UK tax breaks for oil and gas under scrutiny from climate activists

The UK government failed to account for the billions of pounds in financial support it provides to the fossil fuel industry when deciding how much oil and gas to extract from the North Sea, climate campaigners have argued.

A high court hearing that began on Wednesday has put the economics of the fossil fuel industry under the spotlight and raised questions about the compatibility of oil and gas production with a net zero goal.

The UK’s Oil and Gas Authority (OGA) has a legal duty to “maximise economic recovery” from domestic oil and gas resources and adopted a new corporate strategy to achieve this in February. But campaigners say this does not benefit the UK as a whole.

The three plaintiffs in the case – climate activist Mikaela Loach, thinktank director Kairin van Sweeden, and a former oil refinery worker, Jeremy Cox – say tax relief for new oil and gas exploration, as well as financial support provided for decommissioning costs, effectively amounts to a subsidy – a description the government denies.

These “negative tax flows” totalled £2m in 2015-16 and £359m the following year – more than oil and gas firms paid the UK in tax.

Representing the plaintiffs in court, David Wolfe QC claimed it was wrong for the OGA to exclude tax relief from its economic calculations and said the body could not claim to be acting in the national interest if it did not distinguish between money going to the Treasury or to the fossil fuel industry.

Related: Environmentalists warn of close ties between oil and gas sector and UK’s North Sea regulator

The lawsuit also notes that many of the petroleum companies extracting North Sea oil and gas are foreign-owned, so much of the money spent supporting the industry flows outside the UK.

Government support for the fossil fuel industry is increasingly under the spotlight, with one report estimating that the UK provides £12.5bn in annual subsidies.

The Committee on Climate Change recently recommended the Treasury review the role of the tax system in delivering net zero.

The OGA’s February strategy imposes some new climate-related obligations on the oil and gas industry, including a requirement to cut emissions associated with production, support for carbon capture and storage projects, and moves to advance clean hydrogen production.

But the plaintiffs argue that it is in fundamental conflict with the UK’s pledge to be net zero by 2050, because it would lead to greenhouse gas emissions from burning fossil fuels that would otherwise have stayed in the ground, and because it would create stranded assets from the infrastructure required for such extraction.

That is important, they say, because it provides further evidence that the government made an “irrational” decision in approving the OGA’s strategy.

North Sea oil and gas producers are pressing the government to back up to 18 new fossil fuel projects. But last week Shell announced it was backing out of plans to develop the Cambo oilfield, casting doubt on the whole project.

Neither the OGA nor central government would comment on an ongoing legal case. But in a statement, the Department for Business, Energy and Industrial Strategy said there would “continue to be diminishing need for oil and gas over the coming years while we ramp up renewable energy capacity”.

The case continues.