The United Kingdom has been a major producer of oil and natural gas since the 1980s, though the long-term trend is of declining output from the continental shelf in the North Sea as its reserves deplete. Historically, the country was a big coal producer as well, but production declined sharply in the 1990s with the phasing out of state aid. Coal production has continued to sharply decline and by 2019, the United Kingdom’s coal output was a mere 1% of levels recorded in 1990. From 1999, natural gas was the top fuel used in power generation, exceeding coal, oil and nuclear during most years.
OECD Inventory of Support Measures for Fossil Fuels: Country Notes
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United Kingdom
Energy resources and market structure
Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).
The United Kingdom has been a pioneer in deregulating and liberalising energy markets through price de-control, the closure of inefficient coal mines, the removal of subsidies, privatisation and the introduction of competition, and open access to electricity and natural gas networks regulated by an independent regulatory body. Today, there is virtually no state ownership of energy assets and all markets, except the high-voltage transmission grid, are open to competition. The National Grid operates the high-voltage transmission grid throughout England and Wales, and owns the transmission grid in England and Wales. Scottish Power and Scottish and Southern Energy own the transmission system in Scotland and Northern Ireland Electricity Networks own the network in Northern. Through the process of unbundling and privatisation of the energy sector in the 1990s, well over half of all retail customers have switched away from their incumbent natural gas and electricity supplier.
Energy prices and taxes
All retail energy prices in the United Kingdom are set freely by the market. The Office of Gas and Electricity Markets (Ofgem) regulates electricity and gas network access charges through five-year price control periods that set the maximum amount of revenue energy network owners can take through the charges they levy on customers. These prices cover their costs and earn them a return, while providing incentives to be efficient and to innovate technically.
Oil and gas production is subject to three taxes: (i) the Petroleum Revenue Tax (PRT), levied on the gross profits made on fields that were approved for development before 16 March 1993 (it was permanently reduced to 0% from 50% in March 2016); (ii) the Ring-Fence Corporation Tax (at a rate of 30%); and (iii) a Supplementary Charge (which was cut to 10% in March 2016).
Energy sales are subject to VAT (at a rate of 20%), excise taxes, and a Climate Change Levy (CCL). A reduced VAT rate of 5% is applied to domestic fuel and power, as well as to the installation of certain energy-saving materials in some circumstances. Excise taxes are levied on oil products used for both commercial and non-commercial purposes. Businesses and public sector organisations are charged the CCL on consumption of electricity, natural gas, LPG and other solid fuels (e.g. coal, ignite). Discounts and exemptions exist depending on the source and use of the fuel (e.g. power generators, combined heat and power plants or fuel supplies for use by visiting foreign defence forces are exempt). Household users are exempt from paying the CCL.
As of August 2015, electricity generated from both renewable and approved co-generation schemes are also subject to Carbon Price Support rates which must be paid for each tonne of carbon emitted via the burning of fossil fuels to produce energy. Small generators and generators located in Northern Ireland are, however, exempted.
Figure 2. Total tax rebates and support for fossil fuels in the United Kingdom
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Recent developments and trends in support
Several support measures exist to reduce the tax burden on the upstream sector. In 2015, the UK government, in order to simplify the tax regime applied to the oil and gas industry, discontinued new field allowances and the brownfield allowance and replaced them with the Investment Allowance. In 2018, the government announced the introduction of a transferable tax history (TTH) mechanism to remove tax barriers to new investment in the North Sea and in 2016 set the Petroleum Revenue Tax benchmark to 0% to simplify the process by which older fields are sold. The Oil and Gas Authority estimates that the total industry costs between 2019-20 and 2064-65 for decommissioning all UK Continental Shelf (UKCS) oil and gas infrastructure are GBP 48 billion. According to government statistics, the projected Exchequer cost of tax relief from this expenditure is GBP 18.3 billion. This is made up of GBP 9.4 billion from tax repayments and a reduction in the Ring-Fence Corporation tax and Supplementary Charge of GBP 8.9 billion. Decommissioning expenditure reduces company profits and hence lowers the overall tax take.
