House of Commons - Environment, Food and Rural Affairs

CLIMATE CHANGE: THE ROLE OF BIOENERGY—8TH REPORT (2005-06), PUBLISHED 18 SEPTEMBER 2006

Conclusion/Recommendation Government Response

2. Introduction

UNITS, MEASUREMENTS AND TERMINOLOGY

1. In conducting this inquiry we encountered a wide range of different units, measurements and terms which are all used in calculations of energy and emissions. We recognise that different kinds of data are needed for different purposes, but the Government should ensure that its use of units and terminology is consistent across departments so that those outside the science community can form a clearer view of the relative merits of different forms of energy in the context of climate change. (Paragraph 12)

We recognise the need for greater consistency of units and terminology, wherever possible and appropriate, in Government sponsored publications and will endeavour to ensure comparisons or values are expressed in uniform terms.

2. The Government has estimated the contribution that bioenergy could make to the UK's energy mix by sector as percentages of the total, and using different dates for each sector. This does not facilitate useful comparison and suggests a lack of consistency in approach across Government departments. We recommend that the Government recast its estimates, settling on one target date and indicating what the relative percentages, in million tonnes of oil equivalent (Mtoe), actually represent. (Paragraph 14)
It is difficult to set a single target or target date for the different renewable energy sectors because the targets reflect a mixture of EU and domestic objectives. They are set to encourage the expansion of the individual renewable energy industries, which are at different stages of development. However, we recognise that this lack of uniformity can be confusing and may make drawing comparisons more difficult. We are looking to assess and report on the overall contribution that bioenergy can potentially provide within the UK Biomass Strategy across a range of target dates.

3. Potential carbon savings from bioenergy

BIOMASS FOR HEAT AND ELECTRICITY

3. Current Government policy focuses on renewable electricity generation at the expense of the prospects for the development of renewable heat. We note that in its response to the Biomass Task Force Report the Government has undertaken to increase the use of biomass heat and electricity. We recommend that the Government build on this commitment by setting out clear and quantifiable targets for biomass heat in its forthcoming Biomass Strategy. We further recommend that the Strategy redress the balance between biofuels, renewable electricity and renewable heat, to reflect the greater potential carbon savings offered by biomass heat. (Paragraph 35)

We noted, in the Energy Review, that in the absence of an equivalent mechanism to the Renewables Obligation for renewable heat, there was the potential for a distortion of the market for biomass on a revenue basis. In responding to the Biomass Task Force report we agreed that renewable heat provides important opportunities and is a particularly efficient way of cutting carbon emissions, provided that development is planned appropriately with a secure market for the heat generated. We therefore committed, in both the Government's Response to the Biomass Task Force Report and in the Energy Review, to consider options for providing longer-term support for renewable heat, including biomass. A project is being commissioned to assess the case for longer-term support and, if appropriate, the potential mechanism(s) for delivering such support. At this stage we are not ruling out any potential mechanisms or approaches, including targets. This review does not affect the decisions already taken to support development including the five-year capital grant scheme for biomass heat and CHP projects as announced in March 2006 in the Climate Change Programme Review. The Government is also currently consulting on a number of changes to the Renewables Obligation.

4. Reflecting on the conclusions of the Biomass Task Force, and acknowledging that the Government has already published its response to the Task Force report, we are disappointed that the Government has failed to take the opportunity offered by the Energy Review properly to address the issue of biomass heat, and has only committed to producing the Biomass Strategy "over the coming year". Given the urgent need for concrete measures to support biomass heat, we should not have to wait until 2007 for the Biomass Strategy, and recommend that the Government make clear in its response exactly when it anticipates publishing this strategy, and further suggest that it does so at the earliest possible opportunity. (Paragraph 36)
In preparing the Government's Response to the Biomass Task Force Report, it was judged that a full twelve months would be needed to undertake this work, including the commissioning of underpinning research. We have considered this timetable carefully in light of the EFRA Committee's recommendation but believe that consideration of the complex issues and in-depth discussions with key stakeholders are required, such that the quality of the final strategy would be seriously compromised should we bring forward the publication date significantly. We are giving this work high priority and will also take account of its links to the Energy White Paper which is due to be published in early 2007.

The Committee will wish to note that we are about to commission a project, due to start early in November 2006, to examine the case for, and mechanisms available to deliver, longer-term support for renewable heat. This should report early in 2007. In the meantime the biomass heat sector continues to be supported via the Bioenergy Capital Grants Scheme—for which a further round of applications were considered in July 2006—the Low Carbon Buildings Programme and the Defra-funded biomass heat capital grant scheme, which it is expected will be open to applications early in 2007. Capital support was considered by the Biomass Task Force to be the most appropriate measure to support this sector in the short to medium term.

MARINE BIOMASS

5. We agree with the Biosciences Federation and Royal Society of Chemistry that the potential of marine biomass as a source of energy should not be overlooked. We recommend that the Government conduct a scoping study to investigate the potential for and anticipated carbon savings from the use of marine bioenergy, and to establish the likely up to date costs associated with developing this technology. We emphasise, however, that any research in this field must be carried out in addition to—and not instead of—research and development into land-based bioenergy production. (Paragraph 42)

We welcome the attention drawn to the potential of marine biomass. We agree that a scoping study to investigate the potential use of marine bioenergy is an appropriate way forward. The issues to be addressed are wide ranging and complex, including whether the marine biomass could be harvested from wild or cultivated algal resources, what positive and negative impacts this would have on the wider marine environment including fish stocks, the scope for production, and economic viability. It would probably be appropriate to categorise this study as "Horizon Scanning'" and will be resourced separately to the ongoing work programme on land-based bioenergy.

Marine biomass is an important potential theme in the new EU R&D framework programme (FP7).

POTENTIAL CARBON SAVINGS FROM BIOFUELS

6. No analysis of the relative benefits of different forms of energy is complete without consideration of the cost, in both financial and sustainability terms, of reducing emissions. The difficulties of making reliable calculations—owing to the volatility in oil prices, and consequently biofuel prices, as well as cost differences in feedstocks and processing methods—are well understood. We seek confirmation from the Government that the Stern Review on the Economics of Climate Change will provide clarity in this area. (Paragraph 50)

The Stern Review is the most comprehensive study ever carried out on the economics of climate change. It was published on 30th October, and is available at:
www.hm-treasury.gov.uk/independent_reviews/
stern_review_economics_climate_change/stern_review_report.cfm

SECOND GENERATION BIOFUELS
BARRIERS TO PRODUCTION

7. Defra does not say when in the future it expects second generation biofuels to become cost-effective, or what contribution the Government intends to make in terms of research and development in this field. While we accept that the Government may be reluctant to pick technology 'winners' and 'losers' at this stage, it is vital that the Government examine the barriers to further progress on second generation biofuels, and—as a matter of urgency—establish the level of investment and policy support required to accelerate development of this technology. (Paragraph 63)

The Government is committed to promoting biofuels in the context of our climate change objectives, and we are particularly keen to encourage the development of fuels offering the greatest level of greenhouse gas (GHG) savings, including second generation fuels.

The Government has funded R & D into second generation biofuels and will continue to do so, including a new Defra-funded National Non Food Crops Centre study on Biomass to Liquids. This will look specifically at the feasibility of introducing this technology in the UK. Revenue expenditure on R & D will also continue to benefit from general tax credits of 125% for large companies and 150% for small and medium sized enterprises.

The Government's central policy mechanism to deliver a significant biofuels market in the UK into the long term is the RTFO that we announced last year. The RTFO has been designed specifically to enable and incentivise the sort of long term, high capital investment required for the best biofuel production facilities. Although the Obligation will be framed in terms of volume in the early years, we have made it clear from the outset that the policy is about reducing emissions of greenhouse gases and that we intend to move, over time, towards a system under which we offer different levels of credits to different biofuels on the basis of the carbon savings that they offer.

As set out in the Energy Review, we will be consulting next year on future enhancements to the RTFO beyond 2010/11. We will work closely with stakeholders to develop proposals that would directly incentivise fuels giving a higher level of carbon saving as soon as that becomes feasible. We will also assess the extent to which these proposals would stimulate R&D and investment into advanced technologies in this area.

The Energy Review also announced that a Low Carbon Transport Innovation Strategy would be developed to spur vital innovation in low carbon transport technologies. The Strategy will include all generations of biofuel technology.

We have examined and will continue to examine the barriers to progress, and to assess policy options to maximise GHG savings from renewable fuels. For example, a DTI Global Watch mission on next generation biofuel technologies took place earlier this year. The report, which was published in the summer, concluded that the very high capital cost of advanced production facilities is the primary reason for the low level of deployment. It recommended that policy for encouraging biofuels should be on a GHG reduction basis to provide incentive for investment in second generation technologies[2]

The Government also announced in the 2006 Budget that it had applied for State Aid approval for introducing an Enhanced Capital Allowance Scheme to support the cleanest biofuels production plant, including those using designated advanced processes. Discussions are continuing to be taken forward with the Commission and interested parties, and the Government hopes to introduce a scheme in 2007.
We expect the EU R&D framework programme (FP7) to give significant emphasis to second generation biofuels.

SECOND GENERATION BIOFUELS FOR AVIATION
SYNTHETIC KEROSENE

8. Although we recognise the valid safety concerns raised by witnesses regarding second generation aviation fuels, we note that synthetic kerosene is already being used in aircraft departing from Johannesburg. We are puzzled as to why the Government does not appear to be pursuing the option of second generation Fischer-Tropsch kerosene—as used in South Africa—to deal with the rapidly growing climate impact of aviation. If a biomass-derived process for producing synthetic kerosene can be made economically viable, the UK Government must support its development. We recommend that the Government take immediate steps to investigate the economic viability of using biomass as the feedstock for synthetic kerosene. (Paragraph 72)

The UK project "The Potential for Renewable Energy Sources in Aviation" produced by Imperial College Centre for Energy, Policy and Technology in 2003 for DTI, studied the options for potential renewable fuels for civil aviation. The study examined a whole range of alternative fuels and energy sources including Fischer-Tropsch (FT) kerosene.

The report acknowledged that the physical properties of FT kerosene made it potentially suitable for use in aircraft, but concluded that the cost of producing biomass-derived FT hydrocarbons was likely to rule out their commercial development for the foreseeable future. Whilst this was a useful examination of the subject, it should be noted that biofuel technology has developed since that report was produced.

