The UK’s rigged energy market will do little to restrain the cost of living crisis or promote renewables, says Thomas Perrett

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Chancellor Jeremy Hunt’s recent Autumn Statement included an increase in the rate of tax on the profits of energy firms from 20% to 35%, which will remain in place until March 2028.

However, according to analysis by the New Economics Foundation (NEF) think tank, the updated tax, which includes loopholes to incentivise energy firms to invest in new fossil fuel infrastructure, will allow major oil and gas giants to retain £52 billion in profits over the policy’s lifetime, keeping 73% of the profits that they would have made had it not been implemented.

The tax has been criticised as insufficient by green campaigners and opposition politicians, who argue that it barely makes a dent in a tax system generally built to incentivise further extraction of oil and gas. Shadow Chancellor Rachel Reeves claimed that the Government has “failed to close a huge loophole” in the scheme, leaving “billions of pounds on the table, profits that are the windfalls of war.”

Indeed, Shell and BP paid no tax on North Sea oil profits between 2018 and 2020, claiming tax relief worth £400 million while paying shareholders more than £44 billion in dividends.

The windfall tax up-rate announced by the Chancellor still permits major fossil fuel companies to benefit from an array of taxpayer subsidies, claiming tax relief for expenses such as research, decommissioning costs and building new infrastructure. Even according to the Treasury, these loopholes are “far more generous than is available in other industries”.

This tax system dates back to 2016, during which an oil price crash two years earlier compelled the Government to reduce the Petroleum Revenue Charge on North Sea oil profits from 32% to 16%. 

Between 2016 and 2020, oil and gas firms received £9.9 billion in tax relief for new exploration and production, in addition to £3.7 billion relief for decommissioning costs. The industry is a noted drain on the taxpayer – in 2019, the Government gained the equivalent of just $2-per-barrel from North Sea oil, in comparison to $22-per-barrel for Norwegian oil.

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The industry has become notoriously profitable, thanks to taxpayer support. The taxpayer will subsidise £18.3 billion of the industry’s £46 billion decommissioning costs, which increased as a proportion of operating costs from 5% in 2010 to 15% in 2017, and are projected to increase further. Between 2015 and 2017, despite HMRC making a net loss from the oil and gas industry, North Sea oil firms received £361 million in taxpayer subsidies. 

Moreover, there is an ‘investment allowance’ which ensures that 80% of energy firms’ investment into new North Sea oil and gas can be deducted from their tax expenses, sparking widespread controversy.

Former Green Party leader Caroline Lucas recently argued during a House of Commons session that “changes to tax relief coming in from January next year mean that a company spending £100 on upstream decarbonisation will be able to deduct £109.25 when calculating its levy. In other words, the taxpayer is paying money to the oil and gas companies rather than the Treasury receiving net money.”

Indeed, the Government’s windfall tax allows £22 billion of the £42 billion set to be paid by fossil fuel companies to be claimed back.

The Government claims that allowing profitable North Sea firms to invest back into domestic production will boost the country’s energy security and accelerate investment in clean energy. Hunt himself stated that the windfall tax would “recognise the cyclical nature of many energy businesses”.

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A Prolonged Crisis

However, the tax is unlikely to incentivise new renewable energy investment, given that major energy firms are notoriously reluctant to subsidise clean energy, instead pouring billions into oil and gas pipelines.

Earlier this year, Channel 4 examined the accounts of Europe’s four largest energy firms – Shell, BP, TotalEnergies and Equinor – revealing that while these firms had made combined profits of £74 billion in the first half of 2022 alone, they had invested just 5% into renewable energy. Shell invested three times more in fossil fuels than in renewables, while BP’s clean energy investments were just a-tenth of the profits it invested into oil and gas.

It is significantly counter-productive to help major fossil fuel companies to make huge profits in the hope that they will reinvest them into domestic energy production to assuage the cost of living crisis. Indeed, gas prices are set internationally, meaning that 80% of domestically-extracted gas is sold overseas to the highest bidder.

More than a-third – 506 of 1402 – unique areas in the North Sea are controlled either by foreign regimes or private enterprises, with the number of private companies producing oil and gas having risen from 8% in 2010 to 30% in 2020. From September to November of 2021, sales of domestically-produced gas to foreign buyers were twice what they were between September and November 2020. 

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The Government’s heightened windfall tax has been accompanied by a 45% levy on low-carbon electricity generators, including offshore wind, which will take effect from January. This measure was criticised by environmental campaigners who argue that clean energy generators had not benefited from the same investment incentives awarded to oil and gas producers.

Alethea Warrington, campaign manager at environmental charity Possible, stated that: “the Chancellor’s windfall tax doesn’t go far enough on dirty fossil fuels, while clean energy generators got slapped with the biggest single levy increase in the budget,” adding: “the Government should act to increase clean, cheap energy by unblocking onshore wind and implementing a bigger windfall tax on oil and gas companies.”

By penalising wind power, which is nine times cheaper than fossil fuels, the Government has missed a lucrative opportunity to cut ever-rising energy bills. The Autumn Statement raised the average household energy cap to £3,000 from April, up from its current rate of £2,500. This represents a significant increase for many households; according to the NEF, 37% of families will likely be unable to afford basic essentials by April 2024.

While the Autumn Statement has been praised for its departure from the hardline libertarianism which characterised Liz Truss’ short-lived tenure in Downing Street, it has simply delayed the economic consequences of the cost of living crisis.

Despite the record profits that energy giants have made this year, the windfall tax has failed to raise sufficient revenue to reduce energy bills, instead permitting future investment into heavily-polluting sources of energy and refusing to alter the myriad of tax deductions which have bolstered the notoriously unproductive North Sea oil industry.

Far from addressing the cost of living crisis, Jeremy Hunt’s actions are prolonging it. 

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