family construction company that uses the New Holland tractor and the Merlo telehandler on a site during the week and on the family farm in the evenings and at the weekends is now put in a totally impracticable position. Does it run those vehicles on white diesel all the time, incurring additional costs and hitting profitability? Does it buy totally duplicate machines, which would be financially impracticable? Does it follow Her Majesty’s Revenue and Customs rules and flush out the tank before the diesel change, which is again totally impracticable?
That example is replicated in farms and at construction sites right across the UK. Indeed, the same issue will affect those who hire plant equipment, making the management of their business incredibly difficult as they implement the change and seek to adhere to the law.
This is a UK-wide concern, but I hope that Members will indulge me for a few moments as I highlight specific concerns in the Northern Ireland industry. As we share a land border with another jurisdiction, we do so with a direct competitor for business watching the issue closely. There is no doubt that businesses based in Northern Ireland producing and supplying materials to the Irish Republic will be placed in a less competitive position. I have engaged with companies for which Republic of Ireland trade makes up 15% of turnover. For other Northern Ireland firms, that figure will be higher. The change in rebate rules poses a direct threat to such business and, subsequently, to the jobs sustained by that element of the business.
Specifically for companies located in the border areas, there is a secondary risk of material being supplied into Northern Ireland where competing producers based in the Irish Republic will not have to deal with the increased cost, thereby making their products, goods and services more economically appealing to purchasers in Northern Ireland. Furthermore, that will increase the likelihood of tax evasion, as those imports will be subject to aggregate levy, thus meaning more surveillance work for HMRC.
The operation of two sets of rules on the island of Ireland poses a practical problem. If a construction plant is moving up and down, it can use green diesel in the ROI, which will leave markers in the tank for a period. If a plant is moving up and down weekly that may cause issues, and leaves it open to abuse. For those reasons, I ask the Government whether they have undertaken an economic impact assessment of the change to business, particularly in Northern Ireland.
When I questioned the Exchequer Secretary to the Treasury on the proposal in the House on 7 December, the following rationale was given:
“To help ourselves achieve net zero and improve UK air quality, we are reducing the entitlement to use red diesel, which currently enjoys a duty discount, from next April.”—[Official Report, 7 December 2021; Vol. 705, c. 171.]
The reality, of course, is that the proposal will do nothing to achieve net zero or improve air quality, as firms can switch to white diesel only in the absence of greener alternatives. Indeed, the fact that the Government are also removing the rebate from some greener alternatives calls into question the claim that it is even about emissions. One company that has engaged with me since I secured the debate said:
“Bio-diesels like Hydrogenated Vegetable Oil are also being affected be the rebate removal. Therefore it is likely on 1 April 2022 we as an industry will move towards a White Diesel as it is the more commercially viable option.”
That multiplied across many firms will result in the policy having the opposite impact on the environment than that stated by the Government.
The Exchequer Secretary also told the House about the consultation undertaken by the Government. The policy change was first proposed and consulted on when the pandemic was at its height. As such, consultation responses did not reflect the deep concern that is now evident regarding the proposal. Indeed, the market conditions now are as challenging, if not more so, than when the consultation was held. I plead with the Government not to ignore the concerns of the industry. According to the Civil Engineering Contractors Association, losing the red diesel rebate could cost the UK construction industry £280 million to £490 million a year—£20 million to £25 million in Northern Ireland. For our local Executive, the additional cost would be the equivalent of a new build school.
For firms tied into public contracts, absorbing that cost is not possible. It will put them under, and make future Government investment in building roads, schools and hospitals more expensive. We need the Government to pause the proposal and move towards a phased introduction that removes the rebate as new technologies come online that allow the industry to really help to reduce carbon emissions, not just pay more now for no benefit. Consideration must also be given to exemptions, not least for the waste management industry.
I conclude by quoting the Chancellor in his Budget speech to the House last year:
“That is what this Budget is about and that is what this Government are about. Infrastructure connects our country, drives productivity and levels up.”—[Official Report, 27 October 2021; Vol. 702, c. 279.]
He is right, so why make such a key driver in our economy more expensive?
Mr Alistair Carmichael (Orkney and Shetland) (LD)
It is a pleasure to serve with you in the Chair, Mr Bone. I congratulate the hon. Member for Upper Bann (Carla Lockhart) on securing today’s debate and putting her case so succinctly and clearly. This day, I suppose, was always going to come. The Treasury and HMRC have always hated the idea of red diesel, and they have come for it in different ways over the years. There was the removal of its use in pleasure boats some years ago; now we have the removal of the entitlement for its use in construction. The hon. Lady spoke about the crossover between construction and agriculture. That is a feature in my constituency and, I am sure, in many other rural parts of the country. That there are no good answers to her questions illustrates the lack of forethought and planning on the part of the Government.