South Africa has certified FT kerosene for aviation but it should be noted that this is derived from coal (South Africa has huge reserves of coal and the energy costs for its production might not make it a commercial proposition elsewhere). The fuel, produced by SASOL, is a 50/50 blend of synthetic and conventional kerosene. We are aware that Brazil has developed a bioethanol-fuelled single seater aeroplane for agricultural use, e.g. for spraying but this is an alcohol type gasoline and therefore is not similar to aviation kerosene.

Given that biomass is a limited resource, the Government needs to consider the cost effectiveness of its use in different applications. At present, it is easier and more cost effective to integrate biofuel use in road transport and heat and power generation, than for use in aircraft. However, the Government is actively keeping the area of alternative aviation fuels under review and it was identified as an area for co-operation, particularly with the US, after the G8 Gleneagles commitment to extend research aviation science and technology. Discussions with the US have focused on building upon their initial work within their PARTNER research network.

It is most likely that, as with the early South African experience, second generation biofuels would feature only as part of a kerosene blend but significant work remains before this could demonstrated as viable in cost, energy and environmental terms and thus become be a system-wide reality. The energy required for the production of second generation biofuels (from biomass) should be improved, but the efficiency of the process on a large scale is as yet uncertain. Other second generation fuels such as ethanols, whilst suitable for motor vehicles are not compatible with aircraft jet engines at this time and have a lower energy density than the Fischer Tropsch kerosenes.

UK scientists and technologists have been involved in a series of EU workshops to share and improve understanding of the wide range of alternative fuels issues: fuel formulation, technological implications, infrastructure and availability, safety, environmental impacts and cost effectiveness. The fuel companies are also committing considerable resource to this work and the pace of activity is accelerating dramatically. Apart from consideration of biofuels, attention is also being given to kerosene sulphur levels (linked to aviation induced cirrus cloudiness) and to the potential pros and cons of fuel additives.

The subject of alternative fuels is expected to be a prime study area for a new UK knowledge transfer initiative led by Manchester Metropolitan University. Project OMEGA will engage UK academic institutions to assess problems and develop solutions in response to the aviation sustainability challenge, as announced by Trade and Industry Secretary Alistair Darling in May with £5 million from the UK Government. OMEGA will bring together world-class academic institutions to assess known and newly-emerging environmental challenges that the air transport and aeronautical industries must overcome during the next 50 years. It is highly likely that there will be a study supported by OMEGA into aspects of alternative fuels, especially biomass kerosene, linking with key stakeholders

Biogas
BIOGAS FOR TRANSPORT

9. We recognise the carbon saving potential of biogas as a transport fuel, but acknowledge that the necessary adjustments to transport infrastructure represent an obstacle to biogas uptake. We note the Government's acknowledgement of the need to assess the feasibility of using biogas as an alternative to diesel and welcome the Government's Surrey-based pilot project to examine the use of landfill gas as a transport fuel. We recommend that a feasibility study be undertaken in time for the results to contribute to the Government's Biomass Strategy, expected in the coming year. (Paragraph 77)

The Government acknowledges the potential role for biogas to contribute to the renewable fuel mix for use in road transport. Natural gas, including biogas, benefits from a significant duty discount compared with main road fuels, and this is guaranteed until 2008-09. The Government is currently considering whether and if so how biogas might be incorporated within the Renewable Transport Fuel Obligation. We will consult early in 2007 on the details of the RTFO, including on the question of which fuels should count towards the Obligation.

ANAEROBIC DIGESTION

10. We recognise the potential of anaerobic digestion significantly to increase the use of waste as a source of renewable energy. We reiterate the point made by the Biomass Task Force that care must be taken in selecting the most efficient anaerobic digestion technologies. We note that the Government has committed to reviewing its current approach to anaerobic digestion by April 2007. This is too late. Defra's current review of the Waste Strategy—which is due to be published later this year—provides a more suitable opportunity to fulfil this commitment and we recommend that the Government use the review to bring forward all of its work in this area. (Paragraph 84)

The Government acknowledges the potential of anaerobic digestion (AD) to generate renewable energy from a range of organic material, whilst also contributing to our objectives on waste management and methane mitigation from agriculture. AD is already supported under the Renewables Obligation. Defra is giving active consideration to its role in relation to a range of our objectives, including its potential contribution to waste management as part of the current Waste Strategy Review. The complementary review, announced in the response to the Biomass Task Force, will be completed as soon as possible.

4. Land use

FOOD SECURITY

11. We conclude that second generation biofuel production is less likely to have the same impact on world commodity markets as first generation biofuel production, which competes with the food industry for corn and oil feedstocks, further pointing to the desirability of investing in the necessary technologies. (Paragraph 102)

We agree with the Committee's conclusion. The steps being taken to encourage the development and deployment of second generation biofuels are set out in the response to recommendation 7.

ENERGY FROM WASTE

12. It was made clear to us that organic waste material—much of which currently goes to landfill—represents an untapped source of energy. We support the work of the Biomass Task Force and its leader Sir Ben Gill in highlighting the energy potential of waste, and trust that this line of thinking will be fully integrated into the Government's forthcoming new strategy for waste. We see the generation of heat and electricity as an important part of any effective waste strategy. The contribution of waste to energy production could be substantial. However, this should be made alongside, and not instead of, efforts in other areas.
(Paragraph 108)

The Government is committed to reducing significantly the volume of biodegradable waste disposed of to landfill by 2020. We fully recognise the value of this waste, both in terms of the materials it contains and its energy potential, which was highlighted in the Climate Change Programme Review and the Energy Review. Energy from the biodegradable fraction of waste may be supported through the Renewables Obligation and exempt from the Climate Change Levy. The consultation document on the current Waste Strategy Review proposed significant increases in recycling and composting, as well as anticipating an increase in energy recovery. The revised Waste Strategy is due to be published in early 2007.

GENERAL CONCLUSIONS ON LAND USE

13. Questions over land use are at the heart of bioenergy policy. We are concerned by the implications of the Government's claim that "by 2050 the UK could produce as much as one third of its transport energy needs" from renewable sources. We recommend that the Government make clear in its response to our report the evidence—and assumptions made in relation to land use—to support this claim. Biofuels for transport currently offer an important way to reduce carbon emissions from the growing transport sector, but increased production may have an adverse effect on food production and biodiversity. If the Government goes ahead with the increase in the Renewable Transport Fuel Obligation beyond 5%, as proposed in the Energy Review, there may be serious UK land use implications. Exploiting the 'dualfunctionality' of crops to provide both food and bioenergy may go some way to mitigating this. (Paragraph 113)

The conclusion that the UK could produce as much as one third of its transport fuel by 2050 was arrived at in a report entitled Liquid Biofuels and Renewable Hydrogen to 2050, commissioned by the Department for Transport and produced by E4Tech in 2004. The report assumed that ethanol from fermentation and hydrolysis processes would replace petrol, and that vegetable oil based biodiesel and synthetic diesel from a lignocellulosic biomass-based Fischer-Tropsch process would replace fossil diesel. It assumes an ambitious estimate that 4 million hectares of agricultural land could be diverted to biofuel production (based on estimates by ETSU (1998) and Eyre et al (2002)). In addition biofuels from non-crop sources could produce up to 10% of total road fuel.

We are aware that land use may be an increasing issue, not only in the UK, but in other Member States and beyond. As the Committee suggest, exploiting the multiple functionality of crops and other biomass sources may reduce the pressure. This could be by using part of the crops for food and part for bioenergy or part for fuelling the process plant and part for feedstock, while also producing by-products. We will consider the importance of, and the impact of bio-energy developments on land use, biodiversity and commodity markets when determining the future support levels of biofuels and bioenergy, drawing upon the developing research base.

14. Biomass crops used for heat and electricity can have a positive impact on biodiversity, and offer greater carbon savings per hectare, but in the case of short rotation coppice, are costly to establish and yield no output for four years. They therefore require considerable investor confidence. Whilst we recognise that the complex matrix of advantages and disadvantages relating to the various uses of arable land precludes any simple choice between sources, the Government must act now to help reconcile and rationalise these apparent inconsistencies in order to maximise carbon savings. (Paragraph 114) We have taken careful note of the Committee's comments on the choices which are available on different sources of bioenergy. As indicated above, we aim in the Biomass Strategy to set out conclusions on cost-effectiveness and other factors which influence the optimum direction of development. In the specific case of energy crops, the evidence suggests that farmers are prepared to choose to invest in production if a secure market for the output is available. While market forces play a key role in determining the pattern of industry development, we recognise that Government incentives and strategies can also be used to direct development in an appropriate and cost-effective direction.

5. Government policy on bioenergy

15. Government policy does not leave room for newer, more efficient technologies to develop and become commercially viable because it does not link incentives to carbon savings. We recommend that the Government begin to remedy this initially in implementing the Renewable Transport Fuel Obligation. (Paragraph 115)

The Government agrees with the principle that policies designed to address climate change should link incentives to carbon savings where it is feasible and appropriate to do so.

For the RTFO, the Government has been clear from the outset that the primary objective of the policy is to reduce greenhouse gas (GHG) emissions from the transport sector. In this context, the RTFO feasibility study considered the prospects for directly incentivising fuels giving the highest level of GHG savings. The study concluded that integrating GHG fully into the RTFO was fundamental to ensure the potential of the mechanism to achieve its objectives. However, it also found that the additional complexity, legal uncertainty and short term implications of incentivising GHG savings directly suggested that a staged approach toward integration was advisable. It recommended a reporting requirement in the first instance, developing into a hardened carbon incentive over time. The Government will be consulting on this basis with draft regulations early in the New Year. However, the Government is keen to move toward direct incentivisation as soon as it becomes feasible to do so.

BIOMASS SUPPORT SCHEMES

16. We are pleased that Defra is keeping the prospect of a Renewable Heat Obligation under review: this option should not be ruled out altogether without further consideration. We recommend that Defra undertake a full analysis of such an Obligation, but emphasise that such an analysis should not be the cause of any delay to other Government measures in support of biomass heat. (Paragraph 125)

We have commissioned work—following discussions with the industry and other stakeholders—to analyse the business case for longer-term support for renewable heat and the potential support options. The project specification for this work specifically mentioned the need to consider a Renewable Heat Obligation among a number of other suggested options. The outcome of this work will be reflected in the UK Biomass Strategy.

As we have indicated previously, this should not delay the introduction of the measures announced in the Climate Change Programme Review or the Government's Response to the Biomass Task Force Report, i.e. the development of a capital grants scheme for biomass boilers and biomass CHP systems (which should be operational before the end of 2006/07, subject to State Aids approval) and launching a second round of the Bio-Energy Infrastructure Scheme (which should take place before the end of 2006/07).

