OT21750 - Energy Profits Levy: Meaning of decarbonisation expenditure
Source: gov.uk (2025-11-20)


Overview of the decarbonisation allowance

The decarbonisation allowance was introduced by FA(No2)23\S12 and is available for qualifying decarbonisation expenditure incurred on or after 1 January 2023. The allowance is set at a rate of 80% and applies to expenditure incurred on the decarbonisation of a company's upstream production (EPLA22\S2(3)(a)).

The decarbonisation allowance follows similar principles to those of the main EPL investment allowance (see OT21730 (https://www.gov.uk/hmrc-internal-manuals/oil-taxation-manual/ot21760)). To qualify for decarbonisation allowance, expenditure:
- must be capital expenditure. There is no relief for operating or leasing expenditure. “Capital expenditure” is discussed in OT21735 (https://www.gov.uk/hmrc-internal-manuals/oil-taxation-manual/ot21735);
- must be incurred for the purposes of oil-related activities (see OT21755 (https://www.gov.uk/hmrc-internal-manuals/oil-taxation-manual/ot21755)). Expenditure that is incurred only partly for the purposes of oil-related activities must be apportioned on a just and reasonable basis (EPLA22\S2(4) (se, OT21755 (https://www.gov.uk/hmrc-internal-manuals/oil-taxation-manual/ot21755)).
- must not include financing and decommissioning costs (see OT21765 (https://www.gov.uk/hmrc-internal-manuals/oil-taxation-manual/ot21765), OT21780 (https://www.gov.uk/hmrc-internal-manuals/oil-taxation-manual/ot21780) and OT21785 (https://www.gov.uk/hmrc-internal-manuals/oil-taxation-manual/ot21785)); and
- must not be incurred for disqualifying purposes (see OT21760 (https://www.gov.uk/hmrc-internal-manuals/oil-taxation-manual/ot21760)).
Further to these requirements, EPLA22\S2A(1) sets out that expenditure incurred by a company is on the “de-carbonisation of its upstream petroleum production” if:
- it is incurred in qualifying circumstances; and
- the main purpose, or one of the main purposes in incurring the expenditure, is to reduce greenhouse gas emissions in the carrying on by the company of its ring fence trade.
Further to the EPLA22\S2(4) requirement for just and reasonable apportionment if the expenditure in incurred only partly for the purposes of oil-related activities, expenditure that is only partly capital expenditure on the decarbonisation of its upstream production should be apportioned on a just and reasonable basis EPLA22\S2(4A).

The main purpose test

For relief to be available, the main purpose, or one of the main purposes, in incurring the expenditure must be to reduce greenhouse gas emissions in the carrying on by the company of its ring fence trade (EPLA22\S2A(1)(b)).

‘Ring fence trade' includes certain activities giving rise to tariff receipts which are treated as oil extraction activities under s.291(6) CTA10. Further guidance on the meaning of ringfence trade can be found in OT21002 (https://www.gov.uk/hmrc-internal-manuals/oil-taxation-manual/ot21002) onwards.

‘Greenhouse gas’ is defined at EPLA22\S2A(5) and has the same meaning as it has in the Climate Change Act 2008\S92 (CCA08). In that Act ‘greenhouse gas’ means any of the following:
- carbon dioxide (CO)
- methane (CH),
- nitrous oxide (NO),
- hydrofluorocarbons (HFCs),
- perfluorocarbons (PFCs),
- sulphur hexafluoride (SF),
- nitrogen trifluoride (NF).
‘Emissions’ is defined at EPLA22\S2A(5) by reference to s.97 of the CCA08 and means emissions of that gas into the atmosphere that are attributable to human activity.

Reducing greenhouse gas emissions in the carrying on by the company of its ring fence trade does not need to be the only main purpose in incurring the expenditure; it can be one of the main purposes in incurring the expenditure. For example, the main purpose in acquiring an alternative energy asset may be to provide power to enable the company to undertake oil extraction activities, but this does not prevent there also being a main purpose of reducing greenhouse gas emissions if there is evidence to support this.

Example:

Company A uses a diesel generator to power its platform which it uses for the extraction of oil. The generator is approaching the end of its useful life and the company is considering options on how to power its platform in the coming years. The company also wants to reduce its greenhouse gas emissions from its ring fence trade and decides to invest in a new generator that is powered mainly by non-fossil fuel sources. There is a main purpose of investing in the new generator to ensure that the platform can still be powered once the diesel generator is no longer in use. However, this does not preclude the purpose test being met provided that greenhouse gas emissions reduction is also one of the main purposes of investing in the new generator.

