Rebated Fuel Rules: Construction Industry

Alistair Carmichael Excerpts

Wednesday 19th January 2022 Westminster Hall

[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.

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[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.

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[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.

[Mr Carmichael]

Will the Minister give way?

[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.

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[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?