BARRIERS TO BIOMASS HEAT

17. Biomass heat has great potential to generate significant carbon savings. But we do not believe that the Government has properly positioned itself to exploit this potential. The Government must also quantify what it means by the "optimum use" of biomass. Despite the Government's acknowledgement that the contribution from biomass "can be very significant", we note that the Renewable Transport Fuel Obligation is predicted to save 16 times more carbon than the new subsidy for biomass heat. The Government should publish the evidence base—including the basis for its calculation of the carbon savings anticipated to be made from the RTFO—for its current policies. We recommend that financial and policy support for biomass-derived heat be increased to a level that ensures associated carbon savings are at least on a par with those anticipated from the Renewable Transport Fuel Obligation. We further recommend that the Government take the opportunity provided by its long-term Biomass Strategy to make these changes. (Paragraph 134)

We agree with the Committee's recommendation that the UK Biomass Strategy is the correct forum for presenting the detail of current and future strategy on biomass. Within the Strategy we will be identifying the key policy objectives that bioenergy should help to address and, at the same time, we will consider whether the appropriate mix of policy, financial and technical frameworks are in place to ensure the "optimum" use of biomass, i.e. the best use of biomass to deliver the hierarchy of policy objectives in a sustainable manner.

With respect to the evidence base for the Road Transport Fuel Obligation, the assumptions underlying the Government's calculation of carbon savings anticipated to be made from the RTFO are included in the partial regulatory impact assessment available on the Department for Transport's website at:
http://www.dft.gov.uk/stellent/groups/dft_roads/documents/page/dft_roads_610330-06.hcsp#TopOfPage

These assumptions are based on a range of publicly available studies looking at the greenhouse gas savings of biofuels, including the JRC Eurocar Concawe and Sheffield Hallam studies. As the feasibility report acknowledges, the actual savings biofuels offer are highly dependent upon precisely how the fuel is produced, and there can be a significant variance in the net GHG savings associated with biofuels depending upon the feedstocks and technologies used in their production. To ensure that the Government is able to measure the effectiveness of the RTFO, companies will be required to report on the level of GHG savings that they achieve.

While, as the Committee notes, the anticipated carbon savings from the introduction of the RTFO exceed those predicted to arise from the 5 year capital grant scheme for biomass boilers and biomass CHP, the capital grant scheme was only ever envisaged by the Biomass Task Force as being a short-term measure. It is one of a suite of actions to encourage biomass heat which are being driven forward as part of the implementation of the Government's Response to the Biomass Task Force Report. This suite of actions includes the work currently being undertaken on potential future longer-term support mechanisms. The successful delivery of these actions would significantly increase the overall use of biomass heat in the UK and the resulting carbon savings. In relation to the RTFO's predicted carbon savings [at the 5% by volume level by 2010], the potential exists for biomass heat to deliver even larger carbon savings—the Carbon Trust, for example, identified possible carbon savings of 5.6 million tonnes of carbon per annum from domestically sourced biomass[3]. We continue to work hard to realise this potential.

RENEWABLE TRANSPORT FUEL OBLIGATION (RTFO)

18. We note that the 2010 Renewable Transport Fuel Obligation target of 5% biofuel inclusion by volume falls far short of the indicative target of 5.75% by energy as set down by the EU Biofuels Directive. We support the recent announcement made in the Energy Review that the Government is considering increasing the level of the Obligation. However, the Government must take action to ensure its three "critical factors" are met. The Government must also outline specific—rather than hypothetical—targets beyond 2010 as soon as possible, in order to encourage the level of investment necessary for the Obligation to be a success. In addition, the Government should set out the assumptions and evidence base that underpin the Energy Review's conclusion that doubling the level of the Obligation will prevent the emission of a further million tonnes of carbon a year. (Paragraph 141)

As set out in the Energy Review, the Government has committed to consult in early 2007 on the long-term direction of the RTFO, including on how we might develop the RTFO targets beyond 2010/11.

As acknowledged in the Government's RTFO feasibility report, the actual 'lifecycle' carbon savings that biofuels provide can vary widely so any estimates of carbon savings must be treated with caution. Our current analysis suggests that a 5% biofuel commitment would produce carbon savings equivalent to taking 1 million cars off the road. It cannot be assumed, however, that moving to a 10% commitment will deliver twice the carbon savings. Moving beyond 5% will require three critical factors to be met, and the Government is taking action in these areas:

We are working with the Low Carbon Vehicle Partnership to develop robust sustainability and carbon assurance schemes for biofuels. We will be requiring companies to report on these issues as part of the obligation to ensure that we can monitor the effect of the policy.
We have encouraged the European Commission to look at revising the current technical limit of 5% biofuel blends appropriate for ordinary vehicles. The Commission's EU Biofuels Strategy[4] recognizes that action is needed to resolve this problem, and the Commission have now tasked the European standard making body responsible, CEN, to consider revising this limit to 10%.
The RTFO has been designed to help lower the costs of biofuels over time and thus help ensure as far as possible that costs are acceptable to the consumer. However, the actual costs of biofuels beyond 2010 will be dependent on a number of external market factors over which the Government has little control, including the price of oil. Government will monitor the cost of the mechanism following its introduction in 2008, and that will inform the direction of future policy. The costs of biofuels and the availability of resources will also be considered in the context of the UK Biomass Strategy.

Ultimately, the reporting requirement in the RTFO will ensure that the Government is able to make a more refined assessment of the level of carbon savings achieved once the obligation comes into effect.

CARBON ASSURANCE SCHEMES

19. We welcome the news that the Government is developing a carbon and sustainability assurance scheme, but we were extremely disappointed to hear that there will not be a "carbon balance requirement" in the initial phase of the Renewable Transport Fuel Obligation. First generation biofuels are easier to produce and cheaper to buy than second generation biofuels, which require more investment but offer greater carbon savings. We have serious concerns that the RTFO—as it currently stands—could 'lock in' first generation biofuel technologies and so damage the prospects for development and use of more advanced fuels. 'Well-to-wheel' life-cycle analyses of potential carbon savings from all biofuels must be in place to inform policy before the Government pushes ahead with the RTFO. We support calls to link carbon savings with RTFO certification. No biofuel which causes more CO2 emissions on a 'well-to-wheel' basis than its fossil fuel counterpart should be eligible either for the RTFO or the 20p duty derogation. (Paragraph 158)

As set out in our response to recommendation 15 above, the Government is keen to move toward direct incentivisation of GHG savings under the RTFO as soon as it becomes feasible to do so. We are working to develop a methodology to enable companies to measure and report on the GHG savings of biofuels on a life-cycle basis from the outset of the RTFO. These reports will be publicly available and ensure that companies are thinking about GHG savings when sourcing their fuels and negotiating contracts. However, placing a direct additional economic value on levels of GHG saving from biofuels through the RTFO before standards have been developed and agreed, and before verification systems have proved sufficiently robust, would leave considerable scope for fraud, and risk discrediting the RTFO scheme as a whole.

Higher targets under the RTFO in the future, potentially including specific GHG saving targets or otherwise directly incentivising GHG saving, should provide good prospects for development and use of more advanced fuels as the obligation develops. Encouraging the development of the best biofuels will be a key consideration when we consult on future enhancements to the RTFO next year.

20. We are also aware of the implications of first generation biofuels for sustainable development and the environment. We support the work of the Low Carbon Vehicle Partnership in its work to develop reporting systems for carbon savings and environmental standards and we recommend that the Partnership's study be extended to assess the feasibility of linking these standards to RTFO certification. As far as imports for the purposes of bioenergy generation—either of the raw feedstock or of finished biofuels—are concerned, we further recommend that the Government take immediate steps to examine the legal and trade implications of accommodating international sustainability criteria within the RTFO. (Paragraph 159) The RTFO feasibility study examined the legal and trade implications of accommodating sustainability criteria within the RTFO. It concluded that a reporting mechanism could be made consistent with the existing legislative framework, but that proposals to include carbon or other sustainability assurance requirements were vulnerable to risk of legal challenge. However, the report also said that a full analysis would need to await the final design.

The Government would like to move toward including sustainability requirements for the RTFO if it can be done in a way consistent with WTO rules. We will conduct a further analysis once the final design of the carbon and sustainability criteria and reporting mechanisms for the RTFO have been established. We will also support the European Commission in exploring options for a European sustainability standard as part of their review of the EU Biofuels Directive.

ENHANCED CAPITAL ALLOWANCE SCHEME

21. It is not yet clear what effect the Government anticipates the Enhanced Capital Allowance scheme will have on encouraging biofuel development. But we are keen to see evidence of its impact and to receive details of the analysis that led to this scheme being introduced. We recommend that the Government take all necessary steps to ensure that State Aids approval is received from the European Commission and that Defra monitor the effectiveness of the scheme and report on a regular basis. (Paragraph 163)
22. We were dismayed to be told by Treasury officials that Defra will run the Enhanced Capital Allowance Scheme, and by Defra that it is "principally a matter for the Treasury". This kind of confusion at the heart of Government hardly sends encouraging signals to this potentially important industry. We recommend in the first instance that the Government make clear which Department will have the final word on qualification criteria for the Scheme. Both Defra and the Treasury told us that a series of discussions took place with industry when developing the proposed Enhanced Capital Allowance Scheme. We recommend that the Government, in its response, set out its estimate of the proportion of businesses within the industry that are expected to benefit from the scheme. (Paragraph 164)

(Joint response) The Government has set out a partial Regulatory Impact Assessment, which is available on the HMRC website. HMT, Defra and HMRC have been working closely together on the ECA proposal. As the ECA is a taxation measure, HMT and HMRC have led on the State Aid approval. Defra will be responsible for the administration of the scheme if it goes forward. Defra will issue the qualifying criteria and equipment list, but this will be dependent on what is allowable under State Aid rules. Officials from the Departments are currently consulting with stakeholders again following clarification by the Commission on a number of issues, including the 'aid intensity' rules which mean that only a certain level of aid is allowable. As part of our consultation we are assessing the number of businesses which would be likely to receive enhanced allowances and for whom the ECA would be likely to be a material benefit. We will reflect the expected costs and benefits in our final RIA.

