How Rishi Sunak's windfall tax sets back UK's drive towards net-zero carbon emissions in fight against climate change – Martyn McLaughlin

Barely six months have passed since the UK Government hailed the historic pledge struck by nearly 200 countries at the COP26 climate summit to hasten the demise of financial sweeteners for oil and gas firms.

The vow, known as the Glasgow Climate Pact, saw the nations agree to “accelerating efforts” towards the “phase-out of inefficient fossil fuel subsidies”.

It marked the first time that the subsidy issue was mentioned explicitly in the concluding agreement of a United Nations climate conference or treaty, and it felt a significant moment.

Around the world, nearly £4.7 trillion was devoted to fossil fuel subsidies in 2020, with such vast sums contributing to the worsening climate crisis.

The devil is in the detail of Rishi Sunak's so-called windfall tax on oil and gas producers (Picture: Andrew Milligan/PA)

A report by the International Institute for Sustainable Development and the Nordic Council of Ministers found that if the subsidies were removed across 20 countries between 2015 and 2020, their national emissions would have fallen by an average of 11 per cent.

The Glasgow pact could never hope to bring about such seismic change so quickly, but it appeared to demonstrate a commitment to at least making a start. What a shame it is, then, that the agreement is being undermined so soon, and so brazenly.

For all that it has been lauded for finally agreeing to a so-called windfall tax on oil and gas giants, the addendums to the policy confirm that the UK Government remains resolutely unserious about preventing catastrophic, irreversible climate change.

Alongside the headline announcement that the tax rate for the sector will temporarily increase from from 40 per cent to 65 per cent of profits, an accompanying Treasury factsheet and technical note laid out details of a new investment allowance rate which nearly doubles the tax relief available to North Sea producers, and allows them to enjoy a 91p tax saving for every £1 they invest.

According to the Treasury, the rationale for such an incentive is straightforward – the more investment a firm makes, the less tax they will pay. But what will be the ultimate price?

Perversely, there are no conditions attached to the investment allowance, and no stipulations that any investment must be directed to renewable energy initiatives, such as offshore windfarms or green hydrogen projects. There is not even a tiered system which would incentivise firms to pursue cleaner energy developments.

Quite the opposite, in fact. The Treasury says that the super-deduction allowance has been bundled with the new energy profits levy so as to “provide an immediate incentive for the oil and gas sector to invest in UK extraction". In other words, it is a measure explicitly designed to keep the drills running and encourage further development of North Sea fields.

Ironically, some Conservatives who were staunchly opposed to any kind of windfall tax argued that it would hinder private investment in renewable energy. Now, their party has all but guaranteed that outcome.

Those firms eligible for the allowance will not even have to wait years to receive it; unlike the existing 2015 allowance – another subsidy in all but name which was only activated once fields began generating income via production – the new scheme allows companies to take advantage of the 80 per cent rate at the point of investment, meaning many are expected to bring forward big oil and gas capital expenditure projects.

Little wonder that the share prices of BP and Shell dipped by less than a percentage point after Chancellor Rishi Sunak’s announcement, before returning to their opening price by the end of the day.

All of this makes for some risky economic forecasting. The Treasury has not laid out any calculations detailing how the new investment allowance will impact on its aim of raising £5 billion via the energy profits levy.

By doubling down on the UK’s dependence on fossil fuels, it also promises to entrench systemic problems with our domestic energy supply. The idea that encouraging investment now will ease the current crisis sparked by the war in Ukraine is patently nonsense – it takes several years before any planned development begins production, and in any case, the critical investments that are needed now, such as natural gas storage capacity, are being ignored.

All of which raises the question of exactly how the new allowance for oil and gas and production can be justified. The Treasury’s messaging is muddled, but it is perhaps no coincidence that the Conservative party and its MPs have registered £1.3 million in gifts and donations from climate sceptics and fossil fuel interests since the last general election.

Whatever the rationale – or the lack of it – the allowance makes a mockery of the UK’s legally binding commitment to transition to net zero by 2050. The United Nations and the International Energy Agency have made it clear that the world needs to stop new investment in fossil fuels if we are to avert the very worst of the climate emergency.

The most recent report by the Intergovernmental Panel on Climate Change, meanwhile, contained the stark warning that if all new fossil fuel infrastructure in the pipeline reached completion, the global temperature increase is likely to exceed 2.8C.

There were always fears that the imprecise wording of the Glasgow pact – a product, if ever there was one, of diplomats – could give major polluters too much wriggle room. Now, the UK Government has confirmed it.

At a time when it still holds the COP presidency, any hopes that it would demonstrate climate leadership through its own ambitions have been quashed by the devil in the detail of Mr Sunak’s announcement.