Fracking firms could share in UK fossil fuel tax breaks worth billions

Fracking companies are likely to be eligible for tax breaks, potentially worth billions, that the government is extending to oil and gas companies to encourage new exploration of fossil fuel resources.

Combined with high gas prices, the extra funding – which amounts to a subsidy, according to campaigners – could provide a strong incentive to restart fracking operations if a moratorium in the UK is lifted, which could happen as early as this week.

Oil and gas companies will benefit from a loophole in the government’s windfall tax, which allows exemptions for companies that invest in the exploration of new fossil fuel resources. Legal advice provided to the campaigning group Uplift suggests fracking companies would also be eligible for this incentive, based on the way the windfall tax – officially known as the energy profits levy – is currently written.

Tessa Khan, the director of Uplift, said: “Despite a historic cost of living crisis, the government is trying to rush through yet another massive subsidy for oil and gas companies. The energy levy is supposed to ease the burden of rising energy bills for UK households, but this investment loophole allows companies to slash their tax bill if they build more polluting, unsustainable oil and gas projects.

“It is outrageous that fracking companies may be able to benefit from this subsidy, when fracking – like all oil and gas drilling – does nothing to ensure safe, affordable energy for people in the UK.”

The Labour party said the loophole meant oil and gas companies would receive 20 times more in taxpayer incentives than renewable energy firms are eligible for. Labour’s analysis of government data shows that about £4bn could flow to oil and gas companies via the loophole in the windfall tax and “super-deduction” tax credits.

According to Labour’s analysis, the new rules mean that for every £100 an oil and gas company invests in the North Sea, the company receives £91.50 from the taxpayer. For every £100 invested in renewable energy, the renewables company receives £25, but that will fall to £4.50 from April 2023.

If these incentives are extended to frackers, it could be enough to swing the economics of fracking in favour of new operations. Labour said that for fracking companies the rules would mean that, out of every £100 spent on fracking, only £7.50 would be paid by the fracker, with the rest made up for by the taxpayer.

This week, ministers will face the conundrum of whether to lift the moratorium on fracking, as the British Geological Survey has been asked to produce a report on the fracking potential in the UK, which is due by Thursday. Many on the right of the Tory party have vocally supported fracking, and Boris Johnson is seeking their support to bolster his ailing premiership, weakened by two byelection defeats.

Khan said: “How can the government justify effectively picking up the bill for new oil and gas projects when these industries are making record profits and destroying the climate? The simple answer is that it cannot.”

Ed Miliband, the shadow secretary of state for climate change and net zero, said: “It is shameful that the government is handing billions of pounds of taxpayer money back to the very oil and gas companies that have made record profits during this energy crisis. This giveaway will either go to oil and gas projects that would have happened anyway, or will incentivise new projects that will make no difference to consumer bills, will take years to come to fruition, and will drive a coach and horses through our climate commitments.

“[This could also] end up throwing public money towards dangerous, unpopular and expensive fracking projects. This is a government with the wrong priorities.”

A spokesperson for the Treasury said: “As set out in the British energy security strategy, and with Putin’s invasion of Ukraine illustrating the merit of this, the North Sea oil and gas sector is going to be crucial to the UK’s domestic energy supply and security for the foreseeable future – so it is right that we keep encouraging investment while continuing our focus on cutting emissions. We’re also ensuring the UK continues to invest in clean energy too, through incentives such as the super-deduction, the UK’s competitive R&D tax relief regime and the Contracts for Difference scheme.”