23. We further recommend that Defra publish a comprehensive list of bioenergy-related derogations, allowances and other incentives, stating in each case which Government department has the lead in overseeing its operation and what its latest estimate is of the take-up of each scheme. (Paragraph 165) We agree that this would be a useful list and we undertake to publish such a document by the end of 2006, building on the list published by the Biomass Task Force at Appendix B of their report to Government.

CROSS-GOVERNMENT STRATEGY

24. We are disappointed that much of the evidence we received suggests a distinct lack of 'joined-up' Government concerning bioenergy. On a cross-cutting issue such as this it is essential that all relevant Government departments are—and are seen to be—pulling in the same direction. The evidence we received during our inquiry leads us to conclude that Defra appears to have 'all of the targets and none of the levers'. This is unacceptable. If the Government is to honour its commitment to reduce CO2 by 20% below 1990 levels by 2010, much more effective co-operation between departments is critical. No one department appears to take ultimate responsibility for the issue of climate change, and we are disappointed to have to reiterate the recommendation made by our predecessor Committee and again call for a central co-ordinating post to be created at Cabinet level to deal with this important crosscutting issue. (Paragraph 168)

The centrality of climate change objectives to the delivery of a broad range of Government policies was underlined in the exchanges of letters between the Prime Minister and the Secretaries of State appointed to the Departments concerned in May 2006. In September the Government established an Office of Climate Change (OCC) to work across Government to provide a shared resource for analysis and development of climate change policy and strategy. The OCC will support Ministers as they decide future UK strategy and policy on domestic and international climate change by: management and reporting of progress on existing commitments; developing a cross-government consensus on current progress and outstanding issues; identifying short and medium term goals for particular sectors, and consequent priorities for action; carrying out time-limited policy-focussed projects; and promoting understanding of climate change across government and supporting departments to adapt their policies.

25. We acknowledge that bioenergy is not a 'silver bullet' that will in itself overcome the UK's climate change challenge, but we believe that it must play an important role in a range of measures—which must also include demand reduction and increased energy efficiency—to reduce the UK's climate impact. We will examine some of these other measures in our next inquiry into Climate change: the "citizen's agenda". (Paragraph 170)

(No response)

RESEARCH AND DEVELOPMENT

26. We welcome the Environment Agency's offer to undertake a life-cycle study of alternative land-use study and recommend that Defra support and oversee this work. (Paragraph 176)

Defra has invested in research to deliver a comprehensive software package to enable the environmental assessment of bioenergy production and use. This builds on the previous 'Environment Assessment Tool for Biomass Energy (BEAT)' life-cycle assessment based tool developed by the Environment Agency. The new tool will comprise a comprehensive LCA data base of bioenergy options and will enable impacts on a land use basis to be examined. The research will be complete by summer 2007.

27. By cutting its investment in established research centres such as the Institute for Grassland and Environmental Research (IGER), the Government risks missing a valuable opportunity to be at the forefront of new renewable bioenergy technologies. The Government has said it wishes to focus its research and development effort on climate change and sustainable development but, as we have noted, land use is a critical element of climate change policy. Therefore, we are concerned that this restructuring of investment might be to the detriment of land-based research at a time when land-use issues, particularly in terms of non-food crops, are coming to the fore. We further note that Defra's own Chief Scientific Adviser shares these concerns and has said that an additional £20-30 million needs to be spent on research and development if the Government is to achieve its objectives. We recommend in the first instance that the Government publish a breakdown of its spending on bioenergy research and development, pending a full review of its resources for land-based research. (Paragraph 177) To deliver its new agenda, Defra has to realign its R&D spending to give greater support to Ministers' environmental priorities, especially climate change and energy. Defra has publicised well, via the Science Forward Look[5] and the consultation on the Evidence and Innovation Strategy[6], its intention to increase investment towards key environmental priorities and re-direct research programmes in agriculture. Defra has maintained its research investment in support of the non-food use of crops. It has not terminated early any existing programmes at IGER, and the Institute remains a very important research partner for Defra in the development and delivery of its policy objectives. This is reflected in the Department's continuing significant investment at IGER. Defra has developed good strategic partnerships with IGER over many years and in 2005/06 invested almost £6.4m at IGER.

Significant national funding currently also goes into this area through the DTI Technology Programme, and the Research Councils (particularly EPSRC/BBSR and projects such as the Supergen Bioenergy consortium). Research Council expenditure on bioenergy (including biomass and biofuels) is rising and accounted for over £2m in 2005-6. This includes two new large research consortia (funded at £3m and £2.2m each over 3-4 years) as well as projects supported under response mode and research undertaken in Council Institutes. BBSRC has recently consulted on its review of Bioenergy Research, which contains a range of recommendations for further activity. BBSRC is particularly keen to support capacity building in bioenergy in the UK research community and in promoting increased joint working between its institutes in this area.

The proposed Energy Technologies Institute and Environmental Transformation Fund will also increase funding into energy research, development, dissemination and deployment. Bioenergy also features within the key technology themes set out in the prospectus for the Energy Technologies Institute published on 14 September 2006, from which industrially relevant R&D programmes and projects will be selected.

Defra chairs the Government Bioenergy R&D Funders' Forum which keeps an overview of all UK public research dedicated to the production and use of bioenergy crops. The Forum will examine the government-wide portfolio of work and publish a breakdown of spending on bioenergy research and development. Insight into the Forum's work is available online at http://aims.defra.gov.uk/. The Forum is also producing a Research Priorities paper that will help with development and implementation of the UK Biomass Strategy, which is due to be published in 2007.

6. International comparisons

BIOMASS

28. The Biomass Task Force argues that "the potential for biomass district heating systems needs to be better understood", highlighting their use in Finland and Sweden in particular, and supporting the use of planning obligations to establish district heating systems, particularly in new housing developments. We agree and note that measures such as these are also relevant to policy on tackling fuel poverty. (Paragraph 183)

We recognise the carbon and efficiency savings which district or community heating systems potentially offer and are taking steps to encourage their use via the planning system. Planning obligations already play a useful role in ensuring that, where renewable energy policies are included in local development frameworks, local authorities can ensure that new developments contribute to the implementation of these policies. In considering the scaling back of planning obligations alongside the possible introduction of a Planning-gain Supplement, the Government will ensure that any new arrangements support the role of the development industry in promoting the use of renewable energy. We are also including district heating systems (boiler and infrastructure) in our design for the biomass heat capital grant scheme which will provide support in the industrial, commercial and community sectors.

29. We commend the Government's decision to adopt the Biomass Task Force's recommendation that it consider the use of biomass across the Government estate, and call upon the Government to publish a detailed plan, before the end of 2006, showing how biomass will be fully utilised across the Government estate, and what contribution this will make towards the achievement of the target to make Government carbon neutral by 2012. We also call upon the Chancellor to use the 2007 Comprehensive Spending Review to ensure that the Departmental Budgets contain sufficient resources to fulfil this commitment. (Paragraph 185) We recognise the importance of Government leading by example and are therefore examining our estate's suitability for using biomass heating. A mapping exercise of the suitability of the Defra estate (Phase 1, covering the 52 most promising sites) for biomass boilers has just concluded and the results are currently being analysed. Further Phases, during which the remaining Defra sites will be assessed, are planned for 2006/07. At the same time we are carrying out a 'Lessons Learned' exercise on the initial mapping work before formally rolling out the mapping exercise across the other main procuring Government Departments.

The Government's commitment[7] to make the Government office estate carbon neutral by 2012 and also its aspiration of reducing the estate's carbon emissions by 30% by 2020 will require a range of technologies for them to be met. We expect biomass heat to play a key role, but we are not yet in a position to predict the overall contribution it will make across the Government estate.

As part of its preparations for the 2007 Comprehensive Spending Review (CSR07), the Government is taking forward a fundamental assessment of its expenditure, with the aim of maximising value for money across all public spending. The possible introduction of biomass boilers on the Government estate will be assessed in this context.

Biofuels
ALTERNATIVE VEHICLE TECHNOLOGIES

30. Vehicle manufacturers have the technology available for E85 and flex-fuel vehicles, and uptake in Sweden is already high. We recommend that the Government assess the model provided by Somerset County Council which has established a pilot scheme to encourage E85 uptake at local level. We further recommend that Defra work with HM Treasury to produce a cost-benefit analysis of proposals to introduce a range of incentives similar to those used successfully in Sweden. (Paragraph 192)

Our primary mechanism to ensure the supply of renewable fuels into the UK market is the RTFO, and it will be left to the market to decide what is the most efficient way to deliver the fuels.

However, we recognise that additional actions can be taken to support the development of niche markets and gather evidence about future policy options. Through our infrastructure grant programme we have also provided grant funding for ten E85 bioethanol stations in Norfolk and Somerset, and we are currently considering applications for E85 facilities in other areas of the country. Departments will keep under active review the cost benefit of these and other measures to inform future policy in this area.

31. As the availability of low carbon vehicles increases, the Government should develop a uniform system to help consumers make informed choices about the CO2 savings which can be achieved from different types of vehicle. Such a scheme should employ the same approach as is currently used to make fuel consumption comparisons under differing kinds of driving conditions. (Paragraph 193) In July last year Department for Transport Ministers launched a colour-coded vehicle labelling scheme developed through the Low Carbon Vehicle Partnership. The labels are similar to those currently displayed on fridges and other white goods. They rank vehicles in bands from A to G, so that consumers will be able to see the environmental impact of vehicles when they are shopping for a new car. The labels display a variety of information to car buyers, such as how fuel efficient a particular vehicle is, how much motorists can expect to pay in fuel bills, and whether it qualifies for a reduction in Vehicle Excise Duty. Over 80 major car brands, which represents over 98% of new vehicles sales, in the UK have signed up to the introduction of the scheme.
The Government announced this summer that it would introduce a new transport and climate change communications campaign to promote consumer information on buying greener vehicles and on eco-safe driving. The campaign will also target businesses by promoting the benefits of workplace travel planning. The car purchasing strand of the campaign will provide consumer information and advice on the CO₂ emissions of new cars and on different car types. The method by which supporting data will be ranked and presented is currently being developed.

FUEL STANDARDS

32. The Government must make clear its long-term targets for the Renewable Transport Fuel Obligation as soon as possible, in order to give car manufacturers and the petroleum industry sufficient lead time to develop vehicle engines and make the infrastructure adjustments necessary to support the use of fuels containing higher proportions of biofuels. We note that increasing the current limit of 5% will require the European Committee on Standardisation (CEN) to develop new fuel standards for higher inclusion levels of biofuels by volume. We recommend that the Government work with the CEN to ensure that new standards are set as a matter of urgency. (Paragraph 197)

The Government has made it clear that it intends to move beyond the 2010 target of 5% renewable fuels if certain conditions are met. We will be consulting next year on enhancements to the RTFO beyond 2010/11, including the issue of future targets. This could include for example, whether simple volumetric targets remain appropriate, or whether the system should move to one based on GHG targets.

