From the Daily Skeptic
Author: David Telfer
Whenever renewable energy subsidies are discussed on the internet, there's a sort of Godwin's law, which means inevitably someone will say: “Aksholi, fossil fuels are subsidized more than renewables”, or something to that effect , as shown in the example below. I've often thought this claim was false, but until now haven't delved into the details to prove it.
Energy is one of the basic foundations of modern society. Almost any activity you can think of requires some type of energy input. Factories need energy to make things. Offices require energy to heat, light, cool and run computers, as do our homes. Hospitals need energy to run operating rooms. Whether we are traveling by car or train, we all need energy to go to work or visit friends and family. We need energy for home shopping, cooking, going to the gym, cinema or restaurant. Energy is the basis of all economic and social interactions, so it is not surprising if energy is subsidized. Expensive energy is like a tax on our existence, so taxing energy is a drag on society.
So we must get to the bottom of the UK’s claims about fossil fuel subsidies.
What is a subsidy?
Simply put, a subsidy is when the government pays (or requires consumers to pay) for an activity that would not occur if the market had left it alone. For example, granting grants to theater companies or awarding CFDs to offshore wind power.
Taxes are additional fees levied by the government on transactions or activities. For example, most sales of goods and services are subject to a 20% VAT. There are also special taxes, such as taxes on alcohol and tobacco, and of course income taxes. A lower tax rate is still a tax, as opposed to a subsidy. No taxes or subsidies represent a neutral stance.
When it comes to oil and gas, the definition of subsidies becomes somewhat controversial. The International Energy Agency (IEA) defines fossil fuel subsidies as “measures that reduce the effective price of fossil fuels below world market prices.” Indeed, some countries, such as Russia and Iran, do subsidize hydrocarbons according to the IEA definition. Interestingly, the UK government stated in 2021 that “the UK will not provide any subsidies to fossil fuels”, and the UK does not appear in the IEA’s top 25 list of countries subsidizing fossil fuels in 2022 (see Figure 1).
However, it should be noted that in the repository on the IEA website it does claim that the UK provided around £6bn of fossil fuel subsidies in 2022, but not in any other year. There must be something in its definition that leaves the UK out of its Top 25 chart.
Where do demands for UK fossil fuel subsidies come from?
Given government statements and the fact that the UK does not appear on the IEA's list of top subsidizing countries, we need to see where these claims of massive subsidies come from. Unfortunately, the idea of massively subsidizing fossil fuels in the UK has a long history. This 2013 article comes from guardian Claiming that the UK provides “$4.2 billion (£2.6 billion) in annual subsidies to its coal, oil and gas industries”. this guardian Similar articles have been published over the years, such as this one from 2019 claiming “UK leads EU in subsidies to fossil fuels”, and this one from 2023 claiming “UK government has given $20 billion to fossil fuel producers” Additional support from sterling “Renewable energy generation since 2015”. Note that they use the words “support” and “subsidy” almost interchangeably, with subsidies omitting the so-called “tax breaks.” this guardian It's not the only publication to make such claims. Politico 2021 has also joined the bill, claiming the UK “supports the fossil fuel industry with… £10bn a year through tax breaks and subsidies”.
When you dig into the articles, you can see that their definition of a subsidy includes consumers or producers paying less tax on fossil fuels than the authors deem appropriate. At the risk of repeating myself, paying less tax still means taxing the activity, which is the direct opposite of a subsidy. Paying less than an arbitrary level of tax is not a subsidy. Even paying zero tax is a neutral stance and is certainly not a subsidy.
How big are fossil fuel “subsidies”?
this Politico The article linked above cites OECD figures to support its £10bn (2020) claim. By mining newer versions of the data, we can evaluate the accuracy of the claims. Generally speaking, “subsidy” or support mechanisms are divided into two categories: producer subsidies and consumer subsidies.
Support for oil and gas producers is said to total £3.1 billion, based on 2022 figures. The largest part of this is £2.25 billion in decommissioning tax relief. This arrangement allows companies to deduct capital expenditures associated with decommissioning old oil fields from their corporate taxes. For oil and gas companies, decommissioning oil fields is a normal business expense. In normal corporate tax, business expenses are deducted before taxable profits are calculated. There is nothing to suggest that deducting decommissioning expenses before calculating taxable profits is not normal business practice and certainly not a subsidy. There is also said to be £850m of “backstop” as companies can treat investments in new fields as business expenses to offset top-up charges on oil and gas companies' profits. Again, this is not much different from investment subsidies provided to companies in other industries and does not amount to subsidies.