I have been in correspondence with Government Ministers on this issue. The Minister who is here today wrote to me herself on 3 November, saying that the purpose of the changes was:
“Incentivising developers to bring forward alternatives to market sooner than if these tax changes were not made as affected businesses look to alternatives. In the short-term, and as the market for alternatives develops, the Government’s view is that taxing pollution and dangerous greenhouse gas emissions the same, regardless of whether the fuel is burnt on or off road, is fairer than allowing wide distortions to continue.”
What that essentially means is that the Government hope that this change will produce new technology. Again, the points made by the hon. Member for Upper Bann in relation to the position of the UK market were good ones and well made, but the Government will make this change anyway, because they do not like the “distortions” that the Minister referred to.
If the Government were consistent—I hesitate to say this, because I absolutely do not want this ever to happen—they would have looked at the position with regard to agriculture as well. They did not do so because they knew that the political consequences of that would have been too drastic and too dramatic.
What the Government are going at here is the easy target—the low-hanging fruit—at a time when the construction industry is facing a perfect storm, with all the consequences for the wider economy. The lack of availability of building materials at the moment is one of the major challenges facing the sector. If builders are able to get the materials they need, the cost of them is that much higher because the law of supply and demand comes into operation. Now, on top of that, we have a situation whereby builders will have to absorb, in their existing contracts, the extra cost of paying for the fuel duty, and in future contracts they will have to build in that cost and eventually pass it on to their customers, which will have a further inflationary impact. It will mean that many projects do not go ahead, because the already tight margin that many builders are operating on will simply not be viable any more. In that way, we see the consequences of this change moving down throughout the economy and becoming a vicious circle.
When the Minister responds to the debate, can she tell us how things are going? The purpose of this measure is apparently to encourage the development of new technologies. Where are these new technologies and when will they come to market? What assistance will be given to companies such as the small plant hire operator in Orkney I spoke to last week? He says that this measure will put his business under, because he operates something like four diggers and two dumper-trucks—that is the scale of his operation—and in addition he works as a subcontractor for most of the time, but the contractors will expect him to absorb these changes. By the time we get to April, what alternatives will there be for him? What will be the capital consequences for him if he invests in this new and apparently untried technology?
The hon. Member for Upper Bann spoke about this change creating a cliff edge, and she is absolutely right. It is a cliff edge over which the Government risk throwing an entire industry, for reasons—basically—of civil service prejudice and a dislike of exemptions. For a Government who are supposed to be motivated by business concerns, that is poor in the extreme, and I really hope that the Minister will come forward with something that is a bit more meaningful and substantial than what we have heard so far.
Jim Shannon (Strangford) (DUP)
Thank you very much for calling me to speak, Mr Bone.
I thank my hon. Friend the Member for Upper Bann (Carla Lockhart) for setting the scene so well, and I thank others for their contributions. The right hon. Member for Orkney and Shetland (Mr Carmichael) also hit the nail on the head, which is that small businesses will be affected. The right hon. Member for East Yorkshire (Sir Greg Knight) intervened on the issue that I want to talk about on behalf of constituents who have contacted me, who are not involved in construction as such but are involved in that sector.
I will give two examples of that. Just after Christmas, I wrote to the Chancellor about this very matter, which is of some importance. My constituents are clearly perplexed to find themselves in a position where the cost factor may push them to the stage where they have to make a decision about the survival of their businesses. When I make these pleas to the Minister, I do so because I hope to get a consideration or concession for one of the firms, and the other has told me clearly what its problems will be.
It is great to be here to support my hon. Friend the Member for Upper Bann. This issue is imperative for Northern Ireland businesses. The new legislation coming into force from April 2022 will have a significant impact on our economy—in particular on our construction industry and, as mentioned by the right hon. Member for East Yorkshire in his intervention, those involved in clearing up afterwards. There are huge concerns about this issue throughout Northern Ireland.
It is great to speak on behalf of the businesses in my constituency. There are many contributing factors making the move to white diesel unsustainable at this time. First, the cost is a primary factor for most of my constituents affected by this issue. I have given two examples, but it will actually affect a much greater number. It is like a stone hitting the water; the ripples go out well beyond that. We will feel the impact in many sectors.
