Yee-haw! Osborne's oil bonanza

Dave Powell

08 February 2013

Fossil fuel subsidies are a really bad idea: they increase the risks of climate change, keep economies hooked on oil and gas, give unneeded strength to the arm of some of the world's biggest, dirtiest corporations, and make it harder for clean energy to break through.

But our new research shows that the Chancellor, George Osborne, appears not to think so. He has provided the best part of £1 billion worth of tax breaks to oil and gas producers in the last ten months alone, as Larry Elliott covered in the Guardian earlier this week.

Friends of the Earth's research quantifies by how much the Chancellor's tax breaks for oil and gas production, called "field allowances", have been massively ramped up since Budget 2012.

Field allowances work by reducing the amount of tax that that certain types of field have to pay on their profits. They are deliberately designed to encourage oil and gas extraction from smaller, declining or tricky fields, where it would otherwise not make economic sense to do so. That is: the Chancellor is fiddling with the marginal economics of oil and gas investment decisions, to make sure the pumps continue to, er, pump.

Osborne didn't invent field allowances - Alistair Darling did, back in 2009. But they were relatively small fry until George got his hands on them. Over the course of 2012 Osborne has expanded existing allowances and created new ones. Since Budget 2012, 40 new fields have been licensed, of which 32 (80%) have bagged themselves a field allowance. That makes them worth £864 million to the industry over just the last ten months, and that figure is set to increase further.

So what, some people say; the oil and gas industry remains highly taxed, leave them alone. Firstly, that doesn't always hold: field allowances mean that fields could pay as little as 30% tax on profits. And, quite frankly, the oil and gas industry should be very highly taxed: they benefit from colossal implicit subsidy by not having to pay the full costs of the economic, social and environmental damage they cause through air pollution, climate change and oil spills.

But the biggest issue with these tax breaks isn't really the amount they are worth, but the activity they create - oil and gas investment in UK waters that would otherwise not have taken place. The Treasury's static response says it doesn't matter whether we increase fossil fuel production here, because a barrel of oil dug up from the UK would just replace one that would have otherwise been dug up somewhere else. But a small thought experiment reveals both the folly and race-to-the-bottom horribleness implicit in this line of thought: if it's OK for the UK to ramp up its production, it is presumably OK for everyone else to do so as well.

The problem is that we need to drill a heck of a lot less. The people at Carbon Tracker warn that only 20% of the world's fossil fuel reserves can be burned if we're to have a decent chance of avoiding bonkers climate change. If every country "milks the last drop" from its reserves, as Osborne is deliberately intending to do, things are going to get exceptionally grisly.

Just last month, the President of the World Bank slammed fossil fuel subsidies. The OECD has also repeatedly done so, as has the International Energy Agency - its chief economist, Fatih Birol, saying that fossil fuel subsidies are the ruptured appendix of our energy system (read the full article here).

Oil and gas are dirty industries of which our economy must sharply wash its hands. All economies must.  We urgently need to get money into the technologies of the future; sweeties for fossil fuel production are inexcusable.

The Chancellor, now chewing over what shade of tax break he wishes to hurl at shale gas producers - a decision due for Budget 2013 - must stop his precious love-in with oil and gas: it's dangerous, phenomenally short-termist, and rather irritating.

A version of this blog first appeared on ToUChstone, the blog of the TUC.