|
Will Labour End Subsidies to Fossil Fuels?
"Naturally governments prefer to avoid the political flak which comes with slashing subsidies...(however) as soon as firms in the $1 trillion-a-year fossil-fuel industry believe governments are serious about greenhouse emissions, they will invest furiously in reducing costs of alternative sources of energy" Summary The new Labour Government has inherited a number of subsidies to the oil, gas and coal industries. These subsidies force down the price of fossil fuels, encourage consumers to use more, stimulate new exploration for fossil fuels, and therefore exacerbate global warming. Current UK Government energy funding reflects an old mindset that assumes that expanding the reserves of fossil fuels is in the national interest. It does not reflect our new understanding of the fragility of the global climate. This understanding creates a policy imperative to begin a fossil fuel phase-out, and the need to ensure that the majority of fossil fuels are never extracted and burnt. Issues that the new Government has to address include: • Plans by the DTI to spend almost £8 million of public money in 1997/98 supporting such oil industry costs as technology development and trade fair promotion. • A lax offshore tax regime that encourages oil companies to expand fossil fuel reserves, and incorporates seven tax breaks that allow exploration and development costs to be offset against Corporation Tax. • A Labour promise to divert finance for renewable support to coal combustion projects that threaten its manifesto commitment to reduce CO2 emissions by 20% by 2010. • Historic inequity: for every £1 of public money used to support the development of renewable energy fossil fuels have received over £100 in direct subsidies, in the period 1990-1995. • The scandal of EU funding; in the five years since EU states signed up to the Climate Convention, the European Commission has spent £3.2 billion in subsidising the fossil fuel and nuclear industries.
• Remove all direct and indirect subsidies to the fossil fuel and nuclear energy industries. • Transfer these funds to programmes that accelerate the commercialisation of solar energy technologies and the uptake of energy efficiency. • Push for the adoption of ambitious targets for the expansion of renewable energy within the EU. The fossil fuel legacy
Oil & Gas Subsidies The oil and gas industry is a mature industry with the financial resources to bear the costs of its own research and development. Its income from sales of UK oil and gas resources alone exceeds £100 billion since 1990.1 However the last Government continued to direct millions of pounds of public money to supporting the exploration and production activities of private oil and gas companies.
At least £1million of the programme budget was used to ‘promote’ the oil industry, including sponsoring oil company representation at international trade fairs. This is more than the budget dedicated to solar electric technology, whose long-term importance in reducing CO2 emissions is undisputed, and where the imperative for government to support commercialisation is clear. The previous Minister for Energy, Lord Fraser, stated clearly that the current development of floating oil rig technology (FPSO- Floating, Production, Storage & Offloading ), which has made it technically possible for BP and other companies to extract oil from the Atlantic Frontier, was developed with public money: 'The UK now has a highly competitive capability in the FPSO sector , because Government ...intervened to galvanise UK industry when it became clear that FPSO’s were assuming increasing importance in the North Sea and elsewhere.’3 The offshore taxation regime in the UK is weakest in the world, bar Ireland, and has been designed specifically to lower the costs of oil production to private companies and allow them to expand their reserves and the supply of oil and gas. These tax changes have resulted in a decline in Government revenues from the offshore industry and constitute an implicit subsidy to fossil fuel supply. A recent Sheffield University study notes that if the taxation regime in place in 1987 had been maintained, the Government would have received an additional £12 billion in tax revenues between 1987 and 1994.4 The large companies such as BP and Shell, who can write off a majority of their exploration & development costs as relief against Corporation Tax, are particularly favoured by the UK fiscal regime. One particular change in 1993 where Petroleum Revenue Tax (PRT) was reduced on existing fields and abolished on new fields directly increased the profitability of the big North Sea oil operators such as BP. In 1993, shortly after the changes, the Financial Times commented that: ‘City Analysts reckon that the reduction in the PRT could add as much as £130 million to £140 million to BP’s profits’5 Subsidising the oil industry expansion into the Atlantic Frontier The lax UK offshore tax regime has allowed oil companies to begin extracting oil from the Atlantic Frontier, off the North West coast of Scotland, which was previously considered to be uneconomic. The benefits of this fiscal regime where made clear by oil industry analysts Smith Rea and Energy Information Services in a study of the potential for the development of oil and gas fields in the Rockall Trough. In the report they advise the oil industry that: ‘The British tax regime is generally considered to be very favourable. New fields approved for development since 16 March 1993 are exempt from Petroleum Revenue Tax (PRT) and are only subject to Corporation Tax. Government Royalties are not chargeable on new fields approved for development after 1 April 1982. Salient features of the regime are the following:
• Corporation tax of 33%. In the circumstances of the long history of exploration/production activities on the UK continental shelf, the economic evaluation has been based on the assumption of immediately available Corporation Tax relief ie, an existing Corporation Tax -paying position on the part of the participator from existing UK Continental Shelf operations which is adequate to shelter all deductions arising from the Rockall development project.’