Construction businesses across Northern Ireland have stated that, unfortunately, the added cost will be passed on to the customer—in some cases, that means the UK Government, who own and operate some forms of construction work. According to the Civil Engineering Contractors Association, losing the red diesel rebate would cost the UK construction industry between £280 million and £490 million a year. As my hon. Friend the Member for Upper Bann said, in Northern Ireland alone the additional cost will be between £20 million and £25 million.
I recently visited Conexpo, a family business based in my constituency in Northern Ireland. The right hon. Member for East Yorkshire mentioned quarries in his intervention—Conexpo has three, located in Ballygowan, Carryduff and Ballynahinch, all of which are in my constituency of Strangford. Conexpo produces highly polished stone value aggregates for export markets. Every one of the roads around London is built on stone from the quarries in my constituency; the same stone from Northern Ireland is used in Hong Kong. Conexpo is a lucrative business, because people very much want to have that stone. However, at the same time, there is a cost factor.
Conexpo has raised some important points explaining why the current policy on red diesel is not sustainable. My hon. Friend the Member for Upper Bann spoke about phasing in the policy in order to give businesses time to come up with new ideas and innovation. However, for Conexpo, there is no alternative. There are no hydrogen lorries sitting by to take over because they have not been perfected yet. Conexpo has worked extremely hard to reduce its carbon footprint, and it has succeeding in doing that. It is probably doing more for its carbon footprint than most people. Unfortunately, there are currently no alternatives to diesel engines to power the machines it requires. It is a big business—stone goes from its three quarries to Belfast harbour and then across the world.
Conexpo stated that it
“would welcome some clarity to the practical issues of how the red diesel rebate removal will happen. We believe it would be vitally important to retain the utilization of red diesel and a phased increase of the duty levied by HMRC would be charged by the fuel supplier.”
Another example is Cooke Brothers, which is run and owned by Ken Cooke in Newtownards. He has also voiced concerns on the red diesel rebate. He has stated that the Government must provide more clarity in regard to red diesel for generators. His engineering business does instrumental work for shipyards and sewerage works. The lack of information around generators is causing major anxiety for construction businesses.
Can the Minister say if there could be an exemption or some help for the people who depend on generators? Red diesel is important first for lorry movements and secondly for the generators used in engineering.
The legislation will cost the average business an extra £50,000 a year. It will also potentially mean that jobs are on the line. The Government have a proud record of creating jobs—the unemployment rate is down to 4.5% today, which gives us an indication of their polices—but if they want to be progressive and reduce that more, we cannot lose the jobs we have. The Government must recognise that, at this moment in time, there is no suitable alternative for most users, and that discretion must be given to construction businesses that simply cannot afford this change.
I will conclude within the timescale you set, Mr Bone. In my humble opinion, my constituents need help. I look to the Minister for that. Northern Irish businesses have suffered all too much in recent years, from the horrific impact of the protocol to the pandemic, and now our construction employers face extortionate costs relating to the red diesel change. I encourage the Minister to step in now and answer the questions of our constituents. Give us the help needed, give us the reassurance we seek, give us the phasing in. There is undoubtedly confusion surrounding the new legislation. Assurances, as presented by my hon. Friend the Member for Upper Bann and replicated, must be given to ensure the success of our construction businesses.
Dave Doogan (Angus) (SNP)
It is a pleasure to serve under your chairmanship, Mr Bone. I give many thanks to the hon. Member for Upper Bann (Carla Lockhart) not only for securing the debate but for articulating so clearly the important details now manifest by this deeply unfair removal of the rebate. In April, the 46.8p raise cost £1.5 billion across the construction sector. It is incumbent on the Government, having introduced such a fiscal measure, to have an idea—a passing regard, at least—of how it will affect the industry. In the event that the Minister and her Department do not have that, I can set out a couple of those effects.
However, at the heart of the concern is fairness. As other hon. Members have set out, the notion that operators of this type of vehicle will somehow go out within the next two to three months to purchase alternatives that will not be subject to this tax increase is for the birds. The alternatives are not there—the manufacturers do not have the technology beyond the prototype stage. This is therefore a tax grab, essentially. We need to call it what it is. What the Government should have done, and may have got a bit of respect for, was implement a well-advertised, well-indicated, well-consulted-upon, graduated reduction of the rebate on red diesel, to allow industry and manufacturers to appropriately and realistically adapt their fleets and their products to meet the climate change targets that we all agree on. There is no dispute about those; it is how we get there that, in this instance, is deeply unfair.
