10 August 2018

The red diesel loophole is slowing the transition to cleaner alternatives


In late June, 14 mayors from across England and Wales descended on Mansion House in London to discuss how to deal with air pollution. Also in attendance was the Environment Secretary, who was listening attentively to the contributions of health professionals, academics, and clean air campaigners alike.

The Department for Environment, Food and Rural Affairs (Defra) has been doing a lot of listening since Michael Gove took to the helm – something which prompted his opposition counterpart, Sue Hayman MP, to dub him as the “Secretary of State for Consultations”. One such consultation which Defra, alongside HM Treasury, has recently been deliberating on is the issue of red diesel.

Red diesel is no different to ordinary diesel, save for three characteristics. First, it is coloured with a, well, red dye. Second, rather than attracting the full tax levy on diesel of 57.95 pence per litre, it enjoys a rate of just 11.14 pence per litre – a saving to consumers of over 80 per cent. Third, and in relation to the second point, its use is permitted only in engines which rarely or never use public roads.

This fiscal quirk is a hangover from when fuel duty was introduced in the 1920s. Policymakers wanted to tax road transport, but were wary not to tax, for instance, homes, which at the time widely used gas oil for heating. Therefore, certain exemptions – such as non-road equipment – were made liable for a tax rebate.

The dye, incidentally, which gives red diesel its colour and name first came about in 1961. It is mixed with regular diesel in order to allow law enforcement authorities to more easily identify those illegally using red diesel in normal road vehicles, which are not entitled to benefit from the discounted fuel duty rate.

Altogether, the tax rebate amounts to £2.4 billion of potential revenue slipping through the fingers of the Chancellor each year. But the effects of red diesel’s favourable tax status have other pernicious consequences.

It is generally thought that red diesel is confined mostly to rural activity, justified as a necessary relief for the country’s hard-pressed farming community. Yet in reality, only a quarter of red diesel is consumed by agriculture. The rest is utilised by as diverse sectors as private watercraft, freight trains, back-up generators, and lots of small-scale machinery – all benefiting from what is essentially artificially cheap fuel.

Crucially, this generous subsidy stifles cleaner technologies from becoming commercially competitive – the adoption of which will likely be necessary if the UK is to adhere to scientifically acknowledged safe air quality standards.

To cite one example, just think of the now ubiquitous fleets of refrigerated vans which deliver chilled goods and food up and down the country. Though the main engine will probably run on standard diesel charged at the full rate, approximately 26,000 of them utilise an auxiliary engine to power their cooling units, which are permitted to use red diesel – producing the same amount of particulate matter as an estimated 3.2 million Euro 6 diesel cars (that is, cars which meet the sixth and most recent incarnation of the European Union’s minimum emissions standards for vehicles).

Although cleaner, zero-emission alternatives are out there, such as liquid nitrogen cooling technology or e-cargo bicycles for “last mile” deliveries, they struggle to achieve widespread uptake because regular vans – able to exploit the red diesel tax rebate, and thus lower their operating costs – remain the cheaper option.

Consider also the construction industry. Whilst few people doubt that the UK needs to seriously crack on with building (new homes and better infrastructure, for example) let us not kid ourselves that, under current conditions, such development will have negligible consequences for the environment.

Data from the London Atmospheric Emissions Inventory last year blamed construction sites for 7.5 per cent of total nitrogen oxide emissions, 8 per cent of total large particulate matter emissions (PM10), and nearly a sixth of all fine particulate emissions (PM2.5). The vast majority of these pollutants come not from dust which building work suspends in the air, but rather the countless numbers of excavators, generators, and other machinery which is invariably powered by – you guessed it – red diesel.

Here again, cleaner substitutes are available (whether they be fully electric fork lift trucks, diggers, or battery-operated power tools), but can get overlooked due to price.

These two cases demonstrate how the red diesel loophole pours cold water on an exciting and exportable market opportunity for British engineering and manufacture. For the Environment Secretary, however, there is a particular reason to explain why he is right to have red diesel fixed firmly in his sights.

When engines burn fuel, they turn dormant chemical energy into useful mechanical power. But combustion also produces less desirable by-products, such as noxious gases and ultrafine particulate matter. Whilst diesel engines contribute a smaller amount towards carbon dioxide emissions than petrol engines, they typically generate much greater levels of toxic nitrogen dioxide and irritant microscopic particles.

Exposure to these pollutants can be harmful for human health and the wider environment. Nitrogen dioxide, for example, is a leading cause of respiratory and cardiovascular illnesses, and ultimately results in people living shorter, less healthy lives.

Recently commissioned Bright Blue polling found that significant majorities of all age groups in the UK are concerned about the consequences of poor air quality on their health and that of others, yet only 10 per cent of UK adults thought that the Government is doing enough to protect them from air pollution.

Clearly, more must be done to address the emission sources which both dirty the UK’s atmosphere and slow the transition to a less polluted Britain. Diesel, being a hugely significant contributor to poor air quality, is thus deservedly high on the agenda. And, given that red diesel accounts for some 15 per cent of total diesel use, it in particular ought not escape scrutiny. As long as red diesel enjoys its arbitrarily favourable tax status, the incentive for firms to divest from polluting equipment or vehicle fleets will almost always be weaker.

Air pollution looms as one of the major environmental crises of our time. The cost of inaction is lower economic productivity, missed commercial opportunities, and a less healthy population. Yet there are some low-hanging fruits which the Environment Secretary could easily pick to address the problem. Reviewing the distortive tax rebate on red diesel to lower the use of it and incentivise a shift towards cleaner technologies is just one step he could take.

Eamonn Ives is a Researcher at Bright Blue, a liberal conservative think tank.