By Paul Homewood
h/t Robin Guenier
This report came out while I was away, and I wanted time to analyse it properly.
The UK has been accused of trying to “fudge” how much money it spends on subsidising coal mining and fossil fuel use despite its pledge to phase out environmentally harmful subsidies by 2020.
The country ranked first on its commitment to end fossil fuel subsidies but last on transparency in a new study led by the Overseas Development Institute (ODI) which ranks each G7 country on ending support for the production and use of oil, gas and coal ahead of a group meeting which starts in Canada on Friday.
The UK does not provide national reports on its fiscal support for fossil fuel production and consumption and the government has repeatedly denied providing fossil fuel subsidies. However, the report states that the UK is providing subsidies in the form of tax breaks for oil and gas exploration in the North Sea and the decommissioning of oil.
Researchers also argue that the UK is using public finance through the UK Export Finance, a government agency which underwrites loans to boost British companies’ exports, to support fossil fuel projects abroad – a finance stream they say the government should be counting as a subsidy.
A government spokesman said the UK was meeting its G7 targets since it has “no inefficient fossil fuel subsidies” following an assessment by the International Energy Agency.
He added: “We are leading the world in tackling climate change, delivering the biggest carbon reductions of any G7 nation over the last 25 years.”
Inconsistencies
The authors of the report have pointed out to the inconsistency between the UK government’s climate commitments and its failure to recognise it is still handing out generous support for fossil fuel use.
Matthew Crighton, of Friends of the Earth Scotland, told DeSmog UK the UK and Scottish goverments should be developing a joint approach for a transition away from fossil fuels rather than encouraging oil and gas exploration and production in the North Sea.
He said: “By providing financial support for the enormously wealthy oil and gas industry whilst giving crumbs to renewables, the UK government is backing the wrong technologies and drastically slowing the much-needed just transition to clean energy. They should convert subsidies to fossil fuel extraction into incentives for the fossil fuel industry to move rapidly to develop the energy supplies of the future, not to get locked into systems which we know we will have to abandon.”
The study found that the world’s seven major industrial democracies spent at least $100 billion (£70 billion) a year to prop up oil, gas and coal consumption at home and abroad in 2015 and 2016 despite their pledge to end fossil fuel subsidies by 2025.
While France topped the overall ranking, the UK scored the fourth lowest score out of seven and the US was last. The data analysed does not cover the Trump administration.
Shelah Whitley, head of the climate and energy programme at the Overseas Development Institute (ODI) and lead author of the report, told DeSmog UK the research found that all G7 countries had increased their support for fossil fuel exploration since countries committed to limit global temperature rise “well below” two degrees under the Paris Agreement in 2015.
Describing the finding as “shocking”, she added: “Increased support for fossil fuel exploration is one of the most egregious activities that countries can be doing and directly counters their pledges under the Paris Agreement. Yet, they are still doing it.”
Scientists have previously warned that more than 80 percent of global coal reserves, half of all gas reserves and more than a third of the world’s oil reserves had to stay in the ground to prevent dangerous global warming of more than two degrees.
Co-author Ivetta Gerasimchuk, from the International Institute for Sustainable Development, said: “G7 governments committed to phase-out fossil fuel subsidies back in 2009, but since then have made very little progress.
“At the same time, less wealthy countries with similar commitments made under the G20, such as India and Indonesia, have reduced subsidies by billions of dollars. The richest countries must demonstrate leadership in ending handouts to fossil fuels.”
Transparency
The UK has made a series of commitments to phasing out fossil fuel subsidies.
As part of the G7 it pledged to end all fossil fuel subsidies by 2025. As part of the EU, the UK also agreed to cut all environmentally harmful subsidies by 2020 and end subsidies to hard coal mining by 2018.
Despite these pledges, the UK is the only G7 country with Japan which has not yet undertaken a peer review into its fossil fuel subsidies.
The report urged the UK to take part in the peer review arguing that “this should be a high priority for the country if it is to demonstrate transparency and accountability in meeting its international commitments”.
While the UK government says it is not subsidising fossil fuel production or consumption, Whitley, of ODI, said the UK government was using its own definition of what counted as a fossil fuel subsidy.
She added that the evidence used by the ODI and others to track subsidies showed that the UK was handing out such subsidies and suggested this was a fact the government may be trying to “hide”.
She said: “They are trying to fudge it. They’ve made their own definition of subsidies, they say they don’t have any but refuse to take part in a peer review, which is suspicious. If there isn’t any subsidies, they shouldn’t be afraid of taking part in the peer review.”
