After COP26, Scottish Independence Can’t Be Fueled by Oil

This year, Scotland is hosting the U.N. climate change conference (known as COP26), yet another attempt to keep climate change to the relatively manageable level of under 1.5 degrees Celsius hotter than pre-industrialization levels. The Scottish National Party (SNP), leading Scotland’s devolved government, has been determined to use the platform afforded by hosting this globally significant event to once again make the case for Scottish independence. The problem is there’s only one way Scottish independence might even begin to make sense economically: fossil fuels.

The question of Scottish independence was supposed to have been resolved by the 2014 independence referendum for at least “a generation.” The issue was quickly reactivated by the Brexit vote in 2016, where around two-thirds of Scots voted to remain in the European Union. The SNP is making the case that Scotland is being dragged out of Europe against its wishes.

The COVID-19 pandemic is the only thing that has given pause to the SNP’s drive to get independence back on the table. But as the immediate health crisis appears to be subsiding—and on the back of a Scottish parliamentary election in May that kept the SNP the biggest party at Holyroodhouse, with 64 parliamentarians (up one) but still one short of an overall majority—the SNP negotiated a coalition with the Scottish Green Party, and the attention of Scotland’s devolved government has returned to its principle political project: an independent Scotland.

The problem, however, is it is very difficult to see how Scotland could afford to go its own way. Scotland’s 2020-2021 budget deficit amounted to almost $49.6 billion, or 22.4 percent of Scotland’s entire GDP—significantly higher than the 14.2 percent for the U.K. as a whole. Of course, the last fiscal year has been a very difficult one for most countries around the world due to the pandemic. And although this sounds cataclysmic, the Scottish government does not have borrowing powers, so deficit actually gets subsumed into the U.K.’s much larger budget deficit, which has also ballooned in the wake of the pandemic—though it is still much more sustainable.

The more fundamental figure is $20.6 billion, which was Scotland’s fiscal deficit in 2019-2020, amounting to 8.6 percent of GDP. That net figure includes ongoing income from Scotland’s dwindling North Sea oil reserves. When taking out that ephemeral fiscal boost from the equation, Scotland’s structural fiscal deficit has hovered at around 10 percent for decades.

The SNP’s economic case for independence in 2014 was predicated on a second North Sea oil boom that was supposed to bring in revenues of $9.3 billion to $10.8 billion per year. The SNP proposed that Scotland plug (most of) its yawning fiscal gap with the temporary windfall afforded by a finite resource with volatile international prices. That’s an old mistake made by oil economies—save for Norway, which has consistently invested its oil revenues in a long-term fund that will keep the country going long after the fuel runs out. In Scotland, oil revenues have averaged $819 million a year since 2014 for a number of reasons, from price volatility to global efforts to move away from fossil fuels toward more sustainable energy sources.

This is where COP26 enters the discussion. One of the more delicate political issues in Scotland over the past year has been the question of expanding North Sea oil exploitation, particularly in the Cambo field.

The SNP’s broader political positioning outside of its pro-independence stance is broadly social-democratic and progressive. That, of course, must nowadays include robust environmental credentials. The SNP’s case for Scottish independence has relied on “Scottish oil” from the very beginning of the movement in its modern form—but nowadays, its voters do not want more oil, and the planet can’t take it. So Nicola Sturgeon, the leader of the SNP, has been forced this year to repeatedly punt on the “Cambo question.”

If Scotland actually succeeds at becoming independent, the country will need all the money it can get from any source it can get it from. The only other alternative would be raising taxes and/or cutting spending. Raising taxes would be extremely difficult because it would render Scotland less competitive than the rest of the United Kingdom and cut it off from the chance Ireland has taken: becoming a comfortable haven for foreign firms. Cutting spending or raising personal taxes would be political suicide for a party that has defined its political DNA on “Scottish social democracy” in opposition to “London austerity.”

The only way for the SNP—and indeed, for Scotland—to square this circle is to find some alternative fiscal booster that can replace oil in the architecture of the old argument for independence. And, at least at first sight, Scotland has one plausible candidate for that role: renewables.

Scotland is a windy place. It is surrounded by a very large number of islands with shallow waters and strong currents, ideal for seabed turbine technology. And it has innumerable firths (i.e. fjords) that could be tapped for tidal power. Moreover, much of the oil and gas physical infrastructure it has built over the past 50 years, as well the skill base that goes into that sector, can be retrofitted for hydrogen’s production and export, both “blue” (natural gas split into hydrogen and carbon dioxide) and “green” (water split by electrolysis into hydrogen and oxygen).

Indeed, last year, Scotland produced the equivalent of 97 percent of its gross electricity grid’s consumption from renewables. And most of that was from onshore wind. All the other potential sources, especially offshore wind, are hugely underexploited. With that being said, renewables only contributed $7.1 billion to its GDP in 2019 and supported around 22,660 jobs, whereas oil and gas contributed $12.3 billion (more than 5 percent) and supported around 101,400 jobs. Even tax receipts from the oil and gas sector only amounted to $989 million in 2019-2020, a far cry from what is needed to plug in the fiscal gap. Tax return rates for renewables are even lower, as the sector still needs ample subsidies to expand.

Renewables are strong, growing, and still have a lot of runway to keep growing. And if the appropriate hydrogen infrastructure is built, they could amount to a sustainable export industry that could add up to some 12 percent of its GDP—a very good place to be. But getting there would require a quadrupling of current output, plus building up all the infrastructure to absorb and export energy production’s surplus. All of that requires huge amounts of investment both from the private sector and, equally important, the public sector in the infrastructure needed to support such growth—all at a time when the Scottish government would also need to maintain subsidies to sustain that growth.

Such a concerted investment effort would need to be sustained for probably longer than a decade before its fruits could be reaped, and Scotland’s renewable potential could even begin to plug Scotland’s existing fiscal gap as well as the economic and fiscal gap of its fossil fuels industry’s inevitable and desirable decline. But such an investment effort would be infinitely more difficult to pull off in the fiscal environment that immediate independence would impose—at least, if the SNP does not wish to commit electoral suicide by sharply cutting social spending.

The sensible way to go about independence for Scotland would thus be for supporters to bide their time and to use the fiscal cushion afforded by the United Kingdom to invest in the economic transformations the country needs to afford independence. But that might take a good 20 years or more of consistently sound economic policy. And by then, the post-Brexit political logic in favor of independence will have likely evaporated. The SNP does not appear in the mood to wait and do things the sensible way. And just like with Brexit, it will be those who can least afford it that will ultimately suffer the downsides of yet another self-defeating nationalist project.