But environmentalists argue case forced government to accept oil and gas companies can make more money from subsidies than they pay in taxes

A legal case which argued the UK’s current strategy to ‘maximise economic recovery’ of oil and gas in the North Sea basin was unlawful, because it does not account for the significant tax breaks provided to fossil fuel companies, was thrown out by a High Court judge yesterday.

Despite losing the case, the three environmental campaigners who brought the action said yesterday that they had been “vindicated” by the judgement because it accepted that oil companies operating in the UK can make more money from subsidies than they pay in taxes.

In addition to arguing that the Oil and Gas Authority (OGA) could not lawfully conclude whether production of oil and gas in the North Sea was economic for the UK as a whole, the trio of environmental campaigners had claimed the strategy was “irrational” because it would lead to increased emissions and as such conflicted with the UK’s legal duty to achieve net zero emissions by 2050.

But Mrs Justice Cockerill yesterday ruled the claimants’ arguments had failed on both accounts, declaring that their argument “oversimplifies the Strategy and the OGA’s economic assessment to the point of misunderstanding it”.

She said maximising recovery of oil and gas “does not need to be in conflict with net zero”, noting that the strategy requires “relevant persons” to maximise the expected net value of economically recoverable oil and gas, rather than the volume expected to be produced.

She also noted that the OGA believed the industry could deliver carbon capture and storage (CCS) technologies that would be essential to tackling climate change and could slash emissions from the industry to bring it into line with net zero goals.

“The claimants’ approach also entirely fails to grapple with the changes to reflect the move to net zero,” Justice Cockerill said. “Carbon costs have now been brought within the assessment of economic recovery.”

CCS and the wave of net zero targets adopted by some leading oil and gas companies remain highly controversial, with many environmental campaigners arguing that carbon capture technologies are yet to be deployed at scale in the UK and are likely to prove uneconomic without significant government support.

But Business Secretary Kwasi Kwarteng welcomed the High Court judgment. “Turning off North Sea oil and gas overnight would put energy security, jobs and industries at risk – and make us even more dependent on foreign imports,” he said. “This has to be a transition, not extinction.”

OGUK chief executive Deirdre Michie said she hoped the decision would “strengthen investment confidence in the UK basin at a time when we need to prioritise domestic energy production while delivering a lower carbon energy future”.

“Our companies are adapting their 50 years of energy expertise to accelerate crucial green technologies like hydrogen, carbon capture, and wind,” she added.

The ruling comes just a month after Shell dropped plans to develop the giant Cambo field west of the Shetland Islands on the grounds that the economic case for investing in the project was not strong enough. The oil major’s decision to scrap the project followed fierce opposition to the scheme from campaigners, who have argued that oil and gas exploration in UK waters is incompatible with the nation’s net zero target and flouts the International Energy Agency (IEA) warning that no new fossil fuel exploration projects should be developed if the world is to stand a chance of limiting average temperature increases to 1.5C.

Yesterday, the three campaigners who mounted the challenge against the OGA’s maximum economic recovery regime said were seeking legal advice on an appeal. Their action had been supported by a raft of environmental groups, including Greenpeace UK, Friends of the Earth Scotland and 350.org, which have backed the Paid to Pollute campaign targeting the subsidies handed to fossil fuel firms.

Despite losing the case, the trio – CommonWeal organiser Kairin Van Sweeden, Edinburgh University medical student Mikaela Loach, and former oil worker Jeremy Cox –  said they felt vindicated that the government had conceded that oil companies could profit from the UK’s tax regime.  

“The court also accepted that oil and gas companies may receive more pay-outs in public money than they pay in tax,” they said. “While the court did not think this is unlawful, we think this is completely unacceptable in a time of bumper profits for oil and gas companies and during a climate emergency.

“The court may not have agreed with the legal arguments, but the costs of subsidising oil and gas production are now a matter of the public record.”

Rowan Smith, a solicitor from law firm Leigh Day, which represented the claimants, said the court had “misconstrued” the claimants’ case.

“We consider that the court’s conclusion that it is not its role to interpret the meaning of MER as a statutory term, runs contrary to established principle,” he said. “We also consider that, in reaching its findings, the court appears to have misconstrued the claimants’ case. It was not about how taxes are set, rather it was the OGA’s failure to consider the effects of taxation as part of its MER assessment, which rendered the strategy unlawful.”

In December, the government announced all fossil fuel licensing rounds would be subject to a new ‘climate compatibility checkpoint’, which would require oil and gas projects to meet six different climate-related conditions to secure government approval. However, it is yet to finalise the details of how the new checks will work, fuelling concerns among environmental groups that putative CCS projects could be used to justify continued investment in new gas extraction projects.

Cox said the government would need to revisit the OGA’s ‘maximum economic recovery’ strategy if it wanted the new checks to be credible. “Whatever the outcome of our case, the government has to revisit the principle of MER, otherwise the check will be pointless,” he said. “MER is plainly incompatible with the Climate Compatibility Checkpoint, as well as with the UK’s net zero commitment, the nationally determined contribution and ‘keeping 1.5 alive’.”

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