No place for fossil fuel subsidies

The week before last, the International Monetary Fund published analysis showing that the global fossil fuel industry was subsidised to the tune of US$11 million per minute, totalling US$5.9 trillion in 2020. The subsidies are mostly aimed at keeping prices down but, clearly, they are not working. Britain has a chance here to lead at home and abroad in phasing them out.

First, the UK should start by ending its own fossil fuel subsidies. It is important to note that the Government maintains that its VAT exemption for gas (which is also applied to electricity) does not count as a subsidy. Regardless of how you frame it, gas does receive preferential tax treatment, but where it gets a real leg up is when it comes to bills.

Because gas is used directly for heating and to produce electricity, the price spike has caused the wholesale cost of both to rocket. However, there are environmental and social levies on electricity bills (totalling 23% of the bill) which barely touch gas bills (only making up 2%), meaning electricity bills have an extra £159 heaped on top.

This is unfair to those who do not use gas, but also puts those on dual fuel bills off the switch to lower-carbon electric heating. This is the main barrier to the nation-wide electrification of heat, the only surefire way to protect households from the volatility of gas.

Scrapping these levies altogether with no replacement funding mechanism is neither practical nor desirable. For a start, this would cause catastrophic loss in investor confidence as the Government would be pulling out of legal contracts it has legally signed up to for getting renewable projects to market.

Moreover, it would be similar to scrapping the fire brigade as your house is burning down. The green schemes these levies pay for, like Contracts for Difference, are what have caused the private investment flowing into UK renewables to turn from a trickle into a flood, not just greening our grid to fight climate change but creating thousands of jobs here in the meantime.

Some have argued that yet more support for the gas sector in the North Sea (where Britain gets about half its gas from already) is the way forward. But there is no guarantee that any gas produced there would be used in UK homes, because another country may pay more for it, or that it would have a meaningful impact on gas prices, which are set globally. The same goes for those arguing one more time for ministers to push for fracking, which is deeply unpopular among the public.

Britain’s energy system needs investment, but it would surely be better to continue investing in renewables, which have much lower operating costs than gas production and are not at risk of becoming stranded assets. The UK should ensure a smooth transition to those rather than artificially hold up the fossil fuel industry, which is increasingly uneconomic.

G20 leaders committed to phasing out ‘highly inefficient’ fossil fuel subsidies in 2009, at the height of the great recession but more importantly before the renewables revolution. Now, competitive alternatives to gas and coal exist, and the taxpayer money wasted on keeping the price of fossil fuel consumption down would be better used elsewhere.

With the Net Zero and Heat and Buildings strategies due out next week, the Government has a chance to lead by example by reducing artificial support for fossil fuels. But it should also get on the front foot internationally, to break the grip of these economically nonsensical subsidies.

The UK could seek to deepen its cooperation with nearby neighbours, particularly Norway, to build more interconnectors and enhance energy trading. The recent signing of a bilateral treaty with the Norwegians over power trading is a big part of how Britain will overcome the problem of wind lulls while also building more resilience into its grid. 

These interconnectors make for a more resilient system: energy independence is not the same as energy security. More bilateral deals focusing on investment and technology with allies is the way forward. Shipping green hydrogen from democratic solar superpowers like Australia, for example, would also help the UK move international trade from ‘dirty’ to ‘clean’ energy.

On a more multilateral level, Britain could also signal its intention to join the Agreement on Climate Change, Trade and Sustainability, which is being led by New Zealand. Though there might be challenges, the WTO has signalled its support for this agreement which has the phase-out of fossil fuel subsidies at its core. As a major economy, the UK could use this deal to revolutionise trade.

G20 leaders agreed that fossil fuel subsidies had to go by 2025 over a decade ago, but virtually no progress has been made since then. But now the clean energy revolution is here, and demand pull inflation and a series of supply shocks have exposed gas once again to be an unreliable source of energy. The Government is doubling down on its energy transition; it should use diplomacy and trade to urge others to follow.

Jack Richardson is James Blyth Early Career Associate Fellow at the Council on Geostrategy. He is also Climate Programmes Manager at the Conservative Environment Network.