Whitley added that G7 countries did not have a system in place to track progress made in phasing out fossil fuel subsidies and warned that unless the group of developed countries put a system in place to hold themselves accountable, they won’t be able to reach the 2025 target.
Polluting abroad
According to Whitley, an estimated one billion pounds of UK public finance was spent on fossil fuel projects abroad mostly through the UKEF, which helps British companies enter the supply chain of major overseas projects.
While the UK government does not consider this to be a subsidy other global organisations do.
Whitley said the World Trade Organisation (WTO) included public finance money spent abroad as a subsidy and that the OECD was developing a similar approach.
DeSmog UK has previously reported that the UKEF was spending millions of pounds of taxpayers’ money to underwrite loans and guarantees supporting fossil fuel projects abroad — locking some developing countries into decades of fossil fuel use.
Some of the key countries which have received UK guarantees and public finance for oil and gas exploration and/or production include the United Arab Emirates (UAE), Brazil, China, India, Saudi Arabia, Jordan, Singapore, and Vietnam.
At the end of last month, international trade secretary Liam Fox visited the UAE and Bahrain to support 68 projects worth more than £30 billion to investors. The nature of the projects were not revealed.
Brazil has also been the focus of Fox’ department. Internal documents obtained by freedom of information requests previously revealed Fox told executives at oil giant BP earlier this year about his recent trip to Brazil, adding “now is a great time to get into Brazil”.
It was later revealed that trade minister Greg Hands lobbied Brazilian officials on behalf of BP and Shell over taxation and environmental regulation, two months after BP’s meeting with Fox.
Eight countries also received public finance support for oil and gas-fired power projects, including Bangladesh, Ghana, India, Nigeria, Sierra Leone, Turkey, Ukraine and the UAE.
According to the report, 14 percent of UKEF credit exposure was to the oil and gas sector last year.
Supporting coal mining
The report ranked the UK fifth out of seven for supporting coal mining.
The finding comes despite the UK having launched the Powering Past Coal Alliance with Canada last year and pledged to end unabated coal by 2025.
Researchers found that although support for domestic coal mining was equivalent to zero in 2015 and 2016, support was still granted in the form of extraction allowance and abandonment costs.
Whitley added that the UK rated poorly compared to other countries because the subsidies were calculated relatively to the country’s GDP.
In 2016, the UKEF also provided a guarantee for the underwriting of coal mining equipment in Russia.
Whitley said remaining support for coal mining was “notable” and she urged the government to follow the lead of others countries which successfully ended that support.
https://www.desmog.co.uk/2018/06/04/uk-worst-g7-countries-hiding-fossil-fuel-subsidies-report
This is the ODI table purportedly showing how subsidies are being thrown at fossil fuels:
https://www.odi.org/publications/11131-g7-fossil-fuel-subsidy-scorecard
We can break it down into the following categories:
1) Tax breaks for North Sea Oil – annual cost $0.66bn
I addressed this fake claim, which originated in an earlier ODI report here, and none of the items mentioned could remotely be described as “subsidies”, as oil and gas operations are still paying more tax than companies in other sectors.
There are extremely complex rules in the UK about what expenditure you can claim against profits, and when you can claim them, for Corporation Tax purposes. So-called tax breaks simply define these rules for the oil industry.
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The bottom line is over the years UK oil and gas production has provided tens of billions in tax revenue, over and above the normal rate of Corporation Tax paid by most other companies in the UK:
https://www.gov.uk/government/statistics/government-revenues-from-uk-oil-and-gas-production—2
Revenues have dipped in the last couple of years, because of falling oil prices and profits. Nevertheless, OBR forecasts still project tax revenue this year of £0.9bn.
In recent budgets, the government has simplified much of the tax structure, of which CW Energy have a good summary here.
Under the new regime, companies undertaking oil and gas exploration, development and production activities in the UK or the UK sector of the continental shelf pay the following taxes on profit:
a) Ring fenced Corporation Tax at 30%. The ring fence is designed to prevent companies offsetting these profits against other downstream activities.
b) A Supplementary Charge of 10% of profit.
In other words, such companies pay 40% tax on profits. The comparable Corporation Tax rate for most other companies in the UK is 19%.
Clearly, oil and gas exploration and production is not being “subsidised” as the ODI report falsely claims.