I do not hear anybody making political points in this debate. There is no political capital at stake. In that spirit, I offer the Minister an out to this situation. If she wishes, she can put it down to what has happened to the cost of living, with inflation at a 30-year high, as the right hon. Member for Orkney and Shetland (Mr Carmichael) discussed. The principal casualty of this measure is the construction industry, which also faces a chronic labour shortage, and a chronic shortage and rising prices of materials. These things have also changed relatively recently, which gives the Government that out. Eleven companies in my constituency in the mineral products sector are affected by that.
However, this affects not only quarrying but construction and material handling. It is not only Geddes quarries in Angus or Laird’s concrete products in Forfar. I had a meeting with John Lawrie Metals in Montrose, which does a tremendous service to the environment by repurposing equipment from the offshore oil and gas sector for the construction sector. It has met Liebherr in Germany to discuss the timeline for the availability of its hydrogen-powered heavy shovels, but that is a long way away—way beyond the horizon of this change.
I implore the Minister to seriously consider a reversal of this change, because it is perverse on two levels. First, it will not make an iota of difference to pollution levels, because there is no alternative; it will be diesel that does the work, whether or not the Government maintain this change to the rebate. Secondly, as the hon. Member for Upper Bann indicated, it will also displace biodiesel, so there will be a negative consequence to the environment. There is nothing to recommend this. It will harm business and public sector capital investment.
It is okay for the UK Government—they will receive the tax from the change, so that will offset the increase in their capital expenditure to some extent—but what about the Governments of the devolved nations? Who is going to offset their increased costs for building new schools and hospitals? The construction sector will pass this on. It is bad for the environment and for the covid recovery, so I urge the Minister and the Department to think again.
Peter Grant (Glenrothes) (SNP)
It is a pleasure to serve under your chairmanship, Mr Bone. I congratulate the hon. Member for Upper Bann (Carla Lockhart) on securing the debate and her excellent opening speech. She has clearly spent a long time familiarising herself with the issue and getting the views of the people who really matter: those whose jobs and businesses are at risk if this goes wrong. There has been huge amount of agreement from all the speakers, which is what happens when we put a good bunch of Ulstermen and Scots together: agreement on most things, shall we say.
As has been said, Mr Bone, there is no argument about the principle. We want to reduce carbon emissions and the other air pollution that comes from almost all fossil fuel use. We would support anything that will achieve that, but there is nothing in the policy paper that the Government have produced about a long-term reduction in the use of fossil fuels, and the Exchequer impact, the tax take, sits at around £1.4 billion to £1.5 billion every year for the duration mentioned in the paper.
Mr Carmichael
On the subject of emissions reduction, there is a possibility that in fact we will see an increase in emissions. I have one company in Shetland that manufactures polystyrene boxes for use in aquaculture and fishing. It can manufacture their boxes in Shetland at the moment and sell them economically, but its competition on the Scottish mainland do so with mains gas. That company will lose its competitive advantage and polystyrene boxes will then have to be transported from the mainland to Shetland. The carbon consequences of that are just lunatic.
Peter Grant
I am not familiar with the details of the example that the right hon. Gentleman gives, but I have no reason to doubt that he has researched it as thoroughly as he researches everything else he says, either here or in the Chamber. There will be unintended consequences that the Government have not identified yet.
I have the privilege to serve on the Public Accounts Committee. One of our reports, a year or two ago, looked at what are termed environmental taxes. We raised concerns about how it is often difficult to see where the environmental impact of environmental taxes is being measured or monitored, or whether there is even any target impact when they are introduced. A lot of environmental taxes might be well intentioned to begin with, but they quickly become just another money-making scheme for the Treasury.
It appears quite clear to me that that is what this proposal is set out to be from the beginning. If it is not about making money, but about reducing fuel use and pollution from fuel, why does the policy paper tell us how much more money the Treasury will get out of it, but not the expected reduction over the next four years as a result of the tax? In answering, can the Minister tell us by how much the Government expect the use of diesel fuel to be reduced as a result of this measure? If he cannot give that answer, he should ditch this plan and bring it back for parliamentary approval when he can tell us what the environmental impacts are likely to be. The right hon. Member for Orkney and Shetland (Mr Carmichael) referred to a case where the proposal could actually increase fossil fuel use.
