UK tax plan incentivizes oil, gas producers to pump more fossil fuels

© Reuters. FILE PHOTO: A section of the BP Eastern Trough Area Project (ETAP) oil platform is seen in the North Sea, around 100 miles east of Aberdeen in Scotland February 24, 2014. REUTERS/Andy Buchanan/pool/File Photo

By Shadia Nasralla

LONDON (Reuters) - The British government's 5 billion pound ($6.29 billion) windfall tax plan for oil and gas producers includes an incentive for those producers to pump more fossil fuels, riling climate activists who had called for the tax.

Tax bills for oil and gas producers, including the new additional 25% levy on profits, can be reduced significantly with higher investment specifically in oil and gas projects.

"Within the levy, a new 'super-deduction' style relief is being introduced to encourage firms to invest in oil and gas extraction in the UK," the government's Treasury said in a factsheet as it announced the plan on Thursday. It did not list other types of energy investments such as in renewables or electric car charging.

"The new ... Investment Allowance will mean businesses will overall get a 91 pence tax saving for every 1 pound they invest," the Treasury said.

Britain's government has pledged to become a carbon-neutral economy by 2050. It also hosted last year's COP26 climate summit, which urged countries to phase out inefficient fossil fuel subsidies.

At the same summit, it shunned invitations to join other oil and gas producing nations in their efforts to ban fresh extraction of hydrocarbons.

Thursday's announcement that an additional tax on oil and gas producers included a tax incentive for higher production marred the policy in the eyes of climate activists.

"Rewarding oil and gas extraction, while doing nothing to encourage investment in renewables will not provide energy security, push bills even higher and pour fuel all over the climate crisis," said Ami McCarthy, political campaigner for Greenpeace UK.

Steve Trent, founder of the Environmental Justice Foundation, said the tax was a positive step to help households cope with rising energy costs.

"But there is a gaping loophole. Oil and gas corporations can largely avoid the levy by increasing investment in the extraction of yet more fossil fuels in the UK," he said.

($1 = 0.7952 pounds) Graphic: UK government revenue from oil and gas sector UK government revenue from oil and gas sector, https://graphics.reuters.com/BRITAIN-OIL/TAX/akpezrnzavr/chart.png Graphic: Britain's biggest oil and gas producers, https://graphics.reuters.com/BRITAIN-OIL/zdvxowamwpx/chart.png