UK subsidising fossil fuels by approximately £12bn a year on average since the Paris Agreement, say think tanks

After disappointment at the outcome of COP26, progressive think tanks call for a rapid phase-out of fossil fuel subsidies

• Common Wealth and the New Economics Foundation analysis out today finds that, prior to the pandemic, tax reliefs for domestic fossil fuel consumption and production have only declined by 15% in real terms since 2015, from £14.7bn to £12.5bn in 2019.

• While the overall level of domestic support has fallen from £17bn to £10.5bn 2020-21 (in real terms), this includes a fall of £2.3bn in direct budgetary transfers rather than changes to tax reliefs, as well as a fall of £2bn between 2019-20 and 2020-21 linked to the steep economic contraction caused by the Covid-19 pandemic.

• Over this time period, no major measures have been withdrawn - with the exception of the announced plans to reduce eligibility for Red Diesel relief from April 2022 - suggesting the government has not taken meaningful action to align its tax and subsidies system with climate goals. The think tanks call [1] on the UK Government to demonstrate international leadership following the COP26 UN climate conference in Glasgow.[2] The UK Government should set out a roadmap to phase out fossil fuel support and subsidies as part of a just transition in line with the UK’s commitment under the G7 pledge of ending all subsidies by 2025.

The UK Government has not eliminated a single major fossil fuel subsidy since signing the Paris climate agreement in 2015, and has only announced plans to phase out less than one fifth of total support, according to new research, published today by Common Wealth and the New Economics Foundation.[1] Since 2015, UK support for fossil fuel consumption and production amounted to approximately £12bn annually, only falling to about £10.5bn in 2020-21 during the Covid-induced economic shock. The report argues that this is likely to bounce back up as the economy recovers.

The report finds that, although prior to the pandemic fossil fuel support fell by £4.5bn between 2015 and 2019, more than half of the decline is due to a drop in ‘direct budgetary transfers’. These are 'payments made by governments, or bodies acting on behalf of governments, to individual recipients' - such as direct payments to fossil firms for decommissioning their old infrastructure. Before the pandemic, tax reliefs for fossil fuels declined by only 15% in real terms since 2015 (from £14.7bn to £12.5bn). The report finds that much of this drop reflects the decline in oil and gas investments (which benefit from reliefs) since 2015, rather than intentional changes to the tax system. 

The report further argues that the UK Government’s current definition of fossil fuel subsidies is excessively narrow, failing to capture the scale of government support for fossil fuels. Tax reliefs, for example, are not recognised by the UK government as fossil fuel subsidies.

In 2020, the International Institute for Sustainable Development (IISD) scorecard on fossil fuel funding found the UK scored among the lowest among the Organisation for Economic Co-operation and Development member countries of the G20. The IISD identified particular concerns about a lack of transparency or progress in ending support for fossil fuels.[2]

The report backs principles developed by the Tax Justice UK that the UK tax system should be aligned with the country’s climate and environmental goals, be fair and not disproportionately penalise low-income households, be effective, and form part of a broader economic transformation.[3] 

Phasing out UK fossil fuel support, the report argues, needs to be part of a coherent strategy to ensure a just and rapid transition. The report recommends: 

• Changing the definition to change the debate: The UK Government should rework its current definition of a fossil fuel subsidy, aligning it with a more comprehensive approach that incorporates tax reliefs, subsidies and state support. 
• Initiating a rapid phase-out of fossil fuel subsidies and support: The government should create a comprehensive roadmap to immediately substantially reduce and then rapidly phase out fossil fuel subsidies completely by 2025, in line with UK’s G7 pledge, as part of a just transition that supports everyone to switch to affordable clean energy.
• Designing a tax system fit for the future with just transition as Treasury’s new operating model: HM Treasury should build on its Net Zero team to form a Just Transition team, overseeing all Treasury policies, coordinating closely with BEIS, Cabinet Office and relevant bodies,and advising ministers and Parliament on how to implement recommendations from its climate advisers and reduce emissions while facilitating both climate and economic justice. 

Miriam Brett, Director of Research and Advocacy at Common Wealth, said: 

COP26 was an opportunity to take serious action addressing the climate emergency, and yet the scale of UK fossil fuel subsidies and support was largely missing from the agenda.

Despite the unprecedented crisis, the level of fossil fuel support in the UK has not declined significantly since the Paris Agreement. A reimagined UK tax system can play a central role in delivering a Green New Deal, driving a more equitable distribution of wealth while reorienting economic activity away from high-carbon production and consumption. Phasing out UK fossil fuel support needs to play a key role in this. 

Lukasz Krebel, Economist at the New Economics Foundation, said:

The UK Government is positioning itself as a world leader in the fight against climate change, yet it continues to support fossil fuels at home with tax breaks that averaged nearly £12bn a year since the Paris Agreement. The Treasury uses a technicality to deny these are subsidies - but they need to recognise them for what they are - a handout to an outdated and harmful energy system. They must phase out the reliefs that are undermining the government's net zero commitments. The current energy price crisis further underlines the need for a well-designed just transition to a zero-carbon economy, where phasing out of fossil fuel support and use is coupled with significant public investment in energy security and protecting households from escalating costs.

ENDS 

[1] PDF available on request

[2] IISD et al. (n.d.). Doubling Back and Doubling Down: G20 scorecard on fossil fuel funding. Available at: https://www.iisd.org/system/files/2020-11/g20-scorecard-report.pdf

[3] Tax Justice UK (2021) Reforming a Tax System to Support a Green and Fair Transition. Available at: https://www.taxjustice.uk/uploads/1/0/0/3/100363766/reforming_the_tax_system_to_support_a_green_and_fair_transition.pdf