By Lucas Amin: Britain’s biggest polluters are being handed the equivalent of £10bn under a little-known government scheme that is supposed to help tackle climate change.

The UK oil and gas industry – which has made vast windfall profits this year – netted the largest share of the government handouts, with Ineos, ExxonMobil and Saudi Aramco securing lucrative ‘pollution permits’ free of charge.

The UK’s Emissions Trading Scheme (ETS) is a ‘cap and trade’ policy that sets a binding limit on the amount of carbon companies can emit. Major polluters must obtain government permits for every tonne of carbon dioxide they emit.

Permits are sold at auction by the government – which effectively imposes a carbon ‘tax’ – while unused permits can be resold on an approved secondary market, creating financial incentives for companies to reduce their emissions.

However, data obtained and analysed by openDemocracy reveals that the government gave away 38 million pollution permits to Britain’s biggest polluters for free last year.

The average cost in 2021 of a single permit on the carbon market was £55.56 – giving the permits an approximate value of more than £2bn.

The government has pledged to give away 150 million further free permits over the next four years, which, at last year’s prices, will be worth more than £8bn. The real value is likely to be higher, however, as the average carbon price in 2022 is already up 25% on last year.

The Department for Business, Energy and Industrial Strategy (BEIS) told openDemocracy that a “proportion of ETS allowances are allocated to businesses to support the transition to net zero”. They added that the free permits were allocated to stop “carbon leakage” – whereby British firms simply move to jurisdictions with less punitive green laws.

But Greenpeace’s chief scientist and policy chief Doug Parr said: “While carbon leakage can’t be completely ruled out, emissions trading schemes have historically been far too generous in granting free allowances, ending up with fewer than one in ten industry permits being paid for.

“This undermines the ‘polluter pays’ principle and weakens the case for clean investment.”

Oil industry

The oil and gas sector was given 35% of last year’s free permits – more than any other sector – with a total estimated value of £740m. Among the biggest beneficiaries are firms in the Ineos Group, the petrochemicals giant founded by Brexit-backing billionaire Jim Ratcliffe, which netted an estimated £115m in free permits.

Many recipients of the free permits have posted windfall profits this year. ExxonMobil, which was given free permits worth £113m, reported a company record £13bn profits in the second quarter of 2022. An Exxon spokesperson stressed that while the company did receive millions of free ETS permits, it had also spent in excess of £100m through the scheme last year.

In some cases, free permits cover the vast majority of an industrial site’s emissions. Some 94% of the Humber Oil refinery’s emissions were covered by free permits – worth £100m – given to US oil company Phillips 66. Phillips 66 will receive the same number of free permits – 1,820,582 – for the next four years.

Critics say government support for the highly profitable oil industry removes the incentive to decarbonise.

Phil MacDonald, the chief operating officer of the energy think tank Ember, told openDemocracy: “Sheltering companies from the cost of carbon prevents them from innovating, and locks them into processes reliant on fossil fuels.”

Phillips66 did not respond to a request for comment from openDemocracy.

Revenue source

Global oil giants such as BP, Shell, and Total all received free permits worth tens of millions of pounds, while oil companies linked to Saudi Arabia and China also benefited.

A third of Ineos’ free permits (worth £40m) were allocated to a joint venture between Ineos and PetroChina, an oil company controlled by the Chinese state. SABIC UK Petrochemicals, which is owned by Saudi state oil company Saudi Aramco, received free pollution permits worth £36m.

Parr said the government was overlooking an important revenue source by giving away free permits so readily. “Failure to charge for or auction the bulk of industry allowances means the government is missing a source of revenue that could fund worker re-skilling programmes, investment into energy efficiency, and renewable energy rollout… right at a time when households are struggling and public finances are under massive strain.”

The steel and cement sectors took 27% and 16% of the permits, respectively, with chemicals, glass and fertiliser companies also receiving free permits.

Some companies argue that they need support to maintain their viability. Yet oil and gas companies are in record financial health due to the global energy crisis caused by the sanctions on Russia following its invasion of Ukraine.

The UK ETS, introduced last year, is closely modelled on the EU’s policy of the same name, which the UK left after Brexit.

The government has claimed that “our UK ETS is more ambitious than the EU system it replaces” – because it has an emissions cap that is 5% lower.

But the EU has voted to phase out free permit allocations from 2026. It also redistributes the revenues raised by permit sales to environmental projects – whereas in the UK the proceeds are retained by the Treasury.

The UK has run two consultations on reforming free allocations but is yet to announce an outcome. Earlier this month the independent Committee on Climate Change told BEIS that “the existing UK ETS cap is not consistent with the path to net zero” and encouraged the government to adopt a new policy for 2024 and beyond.

Lucas Amin is a reporter for openDemocracy’s investigations team