Treasury sets ball rolling at last on biofuel tax incentives

A discussion document on the possible use of enhanced capital allowances (ECAs) to stimulate investments in biofuel manufacturing plants has been issued by the Treasury.1 Meanwhile, a new study has concluded that bioethanol production from wheat has the technical potential to bring substantial savings in greenhouse gas emissions - but its findings suggest that an ECA scheme may not be the right instrument for the job.

Until now, biofuels have been supported by differentials in fuel duty, but last year's pre-Budget report signalled the possibility of additional instruments by committing the Treasury to stakeholder discussions on input-based taxation for biofuels.

A further step came in the Budget itself, which announced that the Government "will be discussing with stakeholders the application of ECAs to support investment in the most environmentally beneficial biofuels processing plants, with a view to announcing the outcome at the 2004 pre-Budget report."

Not much has happened in the intervening months. The Treasury paper circulated in October offers only one page of discussion about how an ECA scheme might work, followed by half a dozen questions to interested parties. An announcement in the pre-Budget report on 2 December seems improbable. Indeed, the Treasury is now promising talks with stakeholders "over the coming months".

The paper suggests that the key feature of a biofuels ECA scheme would be a qualifying standard, based on a life-cycle assessment of a production plant, and expressed in terms of the greenhouse gas emission savings which the plant delivers "over and above traditional methods".

According to the paper, traditional methods of producing biodiesel and bioethanol, including the growing of UK crops, achieve greenhouse gas savings of around 55%. The figure increases to over 70% where straw from the feedstock is used as a fuel for the process, and ECAs could be targeted at such facilities.

Provided they met the qualifying standard, plants would be eligible for ECAs if they used any form of biomass or other renewable material as feedstock, and any renewable source - including wind, tidal, solar and other technologies as well as biomass - to produce the energy to run the process.

The paper suggests that available generic data could form "much" of the evidence needed to demonstrate the greenhouse gas savings achieved in a particular case.

In practice, matters may not prove so straightforward - as a new report from the Government's Low Carbon Vehicle Partnership (LowCVP) suggests.2The report was produced by a sub-group headed by experts from British Sugar and ExxonMobil and including academics specialising in LCA. Its brief was to reach a consensus on the life-cycle energy and greenhouse gas balances of bioethanol made from wheat - a potentially significant conventional biofuel in the UK.

The group carried out a "well-to-wheel" analysis, including wheat growing on set aside land and ethanol production using currently feasible hydrolysis and fermentation processes.

The work showed that three variables had a major influence on the energy and greenhouse gas balances: the type of energy production at the plant, with combined heat and power (CHP) being essential to maximise emission savings; whether the wheat straw was ploughed back into the soil or used as fuel at the bioethanol plant; and whether the residue from the grain fermentation stage - the so-called distillers' dark grains with solubles (DDGS) - was used as fuel or as animal feed.

Six process configurations were used to illustrate the impact of these variables. Key conclusions included:

  • Even the least energy-efficient process - with energy being provided by a conventional gas boiler and electricity imported from the grid - gave a net well-to-wheel greenhouse gas saving over petrol.

    With the DDGS being used as animal feed the saving was small, at 7%, but if the material was used as an energy source it increased to 37%.

    The biggest emission saving was achieved where straw was used as fuel in a CHP plant with a condensing turbine. With energy being recovered from the DDGS the net emission saving over petrol increased to 77%, though when the material was used as animal feed it dropped back to 48%.

  • However, savings as big as this appear unrealistic. According to the group, the most likely commercial options in the short term would use gas-fired CHP units, with DDGS being sold for animal feed. Here the projected emission savings are significantly smaller, at 35-40% over petrol.

  • The emission savings are highly sensitive to assumptions about nitrous oxide emissions from wheat fields.

    Nitrous oxide is a powerful greenhouse gas, and accounted for 20-30% of the greenhouse gas balances in the LowCVP study. Yet emissions can vary greatly with soil type, weather and farming practices - including whether straw is incorporated in or removed from the soil. A single, fairly cautious value for N2O emissions was used in the study, but even so it may well be exceeded in parts of the UK.

    The group acknowledges that the issue needs further study. Clearly, an ECA scheme's robustness - and credibility - would not be great if bioethanol plants moved in or out of eligibility for the incentive on account of disputed N2O values.

    The research begs two further questions. One concerns the baseline or, in the Treasury's parlance, "traditional" bioethanol plant which might be used in an ECA scheme.

    The process with the smallest greenhouse gas savings - using a gas boiler without CHP - is, as the report notes, "outdated industrial practice, and is unlikely to be selected for new plants." Using it as a baseline plant therefore seems ruled out.

    However, the process options which were most attractive in greenhouse gas terms in fact yielded only slightly bigger emission savings than those with the greatest short-term commercial appeal - with all comfortably below 50% - wherever DDGS was not used as fuel. With little to differentiate them, this may call into doubt the value of an ECA scheme.

    Second, the biggest difference between process options in emission terms is clearly whether DDGS is used as fuel or not. The net emission saving over petrol for each of the six options increased by 20-30% where the material was used as an energy source.

    However, using the material as animal feed produces a better economic return - and so, the study notes, "it may not be commercially viable to invest in the enhanced carbon savings unless more value can be gained from the additional environmental benefit." Whether an ECA scheme would be the right way of delivering that extra value must be open to question.

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