31 October 2024

Labour are making us reliant on foreign fossil fuels

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Like a drunken thug kicking his victims when they are already lying on the ground, no punishment for the oil and gas sector, it seems, is ever quite enough. One measure in Wednesday’s Budget got a bit lost among the other nasties: the Energy Profits Levy (EPL) will be raised from 35% to 38%. Moreover, the Investment Allowance which allowed firms at least to offset 29% of investment spending against tax, is being abolished. The EPL is also being extended to 2030, a year later than previously planned.

When the Conservative government first introduced the EPL in 2022, it was set at 25%. Then it was raised to 35% and now to 38%. Together with Corporation Tax, the effective rate of tax on North Sea oil and gas is now 78%. That is the kind of punitive taxation which was common in the 1970s, when the Callaghan government had a top rate of income tax of 80% (and with a surcharge on unearned incomes, it even rose to 98%).

The Energy Profits Levy was supposed to be a windfall tax, to cream off some of the very high profits which were being made by oil companies in the wake of Putin’s invasion of Ukraine in 2022, after which the then CEO of BP Bernard Looney called his company a ‘cash machine’. But with oil prices falling sharply in recent months, it has evolved into something quite different: a mechanism to bully oil companies into submission. It is certainly achieving its aim: last week, Harbour Energy announced that it is selling up in the North Sea. It had already cut hundreds of jobs in reaction to the EPL.

The EPL has become a climate policy in disguise. Not that on its own it is going to do a thing to reduce global carbon emissions.   All it will achieve is to make Britain more reliant on imported fossil fuels. Energy Secretary Ed Miliband has several times alluded to wanting to free Britain from ‘fossil fuel dictators’, yet the Government’s policies are promoting reliance on imported energy.

It is highly unlikely that there will now be any further significant investment in the North Sea. Even if you already have a licence, or could persuade Ed Miliband to issue one, who on Earth would want to take the risk given that the Government seems embarked on a policy of progressive, destructive taxation of the business?

This is not a route that is being taken by other countries – even those which are notionally committed to achieving Net Zero. Brazil muttered all the right platitudes at COP28 last year, backing calls to ‘phase out’ fossil fuels, yet it is planning nearly to double oil production by 2029. Canada, too, has expanded oil production, in spite of backing the same motion at COP28. The US is not going to compromise its new-found energy security, whoever wins next week’s Presidential election. Kamala Harris has already rowed back on her one anti-fracking stance.    

There is now a somewhat loud contradiction in UK energy policy. A few weeks ago, the Government announced £22 billion on investment in carbon capture and storage – a technology whose most obvious deployment would be in removing the carbon dioxide from the chimneys of gas power stations. If the Government is trying to force Britain’s remaining oil and gas industry into submission, what is the point in the investment in CCS? Put it another way, if the government has such faith in the ability of CCS to clean up power stations, then why the need to get rid of gas at all? Mitigated gas could surely then be used as the back-up for intermittent wind and solar. Miliband has certainly not so far come up with any alternative suggestion as to how he is going to cope with the intermittency problem.    

Will the rise in EPL even raise extra revenue? The Treasury has pencilled in the EPL to raise an extra £195 million this year thanks to the higher rate. By 2029/30, it hopes, it will be raising an extra £955m a year. But that does rather rely on oil and gas companies to continue working the North Sea while grinning and bearing the EPL. As with several other measures in this Budget, this may turn out to be a forlorn hope if the Laffer Curve turns out a different shape than the Treasury seems to think, and oil and gas companies decide to throw in the towel.   

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Ross Clark is a journalist and author.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.