Bob Ward explores the subsidies currently doled out by the government to fossil fuel companies and asks why it has not attracted the same degree of criticism as subsidies for the renewable energy industry

Ward, Bob

English

LSE Research Online

blo gs.lse.ac.uk http://blogs.lse.ac.uk/po liticsandpolicy/archives/29008The Government’s financial support for fossil fuelcompanies is being overlookedBob Ward explores the subsidies currently doled out by the government to fossil fuelcompanies and asks why it has not attracted the same degree of criticism as subsidies forthe renewable energy industry.The new Energy Bill, which was introduced into Parliament on 29 November, has provokedsome crit icism f or laying out plans to subsidise renewable power up to 2020, but haselicited litt le comment about its silence over the massive f inancial support that theGovernment continues to provide to f ossil f uel companies.An analysis published last year by the Organisation f or Economic Cooperation and Development andInternational Energy Agency f ound that gas, oil and coal companies in the UK have been receiving morethan £3 billion a year in the f orm of  tax breaks and other incentives f or production and consumption.The analysis provides “estimates of  direct budgetary support and tax expenditures supporting theproduction or consumption of  f ossil f uels”. It states:“The scope of what is considered ‘support’ is here deliberately broad, and is broader thansome conceptions of ‘subsidy’. Essentially, it includes both direct budgetary expenditures andtax expenditures that in some way provide a benefit or preference for fossil-fuel production orconsumption relative to alternatives.”The largest part of  the UK Government’s hand-out to the f ossil f uel industries is the reduced rate ofVAT on the consumption of  electricity and heating, most of  which is supplied by burning f ossil f uels. Inaddition, the lack of  a strong carbon price across the economy means that f ossil f uels enjoy a hugeimplicit subsidy because they do not bear the costs of  the climate change impacts that result f rom thegreenhouse gas pollution. When it comes to f ossil f uels, the polluter does not pay.Despite the severe pressures on the public purse, f ossil f uel interests are set to benef it even more f romthe Government’s largesse in the f uture. In the Budget in March 2012, the Chancellor announced anincrease in the size and eligibility of  allowances f or small oil and gas f ields in the North Sea, and a new£3 billion allowance f or drilling to the west of  the Shetland Isles (see pages 12-13 here). And during hisspeech at the Conservative Party conf erence in October 2012, Mr Osborne promised companies “agenerous new tax regime” to encourage the search f or shale gas reserves.What is perhaps even more remarkable is that the Chancellor in November 2012 signed a communiqué inMexico City, alongside other G20 f inance ministers, which promised to “rationalize and phase-out overthe medium-term inef f icient f ossil f uel subsidies that encourage wastef ul consumption”. This was arenewal of  a pledge made by G20 leaders at their summit in Pittsburgh in September 2009, whichacknowledged that “inef f icient f ossil f uel subsidies encourage wastef ul consumption, distort markets,impede investment in clean energy sources and undermine ef f orts to deal with climate change”.Yet the ‘World Energy Outlook 2012’ report, published in November 2012 by the International EnergyAgency, points out that subsidies and other Government f inancial support f or the f ossil f uel industriesreached near-record levels in 2011. Subsidies f or the consumption of  f ossil f uels amounted to $523billion (£330 billion) last year, up 28 per cent f rom $409 billion (£258 billion) in 2010. Af ter a major dip in2009 during the economic downturn, Government subsidies f or the consumption of  f ossil f uels areapproaching the peak level of  2008.When one adds support f or production and general services, governments and taxpayers worldwidegif ted the f ossil f uel industries more than half  a trillion pounds last year through direct subsidies andother f orms of  spending and tax breaks. With all this public money being handed over to the privatesector, one might have discussions about UK energy policy to include plans f or how the Government tokeep its G20 pledge on f ossil f uels. Yet bizarrely, polit ical and media attention is f ocused on Governmentsupport f or alternative sources of  energy that would reduce the UK’s dependence on oil, coal and gas.In the UK, renewables, including hydro, are expected to receive just over £1 billion, of  which less thanhalf  went to onshore wind, in direct subsidies in 2011-12 through f eed- in tarif f s and the RenewablesObligation. Globally, the International Energy Agency f ound that consumption subsidies f or renewableenergy in 2011 were $88 billion (£56 billion), about one-sixth of  the equivalent help f or f ossil f uels.But the case f or Government support f or relatively new renewable technologies is f ar clearer than it isf or established f ossil f uels, as Nicholas Stern pointed out in an article in ‘The Observer ’ in November2012. Subsidies help to correct market f ailures that hold back the rapid development of  renewables, andto create a level playing f ield with f ossil f uels. Such f ailures include the inability of  capital markets tomanage properly the risks associated with investments in new technologies. And other f ailures areassociated with the limitations of  networks to accommodate new technologies, particularly publictransport and power grids.However, such subsidies f or renewable technologies should be reduced and eliminated as the costs ofdevelopment and deployment f all over t ime, as carbon markets become stronger and as other marketf ailures are tackled. Onshore wind energy is expected to become economically competit ive with gas-f iredpower stations as a source of  electricity generation within the next 5-10 years, and the subsidy f oronshore wind f arms through the Renewables Obligation was reduced by 10 per cent earlier this year inrecognition of  recent cost reductions.But such sound economic reasoning does not, apparently, apply to f ossil f uels, which are likely to remainhooked on UK Government f inancial support f or the f oreseeable f uture, unless and until the Chancellorand the rest of  the Government decide to keep the G20 pledge.Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, norof the London School of Economics. Please read our comments policy before posting.About the authorBob Ward is policy and communications director at the Grantham Research Institute on Climate Changeand the Environment at London School of Economics and Political Science.You may also be interested in the following posts (automatically generated):1. Onshore wind energy certainly has a role to play in decarbonising our economy (9.5)2. ‘Green Growth’ is an attractive concept f or analysts and policy makers alike, but to be ef f ective itmust be backed up by ef f ective collective action, not spin. (7.8)3. Local authorit ies should be at the f oref ront of  going green. This will see economic returns as wellas environmental benef its (6.5)4. The rapid growth of  wind power is a model of  successf ul public policy (6.1)

The Government’s financial support for fossil fuel companies is being overlooked

Abstract

Similar works

Full text

Available Versions

LSE Research Online