As indicated above, action is in hand to address the problems arising from the current European fuel standards.

OVERALL CONCLUSION

33. Climate change is a long-term concern but action is needed today. Bioenergy is only one part of a many-faceted solution to the pressing problem of climate change, but we must make use of all the measures available to us. If the UK is to be a credible leader, setting the global agenda for tackling climate change, the Government must take every opportunity to reduce domestic carbon emissions. Bioenergy represents one of the most significant such opportunities available today. (Paragraph 198)

We share the Committee's conclusion that climate change is a long term concern but action is needed today. The Government is committed to act to reduce domestic carbon emissions and the Prime Minister has made clear that climate change is a top priority for Government at home and internationally. We recognise that climate change is one of the biggest problems facing the UK and the world, and we need to ensure that the actions we are taking as a Government are co-ordinated and as effective as possible. The new Office of Climate Change will help us meet that challenge and will be a key resource to help us achieve the challenging targets we have set to reduce carbon dioxide emissions by 60% by 2050. Its first task is to begin an audit of existing work to develop a clear picture of where we currently stand on climate change and what outstanding issues need to be addressed most urgently, taking as our starting point the Climate Change Programme Review carried out earlier in the year. As indicated earlier in this response we welcome publication of the comprehensive review led by Sir Nicholas Stern which has confirmed that the Government is right to set climate change at the top of our domestic and international agenda.

As the Committee has recognised, efforts to reduce carbon and other GHG emissions require a wide combination of approaches and initiatives and calls for a collective effort to ensure we move toward a lower carbon future. Energy efficiency is, of course, an integral element of the UK's strong domestic programme to tackle climate change but other measures such as the new Planning Policy Statement on climate change will be important to start to lock in low carbon living. Finally, we strongly agree that sustainable bioenergy can make an important contribution to Government's renewable energy and climate change objectives and the UK Biomass Strategy will be a key vehicle to take this forward.

DEFRA'S DEPARTMENTAL REPORT 2006 AND DEFRA'S BUDGET—2ND REPORT (2006-07), PUBLISHED 23 FEBRUARY 2007

Conclusion/Recommendation Government Response

2. Financial Management

1. We have considered a substantial amount of evidence about the causes of Defra's £200 million deficit in 2006-07. This deficit ultimately resulted in action to reduce, in-year, the 2006-07 budgets of several Defra executive agencies and Non- Departmental Public Bodies (NDPBs) and disrupt a number of important environmental programmes and projects. The evidence suggests that the Department itself has to take much of the blame for the precarious financial situation it found itself in 2006-07. We regard this whole episode to be a serious failure in the Department's financial management. (Paragraph 28) The Government accepts that the budget allocations for 2006/07 agreed in January 2006 did not take full account of all potential financial pressures. Risk was managed to some extent by instructing key delivery bodies not to commit more than 90% of their budget until the allocations were re-confirmed in March 2006. Procedures were also put in place for intensive financial management throughout the year. The allocations remained under scrutiny by the Finance team during February and March 2006. By insisting on corrective action as soon as the new Ministerial team was in place after the Cabinet reshuffle, the Government demonstrated decisive financial management, albeit that it could have been sooner and the disruption reduced. Nevertheless, whilst it would have been less disruptive to have recalibrated budgets more quickly, earlier action would not have reduced the level of budgetary pressure that Defra faced.

Lessons have been learned and changes put in place. The Government is far more sensitive to potential risks in setting the 2007/08 budgets and in the approach to the CSR07 period. Programme allocations for 2007/08 were issued to policy areas and sponsored bodies in December 2006, as promised. Since then new pressures have emerged but these will be managed down within the control totals set by Treasury. The Department is also strengthening controls already in place and developing new procedures to ensure that new spending commitments are tightly aligned to priorities. Defra is maintaining an open dialogue with sponsored delivery bodies about the overall financial position. Ministers are being kept fully informed of all significant developments.

The actual out-turn for 2006/07 will be very tight demonstrating that although the action on the budget was taken later than it should have been, it was well-justified.

2. We acknowledge that some minor factors for the deficit, such as costs related to the Spring 2006 avian influenza outbreak, were largely beyond the Department's control. However, many of the financial problems carried over from 2005-06 occurred because the Department had made budgeting commitments based on unsubstantiated assumptions about the generosity of HM Treasury in a tight fiscal period. We believe the Department was irresponsibly over-optimistic and complacent in budgeting on the assumption that, first, it would be allowed its drawdown its full End-Year-Flexibility (EYF) from the Treasury in 2005-06 and, secondly, that it would be able to switch £85 million from non-cash to near-cash that same year. These two factors alone amounted to £110 million of the £200 million deficit. We are not convinced that the Department explored fully with the Treasury at an early enough stage the possibility of making these kind of transactions, particularly bearing in mind the tight financial climate. This complacency had unplanned-for severe consequences. (Paragraph 29) The Government does not agree that, when setting budgets for 2005/06, the assumption that full planned End Year Flexibility (EYF) drawdown would be available in 2005/06 was irresponsibly over-optimistic. If planned EYF were not included in the budgets until the drawdown was absolutely certain, then it would be too late that year to use that funding for valuable outcomes, as the normal drawdown point is the Spring Supplementary Estimate towards year-end. The EYF stock would then simply roll forward as an underspend from year-to-year, and not be available to help manage spending pressures or promote priority policies. There would be no incentive for departments to plan an underspend in one year to fund additional, better value expenditure in the following year, consistent with the objectives of resource accounting and the nature of long-term programmes. This particular EYF entitlement resulted from a planned underspend in 2004/05 specifically to fund additional better value programme expenditure in 2005/06.

In following Treasury's guidance when completing the return for the Provisional Out-turn White Paper during June 2005, there was no indication that the EYF drawdown would be restricted. Only after we had submitted the resulting EYF entitlement claim in July 2005 were we informed (in common with all Government Departments) that the permitted drawdown should be zero unless a compelling case was made to the Chief Secretary to the Treasury (CST). A combination of new budgetary pressures and restrictions on EYF drawdown meant we faced a £140m deficit in the resource budget and £27m in the capital budget for 2005/06.

The then Finance Director agreed with the then Secretary of State that we should seek to make a compelling case for Defra to the CST. After extensive negotiations, the CST agreed on 23^rd November 2005 to an EYF drawdown of £65m resource and £27m capital, by which time we had addressed the remaining shortfall with a package of restraining measures and expenditure deferrals agreed across Defra and its sponsored bodies. This successful negotiation reduced, but did not eliminate, the upheaval to budgets we encountered in 2005/06 and, as a consequence, costs were carried over into 2006/07.

The Department did not expect to be able to switch the full £85m from non-cash to near-cash resource in 2005/06. The Spending Review 2004 settlement letter stated that such flexibility was only available within the context of the fiscal rules and having worked through the EYF negotiations the Government was well aware of the tightness of the fiscal position. Defra was not complacent. The Department assessed the risk and concluded that the pressure on near-cash resource could be managed in-year. Treasury's budgeting guidance, available in draft form from August 2005 and finalised in December 2005, set out in more detail the switching rules and therefore in November and December 2005 the Department had discussions with the Treasury (at the same time as other Government departments) to see what could be achieved for Defra. These discussions secured a £20m switch to near-cash resource for each of 2005/06, 2006/07 and 2007/08. The remaining £65m in 2005/06 was successfully managed out across the rest of the year because the out-turn was a £1m underspend.

3. We are particularly unimpressed with the Department's explanation of how the Treasury "re-classification" of near-cash and non-cash spending impacted on its budget. Our evidence shows that no good reason existed for the Department to assume it could make a transfer of £85 million non-cash into near-cash, and to make budgetary commitments based on this assumption. The Department had never made such a large transfer before. No Treasury guidance existed permitting it to do so. This financial pressure was therefore caused more by the Department's self deception, as well as its misguided assumptions about Treasury rules. To blame the Treasury was on this occasion incorrect. The result was a sudden, unplanned, poorly explained and highly disruptive mid-year restriction on budgets. Defra's agencies and NDPBs—as well as voluntary groups reliant on Defra funding—found themselves with wholly unanticipated financial problems as a result. In its response, the Department should tell us when Ministers were informed by officials about the rule changes and their financial consequences. (Paragraph 30) The Department did not assume that an £85m transfer could be made from non-cash to near-cash for 2006/07. Moreover, since 2005/06 was the first year that the distinction between near-cash and non-cash resource was formalised no transfers would have been needed for earlier years. The detailed Treasury rules brought in for 2005/06 onwards did provide for the possibility of large transfers (in excess of £20m) provided they were affordable fiscally and complied with the guidance. Defra had already secured a £20m transfer under these rules for 2005/06, 2006/07 and 2007/08 and had by then a thorough understanding of the Treasury rules and the overall fiscal position. The Department knew the likelihood of further transfers was very remote so the remaining £65m was being carried as a pressure to be managed in-year, as it had been in 2005/06.

As the position became clearer, the Department decided that the full scale of the pressures had to be dealt with as a specific exercise rather than leave all or some of it to in-year management.

Ministers were advised of the impact of this tighter financial regime in May 2006 when the budget review exercise was launched.

4. We also remain doubtful whether the £23 million figure that Defra says the Rural Payments Agency (RPA) contributed to its budget deficit tells the full story. In its response to this report, the Department should state how much the RPA was within or over budget on a monthly basis throughout the financial year 2005-06. The Department must also indicate what parts of its internal budget were affected during this period by financial transfers to the RPA, and the consequences of these financial movements. (Paragraph 31) The Government can confirm that RPA was also provided with an additional £23m of capital budget for 2006/07 at the same time as the additional resource budget. This funding was available within the overall capital budget so did not require any separate action.

