Removal of the Red Diesel Rebate
The UK Treasury has administered a rebated duty on fuel since 1929 in the UK. In practice, a rebated duty on fuel means that having to pay less on purchasing fuel. Rebating diesel fuel is a common fiscal instrument used for a range of industries and countries. Its main objective is to ensure an industry, such as the agriculture sector, remains competitive during fluctuations in global crude oil prices. The fuel on which the rebate is applied is coloured red to ensure it is identifiable and that strict requirements are met on its use. However, the rebate foregoes government revenue. Additionally, agricultural machinery is estimated to contribute around 5-10% of Scottish agriculture’s greenhouse gas emissions, and it has been argued that the red diesel rebate dampens farmers’ desire to decarbonise machinery or switch to alternative less environmentally damaging fuels.
Based on these arguments, this research explored the potential impacts of a removal of red diesel rebate on Scottish farming systems. We estimated the amount of expenditure and the current use of red diesel and the related greenhouse gas emissions and explored the impact of the removal of the rebate on farm viability for farms included in the Scottish Farm Business Survey. We examined the consequences of the removal of the rebate on the farm net profit and production using an optimising farm level model, ScotFarm, and also explored a scenario of switching to Hydrogenated Vegetable Oil (HVO), as an alternative fuel source on farms.
Our analysis showed that the removal of the rebate will have impacts across the sector, but these will be uneven and are dependent on the farm activity. The removal of the rebate reduces farm business income by around 23% on average. The removal of the rebate results in an increase in the number of unviable farms (below the threshold of a basic living wage) by around 7%. Cattle, Mixed Livestock and General Cropping systems are the most affected due to either their current income fragility or their high dependence on red diesel as an input. The model results, however, suggest that farms can adapt to mitigate the economic impacts by up to 70%. Arable farms are projected to change their crop mix to optimise farm resources under the removal of the red diesel rebate. Although the projected changes in on-farm mix are small (± 2%), there is clear indication of a movement towards farm enterprises with relatively lower variable costs. For dairy farms, there is a very small reduction (0.2%) in farm net profit under the removal of the rebate. There is no change projected to farm management practices.
Full report is available here.