The hon. Member for Upper Bann pointed out that some of the Government’s own guidance tells us that, as a consequence of a fuel reduction scheme, people are supposed to flush more fuel down the drain than they were before. Every time they change from one use to another, they are supposed to flush out the fuel from the tank. A supplier who wants to switch from using white diesel to using red diesel instead is told to flush every trace of white diesel out of the tanks. What a waste of fuel from a system that is supposed to be about reducing fuel usage.
Dave Doogan
Does my hon. Friend agree that, because of the traces of red diesel that will still be intact, the construction sector should be genuinely concerned about the pragmatic approach of Her Majesty’s Revenue and Customs in enforcing the excise situation? Should we not have something that is much less opaque and more defined?
Peter Grant
My hon. Friend makes a valid point. We have seen other examples of proportionate, pragmatic and reasonable enforcement from HMRC. Certainly, the experience of my constituents in a lot of tax enforcement is that those terms tend not to come up in conversations very often.
We should be clear that this is not an example of the Government closing a tax loophole that is being exploited at our expense by rogues, villains and scallywags. Those companies have done everything legally, and quite often put themselves at significant difficulty to separate the red and white diesel that they use for different purposes.
We are talking about criminalising on 1 April something that was perfectly legal on 31 March. If the Government suddenly decide to criminalise what those companies are doing, surely it is reasonable to use some of the £5.5 billion that the Government will make over four years from the changes to support businesses that will need it to comply with the new regulations.
The Government have said that the measure will have no macroeconomic impact. I do not know how macro something has to be to be considered macro, but I suggest that taking £5.5 billion out of the economy over the space of four years will have a macroeconomic impact on a lot of businesses. If someone’s business closes, that has a macroeconomic impact on their family’s finances. It is not even as if we are adding this tax to a low tax burden for businesses and individuals. The UK tax burden is already close to the highest it has been since my mammy was at school—I have a free bus pass, so Members can do the arithmetic for themselves.
Some of the indirect impacts of the measure have already been mentioned, including on the cost of construction. It will no longer be viable for self-employed people in the construction businesses to continue trading. Construction businesses will close down, and construction projects will stop mid-stream—or might never be completed—when the main contractor goes bust without warning. That kind of thing already happens all too often.
Affordable house building will become less affordable because the builders will not be able to continue to build at the prices they had given previously. There is only one place those additional costs will go: to the people buying the houses at the end of the construction. If that purchaser is a council, a housing association or another social landlord, the additional costs will go to tenants or will lead to the cancellation of the project because it is no longer affordable.
As has been mentioned, there is extreme volatility in the prices of raw materials that construction firms rely on. I have spoken to construction supply firms that find that the price of raw materials can increase by 100% and then drop back down again in a matter of weeks, making it difficult for them to price jobs and to rely on affordable pricing from which they can make a profit without pricing themselves out of the market.
If there were clearly demonstrated environmental and pollution-reduction benefits to the tax, there might be a price worth paying by us all, but there are none whatsoever. The impact is targeted at far too small a portion of the economy, and in a part of the economy that was already on its knees because of the combined impact of Brexit and the coronavirus pandemic.
The construction sector and the construction materials sector should be getting Government support; they should not be getting kicked while they are down. If the Government are not prepared to give up on this plan entirely, I ask them to delay it or, at least, to phase it in over a longer time, to give our hard-pressed industries a chance to survive.
James Murray (Ealing North) (Lab/Co-op)
It is a pleasure to serve under your chairship, Mr Bone. Thank you for the opportunity to speak on behalf of the Opposition. I congratulate the hon. Member for Upper Bann (Carla Lockhart) on securing the debate.
As we know, from April 2022, measures in the Finance Act 2021 will come into effect to reduce the number of businesses that can benefit from red diesel tax breaks, as well as extend fuel duty to biodiesel, bio-blend and fuel substitutes used in heating. The measures in the 2021 Act maintain a number of exceptions, however, for situations in which red diesel tax breaks will continue, including for vehicles and machinery used in agriculture, horticulture, fish farming and forestry, and for the heating of non-commercial premises, including homes and buildings such as places of worship, hospitals and town halls.
Historically, the existence of red diesel tax breaks arose from the use of that fuel in off road machinery or vehicles. Duty has historically been charged on fuel used by motor vehicles to reflect the damage caused to public roads. The rebated rate for red diesel reflected the fact that it was only used in off-road situations. The dyeing of the diesel has also allowed law enforcement agencies to identify it as rebated fuel and therefore to detect when red diesel is being used wrongly, providing a deterrent to fuel fraud.