The main purpose test and new oil field developments

For new field developments, production activities may not have started and therefore there may not be any existing greenhouse gas emissions in that new field development to benchmark a reduction in emissions against. However, expenditure can still qualify for the allowance in new field developments provided that the main purpose or one of the main purposes of incurring the expenditure is to reduce the greenhouse gases that would have been emitted in the absence of incurring the expenditure.

Example:

Company B is developing a new oil field. The company wants to limit greenhouse gas emissions from its production in the new field. It decides to power one of its platforms by installing a dedicated floating wind turbine. Provided that the main or one of the main purposes of installing the floating wind turbine is to reduce the greenhouse gas emissions that would arise from its ring fence trade activities in that new field then the decarbonisation allowance will be available for expenditure:
- on the provision of the floating wind turbine (as an alternative energy asset), and
- on the provision of necessary cables or other assets to connect the wind turbine to the platform power system.
Evidencing a main purpose to reduce greenhouse gas emissions

There are a number of ways in which a main purpose, or one of the main purposes to reduce emissions could be demonstrated. Examples may include information contained in Field Developments Plans or Field Development Plan Addendums, Emissions Reduction Action Plans, project plans and relevant meeting minutes. This list is non-exhaustive and is for illustrative purposes only.

Meaning of ‘qualifying circumstances’

Expenditure must be incurred in qualifying circumstances (EPLA22\S2A(1)(a)). Expenditure is incurred in qualifying circumstances where one or more of the following applies:
- It is incurred on the provision of an alternative energy asset which is to be used for the purpose of generating or storing power for use by the company in its upstream petroleum facilities (EPLA22\S2A(2)(a)). An alternative energy asset is defined as an asset that generates or stores power (wholly or mainly) from sources of energy other than fossil fuels (EPLA22\S2A(3)). ‘Fossil fuel’ is defined in EPLA22\S2A(5) by reference to Electricity Act 1989\S32M and includes: coal, lignite, natural gas, crude liquid petroleum, petroleum products, or any substance (other than bioliquid), produced directly or indirectly from these substances. For the meaning of ‘upstream petroleum facilities’ please see ‘meaning of upstream petroleum facilities’ section below. Examples of an alternative energy asset include wind turbines, solar panels, a generator powered wholly or mainly from non-fossil fuel sources or a battery storage asset where the power stored is wholly or mainly derived from sources of energy other than fossil fuels.
- It is incurred on the modification of an asset so that it becomes an alternative energy asset which is to be used for the purpose of generating or storing power for use by the company in its upstream petroleum facilities (EPLA22/S2A(2)(b)). An example is making modifications to a generator powered by fossil fuels so that it is powered, wholly or mainly, by sources of energy other than fossil fuels.
- It is incurred on the provision of an asset (such as a cable or substation) where the asset is to be used to make a connection to the electric grid or to an alternative energy asset so that (in either case) the company can use the power generated in its upstream petroleum facilities (EPLA22\S2A(2)(c)). This does not include expenditure on the provision of assets that are to be used to export energy to the electric grid or to any third party. Examples include cabling and other assets to connect to a company’s alternative energy asset or a third party’s (such as a wind developer) alternative energy asset as well as cabling needed to receive electricity from the electric grid to power production activities. The expenditure in connecting to the electric grid does not need to evidence a non-fossil fuel source but will still need to meet the main purpose test such that the main or one of the main purposes of incurring the expenditure is to reduce greenhouse gas emissions. The ‘electric grid’ is defined at EPLA22\S2A(5) as anything which is a transmission system, or a distribution system connected to a transmission system as defined in Part 1 of the Electricity Act 1989 or Part 2 of the Electricity (Northern Ireland) Order 1992.
- It is incurred for the purpose of reducing or eliminating flaring or venting (EPLA22\S2A(2)(d)). Examples include flare gas and vapour recovery units and reinjection facilities.
- It is incurred for the purpose of capturing greenhouse gas emissions (EPLA22\S2A(2)(e). This only includes expenditure incurred for the purposes of capturing greenhouse gas emissions from the company’s oil related activities. Note that where carbon capture is carried out as a separate trade, any expenditure related to that trade will not meet the main purpose test.
- It is incurred for the purpose of monitoring or measuring greenhouse gas emissions (including with a view to detecting leaks of greenhouse gas emissions from the company’s upstream petroleum facilities) (EPLA22\S2A(2)(f)). Examples include gas imagery equipment or leak detection systems. Please note that expenditure on this equipment will only meet the main purpose test of reducing greenhouse gas emissions from the carrying on of the ring fence trade where the equipment is to be used to identify emissions or leaks with the aim of taking action to reduce those emissions or leaks.
Meaning of ‘on the provision of’

