Shale: what colour would sir like his tax breaks?

Dave Powell

23 July 2013

In its latest two-fingered salute to those that think a new 'dash for gas' isn't a good idea - what with the state of the planet and everything - last week George Osborne's Treasury announced a "consultation" on tax breaks for UK shale gas.

It's one of those types of consultations: a kind of 'what kind of paper should we use to print the thing we've already decided we're going to do?' type of consultation. While Treasury does appear genuinely interested in working out exactly how big it should make the tax breaks it has already decided it is going to give, it feels a bit like putting lipstick on a pig.

The Chancellor has form on doling out tax breaks to fossil fuel companies. In the last financial year North Sea oil and gas producers qualified for just short of £2 billion worth of tax breaks, thanks to the Treasury's expansion of 'field allowances'. Allowances reduce the total rate of tax payable on some of the profits from certain type of fields. The Treasury wants to use the same principle for shale gas.

In theory, these tax breaks are about improving the economics of an investment decision so that it is more likely to happen. Economically though, what's on the table are fairly blunt tools. Look at the existing field allowances for North Sea oil and gas. In 2012/13, 34 new licences were awarded, of which 28 had a field allowance attached, meaning for five years profits from those fields would be taxed at a lower rate.

Companies get a tax break by default, irrespective of whether they actually need one - they apply to all fields of a particular classification. Remembering that oil majors are generally hulking great highly profitable beasts, what are the odds that all of those tax breaks really tip the decision as to whether to invest? Small, I'd say.

There's certainly no consensus that the nascent UK shale industry is hanging out for tax sweeties. I found out that when finally asked, the industry actually told Government behind closed doors that they don't need tax breaks, a sentiment a few of its representatives have also made in public. Even Peter Lilley says he doesn't think they're necessary.  

Odds are that more often than not with this kind of thing, Treasury is throwing money away, at a time in which we are all being walloped around the head and shoulders with the austerity mallet.

So obviously there's more going on. This is political. The Chancellor announced plans for a "generous" tax regime for shale over a month before the first meeting with the industry to discuss its economics.  Osborne's number one priority is creating the impression that the UK is open for shale: he wants to use his arsenal to encourage (polluting) activity to happen now that otherwise might not, so he can tax it more in the long run. The consultation is cheerfully upfront about it: "Shale gas has significant potential to... generate substantial revenue for the Exchequer".

Encouragingly, Shadow Chancellor Ed Balls suggested a fortnight ago that a fracking "bonanza" is "implausible". But his moves are being limited. In the process of giving certainty to shale gas investors, Osborne is making it harder for any future Chancellor to reverse the tide: the favourable shale gas tax regime, whatever it ultimately looks like, will be cemented in forthcoming legislation. The Chancellor, who resists legislating for the decarbonisation of electricity (see below), seems rather more happy to set generous fossil fuel tax policy into law to make it harder to be tinkered with.

It all points to a nice clear path for frackers. Political uncertainty is extremely damaging for investment, especially in new industries that depend on particular policy environments. The Chancellor knows this all too well: with renewable energy he has deliberately fostered a sense of deep unease amongst investors - not just by championing a carbon-budget-busting level of gas use and obstructing a 2030 decarbonisation target for electricity, but also in the language he uses. He paints renewable energy as costly, gas as "cheap", and shale gas in particular as some kind of silver bullet for the UK's ailing economy.

Game over? No. What the Chancellor repeatedly forgets is that the UK isn't the USA. We don't have "MAMBA" in which to build, nor (yet) the kind of permissive regulation that prostrates itself at the feet of the industry. Public uproar over local impacts already felt, like earthquakes in Lancashire, could be nothing compared to the fury in communities across the UK - including in Conservative hotbeds (like, imminently, Balcombe in West Sussex) - at the prospect of fossil fuel drilling on their doorstep.

Public opinion repeatedly shows that we're firmly on the side of clean British energy, not fossil fuels. A dash for gas jeopardises climate progress and encourages investors to not put their cash into future-proof technologies like renewable energy but instead into fossil fuels. The world can only burn a fifth of known reserves of oil and gas if we are to avoid the +2 degrees temperature rise that governments, including the one of which Mr Osborne is Chancellor, are supposedly committed. It simply isn't very wise to build long term tax revenues on an energy source we have to get off as quickly as possible.

If the Chancellor thinks he can make all that go away merely by cooing at the industry and throwing "incentives" at affected communities, I rather feel he may have shown his cards too early.