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Energy - Taking forward our National Conversation

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3 Commission on Scottish Devolution

Chapter Summary

  • This chapter discusses the conclusions of the Commission on Scottish Devolution on energy matters, and gives a picture of what Scotland would be like if the Commission's recommendations were implemented.
  • The Scottish Government continues to believe that greater responsibilities on energy matters, and in particular the creation of an oil fund for Scotland, would be in the economic interests of Scotland.

3.1. The Commission on Scottish Devolution 15, commonly referred to as the Calman Commission after its Chairman Sir Kenneth Calman, was established in 2008. Its remit was:

To review the provisions of the Scotland Act 1998 in the light of experience and to recommend any changes to the present constitutional arrangements that would enable the Scottish Parliament to serve the people of Scotland better, improve the financial accountability of the Scottish Parliament, and continue to secure the position of Scotland within the United Kingdom.

3.2. As part of this remit, the Commission report considered the question of the extent to which there should be any change to the current constitutional arrangements regarding energy matters. Specifically, it considered the question as to how taxation revenue from oil and gas could be treated in the future, as well as the question of whether there should be additional responsibilities devolved to the Scottish Government in wider aspects of energy. It did not consider these issues in the context of either independence or federalism.

Oil and Gas

3.3. Currently, the majority of policy responsibility relating to the North Sea oil and gas sector, including decision on taxation matters and regulatory matters, is reserved to the UK government. Tax receipts from oil and gas in the UK Continental Shelf ( UKCS) are treated as assets of the whole UK and not assigned to particular geographical regions. Historically, the oil and gas industry has been highly profitable and therefore generates considerable tax revenue.

3.4. Oil and Gas taxation is an obvious area for detailed discussion around additional responsibilities given the fact that the majority of North Sea oil and gas production is from areas which would be classified as comprising Scotland's geographical share of the UK Continental Shelf ( UKCS), as well as the fact that significant reserves still remain to be exploited. For example Kemp and Stephen (2008) 16 have estimated that over the period 2009 to 2013, Scotland's geographical share of oil production is estimated to remain relatively fixed at approximately 96 per cent of the UKCS total, while the share of gas production is estimated to rise from 63 per cent to 67 per cent. Since 1980, around 90% of North Sea tax revenue has been generated in 'Scottish' tax waters: this corresponds to approximately £230bn in 2008 price.

3.5. The Commission on Scottish Devolution commissioned a report from an Independent Expert Group to consider the issue of North Sea taxation and revenue in more detail 17.

3.6. The Expert Group's report argued that, as natural resources represent an immobile tax base, they can be an attractive element of the tax system to devolve. The group also suggested that, since the then Scottish Office and Scottish local authorities had undertaken a significant proportion of the investment in the onshore infrastructure necessary to undertake exploration in the UKCS, there was an argument for Scotland to receive a hypothecated share of the related tax revenues. In addition, as regions in which oil and gas exploration occur can suffer disruption from loss of incomes and employment when resources are exhausted, the expert group argued that there may be a benefit in using a proportion of the natural resource revenue to help support the surrounding economies when production declines. The expert group also supported the principle of creating an oil fund, noting that such a fund can be used to help offset the decline in a country's capital stock which occurs through the depletion of non renewable natural resources.

3.7. The Expert Group concluded that, in principle, it would be possible to construct and implement a basis for identifying the Scottish share of UK oil and gas taxation. However, they also noted that assigning oil and tax receipts would expose the Scottish Government budget to significant revenue variation, and that the Scottish Parliament would have to be given increased borrowing powers to mitigate these risks.

3.8. Whilst the Expert Group noted that it would be technically possible to devolve North Sea taxation, and that there were economic arguments for doing so (albeit with some issues that would have to be dealt with), the Calman Commission decided to recommend that they should remain reserved. The Commission also chose not to recommend the creation of a Scottish oil fund.

3.9. The Scottish Government disagrees with the final recommendation of the Commission and believes that Scotland should have responsibility for the oil and gas sector in Scottish waters, including the fiscal regime in which it operates. In our view, there is a strong case for Scotland to have greater control of North Sea taxation and licensing. There is precedent for such a trend; In Northern Ireland, for example, where petroleum licensing (onshore) has been devolved for a number of years.

