Rebated Fuel Rules: Construction Industry

Greg Knight Excerpts

Wednesday 19th January 2022 Westminster Hall

[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?

--- Later in debate ---

[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.