Question to the HM Treasury:

To ask the Chancellor of the Exchequer, what assessment he has made of the potential effect of proposed fuel duty on (a) biodiesel, (b) bio blends and (c) fuel substitutes used in heating on the attractiveness of transitioning to lower carbon fuels as part of a transition to net zero emissions.

At Budget 2020, the Chancellor announced that the Government will remove the entitlement to use rebated diesel and biofuels from most sectors from April 2022. This will more fairly reflect the negative environmental impact of the emissions they produce and help to ensure that the tax system incentivises the development and adoption of greener alternative technologies. As part of the changes, duty will also be extended to biodiesel used for heating.

The Government recognised that these reforms would be a significant change for some businesses and ran a consultation to gather information on the expected impact and make sure it had not overlooked any exceptional reasons why affected sectors should be allowed to continue to use rebated diesel and biofuels beyond April 2022. During the consultation period, the Government engaged directly with a wide variety of organisations from all parts of the UK, including sectors which consume rebated diesel and biofuels, and fuel suppliers.

Following the consultation, the Chancellor granted entitlements to use rebated diesel and biofuels after April 2022 for a limited number of users, including for use in non-commercial heating and power generation. In the case of non-commercial heating, the Government felt there was a risk that removing entitlement would significantly increase the heating bills of households that use diesel, especially those in areas off the gas grid where there is no alternative.

The Government did not believe that the cases made by sectors that will not retain their red diesel entitlement outweighed the need to ensure fairness between the different uses of diesel fuels and the Government’s environmental objectives.

To support the development of alternatives that affected businesses can switch to, the Government is at least doubling the funding provided for energy innovation through the new £1 billion Net Zero Innovation Portfolio. From that portfolio, the Government announced the £40 million Red Diesel Replacement Competition, which will provide grant funding for projects that develop and demonstrate lower carbon, lower cost alternatives to red diesel for the construction, and mining and quarrying sectors.

HMRC have published interim guidance on the implementation of the changes to the tax treatment of rebated fuels, which is available at:

www.gov.uk/government/publications/changes-to-rebated-fuels-entitlement-from-1-april-2022