Rishi Sunak offers tax incentives to fossil fuel firms despite climate emergency

Chancellor’s plan ‘makes us an embarrassment on the world stage’ says Caroline Lucas

Rishi Sunak has been accused of risking Britain’s reputation as a climate leader by announcing tax relief measures that will encourage energy firms to invest in fossil fuel extraction during a climate emergency.

Climate groups and opposition politicians rebuked the chancellor for incentivising oil and gas extraction when climate scientists, the United Nations and the International Energy Agency have made it clear that the world needs to stop new investment in fossil fuels.

“It’s bone-headedly stupid, even by this government’s low standards, not only to allow but in fact to incentivise the production of new climate-wrecking fossil fuels, rather than keeping them firmly in the ground where they belong,” Green MP Caroline Lucas told The Independent.

“This measure will not only make absolutely no difference to families’ soaring energy bills, [but] any new fossil fuel production acts as a wrecking ball to our net zero climate targets, and makes us an embarrassment on the world stage, particularly while we still [retain] the Cop26 presidency.”

The incentive came as part of a package of announcements to tackle the cost of living crisis in Britain, which included a temporary 25 per cent windfall tax on the profits of oil and gas companies to help support struggling households.

In order to ensure that companies are not deterred from investment by the new levy, Mr Sunak announced that those that invest in oil and gas extraction will be entitled to hefty tax relief on that spending.

“The UK government’s position breaks the pledge it made at the climate talks last year to phase out subsidies for oil and gas projects,” Tessa Khan, director of Uplift, a group that campaigns for a just and fossil-fuel-free UK, told The Independent.

“It is also completely contradictory when it comes to both heading off the climate crisis and tackling the cost of living crisis,” she said. “Fossil fuels are at the heart of both, and yet the chancellor is doubling down and encouraging companies to extract more.”

Analysts and oil executives suggested the measure wouldn’t fundamentally change energy companies’ investment strategies, as the investment tax break, along with the tax on their profits, is due to expire in 2025.

“That’s quite a short time for companies looking at investment in the North Sea,” said Sam Alvis, head of economy at Green Alliance.

An energy company executive who spoke to The Independent on the condition of anonymity said the announcement wouldn’t change the course on net zero in a big way because the firm’s investment horizons are mostly five or 10 years.

Nevertheless, the executive described the move by the government as “messy” and “confusing”.

“We are trying to sell a message to our shareholders – that investment and dividends will have to be shaped by, focused on, ensuring a net-zero-compatible future,” the executive said.

“This muddies the waters, with a mixed message on where investment should be focused from the government.”

A Treasury source said the relief on taxation of oil and gas profits was by design on oil and gas, and pointed to the government’s energy security strategy which says the country needs to expand North Sea oil and gas production to ensure security of supply.

The source said there are other measures to boost green energy investment, including the super-deduction mechanism. This gives businesses tax breaks on investment in physical capital.

However, the mechanism can also be used to invest in fossil fuel infrastructure, according to Mr Alvis.

Ami McCarthy, political campaigner for Greenpeace UK, described the tax break announced on Thursday as “utter stupidity”. “The Chancellor is either in the pocket of the oil and gas industry or is simply happy to see the world burn,” she said.

Ed Davey, leader of the Liberal Democrats, said that in order to reach net zero, the country needs to go “hell for leather for renewable power”.

“We should be cracking down on new exploration because it’s not needed,” he said. “If you were serious about getting to net zero, if you were serious about protecting us from climate change, if you were serious about making sure our country was independent of Russia and other people, you would go far more into renewables. So why aren’t they doing that?”

A Shell spokesperson said that the company had “consistently emphasised” the importance of a stable environment for long-term investment. “The chancellor’s proposed tax relief on investments in Britain’s energy future is a critical principle in the new levy,” they said.

The spokesperson confirmed that Shell still intends 75 per cent of its planned £20-25bn investment in the UK energy system to be in low- and zero-carbon products and services, including offshore wind, hydrogen, carbon capture utilisation and storage, and electric mobility.

A spokesperson for BP said: “As we have said before, we see many opportunities to invest in the UK, into energy security for today, and into energy transition for tomorrow.

“Naturally we will now need to look at the impact of both the new levy and the tax relief on our North Sea investment plans.”