The windfall tax and innovation: how committing to the oil and gas sector will meet the budgeted 4Es

The UK government's recent budget announcement focused on the four E's - Education, Enterprise, Employment, and Everywhere. The announcement confirmed that up to £20 billion will be allocated to support the early development of carbon capture storage and usage (CCUS). Disappointingly, at least to those in the North East of Scotland, the region's Acorn capture carbon project was not mentioned, in contrast to similar projects in England which were highlighted. While this has been met with a certain amount if dismay in some circles in the North East, hope for further information in the coming weeks remains.

CCUS is the process of separating carbon dioxide from industrial sources, e.g., burning fossil fuels, for storage and/or use. The technology may be a key enabler for countries exploring how to meet their net zero targets, including the UK's 2050 target. As fossil fuels are a necessary part of the energy mix, at least until renewable sources can be ramped up, the carbon output of these conventional energy sources can be captured and stored to reduce (and potentially eliminate) the environmental impact. Adopting CCUS could assist in meeting the commitment to limit the global mean temperature increase to 1.5 degrees Celsius. 

CCUS is not new. The first carbon capture plant was proposed in 1938 and CCUS projects have been running since at the 1970s around the world. However, significant scaling up is needed to offset current CO2 emission levels. The government's stated financial commitment could accelerate the growth of CCUS in the UK and allow it to become a world leader in a potentially huge international market.

The UK has a wealth of experience in the oil and gas sector, and it is from this sector innovative solutions could be developed to scale CCUS given the overlapping knowledge base between the two industries. However, the current implementation of the Energy Profits Levy ("windfall tax") may negatively impact innovation. While the tax includes an investment allowance, this allowance is not stopping oil and gas majors from moving investments from the UK to more favourable markets thereby reducing private R&D spending in CCUS. Rethinking the EPL so that it incentivises innovation in targeted sectors such as CCUS could ensure private R&D is available to match public spending. In addition to the £20 billion announced, the government must act quickly to establish the 12 investment zones also announced in the budget. Again, the potential tax savings of such zones may prevent lucrative private investments from going elsewhere. 

The government is working on a "Green Day" announcement due to be released by the end of March, and it may this will address these concerns while ensuring the UK has energy security in the coming decades. Enterprise, Employment, and Everywhere - three of the key tenets of the announcement - when it comes to energy and the environment, the only way to enable these is through innovation provided by public and private R&D spending.