‘Windfall tax’ call on oil companies as profits announced

New research reveals UK missing opportunity to use ‘never-to-be-repeated’ fossil fuel income to invest in clean energy transition.

As BP and Shell are set to reveal yet more carbon-intensive profits, new research published today, Monday 23 October, reveals the paradox of the UK Treasury hooked on income from the oil and gas sector, yet missing a never-to-be-repeated opportunity to invest in the transition to a sustainable energy system.  The research calls on the government to follow the broad example set by Norway, which established what is in-effect an ‘Oil Legacy Fund.’

Research from nef (the new economics foundation) and WWF reveals that although the UK Treasury is still dependent on oil, as domestic supplies dwindle, the opportunity is slipping away to invest prudently the sector’s windfall profits.  The briefing, Hooked on oil: breaking the habit with a windfall tax, for the first time quantifies Treasury revenue from a range of oil-and gas-specific taxes and duties.  This reveals that, in Britain, around £1 in every £12 of government income comes from the oil and gas sector.  The briefing asks whether with so much income from fossil fuels, there is a powerful short-term disincentive to ‘kick the fossil fuel habit.’  

At the same time, energy companies are banking huge profits, and failing to pay the cost of the damage caused by their own operations and products.  If the Treasury’s own estimations of the social and environmental cost of carbon emissions are applied to BP and Shell’s operations and products, it would result in a total bill of £46.5 billion, far greater than their last reported combined profits of £25 billion.

“Britainhas squandered its windfall of natural resources from North Seaoil and gas.  Instead of prudently investing the ‘unearned income’ from nature, to build a safe, clean and green energy supply for the nation, we face unnecessary shortages. But there is still a chance to put the proceeds from liquidating our fossil fuel assets to better and more appropriate use. Instead of oil companies profiteering from climate change and oil depletion, a windfall tax could establish an Oil Legacy Fund to pay for Britain’s urgent transition to a sustainable, decentralised energy system,” says Andrew Simms, nef policy director and the briefing’s lead author.

With the Treasury’s Stern review due to outline the economic imperative to tackle climate change, there is no better time to take a reality check on the economy’s addiction to oil.  The time has come for government to force the issue by setting up an Oil Legacy Fund which would invest in the urgent, widespread transition to a sustainable energy system.  This, the report’s authors believe would be the most appropriate memorial to a fuel source that has brought both great wealth and great problems.

James Leaton, WWF oil policy officer and co-author of the briefing, says: “So far, the revenues have not been spent wisely to develop a sustainable energy future for the UK, as the Stern review is expected to recommend. The UKneeds to admit its addiction to oil, and make a tough decision to get clean. This is the true economics of climate change, which shows that the Treasury needs to act on the economic imperative to harness flows of capital to reduce carbon emissions.”

Unlike Britain, Norway understood that the windfall wealth from its accidental inheritance wouldn’t last forever.   It prudently set up a substantial fund to invest oil surpluses to ensure that future generations would benefit once the oil was gone.   The Norwegian Fund is more than a politically correct gesture to future generations:

• At the end of 2005 it stood at $ 210 billion
• This is equivalent to $ 45,000 each to every man, woman and child living in Norway today.

Meanwhile, the UK is becoming a net importer of oil, and has seen production revenues decline as the North Sea matures.   The situation will only worsen if reliance on imported oil grows and no alternatives are developed.   The UK Government needs to take the opportunity to set up an Oil Legacy Fund, to invest in sustainable energy options, and tackle climate change.   By developing a thriving alternative energy sector, this will offset the decline of the North Sea oil industry.

The report suggests a number of ways the Oil Legacy Fund could for example, be invested in:

• A fund for innovation, development and the promotion of micro, small and medium-scale renewable energy technologies
• An advice service to help local planning authorities with the complexities of managing new, decentralised renewable energy services and technologies
• Making household-energy-monitoring devices available in order to increase awareness of current energy use and to make people aware of opportunities to improve.

Day to day political pressure makes it extremely difficult for governments to earmark funds for long-term projects that won’t reach fruition or their benefits be felt within their own, guaranteed term of office.   But the opportunity to invest these gains for the future is slipping away.  Unless we act quickly we will lose these extraordinary economic gains from using what remains of our fossil fuels that are still safe.  If we fail to act now, we will have followed a sign which says, ‘get rich quick, stay poor long’.

But as the price of oil and gas hits record highs – the opportunity to invest these gains for the future is slipping away.  Unless we act quickly we will lose these extraordinary economic gains from using what remains of our fossil fuels that are still safe.  If we fail to act now, we will have followed a sign which says, ‘get rich quick, stay poor long’

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	related
	at nef BBC business: UK 'has squandered oil revenues' The Guardian: 'Fund clean energy wil oil tax' The Independent: Campaigners call for windfall tax on North Sea oil firms The Telegraph: Uk 'squandered' North Sea revenues The Scotsman: Call for 'oil legacy' tax for green energy
	Publications Hooked on oil: breaking the habit with a windfall tax

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	Andrew Simms