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You are here: Home / Blog / Window for a Scottish natural resource fund closing

Window for a Scottish natural resource fund closing

January 24, 2016 by Frederik Gammelby Jensen Leave a Comment

For almost as long as Scotland has been an oil producing country, there has been an on-going discussion as to whether it should set up a natural resource fund like that of the Norwegian Government Pension Fund.

This puts oil revenues into a state-owned capital investment fund that is now worth £540bn (NKR7trn).The revenues are then placed in other industries, which traditionally are less volatile to oil price fluctuations, thereby securing an increased investment return, once assets are being resold.

The Norwegian fund is thus not only ever growing because of the constant influx of oil revenues to the fund, it also grows because of the increased returns of these investments. In other words, the fund ensures that once Norway’s giant oil reserves have been depleted, future generations of Norwegians will also benefit from the oil – as will pensioners.

Could energy rich Scotland then follow the Norwegian example? Under the fact page about energy on the official Scottish Government website, it says Scotland possesses nearly 60 per cent of all oil reserves found within the EU. Safe to say, the potential to create an oil fund has certainly always been there. However, in light of recent events, one might argue the time to do so is running out for Scotland.

December 2015 saw the climate summit COP 21 producing an effectively worldwide agreement to keep global temperature rises at 2°C and preferably no more than 1.5°C over the next 100 years, compared to pre-industrial temperature levels. On top of that, oil prices are the lowest in more than a decade. In that light, the current global political and economic climate is not exactly favouring a Scottish pension fund based on oil revenues.

A renewables fund instead?

On the other hand, who says a potential government-owned natural resource fund is therefore dead when taking into account the potential for renewable energy in Scotland? Who says revenues cannot come from multiple sources, renewables as well as fossils?

The potential for renewable energy in Scotland is huge, where hydro, wind as well as tidal and wave energy makes the Scottish Government’s ambition of generating 100 per cent of gross annual electricity consumption by 2020 an ambitious but realistic goal.

Could Scotland therefore impose an energy export tax, ensuring that when Scotland sells its excess renewable energy to neighbouring countries, a small sum of money could continuously be transferred into a Scottish natural resource fund?

This would ensure a constant influx of revenues into this potential Scottish energy fund, without Scots ever having to worry whether resources could be depleted.

In other words, as long as the wind keeps the windmills spinning, Scotland could have a continuously growing government pension fund, provided this state-owned fund is set up under proper legal terms. In theory, the thought of a primarily renewables-based fund is highly attractive.

Though Scotland has a highly developed renewable energy potential, there are still some pressing practical matters that could render the creation of a Scottish natural resource fund problematic.

First and foremost, there is the whole matter of how renewables are produced and traded. One could imagine that imposing an energy export tax would not only upset Scottish energy producers, but also consumers in Scotland’s neighbouring countries. A worst case scenario is that an export tax on renewables would be a rather short-sighted way for Scotland to earn money, as it is likely that Scotland’s neighbours would merely buy more energy from other, cheaper producers.

Furthermore, there are a number of other more pressing political problems, which stand in the way of a Scottish resource fund.

Control is key

Energy policy, above all, still lies with Westminster, while energy planning is a devolved matter. If and the Scotland Bill, however, is passed, Clauses 40-42 within it will pass on the management of fossil exploitation licenses to the Scottish government: a potentially big step in the direction of setting up a Scottish natural resource fund.

Secondly, if Holyrood has the goal of 100 per cent of Scottish annual energy consumption coming from renewable sources, there must surely be a potential and incentive for both the Scottish energy industries and Scotland itself to produce more energy than it itself can consume?

Being wholly reliant on renewable energy sources is not necessarily the same as saying Scotland will be able to fuel its own consumption with self produced renewable energy. If the renewable sector must contribute to a Scottish fund, this means that a lot of the energy produced must be sold off to Scotland’s neighbours, thereby leaving an energy supply gap to be filled, which will most likely entail buying energy from mainly England.  This will naturally also limit the profits of the energy exported.

In a 2012 report, the trade union Unison in Scotland raised concerns about whether Scotland in the future would thus face a trade-off, increasing energy imports in turn for job creation in the important Scottish energy export industry. If a fund is thus created, this is a new policy problem that Holyrood will have to face.

The primary problem for the creation of a Scottish natural resource fund is, therefore, that in order for a fund to work under optimal conditions, Scotland must first and foremost be able to supply itself with – and control – energy.

Norway’s natural resource fund, the Government Pension Fund, works because the state has a clear ownership of its own resources, and a dominant state-owned oil company, Statoil, sits on around 80 per cent of Norwegian oil production and channels revenues into the Fund.

There are doubts about whether setting up a fund in the current devolved state of Scotland is even possible. As long as Scotland is not fully in control of its own energy resources and policy, the potential to create a fund, which could benefit Scotland for generations to come, looks bleak.

The thought of a Scottish natural resource fund is highly attractive but the window of opportunity to create such a fund is closing.

 

 

Filed Under: Blog, Economics, European Union, Independence, Policy, UK Tagged With: Norway, renewable energy, Scotland Act, Scottish Government

About Frederik Gammelby Jensen

Frederik Gammelby Jensen holds a bachelor's degree in Public Administration and a master's degree in European Studies from Aalborg University in Denmark. He is currently a MA student in journalism at Edinburgh Napier University, Scotland

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