Whenever the government supports renewable energy or energy transition, opponents often present a seemingly pragmatic argument: without subsidies, the market simply would not budge. This argument assumes that the energy market is a neutral space that has only recently been distorted by policy. In fact, the opposite is true. At least in the UK, the energy sector has long existed under institutional protection, with the largest, most enduring, and riskiest support directed precisely at fossil fuels.
Consider the much-discussed windfall tax. In response to soaring energy prices, the UK government introduced a windfall tax on North Sea oil and gas, raising the nominal marginal tax rate to over 75%. On the surface, this appears to be a measure to tax the ‘windfall’ profits of oil and gas companies; however, the tax system simultaneously includes investment allowances, creating a dual policy signal. The government’s official statement upon its introduction was that, with an 80% investment allowance, companies could save approximately 91 pence in taxes for every pound invested in qualifying oil and gas projects. In other words, the so-called windfall tax does not merely recapture excess profits but instead creates a clear tax reduction pathway for continued drilling through the tax system.
More significantly, the retirement arrangements and the lack of pre-funded guarantees in the system design have long-term implications. North Sea oil and gas facilities must eventually be decommissioned, cleaned up, and the seabed restored, which entails a substantial and unavoidable cost. Recent official estimates indicate that the total cost of decommissioning remaining oil and gas facilities on the UK continental shelf is approximately £44 billion, with around £27 billion needed within the next decade. Under the current tax system, decommissioning expenditures typically qualify for about 40% tax relief or guarantees. In other words, while oil wells are operational and profitable, the profits primarily accrue to private investors; once they enter a phase of no profitability, with only cleanup responsibilities remaining, approximately 40% of the costs are borne by taxpayers.
Crucially, this system does not require companies to pre-fund their decommissioning liabilities at the outset of extraction. The UK has not enforced the same level of obligation on oil and gas projects to establish comprehensive, fully-funded decommissioning funds or guarantees, effectively making the government an invisible guarantor. This starkly contrasts with other high-risk industries. For instance, nuclear energy operators are generally required to establish decommissioning funds during their operational period, locking in future dismantling and cleanup costs to ensure that funds are available even if operators exit later. In contrast, the oil and gas sector operates more on a ‘extract first, clean up later’ model, postponing and partially transferring the most expensive and uncertain tail risks to the public, systematically lowering capital costs.
In addition to the windfall tax and decommissioning arrangements, the oil and gas industry benefits from a suite of less-discussed but equally important tax and institutional advantages. North Sea oil and gas are subject to a distinct circular tax regime, with highly specialized rules that make the return environment more predictable for investors; capital expenditures can be reflected more quickly for tax purposes, enhancing project present value; losses can be managed under the system across periods, improving cash flow; coupled with the government’s long-term emphasis on tax stability, market pricing of policy risk is often depressed. While these arrangements may seem like mere technical details when viewed individually, collectively they significantly enhance the attractiveness of fossil fuel investments.
The disparity between these institutional supports and the support for renewable energy is stark. Household-level clean energy policies, whether through tax exemptions or subsidies, typically have an annual impact in the hundreds of millions of pounds, with clear budgets that can be tightened or terminated year by year, designed to phase out as technology matures. In contrast, support for fossil fuels is concentrated on the industry’s most expensive, uncertain, and unavoidable tail costs, lacking the same clear exit mechanisms. The two are asymmetrical in terms of both magnitude and risk nature.
Thus, to say that ‘without subsidies, no one would be willing to transition to energy’ is to confuse cause and effect. The market’s long-standing willingness to invest in fossil fuels is not due to its inherent competitiveness, but rather because the government has already assumed the largest and most difficult-to-price risks for it. The so-called windfall tax has not altered this structure; it merely recaptures some cash flow during high oil price years while embedding the incentive to continue extraction into the system.
Moreover, this is not just a UK issue. Globally, the scale of fossil fuel subsidies is even more staggering. According to the International Monetary Fund’s broad definition, which includes direct subsidies, tax breaks, price distortions, and unaccounted environmental and health costs, global support for fossil fuels in 2022 was approximately $7 trillion, accounting for about 7% of global GDP. In this context, portraying limited, phasing-out energy transition support as market intervention while ignoring the long-term underpinning of fossil fuels is a form of selective blindness.
The real discussion should never be whether the government should intervene in the energy market, but rather the direction and scale of that intervention. The energy transition is not about subsidizing energy for the first time; it is about attempting for the first time to gradually shift support from an industry that is known to be phasing out but still protected by the system, towards options that better align with long-term public interests. If we cannot even acknowledge this reality, then the assertion that ‘without subsidies, no one would be willing to transition’ is fundamentally untenable.
