H.M. TREASURY Notes on Clauses

CLAUSE 2: RATES OF DUTY AND REBATE ON HYDROCARBON OIL

INTRODUCTION

1. This clause increases the rates of duty on hydrocarbon oil. This is in line with the Government's commitment to duty increases of at least 6 per cent above the rate of inflation but also takes into account the relative environmental impact of different types of fuel. The changes took effect from 6 pm on 9 March 1999.

DETAILS OF THE CLAUSE

2. Subsection (1)(a) amends section 6(1A)(a) of the Hydrocarbon Oils Duties Act 1979 to increase the duty payable on a litre of leaded petrol to £0.5288. This duty rate is also applicable to other light oils, with the exception of unleaded petrol, higher octane unleaded petrol, aviation gasoline, light oil furnace fuel and certain petrol substitutes.

3. Subsection (1)(b) amends section 6(1A)(b) of the Hydrocarbon Oils Duties Act 1979 to increase the duty payable on a litre of ultra low sulphur diesel to £0.4721. This change increases the duty differential over conventional diesel to 3 pence per litre in recognition of the environmental and health benefits of ultra low sulphur diesel over conventional diesel.

4. Subsection (1)(c) amends section 6(1A)(c) of the Hydrocarbon Oils Duties Act 1979 to increase the duty payable on a litre of conventional diesel to £0.5021. This increases the duty differential between conventional diesel and unleaded petrol to 3 pence per litre to remove the advantage diesel has when considering energy and carbon content per litre. It also recognises that diesel is more harmful to health than petrol because of the particulate and nitrous oxide emissions.

5. Subsection (2) amends section 8(3) of the Hydrocarbon Oils Duties Act 1979 to reduce the duty payable on a kilogram of road fuel gas to £0.1500. This reduction recognises the considerable environmental benefit which road fuel gases have over diesel and, to a lesser extent, petrol.

6. Subsection (3)(a) amends section 11(1) of the Hydrocarbon Oils Duties Act 1979 to increase the duty on a litre of fuel oil to £0.0265. This change brings the rate of duty closer to that of gas oil. There is no justification on environmental or health grounds for the present differential in duty rates between the two products and it is intended to equalise the rates by 2001.

7. Subsection (3)(b) amends section 11(1) of the Hydrocarbon Oils Duties Act 1979 to increase the duty payable on a litre of gas oil or ultra low sulphur gas oil to £0.0303. Use of gas oil, also known as red diesel, in off-road vehicles and as heating oil has at least the same environmental impact as use of diesel and therefore the rate has been increased so that users of this cheaper fuel also contribute to the reduction in global warming.

8. Subsection (4)(a) amends section 13A(1A) of the Hydrocarbon Oils Duties Act 1979 to increase the rebate for higher octane unleaded petrol to £0.0055 per litre less than the duty on leaded petrol. The practical effect of this is to increase the duty payable on a litre of higher octane unleaded petrol (also known as super unleaded) to £0.5233 from 6 pm on 9 March 1999. Clause 3 provides that from 1 October 1999 the rebate will further increase to £0.0367 per litre less than the duty on leaded petrol in anticipation of this grade forming the basis for Lead Replacement Petrol.

9. Subsection 4(b) amends section 13A(1A) of the Hydrocarbon Oils Duties Act 1979 to increase the rebate for unleaded petrol to £0.0567 per litre less than the duty payable on a litre of leaded petrol. The effect of this is to increase the duty payable on a litre of unleaded petrol to £0.4721.

10. Subsection (5) amends section 14(1) of the Hydrocarbon Oils Duties Act 1979 to increase the rebate on a litre of light oil used as furnace fuel to £0.0265 less than the duty payable on a litre of unrebated light oil. The effect of this is to increase the duty payable on a litre of light oil furnace fuel to £0.0265.

11. Subsection (6) provides for the new rates to come into force at 6 pm on 9 March 1999.

BACKGROUND

12. These duty rate changes show the Government's continuing commitment to duty increases of at least 6 per cent above the rate of inflation. They will help the Government to deliver the UK's share of the EU target to reduce emissions of greenhouse gases by 8 per cent by 2008 - 2012. Our environmental assessment shows that these measures will improve urban air quality and reduce greenhouse gases by between 2 and 5 million tonnes of carbon a year by 2010.

13. The duty on conventional diesel is increased by more than petrol for the second successive Budget to remove the advantage diesel has when considering the energy and carbon content per litre and to recognise that diesel is more harmful to health and local air quality than petrol because of the particulate and nitrous oxide emissions. However the duty differential between conventional diesel and ultra low sulphur diesel is also increased to 3 pence per litre in favour of ULSD. This Government's policies have been extremely successful in providing fiscal incentives for cleaner fuels. Cleaner diesel is now used extensively in buses, providing much cleaner emissions in urban areas. Ultra low sulphur diesel represented 43 per cent of diesel deliveries in February and the UK will be almost 100 per cent ultra low sulphur diesel in the near future. Some industry sources estimate that this will be achieved by the end of this year.

14. Road fuel gases have a considerable environmental benefit over other road fuels and the duty rate has been reduced by 29 per cent. The Government hopes that this reduction will encourage manufacturers to increase distribution and availability of this environmentally friendly fuel and that the lower price to the consumer will help offset the cost of vehicle conversion.

15. Duty rates on gas and fuel oil are increased by more than the rate of inflation which reflects the cost of pollution from these products and signals that all sectors must contribute to the improvement of air quality and the reduction of global warming. The duty rate on fuel oil will be increased by more than that on gas oil in each successive Budget until the rates are equalised in 2001.

16. The duty rate on leaded petrol has been retained for the 0.5 per cent of deliveries which will remain after the fuel is banned from 1 January 2000. Lead Replacement Petrol (LRP) will be introduced in the second half of this year and will be available for motorists whose cars currently use leaded petrol. LRP will be dutiable as higher octane unleaded petrol and the duty rate on higher octane unleaded petrol will reduce from 1 October 1999 to facilitate the introduction of LRP.

17. These changes will play an important part in discouraging unnecessary journeys, encouraging more fuel efficient cars and efficient use of other fuels, and so reducing emissions of carbon dioxide. They will also encourage use of cleaner fuels such as ULSD and road fuel gases.

18. The estimated revenue effect of these changes in 1999/2000 is +£45 million on an indexed base. The impact on RPI is estimated to be +0.24 per cent.