Since the start of the COVID-19 pandemic, the UK government has announced several policy changes related to public funding support to the country’s fossil fuel production sector. In March 2021, the government announced the North Sea Transition Deal which aims to cut carbon emissions in the United Kingdom’s oil and gas production sector by 50% by 2030. In particular, the North Sea Transition Deal seeks to earmark up to GBP 3 billion to replace fossil fuel-based power supplies with renewable technology, up to GBP 3 billion to Carbon Capture Usage and Storage technologies, and up to GBP 10 billion for hydrogen production. Prior to this, the government also announced in December 2020 a major policy shift to end taxpayer support for fossil fuel projects overseas, with entry into force as of 31 March 2021, with limited exceptions granted to energy efficiency, fossil fuel decommissioning, natural gas-related power infrastructure, stand-alone generators, LPG-powered cooking and heating and carbon capture and storage technologies. This policy shift will result in major fiscal implications as GBP 21 billion of UK oil and gas exports were made in the last four years through overseas trade promotion and export finance.
Households can benefit from the Energy Price Guarantee (EPG), a temporary scheme that capped the energy bills to GBP 2 500per year, and to GBP 3,000 starting from July 2023. It has been in place since 2021 and it has been extended to 31 March 2024. Moreover, households benefitted from a discount of GBP 400 (GBP 600 in Northern Ireland) on their energy bills for winter 2022/2023, for which the government has spent GBP 11.9 billion. Following Russia’s invasion of Ukraine and the energy market crisis, fuel excise rates have been reduced in 2022 across all sectors of consumption until March 2024, and most importantly leaded petrol’s excise tax was lowered by 5 pence. The industry and tertiary sector are also currently receiving financial support from the British government through the energy bills discount scheme (EBDS). This measure provides a discount to firms and especially energy-intensive industries if energy prices exceed certain thresholds until 31 March 2024.The EBDS is the successor of the Energy Bill Relief Scheme (EBRS), which provided UK business firms, public and voluntary sector with relief tariffs on electricity and natural gas bills, resulting in an overall fiscal cost of GBP 7.3 billion in 2022.
Although different measures saw an enormous reduction in their fiscal cost such as the Inherited Liabilities Related to Coal Mining (GBR_dt_03) and the EPG (GBR_dt_07), the United Kingdom’s total support estimate increased by 9.1% in 2022 in comparison to 2021, as the economy reopened after the relaxation of pandemic measures, followed by a rebound in energy consumption, and the government’s efforts to assist households and firms after the start of the energy market crisis. As a major reform, the UK government removed in 2022 the reduced rate of Excise for Red Diesel/ Rebated rate for gas oil (red diesel) measure, which used to represent an important share of the overall UK government’s support of fossil fuels.
The fiscal cost of support measures for fossil fuels in the United Kingdom was estimated at GBP 40.66 billion in 2022 (Table 1). Eighty-five per cent (85%) was directed at end user beneficiaries, as opposed to 14% directed to firms. Support was mainly given out in the form of direct transfers (GBP 24.80 billion) accounting for 61% of the total fiscal cost of support measures. Tax expenditures amounted to GBP 15.86 billion.