'On the provision of' as used in EPLA22\S2A(2)(a) and (c) has the same meaning as it does for capital allowances. There is no requirement that for expenditure to be 'on the provision of' an asset that the expenditure must lead to ownership of the asset. Further guidance on the meaning of 'on the provision of' can be found in CA20060 (https://www.gov.uk/hmrc-internal-manuals/oil-taxation-manual/ot20060) and in CA20070 (https://www.gov.uk/hmrc-internal-manuals/oil-taxation-manual/ot20070).

Meaning of generating or storing power ‘wholly or mainly’ from non-fossil fuels

For an asset to be or to become an alternative energy asset that asset must generate or store power wholly or mainly from sources of energy other than fossil fuels (EPLA22\S2A(3)). Non-fossil fuel sources of power include renewable energy such as wind power, solar power, tidal energy and bioenergy.

Example:

Company C uses a diesel generator to power its oil extraction activities and is considering options on how to reduce its greenhouse gas emissions. Company C decides to make modifications to the diesel generator so that it can be powered partly by biofuel and partly by diesel. Following the modifications, the generator is now powered 20% by biofuel and 80% by diesel and we assume for the purposes of this example that the purpose test is met. However, the expenditure has not been incurred in ‘qualifying circumstances’ and the 80% allowance will not be available as the generator is still powered mainly by fossil fuel sources and therefore has not met the definition of an alternative energy asset. The expenditure on the modification may still qualify for 29% allowance provided all conditions are met. Further guidance on 29% investment allowance can be found in OT21730 (https://www.gov.uk/hmrc-internal-manuals/oil-taxation-manual/ot21730).

If the modification led to the generator being powered 80% by biofuel and 20% diesel, then the asset would meet the definition of an alternative energy asset. Assuming that all other conditions are met, the 80% allowance would be available as it would be powered mainly by sources of energy other than fossil-fuels.

Meaning of ‘upstream petroleum facilities’

Expenditure incurred on the provision of an alternative energy asset, on a modification to an asset so that it becomes an alternative energy or on the provision of an asset such as a cable or substation will only qualify where the power generated or stored is to be used in the company’s upstream petroleum facilities.

An upstream petroleum facility is any ‘facility’ used by the company for the purposes of its oil extraction activities (EPLA22\S2A(4)). Facility is defined in EPLA22\S18(1) and covers a platform (whether fixed or floating), an oil well, a platform well, an oil well head or upstream petroleum infrastructure.

Upstream petroleum infrastructure is defined in EPLA22\S18(1) and means any upstream petroleum pipeline, oil processing facility or gas processing facility (as defined by the Energy Act 2011\S90 but as if that section also applied, with the appropriate modifications, to Northern Ireland).

Expenditure that is only partly expenditure on the decarbonisation of upstream petroleum production

Where a company incurs expenditure part of which is capital expenditure on the decarbonisation of its petroleum production and part of which is not, the expenditure must be apportioned on a just and reasonable basis (EPLA22\S2(4A)). The part of the expenditure which is not may still qualify for the main 29% investment allowance provided the conditions at EPLA22\S2(2) are met. This apportionment is in addition to the apportionment required where expenditure is incurred only partly for the purposes of a company’s oil related activities (EPLA22\S2(4)). Please see OT21755 (https://www.gov.uk/hmrc-internal-manuals/oil-taxation-manual/ot21755).

Example:

Company D incurs £1 million on making modifications to its diesel generator. The expenditure incurred is partly for the purposes of making changes to the generator so that it can be powered mainly by non-fossil fuel and partly for the purposes of other modifications and repairs that are not related to changing the fuel source. Only the expenditure incurred for the purposes of modifying the generator so that it can be powered by a non-fossil fuel source will qualify for decarbonisation allowance provided all other conditions are met. Therefore, the £1 million incurred on the modifications should be apportioned on a just and reasonable basis. It is agreed that £700,000 is capital expenditure incurred on the modification so that the generator can be powered mainly by a non-fossil fuel source. Therefore, only £700,000 of the total expenditure qualifies for the decarbonisation allowance. Of the remaining £300,000, £150,000 is capital expenditure incurred on separate modifications which do not contribute to the generator becoming an alternative energy asset. However, it may qualify for the 29% allowance. The remaining £150,000 is routine repair and maintenance expenditure and does not qualify for any allowance.