During the Committee stage of the Finance (No.2) Act 2021, the Exchequer Secretary to the Treasury, the hon. Member for Faversham and Mid Kent (Helen Whately), set out the Government’s motivation behind restricting access to red diesel. The Minister explained that the restrictions on red diesel were designed so that taxation
“reflects the negative environmental impact of the emissions produced.”
She said:
“Reducing tax breaks on red diesel will mean that approximately 3.6 billion litres of diesel, equivalent to 9.5 million tonnes of CO2, will now be taxed at the standard diesel rate.”––[Official Report, Finance (No.2) Public Bill Committee, 27 April 2021; c. 72.]
Like many Members who have spoken in today’s debate, Labour supports the principle behind cutting the use of diesel fuel and encouraging a move towards more environmentally friendly alternatives. We know that red diesel accounts for around 15% of all diesel used in the UK and is responsible for the production of nearly 14 million tonnes of carbon dioxide a year. We also know that red diesel used in the construction and infrastructure building sectors causes PM10 emissions, a type of particulate matter, so it being used less will help to improve air quality. However, we would like to raise two specific concerns on behalf of representatives of the construction industry, and would welcome the Minister’s response.
First, during discussion of the Finance (No.2) Act 2021 in Committee, the Exchequer Secretary explained that one aim behind the measures was to make sure that the tax system incentivises users of polluting fuels such as diesel to invest in cleaner alternatives. Representatives from the construction sector have therefore questioned why the legislation increases fuel duty on lower-carbon alternatives such as hydrotreated vegetable oil, which has lower carbon emissions and emits less sulphur than standard diesel. For instance, Niki Holt of Certas Energy, writing in The Construction Index, has noted that HVO fuels offer
“an improved burn efficiency and reduced carbon emissions, which accounts for a significant decrease in GHG”—
greenhouse gas—
“emissions. Hydrogen is used as a catalyst rather than methanol, which means that HVO is cleaner-burning and has a longer shelf life than standard biodiesel.”
Although HVO is by no means a perfect solution, members of the construction sector have questioned why the Government are restricting the use of HVO fuel as well as red diesel. They argue that, as a lower-carbon alternative, HVO fuel would presumably be preferable to white diesel. I would be grateful if the Government set out why they are including HVO fuel at this stage.
Alongside those environmental concerns, the other key worry we have heard from the construction sector relates to fuel theft. Research by Crown Oil found that there were over 25,000 confirmed fuel thefts in 2018, which represented over £1.75 million lost to businesses and domestic users. It has estimated that that figure could be up to £9 million if all constabularies reported the relevant data to researchers. Construction sites are already targets for theft, as they tend to be unoccupied at night, and we know that the Civil Engineering Contractors Association and its members are deeply concerned about the heightened risk of fuel theft and subsequent fraud.
CECA has therefore proposed the use of blue dye within standard diesel solely within the construction industry, with duty paid at the full rate, to maintain a deterrent against theft and to enable detection of its illegal use. The colour itself is not important; what matters is that CECA sees this as a way to deter theft that would not be possible with undyed diesel, and it would like legal recognition of that fuel when HMRC and its associated bodies conduct inspections. I would therefore be grateful if the Minister could outline the Government’s response to CECA’s proposal and highlight what measures will be introduced to support the construction industry, both in reducing the risk of fuel theft and in their wider recovery from the pandemic.
To conclude, we support measures to encourage the use of alternatives to diesel, which help to reduce carbon emissions and improve air quality. Our questions today, however, seek to press the Minister on concerns raised about the detail of this policy and its impact on the construction sector in particular. I look forward to her response.
The Exchequer Secretary to the Treasury (Helen Whately)
It is a pleasure to serve under your chairmanship, Mr Bone, and I congratulate the hon. Member for Upper Bann (Carla Lockhart) on having secured this debate on the important changes we are making to the taxation of diesel, which take effect this April. Before I address the points raised by the hon. Member for Upper Bann and other hon. Members, I will briefly run through the reform we are introducing and the thinking behind it.
I hope it will not come as a surprise to hon. Members that the Government take their world-leading environmental commitments very seriously and are determined to achieve our climate change and environmental targets, including to improve the UK’s air quality. That is why, to help achieve net zero and improve air quality, the Chancellor announced back at Budget 2020 that the Government will reduce the entitlement to use so-called red diesel from April this year.
