“We understand that tax affects behaviour. So let’s tax the things we want to reduce, not the things we want to encourage.”
Thus spoke Chancellor George Osborne in his 2016 Budget this week, announcing a surprise tax on fizzy pop (a good idea). Less surprising were more tax cuts for North Sea oil and gas firms.
The Chancellor’s determination to drill ‘every drop we can’ from the dwindling reserves of the UK Continental Shelf, with new measures to ease the impact of ultra-low oil prices made for yet another driller-friendly Budget. But at a cost to the Exchequer – to the tune of over £1 billion in this Parliament alone.
Most fields have just had their tax bill cut by a fifth, through changes to two of the three main levies on North Sea profits:
a flat rate of Corporation Tax at a special rate of 30% – unchanged in the Budget;
an additional Supplementary Charge that stood before the Budget at another 20%, now cut to 10%;
and fields that have been pumping since before 1991 also paid the older Petroleum Revenue Tax (PRT), which was levied at 35% of the remaining profit. This was axed entirely.
On top of oil tax cuts announced in 2015, these latest changes will cost the Exchequer a total of £2.3 billion over the next five years. That’s a big hit for a public purse fighting a losing battle with the Chancellor’s self-imposed fiscal targets.
The industry, meanwhile, has reacted with muted pleasure – welcoming the cuts as “progress”, but already claiming they aren’t big enough. Shares in BP and Shell nonetheless rose by 3.5 and 3% respectively.
Fossil fuels are a shared national resource owned by us all, with the rights to exploit it leading to huge profits for oil companies. It’s right to tax those profits to get a fair return to the taxpayer.
What’s more, fossil fuel companies are largely let off the hook for the costs of the climate damage and air pollution caused by their products – an effective subsidy that’s very conservatively estimated by the International Monetary Fund at up to £26 billion every year in the UK alone.
North Sea fossil fuels are small in the global context and in long-term decline, so on a technical level the climate impacts of wringing this out a bit longer may not be huge.
But the ink is barely dry on the Paris Agreement on climate change, which obliges signatories to act with the “highest possible ambition” in pursuit of the goal to keep most fossil fuels in the ground. All countries – particularly those such as the UK that have grown rich through many decades of exploiting fossil fuels – will need to show leadership.
Promisingly, this week the Government separately promised to enshrine the Paris commitment to a ‘net zero’ economy into UK law. That might just mean admitting that the end is nigh for our economy’s reliance on fossil fuels, and getting on with the urgent job of transitioning industries and communities that depend on jobs from drilling to a sustainable future.
— source neweconomics.org