2) Fossil fuel based power – annual cost $0.18bn
There is a lack of transparency in the ODI report about what this is and how it is calculated. However, the ODI also published a briefing paper in Sep 2017, Monitoring Europe’s fossil fuel subsidies: United Kingdom, which gives us some clues.
From this, it appears that the latest ODI report is counting Capacity Market contracts as “subsidy”. As we know, these are necessary to provide standby capacity to cover for intermittent renewable supplies. As such they should be counted as a subsidy to renewable energy suppliers, and not to the generators (both fossil fuel and others) which provide the back up.
3) Public finance for fossil fuel related projects abroad– annual cost $0.84bn
This falls into two categories:
a) Export Credit Guarantees
These ensure that exporters get paid for contracts in the event of buyer default, and are available to all exporters.
They operate as normal, commercial insurance policies, funded by premiums from exporters. Without such a facility, UK exports would dry up overnight.
b) Direct Finance
Public finance is sometimes provided to buyers as part of the export deal.
Again, this is given in the form of normal, commercial loans, repayable with interest.
It is important to note that the UK Export Finance department has a duty to operate at no net cost to the taxpayer, so by definition there cannot be an element of subsidy:
https://www.gov.uk/government/publications/ukef-annual-report-and-accounts-2017-to-2018-by-section
In particular, UKEF must not undercut premium rates laid down by the OECD, which would be regarded as “prohibited subsidy”:
https://www.gov.uk/government/publications/ukef-annual-report-and-accounts-2017-to-2018-by-section
ODI may disagree with the UK exporting equipment for use in fossil fuel related activities. But they are distorting the truth and misleading the public by categorising credit guarantees and finance as “subsidy”.
4) Fossil fuel use – annual cost $9.33bn
There is no information given within the report, or elsewhere on the ODI website, as to how this number is calculated. (It is deeply ironic that they criticise the UK for “lack of transparency”!)
I have asked for more information from ODI about this, but after two days I have had no reply.
But again, we can glean some clues from the 2017 report, although this came out with a total of £13.2bn.
https://www.odi.org/publications/10935-monitoring-europes-fossil-fuel-subsidies-united-kingdom
The largest items included:
a) Zero VAT on passenger transport – annual cost £4.6bn
Public transport has been zero rated since VAT began in 1973, but the idea that zero rating is a subsidy is preposterous.
Food is also zero rated, but nobody claims food is subsidised.
Even if the label of a subsidy could be justified, it would be transport that was being subsidised, and not fossil fuels. That would be akin to claiming that zero rating food was a subsidy to farmers.
b) Reduced rate of VAT on domestic power and gas – annual cost £3.3bn
Electricity and gas were originally zero rated as well, but VAT was introduced at 8% in 1994, then reduced to 5% in 1997 because of public pressure.
As with transport, the idea that charging 5% VAT, instead of 20%, is a subsidy is simply absurd.
The ODI may think it a good idea to charge people more for transport and energy, as a way to satisfy their perverse agenda. However, such taxes would be extremely regressive, very damaging to ordinary families and would do nothing to reduce the use of fossil fuels.
c) Red diesel – annual cost £2.4bn
Red diesel, which is used predominantly in agriculture, attracts a lower rate of duty.
As with reduced VAT, this is still not a subsidy, and in any should be regarded as one for farming, and not fossil fuels.
d) Warm homes discount – annual cost £0.2bn
This is probably the most preposterous item of the lot!
The Warm Homes Discount was introduced in 2011 to help lower income households, and offers an annual discount of £140 from energy bills. The scheme is administered by the energy companies, who recover the cost from the rest of their customers.
The ODI have taken this cost, and calculated fossil fuel’s share based on the electricity mix. How they can call this a fossil fuel subsidy is beyond my simple mind, when it is purely a transfer from one group of customers to another.
Summary
The fact that the ODI have resorted to including items which plainly are not subsidies in any shape or form is an indication that their report has more to do with a political agenda, rather than a genuine attempt to assess fossil fuel subsidies.
Evidence of this lies in the fact that they have completely failed to mention the very real tax revenue which fossil fuels generate for the government.
I have already touched on North Sea oil revenue. But by far the biggest contribution comes from fuel duties, which generated £28bn last year.
The reality is that the ODI is yet another part of the green blob, funded largely by the UN, EU and taxpayer funded foreign aid money. (Last year, for instance, the DFID contributed an astonishing £16.8m).
Given their background, this grossly dishonest report is probably what you would expect to see. But why UK taxpayers have to pay millions to such a disreputable outfit is a mystery.
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June 23, 2018 at 12:09PM
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