Fossil Fuel Subsidies – The Truth

By Paul Homewood

 

https://www.theguardian.com/environment/2014/nov/11/rich-countries-subsidising-oil-gas-and-coal-companies-by-88bn-a-year

 

I reported yesterday on the Guardian article, UN criticises UK and Germany for betraying Paris climate deal, claiming that the UK is continuing to subsidise fossil fuels.

This claim is based on a report the Overseas Development Institute (ODI), a lobbyist organisation for the reduction of poverty, the alleviation of suffering and the achievement of sustainable livelihoods in developing countries. This study was covered by the Guardian in November 2014, (as at top):

 

 

Rich countries are subsidising oil, gas and coal companies by about $88bn (£55.4bn) a year to explore for new reserves, despite evidence that most fossil fuels must be left in the ground if the world is to avoid dangerous climate change.

The most detailed breakdown yet of global fossil fuel subsidies has found that the US government provided companies with $5.2bn for fossil fuel exploration in 2013, Australia spent $3.5bn, Russia $2.4bn and the UK $1.2bn. Most of the support was in the form of tax breaks for exploration in deep offshore fields.

The public money went to major multinationals as well as smaller ones who specialise in exploratory work, according to British thinktank the Overseas Development Institute (ODI) and Washington-based analysts Oil Change International.

Britain, says their report, proved to be one of the most generous countries. In the five year period to 2014 it gave tax breaks totalling over $4.5bn to French, US, Middle Eastern and north American companies to explore the North Sea for fast-declining oil and gas reserves. A breakdown of that figure showed over $1.2bn of British money went to two French companies, GDF-Suez and Total, $450m went to five US companies including Chevron, and $992m to five British companies.

Britain also spent public funds for foreign companies to explore in Azerbaijan, Brazil, Ghana, Guinea, India and Indonesia, as well as Russia, Uganda and Qatar, according to the report’s data, which is drawn from the OECD, government documents, company reports and institutions.

The figures, published ahead of this week’s G20 summit in Brisbane, Australia, contains the first detailed breakdown of global fossil fuel exploration subsidies. It shows an extraordinary “merry-go-round” of countries supporting each others’ companies. The US spends $1.4bn a year for exploration in Columbia, Nigeria and Russia, while Russia is subsidising exploration in Venezuela and China, which in turn supports companies exploring Canada, Brazil and Mexico.

“The evidence points to a publicly financed bail-out for carbon-intensive companies, and support for uneconomic investments that could drive the planet far beyond the internationally agreed target of limiting global temperature increases to no more than 2C,” say the report’s authors.

“This is real money which could be put into schools or hospitals. It is simply not economic to invest like this. This is the insanity of the situation. They are diverting investment from economic low-carbon alternatives such as solar, wind and hydro-power and they are undermining the prospects for an ambitious UN climate deal in 2015,” said Kevin Watkins, director of the ODI.

The report is important because it shows how reforming fossil fuel subsidies is a critical issue for climate change.

https://www.theguardian.com/environment/2014/nov/11/rich-countries-subsidising-oil-gas-and-coal-companies-by-88bn-a-year

 

Let’s see what the Report has to say about the UK:

 

https://www.odi.org/g20-fossil-fuel-subsidies

 

The very first page shows how they define “subsidies”:

 

Note straight off that they include “investment”. I don’t know anybody, other than a demented Guardian reader, who would call “investment” a “subsidy”.

But let’s move on.

They claim that annual national subsidies in the UK total up to $1.2 billion on average. This is what they have counted:

 

1) The ring-fence expenditure supplement – Cost $8 to $81 million pa

This was a rather complex tax arrangement, introduced in 2006, designed to incentivise investment in marginal fields. But what the ODI forgot to tell us was that it was ONLY introduced (and subsequently expanded) as a quid pro quo for a big hike in the Supplementary Charge, from 10% of profits prior to 2006, first to 20%, and then in 2011 to 32%.

This Supplementary Charge is additional to Corporation Tax, and means that currently oil producers pay 40% of profits in tax, double the normal Corporation Tax  rate.

To count something as a subsidy, which is a part of a regime of taxation measures that actually increases tax revenue, is plainly hypocritical nonsense.

 

2) The field allowance rule – Cost $364 to $922 million.