Compared to the budget allocated at the beginning of 2005/06, RPA was provided with an additional £19.7m of resource budget (£18.7m in November 2005 and £1m in March 2006) to cover the increased running costs of the Common Agricultural Policy Single Farm Payment Scheme (SPS). The additions were managed as part of controlling the centrally held pressures, with no other part of the internal budget being affected. During the year, RPA's actual spend each month was less than the original cumulative budget up to October 2005 and then remained less than the revised cumulative budget for the remaining months, with the exceptions of December 2005 and March 2006. For December 2005, the cumulative overspend for the year-to-date was £4.6m, but this position was recovered by the end of the following month. For March 2006 the cumulative overspend for the year was £6.7m on a total running cost budget of £229m (3%) reflecting the problems on SPS which became apparent in that month. This overspend was contained within the Department's overall £1m underspend for the year.

5. Our evidence shows that the chaos and disruption caused by imposing budget reductions in-year could have been prevented by the Department. Defra was fully aware by the end of the calendar year 2005 that it was deferring at least £150 million worth of costs into 2006-07. Yet, when 2006-07 budgets were set in January 2006, the Department decided not to revise substantially budgets to take account of these deferred costs. The Permanent Secretary told us several times that it was a "matter of judgement" as to whether the Department could absorb these additional costs within its 2006-07 budget. It is clear to us that this judgement—made by senior Defra officials and ministers—was seriously flawed. The Department was over-optimistic to assume it could cope with the additional deferred costs from 2005-06 and not incur any further significant unexpected costs in 2006-07. The error of this decision was exposed within just two months, when the relatively minor additional costs from the Rural Payments Agency and the Spring 2006 avian influenza outbreak were enough to 'tip the balance'. Given that neither additional RPA running costs or an avian flu outbreak in 2006-07 could have been totally unexpected, the decision not to revise budgets substantially in January 2006 appears even more inexplicable, and unwisely risky. (Paragraph 44) The Department was aware by the end of the calendar year 2005 that it was deferring a maximum of £95m worth of costs into 2006/07. Nonetheless, the decision taken in January 2006 to over-allocate the budget for 2006/07 to such an extent failed to take account of all potential budgetary risks. This became increasingly apparent through February and March 2006 as the assessment challenged the capacity to manage the rising pressure whilst positioning the Department more realistically for a very tight CSR07. Decisive action was then taken in conjunction with new Ministers, (the core Department and the wide-range of delivery bodies), which meant examining the full extent of Defra's budget.

6. We were taken aback by the Permanent Secretary's acknowledgement that she might have acted more cautiously in January 2006—when setting budgets for 2006-07—if she had been aware that much of Defra's money was spent at the start of the financial year. This decision had severe repercussions for those bodies affected, particularly British Waterways which had little choice in-year but to postpone major works and repairs. The Permanent Secretary was relatively new to Defra, so the blame for her lack of awareness must be shouldered by the Finance Director and his team. (Paragraph 45) The Government accepts that better insights into spending commitments at a time of budgetary pressure are required and should be built into the financial management procedures and into the assessments of budgetary risk. An improved appreciation of the elements of budget over which there is limited discretionary control is being developed.

Actual payments to delivery bodies and for other policy programmes are spread fairly evenly across the year, although within this profile several programmes are fully committed in the first quarter of the year. The point made to the Committee was that the department enters the financial year with a variety of financial commitments. Some of these commitments necessitate the early release of funds; others oblige Government to make payments over the course of the year; whilst others, although not legally or contractually committed represent clear and agreed undertakings to fund important programmes of work. The exercise undertaken in May exposed the difficulty of scaling back expenditure in a number of areas.

7. The Department's communication about the causes of its deficit has been poor. Ministers should have provided a much more complete and comprehensive explanation about the budgetary changes instead of often placing emphasis on avian influenza and Rural Payments Agency spending and vague references to changes in Treasury accounting rules. (Paragraph 49) The Government accepts that the causes of the deficit could have been communicated sooner and more clearly. As the report acknowledges, government accounting and budgeting is complex. In addition, this is compounded by the complexity of Defra's portfolio of programmes. In seeking to explain the situation in layman's terms, the Department could have done a better job sooner. Important lessons have been taken from this. There was no intent to hide behind avian influenza or issues at the Rural Payments Agency.

8. We acknowledge that many of the issues related to Defra's budget are complicated and opaque, particularly those related to various Treasury procedures. However, this complexity does not excuse Ministers—who took important decisions and approved much of what occurred in 2005-06 and 2006-07—from blame for giving confusing explanations. This raises some important questions about the understanding levels both within Defra, and outside, about how the Department's budgetary processes operate. Government accounting is complex, but the Department has a responsibility to provide good, clear explanations to help lay-people—including us—to understand these matters. Ministers should also ensure that they master the complex matters within their brief—especially those relating to financial issues. The Department should say what steps it is taking to raise Ministers' understanding in this area. HM Treasury should also try harder to be more transparent in the language and rules it uses.
(Paragraph 50)
The Government accepts the need to provide good clear explanations to help lay-people understand the complexities of government finances in Defra. We have taken a number of steps to raise Ministers' understanding in this area, for example:

regular presentations by the Finance Director to Ministerial Business Meetings;
direct support to Ministers when they meet with the heads of sponsored bodies;
the lead Minister on finance matters is receiving a series of one-to-one briefings on the budget and estimate processes from senior financial managers and technical experts. The same briefings are available to the Committee members, individually or collectively;
the monthly Management Board Finance Report is copied to the Ministerial team and the authors made available to provide explanations and answer any questions;
all Ministerial submissions with financial implications have to be approved by the Finance team to ensure that those implications are clearly explained and put into the context of the Department's financial position; and

a summary of 2007/08 budgets was placed on Defra's website when budgets were decided in December 2006 (this was the first time that this has happened).

9. We are extremely concerned by the Permanent Secretary's statement that funding will continue to be extremely tight for the Department, and its agencies, over the next few years. Although we recognise that this reflects the financial reality across the whole of Whitehall in the next few years, it raises the question that if expenditure on environmental work remains a departmental priority, what then will happen to other areas of Defra responsibility. Defra must publish as soon as possible what its spending priorities will be and how much will have to be met from further efficiency savings. In the tighter financial environment that is likely, however, Defra has not helped its case for a good settlement from HM Treasury for the Comprehensive Spending Review 2007 period with its poor financial management in the past two years. (Paragraph 53) The Government's Five Year Strategy for Defra is published on the Department's website. The Department spent considerable time during 2006 reviewing and refreshing the Five Year Strategy to ensure it meets changing needs and is fit for purpose to address the challenges for the CSR07 period. The refreshed strategy is supported by eight Departmental Strategic Objectives and these form the structure for the Government's plans under consideration for the CSR period. These will be published once CSR07 is settled later this year.

The Government has accepted that certain elements of the management of Defra's finances over the last two years could have been better handled. However, other elements have been successful:

the Department has dealt with the unexpected and rapid reclassification of all EU income and expenditure on the Common Agriculture Policy into the budget;
the actual out-turns for 2004/05 and 2005/06 contained no surprises compared to budgets and forecasts;
the systemic underspend for which the Department had been criticised in the past has been eliminated;
unqualified audit opinions have been received on successive resource accounts despite all the complexities;
the Department has successfully migrated to the new Treasury financial information system (COINS) which requires much greater detail on a monthly basis;
the monthly Management Board Finance report has been distributed to time and quality for two years;
the Government successfully managed the financial consequences of abolishing compensation paid for cattle under the Over Thirty Months Scheme in January 2006 and its replacement by compensation under a time-limited Older Cattle Disposal Scheme and new stricter testing regime;
Defra also successfully managed to stay within its 2005/06 budget despite not receiving £40m from the Department of Health as its agreed contribution towards the continuation of the Over Thirty Months Scheme; and

the rapid creation of delivery bodies, including the Marine and Fisheries Agency, Animal Health (formerly the State Veterinary Service), the Government Decontamination Service and Natural England: all at no extra cost but with improved customer focus and greater transparency on spending through business plans and annual accounts.

10. We are extremely concerned about the changes in accounting rules whereby the Department will now bear the costs of EU disallowance directly from 2006-07 onwards. This could have a serious impact on Defra Departmental Expenditure Limit (DEL) budgets in the future, in a period when the Department will already be under increased financial pressure. We recommend that the Department keep us informed at an early stage, by means of a ministerial letter, about any future EU disallowance which could potentially affect Defra's DEL budget. (Paragraph 57) The Government accepts this. The latest assessment of the non-cash resource DEL requirement to provide for disallowance payments was laid before Parliament on 28 February for the Spring Supplementary Estimate. This was explained further in the Estimates Memorandum submitted to the Committee on the same date. The potential near-cash resource DEL impact on 2008/09 budgets onwards is being considered as part of the Government's CSR07 plans.

11. We are extremely disappointed that the Department will not meet its efficiency headcount reduction target by the end of 2007-08, and will most likely miss this target by some margin. This is yet another example of how the Rural Payments Agency debacle has had wider negative repercussions across the whole Department. The Department is more optimistic about meeting its financial efficiencies target by 2007-08. However, gaining the remaining financial efficiencies necessary to meet the target may be more difficult than anticipated because the Department will be operating in a much tighter spending environment over the next couple of years. At the same time, the tighter spending environment only increases the importance of making these efficiency savings, so that money can be freed up for other purposes within the Department. We consider it imperative that the Department does not lose focus in attempting to meet its financial efficiencies target of £610 million by 2007-08. Failure to achieve both the financial and headcount efficiency targets would amount to another major embarrassment for the Department. Defra should now provide a clear statement as to how these efficiencies will be made and the timescale to achieve them. (Paragraph 63) Current forecasts indicate that the Department will over-deliver on its £610 million financial efficiency target. The risk-based forecast is that savings of £673m will be delivered, of which £360m is attributable to departmental activity (£49m over-delivery) and £313m to local authority efficiencies on waste management and street cleansing activity (£14m over-delivery).

The Government shares the disappointment expressed by the Committee over the difficulties in achieving planned headcount reductions. The position on headcount has recently changed as a result of a bilateral between the Secretary of State and the Chief Secretary to the Treasury. At the efficiency moderation meeting with the Treasury and Office of Government Commerce in November 2006, Defra reported that, due to difficulties with the RPA Change Programme, it would only be able to deliver 1,100 headcount reductions against the target of 2,400. Since then, the forecast has risen to 1,200 reductions. The Government is also looking at further options for workforce reductions before the end of March 2008. On top of this and in line with its recovery plan, the Rural Payments Agency will reduce by 600 posts by the end of the CSR07 period.

