The future for red diesel

Wed, March 25, 2020 - 2:39:00

Red Diesel

Red diesel has been a hot topic amongst many industries in recent months, in light of the Chancellor of the Exchequer Rishi Sunak’s budget announcement. And with rumours circulating about its abolishment, there have been some confusion as to what the outcome is for these industries. In this article we hope to clear this up, as we discuss the impact of change and what the future holds for red diesel. But first, we’ll summarise quickly what red diesel is…

So, what is red diesel? 

Red diesel was first introduced back in 1961, with the purpose to provide tax-relief to off-road diesel engine users including the agricultural and construction markets, as well as off-grid heating and generators. Whilst not tax exempt, red diesel is heavily rebated with tax at just 11 pence per litre versus the 58 pence per litre for standard road diesel. Its red marker dye is added to help HMRC and other law enforcement bodies to recognise the illegal use of red diesel if found in a public road using vehicle.

With an increasing focus on the environment and red diesel accounting for around £2.4 billion of lost revenue compared to if tax was charged at the standard rate, there’s been controversy surrounding whether red diesel users should still benefit from the tax-relief.

The future of red diesel

Ahead of the Chancellor’s 2020 budget, fears had been rising amongst the farming community and construction industry about his plans to abolish the red diesel tax rebate. NFU President Minette Batters had argued: “Removing this from farmers would leave them at an immediate competitive disadvantage, coming at a time when farmers are dealing with ongoing uncertainty over our future trading relationship with the EU and rest of the world.” 

The Civil Engineering and Contractors Association also voiced their concerns about the 47 pence per litre increase, estimating that the change could cost their industry almost £500 million a year.

Both industries have maintained that as it stands there are no commercially viable alternative fuels available for their machinery and therefore would find it difficult moving to a greener option.

What is the impact of the 2020 Budget on red diesel users?

Rishi Sunak’s budget speech on 11th March brought a mixture of celebrations, temporary relief and disappointment from traditional red diesel users. Whilst the Chancellor announced his plans for the low duty on red diesel will come to an end, this will not come into force until 2022/2023, and even then, with the exception of farming, forestry, rail and heating.

The retained tax relief was widely welcomed amongst the agricultural industry with the National Farmer’s Union’s Minette Batters expressing how pleased she was to see the Chancellor acknowledge their concerns. “Changes to this duty could have virtually doubled fuel costs for farmers and with no current alternative fuel for agricultural vehicles, this would have left farms immediately uncompetitive with many other countries who continue to provide lower fuel duty for their agricultural industries. This lower fuel duty on red diesel recognises its importance to farm businesses, their ability to produce food for the nation”.

Whilst these industries will be exempt from having to pay the same price as standard road diesel from April 2022, for the construction industry it wasn’t exactly the same news, who have been given a delay of 2 years to prepare for this increasing cost to their businesses. CECA’s Director of External Affairs Marie-Claude Hemming stated: "While we are glad that the Chancellor has listened to industry evidence that immediate implementation would have a catastrophic impact for many businesses across the construction sector“, "For many of our members, there are no readily available low-carbon fuels or construction plant that use alternative sources of energy, and the impact of increased fuel costs will ultimately be passed on to customers”.

Second-generation biofuels

Hope for these industries lies in the more environmentally friendly, second generation biofuels such as HVO which are compatible with existing diesel engines and equipment. HVO or hydrotreated vegetable oil, which is made from renewable, sustainable raw materials and can be used as a drop-in replacement for regular diesel, can lower greenhouse gas emissions by up to 90%.

HVO production is currently more widespread in Europe than in the UK, and Sweden have now passed legislation to make HVO exempt from tax. Following the move, Volvo Construction Equipment’s customer centre in Eskilstuna, Sweden is now running their demonstration machines on HVO. Karl Serneberg, director of marketing said “Volvo CE approves all of our machines to run on HVO. No special modifications to the engine are required, and they work just as efficiently on HVO as they do with regular diesel”.

Whilst currently in the UK HVO is generally more expensive than standard diesel due to smaller scale production, if the UK adopt a similar stance to Sweden, this could be good news for those markets that will be no longer illegible to benefit from the red diesel tax relief come 2022.

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