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UK fossil fuel support increased by £500 million, says OECD

  • 05 Apr 2013, 16:00
  • Mat Hope

New data from the Organisation for Economic Co-operation and Development (OECD) suggests support for the UK's fossil fuel industry increased by £500 million between 2010 and 2011. The news comes days after the government's most recent green policy - the carbon price floor - was criticised for making money for the government while pushing households into fuel poverty. 

But if that unpopular policy is meant to make polluters pay, why is the UK giving money to support the most polluting fuels at the same time? And is untangling subsidies to fossil fuels that simple?

How much?

The OECD report calculates that government policies provided £4.3 billion of support for fossil fuels in 2011 (the latest year data is available for) - a £510 million increase on the year before. It calculates the figure based on estimates of how much financial benefit fossil fuels get from a whole range of government energy policies.

Natural gas got the most support through tax breaks and contributions for infrastructure development, getting £3.6 billion. It also got the largest increase in support, with £532 million more in 2011. That increase was offset by a £31 million reduction in government support for coal power, while support for petroleum only increased by a comparatively paltry £10 million in 2011, as the chart below shows:

fossil fuels subs chart

Source: Data from OECD Inventory of Estimated Budgetary Support and Tax Expenditures For Fossil Fuels 2013, chart by Carbon Brief

Most of the support for gas came from a reduced rate of VAT that domestic consumers pay for fuel and power - a tax break on energy. While the majority of UK goods are taxed at 20 per cent VAT, domestic consumption of heating fuel and power is only taxed at 5 per cent (the EU minimum). Coal also receives this tax break - meaning there was £592 million of support for both fuels in 2011, according to the report. 

The OECD tells us the reason for the increase from 2010 to 2011 is simply down to an overall increase in energy demand. 

The drop in overall coal support was largely due to the government spending £46 million less on managing the safety of old British Coal Corporation pits. This support varies a lot year by year, and the OECD tells us that 2011 just happened to be a cheap year for the Coal Authority that is tasked with settling legal claims and ensuring the environmental safety of the pits. 

To put the figures in context - although the figures aren't like for like - the government's budget for low carbon energy support - including renewables, nuclear, and carbon capture and storage - was £2.35 billion under the Levy Control Framework (LCF) in 2012 to 2013, with that set to rise to £7.6 billion in 2020. 

Support or subsidy

But not all the support should necessarily be seen as a government subsidy - it depends on how it's defined.  

This is where the OECD methodology differs from other analyses. The OECD uses a broad definition of support which includes any policies that "provide a benefit or preference for fossil-fuel production or consumption, either in absolute terms or relative to other activities or products".

This contrasts with the International Energy Agency's (IEA) approach, which only includes policies that have an affect on the price consumers pay for energy. If a policy doesn't bring the cost of energy down to below what it would have been without the policy, the IEA don't include it as a subsidy.

Since the reduced rate of VAT does reduce the cost of energy for the consumer, it could be viewed as a subsidy. But the reduced rate applies to all energy - including low carbon energy sources - so whether or not it can be seen as a subsidy which particularly benefits the fossil fuel industry is questionable. 

Part of the picture

The OECD also says the figures only show "part of the picture" of UK fossil fuel support. Its calculations rely on government data and estimates, which it doesn't have for everything. For example, they tell us the data doesn't include any support that might be given for gas field infrastructure in North Sea production. 

It also doesn't make judgements on which kinds of support are useful. But Harald Hebaum, a lecturer in global energy and climate policy at the University of London, says it's important to look at the different kinds of payments being made. He tells us: 

"One important thing we need to keep in mind is that most of the fossil fuel subsidies in the OECD are consumption-based, that is they benefit the end consumer not the producer ... Things like the winter fuel allowance are a consumption subsidy and most people would argue that we need to help those who can't afford ever increasing prices for electricity and heating, particularly in long and cold winters such as the last one."

But in the long-run, there is an argument that such subsidies might lead to perverse outcomes. While the government subsidises energy use to help keep household bills low in the short-term, it could have the effect of locking-in reliance on fossil fuels for cheap energy. 

Hebaum says:

"In the long term maintaining such subsidies (whether consumption or production based) is very bad indeed - they help maintain the status quo and delay the much-needed transition to a low-carbon economy. The short term benefit of keeping subsidies in place is dwarfed by the long term cost of not addressing climate change. Consumption based subsidies artificially reduce the price of fossil fuels, hiding their true cost." 

So while the fossil fuel industry does get billions in support, a lot of this is from a tax break for the consumer which applies to all energy sources. But at the same time, keeping the support doesn't discourage use of polluting fuels, potentially keeping the UK reliant on fossil fuels for cheap energy for years to come.

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