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Rishi Sunak’s new tax relief on investment in oil and gas extraction in the UK will cost the taxpayer around £1.9bn a year, it has been claimed.
The tax relief that has been widely criticised by green groups, opposition politicians and even oil executives also risks shortchanging the public further down the road, according to the New Economics Foundation (NEF) think tank.
By the time the investments start returning profits, the 25 per cent temporary windfall tax on oil and gas profits announced by the chancellor on Thursday could no longer be in place as it is set to end in 2025.
And having paid for 91 per cent of the investment cost, the taxpayer would be left claiming only 40 per cent of the benefit, the NEF said. This is because the temporary windfall tax takes the total rate of tax on oil and gas profits up to 65 per cent – so when the levy expires, taxes will drop back down to 40 per cent.
“In the midst of a climate crisis, when we need to end our dependence on high carbon fuel as rapidly as possible, this policy is irrational and destructive,” said Alex Chapman, a senior researcher at the foundation who carried out the analysis. “This money would be far better spent reducing the need for fossil fuels through investment in home energy efficiency measures such as insulation and heat pumps.”
The investment incentive also allows oil and gas companies to recoup a proportion, potentially as much as a third, of the losses they will incur from the new windfall tax.
It risks incentivising companies to bring forward new oil and gas investments, even where those investments could be loss-making in the long run, he added.
The NEF’s figures are calculated using the Oil and Gas UK forecast that £21bn of investment will be brought forward over the next five years. It compares the amount of tax relief that would have been received on that investment before the new energy profits levy was introduced (46p on the pound) with the amount received after the new levy (91p on the pound).
“It’s a bizarre decision to put the taxpayer on the hook for paying for more oil and gas when they don’t want it,” said Jess Ralston, a senior analyst at The Energy and Climate Intelligence Unit (ECIU) think tank. “The oil and gas super-deduction is a blow to UK taxpayers and a missed opportunity to boost renewables which are cheaper, more popular and don’t generate the pollution that oil and gas does.”
Ms Ralston also said there was a risk that any new oil and gas rigs built could become stranded assets later, which the taxpayer then must pay to decommission.
Polling by the ECIU earlier this year found that 51 per cent of the UK public thought more renewables or better insulation was the best way to solve the energy crisis in the long term, with only 9 per cent citing North Sea exploration as the solution, and 8 per cent citing fracking as the best long-term solution.
Mark Ruskell, a member of the Scottish parliament for the Scottish Greens, said it “seems that rather than making fossil fuel companies pay their fair share, the public purse will actually be subsidising this climate-wrecking investment to the tune of almost £6bn. This is obscene.”
He added: “The truth is that big oil and gas companies will take this as a green light from government to double down on extraction, without a thought for the climate.”
The “almost £6bn figure” assumes that the government will keep its investment incentive in place for three-and-a-half years.
Katie White, executive director of advocacy and campaigns at WWF, said it was “absolutely right” that the government was finally taking action to help people with soaring energy bills but said the country could not afford to lose sight of the climate crisis. “There is no justification for creating new loopholes that will divert taxpayers’ money to subsidise the extraction of yet more fossil fuels,” she said.
In response to the windfall tax announcement, Shell said on Thursday it still intended to spend 75 per cent of its planned £20-25bn investment in the UK energy system on low and zero-carbon products and services, while BP said it would look at the impact of the new levy and tax relief on its North Sea investment plans.
“As set out in the British Energy Security strategy, and with Putin’s invasion of Ukraine illustrating the merit of this, North Sea oil and gas are going to be crucial to the UK’s domestic energy supply and security for the foreseeable future – so it is right we continue to encourage investment there,” a government spokesperson said.
“The levy’s investment allowance means businesses will overall get a 91p tax saving for every £1 they invest and allows for investment in activities to cut emissions, which could include electrification.
“In addition, there are already numerous generous incentives available to bolster investment in renewable energy, including the super-deduction, the UK’s competitive R&D tax relief regime and the Contracts for Difference scheme – making sure the UK continues to invest in clean energy too.”