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Government claims Rishi Sunak’s £1.9 billion subsidy for fossil fuels is ‘not technically a subsidy’

The Independent logo The Independent 22/06/2022 Jon Stone
Cabinet Meeting © PA Wire Cabinet Meeting

The government has claimed Rishi Sunak's new £1.9 billion tax break for fossil fuel companies is not technically a subsidy and so compatible with its climate plan.

Green groups lambasted ministers for playing "semantics" with the planet over the new incentives to invest and oil and gas production – announced just months after the UK’s own climate summit promised to put an end to them.

The chancellor's doubled the rate of tax relief for oil and gas projects in his Budget, a measure that is expected to cost taxpayers nearly £2 billion and produce 899 million tons of extra CO2.

But responding to criticism of the measure from green groups, Treasury minister Helen Whately claimed that the policy was compatible with the UK's international commitment, because of a technicality.

"The UK does not give fossil fuel subsidies, and follows the approach of the International Energy Agency, which defines fossil fuel subsidies as measures that reduce the effective price of fossil fuels below world market prices," she said.

The minister argued that the measure did not meet the IEA definition "using a commonly applied methodology" which was developed by the G20 developed countries.

However this definition is at odds with the standard economic definition of a subsidy, which is a direct or indirect payment, in the form of a cash payment from the government or a targeted tax cut, to increase supply of a product.

The sleight-of-hand comes just months after the UK hosted the Glasgow Climate Summit COP26, where nearly 200 countries agreed to phase out fossil fuel subsidies.

Greenpeace UK's political campaigner, Ami McCarthy, told the Independent: “A hand-out, free ride, reward, tax break, subsidy – don't be distracted by semantics.

"Whatever you want to call it the Chancellor is playing a dangerous game by incentivising new oil and gas extraction as a way to allow fossil fuel giants to dodge paying tax on their hugely bloated profits.

Video: China's Idle Oil Refining Capacity (Bloomberg)

“More domestic fossil fuel production will not bring energy security or reduce bills, since they take decades to extract and will be sold on the international market at international prices. As for how these plans square with the government’s climate commitments - they don't.

“Sunak should ditch the tax breaks and bring in a permanent tax on oil and gas company profits of at least 70% - the global average. This cash should be used to transform cold, damp, energy-wasting homes into warm, efficient ones. Green homes now mean lower bills forever.”

Jamie Peters, campaigner at Friends of the Earth, added: "Whichever way you look at it, the UK is still propping up the fossil fuel industry through massive tax breaks at the expense of the planet.

“Getting off oil and gas isn’t just needed to guarantee a safer future, it’s vital to protect people now from energy price hikes. Yet the government is allowing firms to pay 91p less tax for every £1 spent on new oil and gas infrastructure. This means there will be less money overall to help those struggling most, and to insulate the UK’s inefficient homes.

“The logical solution would be to increase investment in clean energy. Not only is it quicker and cheaper to develop, but it will help to bring down soaring bills, unlike expensive fossil fuels.”

The minister Ms Whately made the argument in response to a written question by Liberal Democrat MP Munira Wilson, who had asked whether the "Government's decision to double tax relief for oil and gas companies investing in domestic fossil fuel extraction projects until the end of 2025 with its COP26 commitment to phase out fossil fuel subsidies".

Responding to the comments, the Lib Dem MP told the Independent: "It's complete hypocrisy that the Conservatives are giving tax breaks for fossil fuels just months after hosting the COP climate summit.

"Giving the go ahead to gas drilling in places like Surrey flies in the face of the concerns of local communities and our green commitments.

Liberal Democrats would cancel this decision and work to expand our renewable energy to reduce our dependence on fossil fuels."

Treasury minister Helen Whateley said: "The UK does not give fossil fuel subsidies, and follows the approach of the International Energy Agency, which defines fossil fuel subsidies as measures that reduce the effective price of fossil fuels below world market prices.

"The International Energy Agency has a long-standing track record in systematically measuring fossil-fuel subsidies using a commonly applied methodology. This definition was originally developed with the European Commission and G20 EU Member States to respond to the G20 commitment to phase out such subsidies.

"The UK has been a longstanding supporter of multilateral efforts to promote fossil fuel subsidy reform since these were first proposed in 2009, including through the G20, and the G7. The UK is a signatory of the Glasgow Climate Pact and is committed to the agreed phase-out of inefficient fossil fuel subsidies across the globe that encourage wasteful consumption, and sees clear benefits in doing so."

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