Red diesel is currently used for a wide variety of purposes, such as powering bulldozers and cranes in the construction industry, as well as in the refrigeration section of lorries, in off-grid heating and in agriculture. It accounts for around 15% of all the diesel used in the UK and, as such, is responsible for the production of nearly 14 million tonnes of carbon dioxide a year—that is nearly 3% of total UK emissions. I am therefore quite surprised to hear such opposition from hon. Members from the Scottish National party, the Liberal Democrats and Labour, as well as from hon. Members from Northern Ireland, considering the importance of tackling climate change and reducing emissions.
Helen Whately
I will make a little more progress, and then I will be very happy to. I am keen to make sure I address hon. Members’ points, which I have listened to and noted down during the debate.
Despite diesel being one of the most polluting fuels that vehicles and machinery can use, red diesel benefits from a significant duty discount—a duty rate of around 11p compared with almost 68p per litre on standard diesel. That really is significant. As a consequence, businesses using red diesel pay far less for the harmful emissions they produce than individual car owners. The tax changes that we are introducing in April mean most current users of red diesel in the UK will instead be required to use diesel taxed at the standard fuel duty rate like motorists, which more fairly reflects the harmful impact of the emissions that are produced.
Importantly, the Government have also heard from developers of alternative technologies—cleaner alternatives to red diesel—that the low cost of running a diesel engine on red diesel currently acts as a barrier to entry for greener alternatives. This widespread use of red diesel is actually counterproductive in terms of our ambitions to tackle climate change, reduce emissions and reduce pollution overall.
Jim Shannon
I kindly put two issues to the Minister. First, all Members, including my hon. Friend the Member for Upper Bann, have said that there needs to be a staging of this process. Only then will the new technology come through. That is not being negative; we all wish to achieve these goals, but there is a practicality issue. The second point, which I raised in my contribution, is that if exemptions are being given to farmers—which I agree with—would it be possible to have exemptions for those who depend on the generator system? Minister, we are not agin ye—to use an Ulsterism—but we really do think that at this stage there should be some honesty and flexibility in the process.
Helen Whately
I heard the hon. Member’s point there. A number of colleagues, including the hon. Member for Upper Bann, talked about there being a cliff edge, and others have asked for a delay. This was first announced back in 2020 and was confirmed in the spring Budget of 2021 to be introduced this coming April, so I would say that there has been a substantial lead time into the introduction of this policy—it is simply not coming as a surprise.
There has been substantial consultation with industry and consideration of the cases that specific sectors have made about the challenges that the shift to paying tax at the same rate as standard diesel might mean for them. The Government have listened to those concerns and made specific exemptions where we can see very material impacts—for instance on the cost of goods and services to households. There is an exemption around some use of red diesel for the purposes of generating energy for those who are off-grid—there is a specific exemption relating to that.
Although the construction sector, and mining and quarrying, which my right hon. Friend the Member for East Yorkshire (Sir Greg Knight) mentioned, argued throughout the consultation process that they should be exempt, their case was simply not compelling against our overall objective to incentivise greener alternatives and greater fuel efficiency and to shift to a position, which can only make sense, where the appropriate level of tax is paid on such a polluting and harmful fuel to reflect the harm that using it causes. However, as I say, we did listen and consult substantially on this proposal; we heard among others from the construction sector and from business representatives in Northern Ireland. We did listen, but we had to make the decision that this is part of an overall direction of travel where we are committed to tackling climate change and the harmful effects of pollution.
Sir Greg Knight
I do not think anyone is questioning the Government’s motive. The problem is, in relation to quarrying in particular, that no alternative equipment is available. We cannot pursue quarrying with a battery-powered machine or an electric machine with long cables. There is no alternative to using diesel.
Helen Whately
As we have heard from those who are trying to develop alternatives, one of the barriers to developing those alternatives—one of the things that reduces the incentives to do so—is the relatively low cost of red diesel. It is only by addressing the fact that there is such a low tax rate on red diesel that we incentivise the development of alternatives—and we are seeing the development of alternatives.
Helen Whately
I will make some more progress. JCB developing its hydrogen-fuelled digger is one example, and Volvo is another example. So we are seeing the development of alternatives. This proposal is a really important part of ensuring that the incentives are there for these things to happen.
I will pick up on a few other points that hon. Members have made. The hon. Member for Upper Bann talked about the impact of covid on the construction sector. I heard the phrase “a perfect storm” from the right hon. Member for Orkney and Shetland (Mr Carmichael). I will say a couple of things. First, we looked at the cost implications, and that is why there have been some exemptions in very specific areas where we thought the taxation change might have a material impact on household costs. However, for the areas where the change is being introduced, the Government do not believe there is a material change in the ultimate prices to households. The cost of fuel is relatively small for most businesses—I recognise that that is not the case for all businesses.
