George Osborne unveils 'most generous tax breaks in world' for fracking

George Osborne has infuriated environmentalists by announcing big tax breaks for the fracking industry in a bid to kickstart a shale gas revolution that could enhance Britain's energy security but also increase its carbon emissions.

The Treasury has set a 30% tax rate for onshore shale gas production. That compares with a top rate of 62% on new North Sea oil operations and up to 81% for older offshore fields.

So far, no shale gas has been produced in Britain, but exploratory drilling is under way and the British Geological Survey recently whetted prospectors' appetites by revealing there could be huge resources waiting to be unlocked, possibly enough to supply the country for 25 years.

"Shale gas is a resource with huge potential to broaden the UK's energy mix," said the chancellor. "We want to create the right conditions for industry to explore and unlock that potential in a way that allows communities to share in the benefits.

"This new tax regime, which I want to make the most generous for shale in the world, will contribute to that. I want Britain to be a leader of the shale gas revolution – because it has the potential to create thousands of jobs and keep energy bills low for millions of people."

But the generous allowances were condemned by environmental groups worried about the chemicals used in fracking and fearful that burning more gas will make it impossible to hit carbon reduction targets designed to mitigate climate change.

It also comes after a survey showed that nearly 80% of those who were polled believed that the UK should reduce its reliance on fossil fuels.

Lawrence Carter, a Greenpeace energy campaigner, said: "The chancellor is telling anyone who will listen that UK shale gas is set to be an economic miracle, yet he's had to offer the industry sweetheart tax deals just to reassure them that fracking would be profitable.

"Experts from energy regulator Ofgem to Deutsche Bank and the company in receipt of this tax break, Cuadrilla, admit that it won't reduce energy prices for consumers. Instead we're likely to see the industrialisation of tracts of the British countryside, gas flaring in the home counties and a steady stream of trucks carrying contaminated water down rural lanes."

Andrew Pendleton, head of campaigns at Friends of the Earth, said it was a disgrace to offer handouts to polluting energy firms when the rest of Britain was being told to tighten belts. "Ministers should be encouraging investors to develop the nation's huge renewable energy potential. This would create tens of thousands of jobs and wean the nation off its increasingly expensive fossil fuel dependency," he said.

Tory MP Peter Lilley, a climate sceptic who is an adviser on foreign policy in No 10, also does not believe the industry needs government help: "I think tax breaks are unnecessary for fracking, based on my knowledge of the oil and gas industry," he said in a debate on shale gas in Westminster Hall last night. Lilley has been an energy industry analyst for more than 20 years, and has a financial interest in central Asian oil and gas.

There is widespread concern within austerity-hit Britain about growing energy costs at a time when the US has managed to drastically cut its gas bills due to huge amounts of shale fuels being produced from Texas to Pennsylvania.

A recent poll by researchers at Cardiff University and funded by the UK Energy Research Centre showed 79% of the 2,500 people surveyed across England, Scotland and Wales in August 2012 were against reliance on fossil fuels – but keeping energy prices low was the most important priority for 40% of respondents.

The coalition has often appeared split in the debate, with Tories arguing in favour of fracking and against more onshore wind power, while Lib Dems, including the energy secretary, Ed Davey, are supportive of green power and insist shale is unlikely to bring down household bills, now averaging almost £1,300 per year.

In a separate move that underlined declining confidence in some quarters about the ability of wind and solar to deliver large-scale new power generation at an acceptable cost, the National Grid has scrapped the greenest growth scenario from its energy planning models, saying the scenario is no longer credible. The company, which operates the pipes and pylons for UK energy infrastructure, said it would only use two, more modest, modelling options: "gone green" – under which carbon reduction targets are hit – and "slow progression" – where they are not.

It added: "We have dropped the accelerated growth scenario from 2012 which showed us exceeding the deployment of renewables ahead of the 2020 targets. This scenario has been retired based on stakeholder feedback which said that this was no longer a credible scenario."