The Committee asks for a clear statement on how these efficiencies will be made and for information on the timescales. Defra's Efficiency Technical Note (ETN) sets out the key initiatives that are delivering efficiencies. With the exception of the RPA Change Programme, information in the ETN remains valid. In terms of timescales, efficiencies must be delivered by the end of March 2008. There is no interim deadline. But the Government is tracking actual and forecast efficiencies. It's on this basis that Defra expects to over-deliver by approximately £63m.

3. Managing Defra

12. Defra is responsible for a large number of delivery bodies. It is of paramount importance that the Department has the appropriate resources and robust management information structures in place to monitor effectively all its delivery bodies. The serious failings in the performance of the Rural Payments Agency (RPA) in the past year have raised concerns—which we share—that such systems and structures are not fully in place. The recent creation of an important new executive non-departmental public body—Natural England—which will have a crucial role in the delivery of many of Defra's primary responsibilities, only adds to our concerns. We will report soon specifically on the problems experienced by the RPA. (Paragraph 67) The Government is making a single response to this and the following (closely related) conclusion. The Government fully advocates the importance of effective governance and management of its relationship with its delivery bodies. The Department's review of its governance of delivery in 2006 confirmed that governance needs to be fit for purpose, and specifically related to the capacity of the delivery organisation to manage its delivery challenges and risks. This means that Defra must balance governance structures and their operation against risk associated with delivery and the organisational capacity and capability of the delivery organisation. Implementing the actions from the governance review is one of the agreed actions to follow up the Department's Capability Review. The Department is taking forward these and other actions resulting from the Capability Review that are designed to enhance the effectiveness of the department's partnership with its delivery bodies through the Renew Defra programme. Specific actions include:

implementing a consistent approach to managing the performance of delivery bodies that takes account of their constitutional status, with clear accountability for relevant Defra senior managers for ownership/management of delivery and inclusion in personal performance agreements;
the introduction of a consistent model, again taking account of constitutional status, for providing specific flexibilities and freedoms to delivery bodies according to performance, risk, capability and capacity. As part of this we will develop with delivery bodies a more robust model for reporting delivery performance to the Defra Management Board. This will help establish when a more or less interventionist approach is needed in specific cases;
enhanced holding of delivery bodies to account for performance by Defra Ministers and Management Board, with the board corporately owning responsibility for delivery effectiveness and regularly discussing delivery performance; and
experience of delivery to be necessary for promotion to the Senior Civil Service within Defra in future, subject to any necessary transition arrangements, and enhanced interchange of staff with delivery partners and other external stakeholders.

The Government aims to complete the necessary actions by March 2008.

We have in place a comprehensive Action Plan for following up the governance of delivery review (as part of the detail of the implementation of the Renew Defra programme).

In parallel with this review of governance, the Department also undertook a review of its advisory non-Departmental Public Bodies. This concluded that the non-executive body landscape was broadly fit for purpose, with little appetite for fundamental reform. There is scope for some reduction in the number of bodies, and opportunity to strengthen the processes for establishing, reviewing and monitoring the performance of these bodies. The Department also identified a number of good practice recommendations, which will help to improve how the existing non-executive body landscape operates. (The Government will send the full report, if the Committee would find that useful). A follow-up action plan is under development.

13. We are pleased that the Permanent Secretary acknowledges the need for the Department further to develop its relationships with its delivery bodies, and we support her view that the Department should be ready to adopt a more interventionist approach to its bodies as circumstances require.
(Paragraph 68)
The Government welcomes the Committee's acknowledgement of the possible need for intervention. The previous response outlines the work in this area.

14. On several occasions in the past we have stressed the necessity of effective 'joined-up Government' in achieving Defra's aims, and expressed concerns that Defra lacks sufficient 'clout' to be taken seriously by other Government departments in framing their key policy decisions. We agree with the Permanent Secretary that Defra has had some success in influencing some major decisions at the highest level in recent times, and in working effectively with other Government departments. However, we are still concerned that Defra's ability to influence other departments on a number of issues it considers important—such as bioenergy—remains limited. We recommend that the Department works to take full ownership of the decision-making process for those areas for which it has overall policy responsibility. This is especially relevant for climate change issues where Government as a whole has still to put a Cabinet-level minister in overall charge of policy in this area. (Paragraph 72) The Government accept this in part. On policy issues where Defra leads, the normal principles of collective responsibility apply, and policies are determined following consultation and discussion with those Ministers who have an interest (and, in respect of policy areas which have implications for the devolved administrations, with devolved Ministers). In many cases, policy on climate change needs to be carefully coordinated with other policies, including security of energy supply, planning policy, and so on—and vice versa. The Energy and Environment Committee has overall responsibility for policy in this area.

Nonetheless, the Government recognises the importance of a joined-up and consistent approach to international climate change issues. Defra leads a cross-departmental International Climate Change Work Programme precisely to address this issue. The Department also works closely with other Government Departments, particularly the Foreign Office, DFiD, Treasury and DTI to co-ordinate activity on climate change. On top of the work Defra leads directly, this enables the Department to achieve environmental objectives working with and through the rest of Government. The Prime Minister set up the Energy and Environment Committee to develop the Government's energy and environmental policies, to monitor the impact on sustainable development of the Government's policies, and to consider issues of climate change, security of supply and affordability of energy.

15. We were also disappointed at the lack of concrete examples provided in the Report about policy co-ordination across Government, and the Department's role in this coordination. In particular, we believe that the Report should include more information about the important work carried out by the various Cabinet Committees that deal with areas of Defra's remit. We recommend that future Departmental Reports provide information about what has been achieved through these mechanisms. (Paragraph 73) The Government does not accept this. Defra's Departmental Report includes numerous examples of policy co-ordination across Government (and beyond)—notably on climate change, energy, fuel poverty and air quality—where Defra has taken a clear lead. The Government also questions the appropriateness of using the Departmental Report to disclose the workings of cabinet committees. Nonetheless, the Government accepts the general principle that the Departmental Report should include good examples of cross-departmental co-ordination and will work towards that.

4. Defra policy

16. The Government, and the Department, often reiterate their commitment to 'sustainable development'. Sustainable development, however, is a complex concept and is embedded within a vast range of policies across Government. Although bodies have been created specifically to monitor and promote sustainable development across Government, Defra is ultimately responsible for overseeing this work. From the information available—in the Departmental Report and elsewhere—it is unclear how successful the Department has been in carrying out this responsibility. The Department has also failed to communicate clearly how it takes the lead in ensuring sustainability is embedded in other Government departments' work. We recommend that future Departmental Reports include a more coherent and freestanding 'mini cross-Government sustainability report', including objective performance measures for both Defra and other Government departments. The mini-report should comment on the Sustainable Development Commission's conclusions about Government departments' Sustainable Development Action Plans. (Paragraph 77) The Government welcomes the Committee's recognition that the concept of sustainable development is complex. Sustainable development needs to be delivered by Government as a whole. Defra's role is to champion sustainable development at all levels of Government. This role includes putting in place governance arrangements for the co-ordination of policy and delivery, for monitoring, scrutiny and evaluation. It also includes working in partnership with organisations at national, regional and local level, as well as engaging people.

Although sustainable development is a concept with many dimensions, and relies as much on the quality of partnership working and co-ordination, as on the contribution of each individual player, the Government now has a number of processes by which overall performance as well as that of individual departments are made transparent. First, the Government's indicators for sustainable development are updated and published annually. Secondly, Government departments publish Sustainable Development Action Plans. And the Sustainable Development Commission, in its strengthened independent "watchdog" role, reports on these plans. Finally, the Sustainable Development Commission reports on Departments' performance against the sustainable operations targets for the Government estate.

17. We welcome the Permanent Secretary's candour that the Department needs to improve the rigour of its approach to biodiversity and related issues. A broader understanding of biodiversity and its value, as well as eco systems, can only improve the formulation and enactment of Government policy in this important area. We look forward to seeing evidence of such a new approach soon. (Paragraph 82) The Government notes the Committee's conclusion. The aim of the Government's Ecosystems Approach project is to help deliver the natural environment outcomes more effectively and more efficiently. The Government is defining an ecosystems approach in two main ways: (1) managing the natural environment in a more holistic, 'whole ecosystems' way, and designing policies and delivery on that basis; (2) communicating more clearly and reflecting in decision-making the value of the ecosystem services which a healthy natural environment provides for people. This work is underpinned by a dedicated programme of research which includes development of a robust framework for economic valuation of ecosystem services.

The shift towards a whole ecosystems focus is reflected in biodiversity policy. The highly fragmented natural ecosystems typical of much of the United Kingdom will be a major constraint for the long term viability of many species and habitats. As a result, broader landscape-scale actions to overcome the fragmentation of priority habitats and to reduce pressures on biodiversity in the wider environment through which species move, are reflected in some of the new targets as published in the revised November 2006 UK Biodiversity Action Plan (UK BAP). This represents a shift of focus from protection of individual species towards adaptive management of whole ecosystems. A recent high-level meeting of key stakeholders to discuss revisions to the UK BAP endorsed this shift in focus.

5. Public Service Agreement targets

18. We believe that several of the Department's current Public Service Agreement (PSA) targets are inappropriate, and we have made similar criticisms in the past few years. Many of the targets are too vague. We recommend that careful consideration be given to the formulation of new PSA targets for the next Comprehensive Spending Review period. The new targets should have much clearer outcomes and performance indicators, and be able to be measured appropriately. We look forward to receiving draft copies of the targets for comment. (Paragraph 88) The Government agrees that it is important to develop effective new PSAs for the forthcoming Comprehensive Spending Review (CSR) period and that these have clear outcomes and performance measures. The department is working up proposals for new PSAs, which will be agreed with the Treasury as part of the final CSR settlement. The Government's approach to developing PSAs in this Spending Round is different from the previous Spending Round in several ways, notably:

There will be a much smaller number of PSAs—around 30 rather than 120;
PSAs will be cross-cutting, focused on key Government priorities; and are likely to involve several departments in delivery;
PSAs will be outcome-focused rather than output-focused;
Each PSA should be underpinned by one or more key national performance indicators (up to a maximum of five);
With regard to measurement, these indicators should be outcome-focused; specific, use robust data subject to quality control, and be sufficiently accurate and reliable as to enable decision-making.
PSAs will be accompanied by delivery agreements showing what different departments, delivery bodies and stakeholders will contribute to delivering the PSA; and
PSAs will be supported by departmental strategic objectives. These will cover the full range of a department's work.