I’ll let the ODI report explain this:

 

Oil and gas companies in UK are subject to a higher corporate tax rate than most other companies – 30% as opposed to 21%. Oil and gas companies pay an additional 32% supplementary charge on their income, for a total tax rate of 62%. Introduced in the 2009 national budget, the field-allowance rule allows companies that operate in certain types of fields to claim an exemption from the 32% supplementary charge on income normally applied to oil and gas income, meaning these companies pay only the 30% corporate tax (Powell, 2014). The UK Government argues that this measure is not a subsidy, because it removes an additional tax specific to the oil and gas industry. However, because the field-allowance rule is targeted explicitly at expanding oil and gas reserves and production by lowering tax rates, it is considered a subsidy for the purposes of this paper.

The following fields are covered:

•• small fields
•• ultra-heavy oil fields
•• ultra high-pressure or high-temperature fields
•• remote deep-water gas fields
•• large deep-water oil fields
•• large shallow-water gas fields
•• shale-gas fields.

 

The report exposes its own hypocrisy here. Oil producers, who claim this allowance, are still paying full corporation tax, just like any other company. Just because they don’t have to pay the higher rate of other oil producers does not mean they are subsidised (except arguably by other oil producers!).

 

According to the Guardian

“This is real money which could be put into schools or hospitals. It is simply not economic to invest like this. This is the insanity of the situation. They are diverting investment from economic low-carbon alternatives such as solar, wind and hydro-power and they are undermining the prospects for an ambitious UN climate deal in 2015,” said Kevin Watkins, director of the ODI.

Does it not occur to these cretins that the whole objective of the field allowance rule is to encourage investment in marginal fields, which may not have occurred otherwise? And without such investment, there is no profit, no corporation tax, and no money for schools and hospitals.

Indeed, the ODI report even admits this:

 

Field allowances have been key to opening up new unconventional oil and gas fields in the UK. According to Friends of the Earth, ‘Every single new field licensed in 2013/14 received one of these tax breaks, and a number of existing fields had a tax break granted to keep them producing.’ (Powell, 2014) The expansion in the 2012 Budget to include additional deep-water offshore drilling qualified fields off the coast of Shetland, opening up potentially hundreds of millions of barrels of oil and generating an additional £3 billion ($5 billion) in profit for these companies in that region alone.

 

So, the $5 billion profit alone will generate £1 billion in tax. The ODI would like you to believe that the taxpayer is missing out on the supplementary charge, which would not have been paid anyway.

 

 

3) Oil allowance – Cost $130 million

This is an exemption from the petroleum revenue tax (PRT) for one million metric tons of oil per year and 10 million metric tons over the lifetime of the oil field.

PRT only applies to fields in production before 1993, and this allowance is designed to keep the older fields working a bit longer.

Again, even after exemption from PRT, oil producers will still pay 40% of profits.

 

4) Tariff receipts allowance – Cost $41 million

They really are scraping the bottom of the barrel now!

This allowance excludes payments to oil and gas companies for use of their assets from the petroleum revenue tax, but as the ODI admit, these sort of allowances (which they wrongly label subsidies) have been around since 1975.

The simple truth is that Harold Wilson’s government introduced a raft of new taxation on North Sea oil, to ensure it paid much more tax than it would do otherwise. Successive governments since have tended to increase this burden.

But, as with any company tax regime, there are all sorts of allowances which need to be seen as part of the overall package. You simply cannot subdivide it and call one bit a subsidy.

 

 

5) Finance

The report then goes on to look at public finance for fossil fuel exploration, concentrating on RBS (still 80% govt owned) and UK Export Finance.

They apparently don’t understand that providing finance in return for payment of interest is not a “subsidy”.

And neither is the provision of export credit guarantees, as they wrongly claim, and which are a normal commercial transaction, paid for through insurance premiums.

 

They even laughably claim:

The UK also contributed an annual average of $53.7 million to fossil-fuel exploration projects from 2010 to 2013 through its shares in the World Bank Group, the European Bank for Reconstruction and Development, the European Investment Bank, and the Asian Development Bank

But it’s all our fault anyway!

 

 

It appears that the Loony Left have their own strange lexicon.

Investment in, and taxes paid by, fossil fuels are regarded as a subsidy.

But subsidies given to renewable energy firms are called investment!