Greening the Golden Goose: Designing a UK Fossil Fuel Fund Without Fueling Extraction
- Valentino Dawson
- Nov 14
- 5 min read
Could a UK fossil-fuel-based sovereign wealth fund be structured to avoid incentivising
prolonged oil and gas extraction?
Half a century after the North Sea oil boom, Britain again stands at a crossroads: between
perpetuating the short-termism of the 1980s or designing a sovereign wealth fund fit for a
net-zero long-term future. The UK remains reliant on North Sea oil and gas even as
production declines sharply, with output 42% below pre-pandemic levels and projected to fall 89% by 2050. At the same time, the government plans to ban new licences and pursue a
managed transition to net zero. In this context, the idea of a UK sovereign wealth fund
(UK-SWF), funded by remaining or future fossil fuel revenues, has gained traction as a tool to capture value for future generations. Nonetheless, such a fund poses a significant risk: if its revenues remain tied to extraction levels, it may inadvertently incentivise prolonged oil and gas production, undermining both climate goals and the rationale for the fund itself.
This brief asks: Could a UK fossil-fuel-based sovereign wealth fund be structured to
avoid incentivising prolonged oil and gas extraction? It proposes viable design options for a
UK sovereign wealth fund against three criteria:
Economic viability – the stability and longevity of revenue inflows
Environmental alignment – compatibility with the UK’s net-zero and decarbonisation
objectives
Institutional independence – mechanisms to insulate the fund and extraction policy
from short-term political incentives
The UK’s Extraction Paradox
The UK continues to depend on North Sea oil and gas even as it pledges to reach net-zero by
2050. According to the Department for Energy Security and Net Zero (DESNZ), indigenous
primary fuels production fell by 6.5% in 2024, reflecting a mature and declining basin, with
the North Sea Transition Authority projecting overall output to fall by 7-11% annually to
2030.
The UK’s petroleum tax base is shrinking fast, with receipts set to fall from £4.5 billion in
2024/25 to £2 billion by 2029/30, less than 0.1% of GDP. Temporary windfall taxes will also
end by 2030. Nevertheless, the statutory duty to “maximise economic recovery” of UK
Continental Shelf resources, embedded in the Petroleum Act (1998), still frames regulatory
decisions, implicitly rewarding continued production.
If a new UK-SWF’s income were pegged to extraction, the Treasury could face a fiscal
incentive to extend licences, delaying the transition. Research shows that easy oil revenues
can make governments dependent on extraction and slow the shift toward economic
diversification.
An International Precedent: Lessons from Norway
Despite this, Norway’s Government Pension Fund Global (GPFG) illustrates effective
decoupling. Established in 1996, it channels all petroleum taxes and state-company dividends into a fund invested exclusively abroad. A fiscal rule limits withdrawals to about 3% a year, keeping the budget stable regardless of oil prices or production levels. This design prevents political pressure for new drilling to finance spending. Moreover, since 2020 the GPFG has divested from pure-play oil exploration, and in 2022 set a net-zero 2050 portfolio goal. Norway’s approach demonstrates that rules-based deposits, offshore investment, and ethical mandates can eliminate fiscal incentives to prolong production.
Limits of Replication: UK and Other Models
However, applying this model to the UK presents limitations. Limiting deposits to existing oil and gas revenues would create only a modest fund, around £25-40 billion by 2040, raising
doubts about its scale and impact. While framing it as a “transition endowment” could build
public support, the small size may weaken its political appeal. There is also a risk that future
governments could divert revenues for short-term spending, unless strict deposit rules are
protected by law through a ‘North Sea Legacy Fund Act’.
While Norway offers a model of decoupling, other funds reveal the pitfalls of dependency.
For example, Gulf state funds, such as Saudi Arabia’s and Kuwait’s, still depend heavily on hydrocarbon revenue. Despite their vast assets (estimated $3.7 trillion collectively), continued state reliance on oil exports has slowed diversification. Similarly, the Alaska Permanent Fund (APF), financed by 25% of state oil royalties since 1976, shows a more mixed outcome. Although it transformed volatile oil rents into a $85 billion financial asset, annual citizen dividends have created political pressure to sustain production, entrenching a form of public extraction dependency. These examples confirm that fund design, not mere existence, determines whether a SWF mitigates or magnifies extraction incentives.
Policy Recommendations
Legacy-Revenue-Only Financing
Limit contributions to taxes and royalties from existing licences, codified in founding
legislation prohibiting new licences. This aligns with the IEA Net Zero by 2050 scenario,
which found that no new oil gas fields beyond those already approved are compatible with
global climate goals. Revenues would thus decline naturally with the basin, avoiding fiscal
motive to expand production.
Sunset and Trigger Clauses
Automatic cessation of deposits once production falls below a defined threshold or by a target year (e.g. 2045/2050). Such sunset rules, recommended by the OECD (2025), signal that the fund is a wind-down mechanism, not a perpetual extraction subsidy.
Independent Governance and Transparency
Create an independent UK ‘Sovereign Transition Fund Authority’ reporting to Parliament and audited by the NAO and OBR. Adopting the Santiago Principles ensures transparent
deposits, withdrawals, and portfolio disclosure. Regular publication of financed-emissions
data, akin to Norway’s Responsible Investment Report, would align the fund with the FSB’s
Task Force on Climate-related Financial Disclosures standards.
Conclusion
A UK fossil-fuel-based sovereign wealth fund can avoid incentivising prolonged extraction
only if it decouples fiscal flows from future drilling and embeds transition goals from the
outset. This requires legislating a legacy-revenue rule that excludes new-field licences, establishing an independent authority with statutory net-zero and regional-development
mandates, and investing returns solely in low-carbon and regional-transition assets.
Implemented effectively, the fund would turn the North Sea’s final production phase into a
long-term national asset that supports the UK’s post-carbon future. Further empirical-based
research on revenue and production modelling would complement this brief by quantifying
how different oil-price and decline scenarios could shape the scale and longevity of a
UK-SWF.
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