Renewable Energy Foundation

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Are Fossil Fuels Subsidised in the UK?

In discussions of subsidies to renewables it is sometimes claimed that fossil fuels in the United Kingdom receive greater support. This misunderstanding arises from the confusion of two quite different things:

a) subsidies to investors in renewables which increase consumer costs

and

b) Lower VAT (5% not 20%) on gas and electricity used by domestic energy consumers, and tax breaks to oil and gas companies, both of which will reduce costs to consumers.

It is obviously misleading to treat these two effects as if they were similar in economic character. However, this is increasingly common, even amongst those who might be expected to understand these matters.

For example, in a lecture last night (28.11.13) at the London School of Economics, Lord Browne, once chairman of BP, claimed that "In 2011, the UK spent over £4bn supporting the production and consumption of oil and gas, more than they spent to support renewable energy."

However, government only "spent" this sum in the sense that it did not collect the money in tax. That is, it gave certain tax advantages to the fossil fuel industry enabling them to produce oil and gas at a lower cost to the consumer. Similarly, the lower rate of VAT on consumers’ energy bills (5% not 20%) meant that government income was reduced, while consumers benefitted from cheaper energy (which is predominantly sourced from fossil fuels, in particular, coal and gas). Presumably the source of Lord Browne's data is the OECD-IEA report on Fossil Fuel Subsidies and Other Support.  The following table extracts the relevant UK data for 2011: 

2011 Support through reduced VAT rate on domestic energy bills (£ millions) Other support (£ millions)
Coal 81 4
Oil 380 159
Gas 3,510 121
Total 3,971 284

It is important to note that the vast bulk of the ‘support’ is through lower VAT on domestic energy bills. It would be interesting to know if Lord Browne believes that this support should be removed thus making domestic consumers pay more.

By comparison, subsidies to renewables are real cash transfers from consumers to investors via artificial prices. In other words, government has forced the consumer to purchase renewable energy at a very high price. For example, offshore wind receives a price for its energy that is approximately three times the wholesale price in the rest of the market. Onshore wind receives a price that is approximately double the market price. Early investors in solar photovoltaic receive a price that is about ten times the market price. All these additional costs are transferred to consumers.

The UK's Department of Energy & Climate Change itself calculates the total additional cost of these income support subsidies to renewable electricity in the year April 2012 to March 2013 at about £2.5 bn, as can be seen in the answer to a Parliamentary Question on total costs of energy and climate change policies since 2002.

The relevant figures are the cost for the Renewables Obligation, a subsidy to larger electricity generators (£1.99bn), and the Feed-in Tariff (FiT), a subsidy for smaller generators (£0.5bn).

The same Parliamentary Answer shows that the total consumer cost of the Renewables Obligation subsidies between March 2002 and April 2013 is £11.6bn. The cost of the FiT, which has only been running since 2010, is already £660m and rising fast.

These renewables subsidies are real additional costs to consumers, and increased income for renewables investors.

By comparison, the reduced VAT taxes on domestic consumers of fossil fuels, and tax breaks to fossil fuel companies, are only book-keeping losses to the government, though they do result in real reductions in costs to all consumers.

It is of course true that by not putting full VAT on domestic gas and electricity the government makes purchases of energy, including renewables, more attractive than purchases of other goods and services. In this special economic sense it is a 'subsidy', though of course one that applies both to fossil fuels and renewables. But since reduced tax benefits consumers, who have to pay less for the energy, as opposed to increasing their costs, it is clearly a different matter from levies on consumer bills.

Failure to understand such basic economic differences leads to absurd views, such as the position taken by the Overseas Development Institute, that cutting "subsidies" to fossil fuels will benefit the poor (see their study Time to Change the Game).

In fact, as we have explained many of these so-called "subsidies" to fossil fuels are in fact beneficial to consumers, and especially to the poor, since energy is larger fraction of their total expenditure.

This discussion has been going for quite some time, and last year Damian Carrington of the Guardian published a muddled article on the subject:

Since Dr Carrington used OECD data we corresponded with the relevant analysts at the OECD, and received the following email which adds further details and technical considerations which are also relevant to Lord Browne’s remarks:

From: Jehan Sauvage
Sent: 10 July 2012 16:03
To: [REF]
Subject: RE: OECD Inventory figures

Dear [REF],

Let me first thank you for your interest in our work.

The GBP 3.63 billion figure mentioned in the article is indeed the arithmetic sum for the year 2010 of all our support estimates for the production and consumption of fossil fuels in the UK. An important point to bear in mind, however, is that Damian Carrington added the numbers himself since the OECD does not provide country totals (we only provide estimates for individual measures).

The reason for this is that the support measures we inventory and document are budgetary transfers and tax concessions (i.e. tax expenditures), with the latter accounting for a very large share of all support in the UK. Because tax expenditures are measured relative to a country-specific benchmark tax rate or tax treatment, they are not comparable across countries and it was felt that providing country totals would invite such comparisons. Also, aggregating the tax-expenditure estimates provided by HM’s Revenue & Customs may over-estimate the actual amount of support provided to fossil fuels since tax provisions can interact with each other. For all these reasons, caution should be exercised when aggregating individual OECD estimates.

Now, regarding the question of whether the OECD support measures are “subsidies” or not, the answer again touches upon the fact that most of the measures we report are tax expenditures, meaning deviations from a benchmark tax treatment defined by HM’s Revenue & Customs. Whether that deviation constitutes a “subsidy” is an open question. We adopted a broader concept of “support” rather than “subsidies” in recognition of the fact that not all tax concessions are necessarily subsidies. For example, a large share of all support in the UK comes from the reduced rate of VAT applicable to purchases of energy products such as natural gas or fuel oil. Some would consider this reduced rate of VAT to be a normal feature of the UK’s tax system, just like food or cultural products attract a reduced VAT rate. Others, like HM’s Revenue & Customs, wouldn’t.

Nevertheless, it remains the case that the measures we report (whether they are called “subsidies” or not) still provide some kind of support in relative terms, i.e. relative to other industries or products in a given country. And this itself is valuable information for policymakers and the greater public.

I hope this helps. Do not hesitate to get back to us should you have any further question on the OECD Inventory.

Kind regards,
Jehan Sauvage
Trade Policy Analyst
Trade and Agriculture Directorate,
Environment Division2, rue André Pascal - 75775 Paris
Cedex 16
www.oecd.org

 

 

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