The other issue, in the context of covid, and taking a step back, is that we have put in a £400 billion package of support for the economy throughout this pandemic. We have already provided £250 million to local authorities in England and recently provided an extra £100 million that local authorities will distribute to businesses affected by covid to support them through the difficult times that we recognise they are going through. The Barnett equivalents of those amounts will go to the devolved nations. So we are giving a huge amount of support to businesses throughout this pandemic—we are absolutely mindful of that. Given that that support is in place, that particular issue is not a reason not to continue with the very important commitments that we have made—and that other parties have supported—to transition to a greener economy.
Mr Carmichael
Will the Minister tell the House what reduction in emissions will be achieved as a consequence of this measure?
Helen Whately
The right hon. Member has asked me to forecast something that clearly has a level of uncertainty. Some businesses will—[Interruption.] If he will just listen to me, some businesses will continue to use diesel but will switch to standard diesel. Others will shift to alternatives. We also expect to see greater fuel efficiency. What we do know, as I said earlier, is the size of the problem. Diesel emits 14 million tonnes of carbon dioxide a year—around 3% of total UK emissions. It is a significant amount, which we should not be overlooking and trying to delay taking action on. I am surprised to hear colleagues arguing for that.
Peter Grant
I am grateful to the Minister for admitting that the Government do not know what reduction in diesel fuel usage they expect to get from the proposal. I will ask the question another way. The figures in the Government’s Budget papers have been cleared by the Office for Budget Responsibility, which will have looked at the assumptions built into them. Is it correct to say that in forecasting the tax take from the tax over the next four years the Government have assumed that there will be no reduction in the number of litres used and therefore in the usage of diesel fuel?
Helen Whately
That is not a figure that I have seen, but I can double-check that. I was asked specifically whether there has been an economic impact assessment. We consulted on the proposal and assessed the expected impact. As usual, a tax information and impact note was produced and published, as hon. Members would expect.
For those who said that the change will not make a difference to the environment, or will backfire, as I mentioned it is about incentivising the development of alternatives. Alternatives are already being developed. Specifically to support that, the Government have doubled the funding for energy innovation through the £1 billion net zero innovation portfolio. The Department for Business, Energy and Industrial Strategy recently announced £40 million of funding for the red diesel replacement competition, which is part of that portfolio, to specifically grant funding to projects that will develop and demonstrate lower-carbon, lower-cost alternatives to red diesel for the construction and mining and quarrying sectors.
Mr Peter Bone (in the Chair)
Order. Before the Minister decides whether to take that intervention, she should know that she is well over her allocated time. We have to allow two minutes for the proposer to wind up. The Minister has 20 seconds.
Helen Whately
My apologies—I thought that I had until 5.45 pm. In that case, I will wind up by saying that I thank hon. Members for their contributions and hope that they will recognise the importance of the tax reforms for our ambitions to tackle climate change and reduce pollution.
Carla Lockhart
I thank hon. Members for participating in the debate. I will gallop through some of the points that were raised. The right hon. Member for Orkney and Shetland (Mr Carmichael) made some excellent points around the fact that the Government are targeting low-hanging fruit. He also said that construction is facing a perfect storm and that many have secured future products and are now tied into a price and unable to claw it back, which will drive up the cost of houses and public expenditure.
My hon. Friend the Member for Strangford (Jim Shannon) eloquently made the point that this proposal will have a ripple effect, and gave excellent examples of businesses in his constituency that will be affected. Take waste management. What is more important than getting rid of our waste? But we are putting those companies in jeopardy.
The hon. Member for Angus (Dave Doogan) talked about a tax grab—he absolutely nailed that point. Alternatives are just not there, and the Government should look at how realistic it is that those alternatives will be there in the next two months. He also made a point about the devolved Administrations.
The hon. Member for Glenrothes (Peter Grant) talked about the unintended consequences and again asked the Government to ditch the plan. This is cliff-edge stuff that will ultimately have a macroeconomic impact. The shadow Minister, the hon. Member for Ealing North (James Murray), highlighted the fact that we are all committed to being more environmentally friendly, but, again, mentioned the impact on fraud and fuel theft.
I thank the Minister. I have to say that I do not feel that we got the answers today. There is absolutely zero—
Mr Peter Bone (in the Chair)
Order. I am really sorry; we could clearly have carried on for longer, but time has beaten us.