3.10. In particular, we believe that the creation of an oil fund for Scotland would be in the economic interests of Scotland. It could be established for Scotland as part of the UK, or as the fund of an independent or fiscally autonomous Scotland. Furthermore we believe that the North Sea fiscal regime should be devolved and that Scotland should get a geographical share of North Sea revenue. Further details on the proposal for an oil fund are given in Chapter 4.

Other Energy Matters

3.11. The Commission also considered the issue of electricity generation and supply issues, including transmission charging as well as consideration of the current planning responsibilities as they relate to energy.

3.12. Although energy is generally reserved, some energy matters have been executively devolved to Scottish Ministers. These are the Renewables Obligation in Scotland, responsibility for consent for power stations of over 50 MW onshore, and over 1 MW offshore or on inland waters (under section 36 of the Electricity Act 1989) and responsibility for consents for overhead power lines of more than 20 KV (also under the Electricity Act). Responsibility for consents for power stations below this threshold has also been devolved as part of town and country planning legislation (for onshore consents), and under the Food and Environment Protection Act 1985 (for offshore consents).

3.13. The report concluded that there was a strong case for a single UK market remaining with regard to the generation, transmission, distribution and supply of electricity although the important role that the Scottish Government has to play in terms of renewable energy and dealing with the climate change challenge needs to be recognised.

3.14. The report highlighted the point raised by some parties who submitted evidence to the Commission that the Scottish Government through its planning powers could be said to have frustrated policy in a reserved area; in this instance decisions regarding nuclear power in the UK. In relation to this point, the Commission made the point that the current devolved position will always provide a certain degree of tension between reserved and devolved competences. The Commission stated that the use of inter-governmental mechanisms be considered in such situations. In relation to planning, the Commission stated that there is no case for any change in the planning laws.

3.15. The Commission report stated that they had received some evidence calling for greater devolution over energy matters, while alternately other submissions had stressed the need for a cross-border energy network. The Commission stated that it had not received evidence making a positive or detailed case against the current reserved position of many aspects of energy policy. The report concluded that the current position had facilitated initiatives such as the establishment of the British Electricity Trading and Transmission Arrangements ( BETTA), which had created a single wholesale electricity market across Great Britain, leading to greater competition in the generation and supply of electricity, and also leading to economies of scale in transmission systems. The Commission stated that this avoided the need for separate arrangements for interconnection between the transmission systems in England and Wales and Scotland and allowed the costs of upgrades to be spread across all GB users of the system.

3.16. In relation to the specific issue of transmission charging, which in the view of the Scottish Government currently places Scotland at a significant disadvantage, the Commission noted that this was an issue for many of those who gave evidence to it but it did not feel that this was a subject which was within the Commission's remit.

3.17. Overall, the Commission stated that a UK-wide approach to electricity supply was

'Essential for ensuring a continuing national supply that international targets and obligations are met and that consumers have access to a competitive and modern energy market. Whilst current arrangements rely upon, and to that degree, encourage close working and cooperation between the UK and Scottish Governments both of which exercise competence in areas consistent with their responsibilities under the devolution settlement, it is appropriate for the UK government to retain reserved powers over energy'.

3.18. The Commission concluded overall that in terms of energy supply, the current arrangements remained appropriate and provided a balance between responsibilities appropriately exercised at devolved and reserved levels. The Commission emphasised the importance of effective inter-governmental relations and an ongoing process of engagement. It recommended in particular greater cooperation between Scottish and UK institutions on energy matters.

3.19. Overall, the conclusions of the Commission as they relate to energy would not envisage any significant change in the current arrangements and constitutional position. It is the view of the Scottish Government that this position fails to recognise the potential that Scotland has in energy, as set out in the previous section, to make a significant contribution towards meeting the low carbon challenges of the future and also to ensure that the potential Scotland has as an energy rich nation be capitalised upon for economic growth.

Summary

The key recommendations of the Calman Commission are:

  • The Commission recommended that North Sea taxation should remain reserved.
  • The Calman Commission chose not to recommend the creation of a Scottish oil fund, despite their Expert Group supporting the principle of an oil fund.
  • The Commission concluded that there was a strong case for a single UK market remaining, although the role of the Scottish Government in terms of renewable energy and dealing with climate change needs to be recognised.