UK Budget: North sea oil industry tax reductions. Anything green to compensate?

After requests from the UK oil and gas industry to reduce production levies and increase investment support, discussed earlier [oxcarre.blogspot.com], the UK Budget for the next few years includes sizeable reductions in taxes for the industry (see also The Economist [economist.com] of this week). There is not much about cutting carbon however.

A simple sum of multi-year measures makes a £1345M reduction in taxes for the Oil industry (Budget here, p. 68, account 11-14, all years to 2020, £275M for this year only). Add to that £1125M on decreases on fuel duties (account 8). Against that I found £340M of tax increases on company cars in 2020 (account  37), which I suppose is not really a green consideration, and £40M of tax increases on energy and water efficient technology through capital allowance from 2016 onwards (account 40; Yes an increase, it has the opposite sign from the tax reductions of oil industry, so it should count as more tax, or less subsidy).

Besides the oil industry in Scotland, another example is the story [BBC.co.uk] of businesses located in Wales that are being compensated for the high energy prices. "It is understood 16 firms including Tata Steel in Port Talbot qualify in Wales, sharing some £240M compensation." Interestingly, it is reported that the head of Tata Steel in Europe made this request directly, because "'heavy industries in the UK were burdened with environmental obligations that pushed up their energy bills, sometimes to levels 50% higher than their European competitors.'" The last part is weird, because for households the energy price difference between UK and continental Europe is the other way around as far as I remember. To push the argument, "[chemical and metal-based] companies employed nearly half a million people in the UK and accounted for 30% of total exports and imports."

The main thing highlighted by the government on sustainable energy is opening of negotiations on a £1000M Swansea Tidal Lagoon energy project [bbc.com], but part of this £1B is financed by private sector and individuals (SWL website), but it's unclear how much.*  So that puts things in perspective.

* Apparently the government has to guarantee a sales price, much like it did with the Nuclear plant in Somerset, decided earlier this year (strike price ~£90/MWh for 35 years). The Telegraph [telegraph.co.uk] put it at "tens of millions" in subsidy. Why? The guaranteed price is £168 per MegaWattHour (MWh) for 35 years. £168 is 4 times current price (so the government puts up the difference between spot and guarantee), the capacity is 500GWh/year. I get to ~£60M annual subsidy ( (168-168/4)*500.000 ). Over 35 years, with energy prices assumed increasing 2% year (so making the subsidy decline) and a 5% discount rate, a ~£1B subsidy Net Present Value (actually £948.6B). So the key figure: if the government was suppose to spend it's subsidy the coming fiscal year it would amount to £63M additional subsidy counted for a green energy measure.

OxCARRE Seminar: The Grey Paradox: How fossil-fuels owners can benefit from carbon taxation

Today's OxCARRE's seminar has Renaud Coulomb from LSE (website) speaking on

The Grey Paradox: How fossil-fuels owners can benefit from carbon taxation

Abstract

This paper studies the distributional impacts of optimal carbon taxation on fossil-fuels owners. We show that optimal carbon taxation can increase the profits of owners of a carbonemitting exhaustible resource. Such phenomenon contrasts with claims from fossil-fuels owners –especially from OPEC member countries– that carbon taxation will undermine their profits. We build a theoretical model of resource extraction where a polluting exhaustible resource competes with a dirtier abundant resource and a clean backstop. The atmospheric CO2 concentration has to be kept under a carbon ceiling and the optimal extraction path is decentralized by a carbon tax. As the carbon ceiling is tightened, the exhaustible-resource rent, and thus profits, is partly captured by the tax levier (the “capture effect”), but the dirtier resource is made less competitive (the “competition effect”). We determine conditions under which profits increase as the ceiling falls. The role of resource endowments, pollution contents, extraction costs and demand elasticity is analyzed. Calibrating the model for the transportation sector, we find that limiting cumulative new emissions in this sector between 322.7 and 637.5 GtCO2 increases profits of conventional-oil owners.

Working paper available here 

UK considers tax decreases to support North sea oil industry

Based on a report by Oil and Gas UK, an interest representing group, that pictures a grave outlook for the industry's activities in the North Sea, the FT [here and here] and the Guardian [here] report that the government is considering corporate tax breaks for the industry in order to stimulate further investment and avoid the scrapping of new projects. Taxes went up when prices were high, taxes may go down when prices are low.

The government's main interest, supposedly, is to maximise tax revenue from oil production and use. Lowering corporate taxation now may insure that new projects are not shelved, but instead developed bringing revenues for many years. Some of the immediate revenues for the government would be given back to the industry to assure 'profitability'. If not through taxation the industry may have to find different means of cutting costs, with as ultimate measure ending production in individual
projects. The question remains whether the government would need to help with this through taxation policy or whether a future oil price increase and technological innovation triggered by hard times would take care of it. Is there really no time to wait a few quarters to see what happens with the oil price?

The call for corporate tax reductions for the oil industry stands in contrast to the calls during the past months [see earlier posts starting here] to increase consumer tax on fossil fuel use based on carbon content.  I'm speculating here, but part of the immediate tax rate decrease may actually be financed by increasing the tax on consumer use of carbon, in some revenue neutralising way of swapping consumer surplus to the oil industry. Why not?