The Government's new approach to setting PSAs was explained in more detail by the Chief Secretary to the Treasury, Rt Hon Stephen Timms MP, to the Treasury Committee on 30^th January 2007.
Defra is developing its proposals for new PSAs and Departmental Strategic Objectives within this new framework. Two new Defra-led PSAs are under development, one covering climate change, and the other the natural environment; both with strong participation of other departments in their delivery. The current proposed text of these PSAs and the key indicators is attached at Annex 1. This is still work in progress, and details may well change; the indicators particularly need further development. They will need to be agreed as part of the final suite of government-wide PSAs as part of the final Comprehensive Spending Review settlement, but they are included here to give the Select Committee an indication of the way these are developing.

To complement the two PSAs to be led by Defra, there will also be a suite of Departmental Strategic Objective (DSOs) which describe the full range of strategic outcomes the department is looking to deliver. These are similarly still under development and will be agreed as part of the CSR, but the latest draft is attached at Annex 2.

6. Format and presentation of the Departmental Report

19. We commend the Department's report-writers for incorporating many of our previous recommendations relating to the presentation of the Report. (Paragraph 89) The Government welcomes the Committee's findings and also the specific recommendations in their report on improving the lay-out of the Departmental Report.

20. We believe the usefulness of the Departmental Report would be improved if it were set out in a style more like that used by quoted commercial companies. The Report should focus much more on the Department's performance in the year in question instead of continuing simply to re-state Defra policies and core philosophies. We recommend that future Departmental Reports include at the beginning of the Report clear information about how the Department has performed against its stated objectives and key performance indicators in the past twelve months. More detailed information relating to Defra's policies and core philosophies should be relegated to the appendices of the Report. (Paragraph 93) The Government accepts this in part. Defra's Departmental Report includes an appendix which summarises progress against each of the Public Service Agreement targets. The body of the report brings out the performance against indicators. Many of Defra's targets have very long lists of indicators, as well as having many medium to long-term target dates. Expanding on each of these would only add to the length of the report. The Government is aware of the complexity of indicators and aims to develop a far smaller number of indicators for Public Service Agreements and Departmental Strategic Objectives for the forthcoming Comprehensive Spending Review period.

21. We recommend that key financial information be included at the beginning of the Report. More detailed financial information can be provided in the appendices. (Paragraph 94) The Government will make every effort to bring out key financial information in the report. That said, the Departmental Report is written well before the publication of the resource accounts. Therefore, it is not possible to publish audited figures for the financial year in the Departmental Report.

22. The recent changes to the Defra budget highlight the lack of transparency about how the Department's financial control mechanisms operate. They also demonstrate that the financial information provided in the Departmental Report is not helpful in understanding the reality of the Department's financial situation at a given time. We recommend that the Department employ quoted company transparency standards to the way it reports its financial situation, and that future Departmental Reports provide more commentary on the Department's overall financial position. (Paragraph 95) The Government does not entirely accept this recommendation, as it conflates the purpose of the Departmental Report with that of the resource accounts. At present, there is a significant gap in time between the publication of the Departmental Report and the resource accounts. It is the resource accounts (audited by the National Audit Office) which set out the overall financial position. The resource accounts, of course, comply with relevant accounting and audit standards.

However, the Government accepts that there is a requirement to publish some information on finances in the Departmental Report. The Treasury specifies which information is to be published. And the information that is used is taken from a Treasury system on a specified date (within the Financial Year covered by the Departmental Report). Faster closing of accounts and, in due course, the merger of accounts with the Departmental Report will overcome this and meet the Committee's wish to see a way of reporting that more closely meets the standards adopted by listed companies.

23. We recommend that an executive summary be included at the beginning of the Report, alongside the key performance and financial data. Its purpose should be to highlight frankly and clearly areas of success, failure and uncertainty, and major changes in the Department's objectives in the past twelve months. (Paragraph 96) The Government accepts this and plans that Defra will include an executive summary from the Permanent Secretary along with an extract from the Department's Balanced Scorecard, summarising overall performance.

24. The sub-chapter on the Rural Payments Agency (RPA) in the Departmental Report is of extremely poor quality, owing to the lack of frankness and detail about the RPA's performance in the past year. The Departmental Report would have greater weight, and credibility, if it provided a candid account of the Department's failings as well as its successes. We welcome the Permanent Secretary's commitment that a clear explanation of the RPA's problems will be included in next year's Departmental Report. (Paragraph 100) The Government accepts this though the extent of the difficulties in the RPA was not wholly apparent at the time the Departmental Report was being drafted. The Departmental Report does, nonetheless, include some indications of the emerging difficulties over the Single Payment Scheme.

25. This year's Departmental Report is still too long, despite a welcome reduction in the number of pages since last year's report. The sheer volume of writing often serves to hide rather than reveal the Department's key messages and data. We recommend that future Departmental Reports make greater use of simple devices in order to prioritise key issues and to signal these to the reader. For example, a 'key issues' box could be included at the start of each chapter or section. (Paragraph 102) The Government accepts this. Defra's Departmental Report for 2006 was almost a hundred pages shorter than in the previous year but the Department recognises that the report could be shorter still. The Government will also make sure that highlights, key issues and facts on funding are set out in boxes at the start of each chapter.

26. Long blocks of text are off-putting to readers and can obscure key information. We believe tighter editorial control should be employed to sift essential information from that which can be relegated to appendices or presented in less detail. More information could also be presented in graphical and tabular form. We recommend that the Department aim, in the style and readability of its report, at something which mirrors a magazine such as 'The Economist'. (Paragraph 103) The Government accepts this. The Departmental Report for 2006 included many charts, graphs and tables but the Department will try to ensure that complex sets of figures are always presented graphically.

27. The long chapters of the Departmental Report, such as Chapter 3, contribute to the difficulties experienced by the reader when attempting to navigate the Report. The Departmental Report would be more user-friendly if it were split into a greater number of shorter chapters, each beginning with a clear contents list. (Paragraph 104) The Government accepts this. The Defra Departmental Report for 2007 will avoid long chapters. And the contents page will direct readers to specific topics within each chapter.

28. Whilst it is sometimes necessary to mention some key issues more than once, repetition in the Departmental Report should be kept to a minimum. We recommend that tighter editing be used to ensure repetition occurs only when absolutely necessary. (Paragraph 105) The Government accepts this and, by shortening the report, aims to reduce the incidence of repetition.

29. Embedding numbers into long blocks of text makes them difficult to assimilate easily. Numbers are generally better presented in charts, graphs, tables or bullet-pointed lists. We recommend that the Departmental Report make more use of these kinds of devices in order to help the reader identify and understand key statistics. We also recommend that comparative statistical data be incorporated in the Report to enable the reader to establish a clear view about the trends encapsulated by the published numbers. (Paragraph 107) The Government accepts this in part. Defra's Departmental Reports include many charts and graphs. Nonetheless, the Government recognises that there is scope for improving the presentation of statistics along the lines of these recommendations.

30. We recommend that cross-referencing in the Departmental Report be improved by making references more specific, directing readers to a specific page number. Cross-referencing would be improved if sections or paragraphs were numbered. The report would also benefit from an index which differentiates between passing references and significant data or discussion. (Paragraph 109) The Government accepts this in part. However, by shortening the report and improving its structure, the aim is to reduce as far as possible the need for cross-referencing. The production of the index is largely automated and there would be an overhead (in a short production life-cycle) in devoting much time to the index. Improving the contents page (along the lines suggested in Recommendation 27 above) and shortening chapters will also help guide readers to significant blocks of text on specific topics.

THE RURAL PAYMENTS AGENCY AND THE IMPLEMENTATION OF THE SINGLE PAYMENT SCHEME—3RD REPORT (2006-07), PUBLISHED 29 MARCH 2007

Conclusion/Recommendation Government Response

1. Defra should establish why its decision making processes did not require an adequate examination in 2003 of the implications and changed risk profile associated with introducing the Single Payment Scheme in parallel with the RPA's Change Programme and its associated new business processes.

2. The policy reasons for the Government choosing the dynamic hybrid are appreciated, but such decisions should not be made in isolation from practical realities. The choice of the dynamic hybrid model made the RPA's task a more complex one than implementation on a historic basis, especially with the Change Programme being implemented in parallel with the SPS. The policy suffered from the closed nature of discussions during its development and a lack of real scrutiny of the implications of what was proposed, such as the fact that payments would henceforth be made outside the farming mainstream.

3. We conclude that Defra ministers selected the 'dynamic hybrid' model in the knowledge that it was inherently more complex and risky. But they did not seem to be aware of what they were letting themselves in for. Defra officials did not quantify these risks for them, and relied too easily on RPA assurances that the choice was deliverable in the time available. These assurances were not based on detailed analysis, and were partly motivated by a desire to escape from difficulties with the development of IT systems to pay the previous schemes. No proper appraisal was made of the volume of work that the chosen policy would entail, both in terms of the number of claims and, even more significantly, the number of land changes that the RPA would have to deal with: land not formerly incorporated would now be within the system and there was a strong incentive for landowners and farmers to register as much land as possible. Defra should now identify those who were responsible for this fundamental failure to recognise the consequences of its own actions on the RPA payment delivery mechanism. Senior officials who presided over the lack of policy analysis should indicate why those actions were not undertaken.

4. The amendment of the original dynamic hybrid decision so soon after it was announced, by adding a third region, reinforces our conclusion that the wider implications of the dynamic hybrid model had not been properly thought through when the decision was made. It also made the RPA's task yet more complex and lost them more time. Defra should provide a commentary to explain this failing in its internal decision making process.

6. We conclude that the numerous changes to the SPS rules and late policy decisions contributed to the delay in implementation by reducing the time available to build and test systems. Defra was not to blame for all of these delays: the EU was slow to finalise the common rules of the SPS. However this should have been a foreseeable risk, as Defra should have realised that other Member States were not in such a hurry to have the details worked out, either because they were implementing in 2006 or because they were using a historic system. In addition, some of the RITA components were not able to cope with the required volumes when delivered, which reduced the amount of time the RPA had to process the 2005 SPS claims. RITA itself did not work reliably enough. Defra failed to anticipate the volume effects on their systems arising from the implications of the SPS policy for the numbers of additional landowners who could now benefit from the new arrangements. Ultimately ministers and Defra senior management must accept full responsibility for their failings.
In its evidence to the Committee the Government sought to demonstrate that both Defra and the RPA undertook a substantial programme of work involving the farming community and their main representatives to analyse the implications of the June 2003 CAP reforms and preferred policy options.

The policy development was taken forward in an inclusive and fluid process. The outcomes of discussions with key