Using 2022 figures again, consumer claims for conventional support for fossil fuels are around £12.9bn. £7.8bn of this comes from consumers being charged 5% VAT on their domestic energy bills, instead of the normal 20% rate. Needless to say, a 5% VAT is still a tax and the exact opposite of a subsidy. A further £3.5bn of so-called support comes from fuel duty relief, whereby certain types of fuel pay less in fuel tax for some uses than others. Likewise, some fuel tax applies, but not the full rate. It's not a subsidy; it's just paying less tax. A further £1.4bn of “support” comes from a reduction in climate change levy. Ironically, much of the support is given to organizations that have signed climate change agreements to reduce energy use or CO2 emissions2 emission. In the crazy world of climate activists, paying for a lower climate change tax by agreeing to reduce emissions amounts to a fossil fuel subsidy. Finally, there is £200 million in consumer support from the Home Sweet Home Discount. This reduces energy bills for older pensioners and other vulnerable groups, and it might be reasonable to call it a subsidy, although it applies to gas and electricity from all sources including renewables, not just fossil fuels . Of a total of £16 billion of supposed subsidies, only £200 million can reasonably be called a subsidy, and that is an indirect subsidy.
However, there is a “but”, and it's a big but, as we also need to consider a one-time consumer support plan. Of this, 19.4 billion pounds is for the energy price guarantee for domestic consumers, 2.6 billion pounds is for the energy bill relief scheme for non-domestic consumers, and a further 2.6 billion pounds is for the energy bill support scheme. These schemes total £24.6 billion, and there is reason to classify the money as some sort of subsidy. However, these schemes should probably be called indirect subsidies because they cover all forms of electricity generation, not just fossil fuels. Note that, as shown in Figure 1, this support does not meet the IEA's definition of a subsidy, otherwise the UK would be ranked around 12th. We should also remember that these plans were a one-time response to the crisis and are no longer operational.
Fossil fuel taxes
If we want to get a full picture, we should also consider the UK tax on fossil fuels. These taxes can be divided into two categories: producer taxes and consumer taxes.
Taxes on oil and gas producers include ring-fenced corporate tax, surcharges (additional corporate taxes), petroleum income tax and energy profits tax (also known as windfall profits tax). According to the OBR, total revenue from these taxes increases significantly from £2.6 billion in 2021-22 to £9.8 billion in 2022-23 (the most comparable year to 2022). Those who claim that we subsidize fossil fuels are actually saying that we should increase these taxes by the £3.1 billion identified by the OECD as “support”. Again, paying taxes below some arbitrarily defined level is not a subsidy.
The Office for National Statistics has published the cost of environmental taxes, many of which could be considered consumer taxes on fossil fuels. This includes direct taxes on fossil fuels, with the following amounts expected in 2022:
- Fuel tax is £24.8 billion. Those who claim we subsidize fossil fuels will add the £3.5 billion in fuel tax breaks identified by the OECD to this already massive tax, making transport even more expensive.
- Emissions trading schemes have raised £4.6bn, including UK and EU schemes.
- Climate change levy (CCL), £2.1 billion. Those claiming huge fossil fuel subsidies will add the above £1.4 billion CCL cut to this already high tax, effectively cutting incentives to reduce emissions.
Additionally, indirect taxes on fossil fuels raised more funds in 2022:
- Road Fund Licensing, £5.2 billion (remember, this tax does not yet apply to electric vehicles).
- Air passenger tax, £3 billion.
- The plastic packaging tax brought in £300 million. Plastic is made from fossil fuels, so this is effectively another tax on fossil fuels.
This generates a total of £31.5 billion in direct taxes on fossil fuels and £8.5 billion in indirect excise taxes.
Finally, VAT is levied on domestic energy, petrol and diesel, which is another direct tax on fossil fuels. However, I can't find a reliable source of data analyzing the VAT revenue generated by hydrocarbons, so we just have to look at a total increase in VAT of around £160 billion per year, of which fossil fuels will account for a large proportion.
in conclusion
Figure 2 below summarizes this analysis.
First, we can think of so-called subsidies to producers as normal operating expenses deducted from taxable profits. We can also think of all ongoing consumer 'subsidies', with the exception of the £200m Warming Homes Discount, as simply lower taxes on certain fuel uses. A tax is still a tax, lower taxes are not a subsidy. If we are being generous to those who claim we subsidize fossil fuels, we can note that one-off indirect subsidies in 2022 will be approximately £24.6 billion. However, these plans are no longer implemented.
In terms of tax, we have £9.8 billion in producer tax, £31.5 billion in direct consumer tax and £8.5 billion in indirect consumer tax, plus an unknown amount in VAT. Even in special years when various energy bill support programs are in place, taxes greatly exceed so-called subsidies.
Now that the energy crisis has subsided, we are left with just £200m of indirect subsidies to help the elderly and most vulnerable, whose energy bills are offset by almost £50bn of direct and indirect taxes, as shown in Figure 3.
However, we should note that as oil and gas prices fall, fossil fuel taxes are likely to fall. Production is likely to fall due to underinvestment caused by a 78% marginal tax rate on profits, resulting in a significant drop in producer taxes. On the other hand, there are rumors that the Chancellor will increase fuel duty in the Budget. High taxes mean high prices, which in turn tax the rest of the economy, leading to a steady, inevitable recession. If we want a prosperous economy, we should cut energy taxes, not increase them. Again, note that lowering taxes is not a subsidy. Zero tax is not a subsidy, but a neutral stance. Keep this in mind when some activists claim we subsidize fossil fuels.
Written by David Turver own values Substack, where this article first appeared.
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