Carbon capture and storage: the role of tax incentives

In November 2020, Boris Johnson, the then prime minister, pledged that the UK would capture and store between 20m and 30m tonnes of carbon emissions every year by the end of the decade. Combined with public statements about plans for the UK to become a world-leader in this technology and the legally binding target to reduce the country’s carbon emissions to net zero by 2050, it is clear that the UK government needs private sector support if these ambitions are to become a reality. It remains to be seen whether the UK government will pursue these aims with such vigour under Rishi Sunak’s leadership – but if it does, tax policy may need to play a part in achieving them.

What has been announced so far?

At the moment, there are no concrete plans for any specific tax reliefs or incentives to be introduced as part of the UK’s carbon capture, usage and storage (CCUS) regime.

However, there are existing tax laws which may be relevant here. Within the UK’s oil and gas taxation regime, there are various long-standing provisions designed to facilitate the reuse of North Sea oil and gas fields and related assets, including for the purpose of carbon capture and storage. For example:

• A modified form of corporation tax applies to profits from extracting and exploiting oil and gas: the so-called ‘ring fence corporation tax’ (RFCT) and supplementary charge (SC). In high level terms, relief from RFCT and SC is available for decommissioning costs in relation to assets used for the ring fence trade. When such assets are then used for another purpose outside the ring fence, such relief is still available on the same basis as would have been the case had the assets remained within the ring fence trade. This ensures the pivot towards carbon capture and storage does not decrease the value of RFCT and SC relief available; and
• petroleum revenue tax (PRT) is a tax on the profits derived from particular oil and gas fields, and again relief is available for decommissioning costs. (Although PRT is now charged at a 0% rate, it is still relevant for companies carrying back losses as it may help them recoup previously-paid amounts.) This PRT relief is maintained even if there is a qualifying change in use prior to the decommissioning occurring, and there is no clawback of PRT where there has been a qualifying change in use. Together, this ensures there is no PRT-related cost associated with repurposing existing fields and assets before decommissioning them.

What else could be done in this area?

As the UK’s CCUS regime continues to develop, there is scope for new targeted tax rules to be added to the package of incentives being offered to private sector actors. This is something those in the oil and gas industry are already pushing for. For example, in a meeting of the Oil and Gas Industry Direct Tax Forum last year, industry representatives highlighted the potential importance of tax policy in this area.

This is unsurprising. There is widespread recognition that tax policy has a part to play in the UK’s attempts to tackle the climate crisis and there are a number of examples of UK tax policy being shaped by the green agenda, both in the form of new taxes (such as the plastic packaging tax, the landfill tax and the climate change levy) and new reliefs (such as the enhanced capital allowances available for green technologies and the higher rate of investment allowance available for decarbonisation expenditure under the energy profits levy announced at the Autumn Statement on 17 November).

To date, no concrete proposals have been put forward on CCUS, but potential measures could include:

• reducing the rate of corporation tax on profits arising from carbon capture and storage;
• introducing a year-one tax deduction for costs incurred investing in carbon capture and storage – perhaps exceeding the costs actually incurred, following the approach of the 130% ‘super-deduction’ previously available for research and development expenditure by large companies; and/or
• switching off the corporate loss restriction rules (which, in broad terms, apply a 50% limit to the profits against which carried-forward losses can be set) in relation to losses arising from carbon capture and storage.

Are such measures likely?

At the meeting of the Tax Forum mentioned above, HMRC representatives explained that, although further thought was still needed, HMRC and HM Treasury had started discussions in this regard with the Department for Business, Energy and Industrial Strategy (BEIS).

However, the UK government has undergone multiple changes of leadership since then, and it remains to be seen whether legislative action will follow these promising early remarks. Rishi Sunak could potentially be more environmentally-minded than his predecessor. On the one hand, he has reinstated the ban on fracking torn up by Liz Truss, he ultimately did attend the 2022 United Nations Climate Change Conference (COP27) and his Chancellor, Jeremy Hunt, reconfirmed in his Autumn Statement the UK’s commitment under the Glasgow Climate Pact to reduce its emissions by 68% by 2030. On the other hand, he removed both Alok Sharma and Graham Stuart (widely considered to be leading voices within the Conservative Party on pro-environment measures) from their cabinet positions and recently announced the introduction of a windfall tax on low-carbon electricity generators which (unlike its oil and gas sector equivalent) does not provide relief for investment expenditure. Whatever his personal views, noting the huge economic challenges to be dealt with and, in his chancellor’s own words, the ‘eye-watering[ly] difficult’ decisions required to balance the books, it is very difficult to see significant new tax reliefs being introduced in this area in the short term at least.

As is the case with much of the UK’s CCUS regime, uncertainty remains. For now, one can only wait, and indeed hope, for tax incentives to be given a bigger part to play here.