The fiscal cost of support measures for fossil fuels has increased by 247% since 2017. Since last year, tax expenditures have increased by 52%, from GBP 10.46 billion to GBP 15.86 billion and direct transfers increased by 5526%, from GBP 3.30 billion to GBP 24.80 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 1. Fiscal cost of support measures for fossil fuels (in billions of national currency)
|
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|---|---|
|
Tax expenditures |
11.444 |
11.615 |
11.821 |
10.296 |
10.461 |
15.860 |
|
Direct transfers |
0.281 |
0.148 |
0.186 |
0.389 |
3.295 |
24.796 |
|
Total |
11.725 |
11.763 |
12.007 |
10.685 |
13.756 |
40.656 |
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Table 2. Selected support measures for fossil fuels with a large fiscal cost (in billions of national currency)
|
Measures associated with large fiscal cost in 2022 |
2022 |
2017 |
Variation since 2017 |
|
|---|---|---|---|---|
|
Tax expenditures |
||||
|
Reduced Rate of VAT for Domestic Fuel and Power |
7.842 |
4.208 |
3.633 |
|
|
Fuel Duty Relief |
2.430 |
(Started in 2022) |
2.430 |
|
|
Ring-fence oil and gas trade corporate income tax relief, first-year capital allowances for plant and machinery |
1.100 |
1.500 |
-0.400 |
|
|
Direct transfers |
||||
|
EPG |
19.395 |
(Started in 2022) |
19.395 |
|
|
EBRS |
2.620 |
(Started in 2022) |
2.620 |
|
|
EBSS |
2.576 |
(Started in 2022) |
2.576 |
|
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 3. Description of selected support measures for fossil fuels
|
Reduced Rate of VAT for Domestic Fuel and Power |
The domestic consumption of both heating fuel and power in the United Kingdom is subject to a lower rate of VAT than that applied to regular products (which corresponds to 20% from February 2011 onwards). |
|
Fuel Duty Relief |
This measure reduces rates of the Fuel Duty, an excise tax payable on petrol, diesel and other fuels used in vehicles, for heating and other uses, such as non-road mobile machinery. The relief measure was introduced for 12 months starting from the 23 March 2022 and then extended for another 12 months until March 2024. It includes cutting rates for diesel and unleaded and leaded petrol by 5 pence per litre (ppl), with a proportionate percentage cut (equivalent to 5ppl from the main Fuel Duty rate of 52.95ppl) in other lower rates and the rates for rebated fuels, where practical. |
|
Ring-fence oil and gas trade corporate income tax relief, first-year capital allowances for plant and machinery |
The United Kingdom offers a 100% first-year capital allowance for ring-fence capital expenditure. This means that 100% of most North Sea capital expenditure is allowable for Corporation Tax, including the Supplementary Charge, in the year that the expenditure is incurred. This applies to both expenditure on plant and machinery extraction stage, or expenditure incurred during the exploration and development phase. If the allowance is not taken the first year in which the capital expenditure took place, then the write-down is reduced by 25% for each subsequent year for both plant and machinery and most intangible expenditure, and 10% write-down for expenditure on long-life assets or extraction assets on a reducing-balance basis. |
|
EPG |
The Energy Price Guarantee (EPG) ensures that a typical household in Great Britain pays no more than an average of GBP 2 500 a year on their energy bill. It has been in place at GBP 2 500 since 1 October 2022 and maintained at this level until the end of June 2023. The guarantee will rise to GBP 3 000 from 1 July 2023 until 31 March 2024, when the support scheme is scheduled to end. The government is also providing a one-off GBP 200 Alternative Fuel Payment in winter 22/23 to UK households who do not receive support for their heating costs via the EPG, such as for those who use heating oil or LPG. |
|
EBRS |
The Energy Bill Relief Scheme provides a discount on wholesale gas and electricity prices for all eligible non-domestic energy consumers (including UK businesses, the voluntary and public sector). The scheme came into effect on 1 October 2022 and will run until 31 March 2023. Relief tariffs are set at GBP 211/MWh for electricity and at GBP 75/MWh for natural gas, whereas wholesale costs in the absence of the measure would have been GBP 600/MWh for electricity and at GBP 180/MWh for natural gas. The UK government has announced a new Energy Bills Discount Scheme (EBDS) from April 2023 to April 2024 for eligible non-domestic consumers in Great Britain and Northern Ireland. |
|
EBSS |
Energy Bills Support Scheme allow all households with a domestic electricity connection in England, Scotland, and Wales to automatically receive a GBP 400 discount on their energy bills for winter 2022 to 2023. Households in Northern Ireland received GBP 600 on the same period. The support was monthly divided as follows: GBP 66 in October and November, GBP 67 in December, January, February and March. This measure ended in March 2023. |
Data sources
Note on the Methodology
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.