Rebated Fuel Rules: Construction Industry

Helen Whately Excerpts

Wednesday 19th January 2022 Westminster Hall

[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.

[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.

[Dave Doogan]

Will the Minister give way?

[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?

--- Later in debate ---

[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.

[Dave Doogan]

Will the Minister give way?

--- Later in debate ---

[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.