Fossil fuel companies won’t drive the green transition — so the state must

BP's latest profits demonstrate that fossil fuel companies are structurally incapable of leading the clean energy transition. Only a state-led programme of transformative investment can deliver it.
Joseph Evans

Financial markets recently opened to the news that British Petroleum, the UK-based fossil fuel giant, made its second-highest profit margin in a decade. BP recorded £11 billion in profit in 2023 on the back of another year of high oil and gas prices.

The announcement was not an anomaly: fossil fuel companies have been making extraordinary profits since the pandemic. In the last two years BP and Shell, the other leading fossil fuel multinational headquartered in London, both announced their two highest annual profit margins for more than a decade.

With oil and gas remaining highly lucrative, this period has proved treacherous for the transition to clean energy. BP spent seven times as much last year on new fossil fuel production as it committed to “low carbon” investments. It also paid out ten times as much to shareholders through dividends and buybacks.

A Shell oil refinery. The fossil fuel giant invested four times into fossil fuels as renewables in 2023. Image: Flickr/James Daisa.

Other fossil fuel companies are doing exactly the same. After making £22.3 billion in profit last year, Shell invested four times as much into fossil fuels as renewables and spent more than eight times as much on their shareholders.

This means that wealth has been funnelled from ordinary households, via higher gas and electricity prices, to the shareholders of major energy companies like BP and Shell. The energy crisis has therefore not just disrupted our progress in transitioning to a clean energy system: it has also resulted in economy-wide redistribution in precisely the wrong direction.

Above all, this period has demonstrated that fossil fuel companies are structurally incapable of leading the clean energy transition. It is becoming increasingly clear that only a state-led programme of transformative green investment can deliver it.

Fossil fuel companies are ‘cash machines’ for shareholders

At the start of the energy crisis, BP’s former chief executive Bernard Looney described the company as a “cash machine”. His words have proved prophetic. Investors in fossil fuel companies have received enormous pay-outs since energy prices skyrocketed.

Climate protestors outside Shell's annual general meeting in 2021. Image: Flickr/Code Rood.

Judging by BP’s recent financial accounts, the Institute for Public Policy Research (IPPR) calculates that the petroleum giant transferred £6.2 billion to shareholders last year through ‘share buyback schemes’. Buybacks essentially allow companies to return profits to their shareholders by repurchasing stock from some of their investors. By our calculations, Shell also spent £11.5 billion on share buybacks last year.

When a company like BP or Shell chooses to repurchase billions of pounds of its own shares through a buyback scheme, this signals that it can find no better investment of this surplus than in funnelling money to its investors. Buyback programmes reduce the total number of outstanding shares, thereby spreading the company’s value over fewer holdings and inflating the value of each shareholder’s remaining assets.

Buybacks were illegal in the UK until 1981 because they were considered to be a form of market manipulation, before Margaret Thatcher's government swept aside restrictions on the financial decisions of business executives. Many companies listed on stock exchanges around the world now use buybacks to inflate their share price. This enriches investors, board members – and executives, whose remuneration is often partially paid in stock options.

Margaret Thatcher's government legalised share buyback schemes in 1981. Image: Flickr/Levan Ramishvili.

Direct ownership of UK shares is overwhelmingly dominated by the richest 1% of households. By contrast, UK pension funds hold a tiny fraction – less than 0.2% – of the shares of BP and Shell. This means that the perverse, upward redistribution of the energy crisis is enriching shareholders who are, by and large, already very wealthy.

This dramatic accumulation of wealth by a handful of investors shows no signs of slowing. BP has committed to buying back another £11 billion of its shares by the end of next year as part of its drive to return “at least 80% of surplus cash flow to shareholders”.

Bad for working people, bad for the climate

All this makes from grim reading at a time when over three million in homes in the UK are in fuel poverty and nine million homes are spending more than 10% of their income on energy bills. To make matters worse, when energy giants hand cash to shareholders, this also comes at the expense of the green transition.

With eye-watering profits to be made from oil and gas, fossil fuel executives show no signs of driving the transition towards renewable energy. After reporting record profits last year, BP’s CEO announced that the company would scale back its commitment to cut oil and gas production. Shell followed suit last summer, dropping its plan to reduce the amount of oil it produces until 2030.

These decisions are shocking but they should not come as a surprise. It’s naïve to expect profit-driven multinationals to lead the transition away from the lucrative commodities on which their business models depend, especially while oil and gas prices remain so high. Shareholders want to maximise returns on their investments and executives are beholden to their short-term interests.

With eye-watering profits to be made from oil and gas, fossil fuel executives show no signs of driving the energy transition. Image: UnsplashZbynek Burival.

BP’s CEO Murray Auchincloss has confirmed as much, declaring after their latest profit announcement that the company “will go for the highest return and highest value projects”.

At the same time, renewables companies are finding it more difficult to build new sources of clean energy. Renewables generate cheaper energy when they are operational, but high interest rates and supply chain issues are making the costs of building and installing them prohibitive. A spate of green energy businesses have recently abandoned their plans to build renewables because of these new cost pressures.

All of this points to an unsettling truth: that the phasedown of fossil fuels is heading in the wrong direction.

The green transition requires government intervention

With fossil fuel companies doubling down on oil and gas and the cost of installing new renewables becoming prohibitive for green energy companies, it is clear that private businesses are incapable of driving the transition to net zero on their own. The government must urgently step in to correct course.

The government could fund a large-scale programme of public investment in renewables, in part by targeting the excessive pay-outs the likes of BP and Shell make to their shareholders. Image: Unsplash/Zbynek Burival.

The state could drive a significant programme of investment in renewables, like we’ve seen in America with the Inflation Reduction Act. This will require breaking with the UK’s recent history of low public and private investment.

The bad news is that neither major political party has a plan for sufficient green public investment, after the Labour Party scaled back its ‘green prosperity plan’.

The good news is that there is an alternative. The government could fund a large-scale programme of public investment in renewable energy and net zero, in part by targeting the excessive pay-outs that companies like BP and Shell make to their shareholders.

The government could also introduce a number of taxes on shareholder pay-outs. When shareholders receive pay-outs, they are taxed at lower rates than those of us who earn wages or salaries. This means that an investor in BP or Shell can profit from our rising energy and fuel bills while paying less tax than us. If the government closed this loophole by taxing dividends at the same level as people’s incomes it would raise £6 billion every year.

We could also follow the example set by America by raising taxes on share buybacks. President Joe Biden has proposed a 4% tax on buybacks to raise billions for clean energy projects. An equivalent measure introduced in the UK would raise around £2 billion every year.

Taken together, these measures could fund an additional £8 billion of green public investment every year, at no additional cost to working people.

What’s lacking clearly isn’t solutions but political ambition. Politicians must urgently grasp the scale of the challenge and commit to investment that matches the scale of the climate crisis. Only a state-led green investment programme can deliver the clean energy system of the future.

Joseph Evans is a researcher at IPPR. His work focuses on policies which rebalance economic power to workers and citizens and which deliver a just transition.

Feature image: Unsplash/Karsten Würth.

Joseph Evans

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