‘The Rockall Trough- A New Deepwater Frontier’, Smith Rea Coal subsidies Coal continues to receive a subsidy from electricity users in the UK because electricity companies pass on the cost of ‘premium price’ contracts offered to UK coal companies by the two main electricity generators National Power and PowerGen. The contracts had more UK coal and at a higher price than if the coal had been bought on international markets. The consumer ultimately pays this subsidy because these increased costs are passed through from the generators to electricity users by the electricity supply companies. These contracts come to an end in March 1998, and this hidden subsidy is likely to be revealed by a significant drop in the price of coal bought for UK electricity generation. Estimated consumer subsidy to coal in the UK (£ million)6
Over the last five years the Conservative Government gave £33 million7 of direct state support to clean coal projects in the belief that more efficient coal burning would bring environmental benefits. They failed to take into account the scale of the threat posed by coal to the global atmosphere. The fact that projected coal demand and coal reserves are so great mean that its impact on the global atmosphere is not likely to be significantly affected by the efficiency with which it is burnt.8 In the UK the justification for ‘clean coal’ projects on environmental grounds is even more tenuous since commercial gas power plants already being built in the UK are less polluting than the emissions expected for clean coal power stations. To avoid rapid and extensive damage to ecosystems it is unlikely that more than 200 billion tonnes of carbon can be burnt as fossil fuels. World coal reserves currently stand at over 600 billion tonnes of carbon.9 Logic therefore dictates that even if all oil and gas use was stopped immediately it would still be necessary to leave two thirds of coal reserves in the ground to avoid dangerous climate change.10
Fossil fuels and the climate The world’s governments signed up to the Climate Convention in 1992. By doing so, they agreed to try to limit the build-up of greenhouse gases in the atmosphere from the burning of fossil fuels, at a level that would prevent dangerous human-made interference with the climate system. The Climate Convention states: ‘Such a level should be achieved within a timeframe sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner.’ Scientists on the Advisory Group on Greenhouse Gases (AGGG) working for the United Nations Environment Programme (UNEP), found that temperature increases beyond 1°C, or a rate of increase exceeding 0.1°C per decade, may lead to extensive ecosystem damage. Greenpeace therefore believes a long-term increase in temperature of 1°C above pre-industrial levels is the absolute maximum that policy-makers should accept and that the rate of change should be kept to less than 0.1°C per decade. It is possible to estimate a budget for fossil fuels: how much we can extract from the ground and burn, while limiting the temperature increase to 1°C. Based on the scientific work of the IPCC, calculations of the world’s climate show that, to stay within the 1°C temperature rise over the next 100 years, the total amount of carbon dioxide from the burning of fossil fuels that can be released is around 225 billion tonnes – or gigatonnes – of carbon (GtC). To protect the world’s climate, then, to the best of our current knowledge, it will be necessary to stick to a fossil fuels budget of 225GtC. If no action is taken on deforestation (which also releases carbon dioxide into the atmosphere), the amount will be lower. On this basis, at the current rates of fossil fuel use, a 225GtC budget is exhausted in 40 years.
In fact primary energy demand is increasing at over 2% a year globally: at such a rate, the budget would be exhausted in under 30 years. It will mean that 75% of the known, economically recoverable reserves of conventional fossil fuels (as carbon) can never be burned. They must remain in the ground. So climate protection dictates an end to fossil fuels. They will not run out (in fact reserves are growing) – they will have to be closed down. By making much better use of the oil, coal and gas we do burn by improving energy efficiency and introducing clean, renewable energy technologies, we can phase out fossil fuel use in a rational way. Labour’s 1997 election manifesto stated that its aim in government would be to ‘be at the forefront of the battle to fight global warming’. However, contradictions between its environmental objectives and its energy policy could well emerge in its relationship with the remnants of the UK coal industry. In opposition, Labour welcomed a plan by RJB mining to begin the process of building up to 5000 MW of clean coal power stations in the UK. In the run up to the election John Battle, now Energy Minister, indicated that Labour would change the Non-Fossil Fuel Obligation to include ‘clean’ coal and that he would ‘leave no avenues unexplored’ in the search for a ‘viable long term future for coal’.12 However, as the ENDS Report commented shortly after the announcement: ‘Labour has failed to explain how its ambitious target to reduce carbon dioxide emissions can be reconciled with moves to prop up the coal industry’13 Coal is never clean ‘Clean coal technologies have higher thermal efficiencies than the 30-38% typical of conventional pulverised coal plant, and hence lower CO2 emissions. Efficiencies of 42-45% are commonly claimed for Integrated Gasification Combined Cycle (IGCC), with an improvement to 50% promised by improved turbine technology and hot gas clean-up technologies. However, the Tampa project has not yet attained its design efficiency of 40% – and the RJB plant would use less efficient technology. Advanced ‘supercritical’ pulverised coal plants with Flue Gas Desulphurisation have now reached efficiencies of up to 45%. The higher thermal efficiencies of Combined Cycle Gas Turbines (CCGT) and the lower carbon content of natural gas mean that, for the same amount of electricity, a gas-fired station emits just over half as much CO2 as a coal-fired IGCC plant. Any move to encourage clean coal capacity in place of new gas-fired stations would threaten the delivery of Labour’s promise to cut CO2 emission.’ In relation to the assumption, explicit in Labour policy, that the best way to control global carbon emissions is by exporting clean coal technology to India and China, ENDS goes on to point out the problems with its analysis:
'The key question (in relation to potential developing world use of clean coal, however, is whether any type of clean coal technology could do more than dent the potentially huge growth in China’s CO2 emissions measures such as energy efficiency programmes and development of gas and renewable generation may prove more effective options’ Historic distortions The UK has the lowest percentage of renewable capacity, as a percentage of final consumption, of any country in the EU, despite having one of the highest potentials for renewable energy generation.14 The reason for this is the huge historic imbalance between funds made available for fossil and nuclear power and support given to renewable energy. A report written for Greenpeace by economists from the Vrije University in Amsterdam, ‘Energy Subsidies in Europe’, reveals that renewables in the UK received only 2% of the funds directed at fossil and nuclear energy. This was the second lowest ratio in the EU.15
The funding pendulum has been swung in favour of fossil and nuclear energy for so long that it will take substantial investment from the new Government before renewable and energy efficient industries have received anything approaching ‘fair’ treatment. In February ‘97 Greenpeace laid down a challenge to the main political parties calling for them to commit to redirect existing fossil fuel subsidies to a national programme to promote solar power. Greenpeace pointed out that redirecting the direct subsidies to fossil fuels from the DTI could stimulate a programme to install 50,000 solar systems on roofs in the UK by 2010.17 The European Dimension EU-wide funding programmes have done more to encourage global warming and nuclear power than promote alternative or efficient use of energy. In the five years since EU states signed up to the Climate Convention, the European Commission has spent £3.2 billion in subsidising the fossil fuel and nuclear industries. In stark contrast, renewable energy and energy efficiency technologies have received less than a third of this in financial support.18
The previous UK Government dismissed the EC’s proposal to increase the renewables target to 12%, contained in an EU Green Paper on renewables. The DTI attacked the target as ‘arbitrary andÉunrealistic’ and opposed any increase in renewables funding. They even went as far as to suggest that' ‘We see no justification for renewables projects having such a large share of any energy spend in the Fifth Framework Programme...’20 Greenpeace recommendations> In order to back up its CO2 reduction commitment and lead the fight against global warming the new Labour Government should: • Remove all direct and indirect subsidies to the fossil fuel and nuclear energy industries eg, the £17.5 million spent on fossil fuels through the DTI energy programme. • Transfer these funds to programmes that accelerate the commercialisation of solar energy technologies and the uptake of energy efficiency. • Push for the adoption of ambitious targets for the expansion of renewable energy within the EU eg, one million solar homes in Europe by 2010. References 1 DTI (1997) The Energy Report, The Stationery Office. 2 DTI (1997) Trade and Industry: The Government’s expenditure Plans 1997/98 – 1999/2000, The Stationery Office. 3 OSO Export Newsletter: No24, DTI, January 1997. 4 Rutledge,I & Wright, P(1996): Taxing the Second North Sea Oil Boom: a Fair Deal or a Raw Deal?, University of Sheffield. 5 Financial Times, 17.3.93. 6 Based on the price difference between the existing coal contracts between generators and UK coal producers and the price for delivered coal on the international spot market for contract volumes of 30 million tonnes. See ‘ Oostehuis,F& Ruijgrok, E (1997) Subsides in Europe, Greenpeace International. 7 DTI (1995 &1997) Trade and Industry: The Government’s expenditure Plans 1997/98 – 1999/2000 &1995-96 to 1996-97. 8 Ellis, M (1996) Can Coal be Clean?, ‘Clean Coal’ technologies & their potential impact on global warming, AID WATCH/ Greenpeace Australia. 9 Intergovernmental Panel on Climate Change (1995a) Climate Change 1995: The Science of Climate Change, Working Group 1, Second Assessment Report, Cambridge University Press. 10 Hare, B (1997) Fossil fuels and Climate Protection – the Carbon Arithmetic, Greenpeace International, Publication Pending. 11 DTI (1997) Trade and Industry: The Government’s expenditure Plans 1997/98 – 1999/2000, The Stationery Office. 12 Financial Times, 21.1.97 13 ‘RJB’s ‘clean coal’ campaign puts Labour’s energy policy to the test’ The Ends Report , February 1997. 14 UK share of renewable energy sources in gross inland consumption in 1994 = 0.6%: Eurostat. 15 Oostehuis,F& Ruijgrok, E (1997) Subsides in Europe, Greenpeace International. 16 Ibid. 17 A Greenpeace briefing, Solar Electric: The Political challenge (1997), sets out the details. 18 Ibid; note xvi, assuming £1= US $1.5. 19 Ibid, assuming £1=US $1.5. 20 DTI ( March 1887) UK Response to Green Paper ‘Energy for the Future: Renewable Sources of Energy’ Lodged with House of Commons Library.
For more information contact Matthew Spencer or Jane Vaus at Greenpeace UK, Canonbury Villas, London N1 2PN.
Greenpeace March 1997
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||