Consumers are struggling to pay rising bills, while energy companies are making record profits, partly as a result of Russia’s invasion of Ukraine. Imposing a one-off windfall tax on these firms, which would offer more support to people who are struggling to make ends meet, seems like a logical step to offset both the moral and fiscal cost of their business. But industry disagrees, and it is industry to which Rishi Sunak appears to have listened.
“A windfall tax would be the worst thing for consumers,” claims Deirdre Michie, the CEO of Offshore Energies UK, which represents oil and gas operators. An extra tax would discourage energy companies from making “vital investments,” she suggests. “That would reduce our energy security, and make us even more dependent on imports from places such as Russia and the Middle East.” Instead, companies should be allowed to invest in platforms and pipelines “to help support the nation through the transition to net zero”.
Sunak seems to have bought into this vision, although it bears little resemblance to reality.
The Labour Party has argued strongly for a windfall tax — the shadow chancellor, Rachel Reeves, in her response to the Spring Statement today, has condemned Sunak’s failure to introduce one — and many economists have agreed. Even John Brown, who was chief executive of BP from 1995 to 2007, said this week: “It’s always a fine balance between how much do you let the rent owner have, and how much do you take for the nation. So when it’s outrageous and stays there, I think it’s not unreasonable to expect the nation to take a bigger portion of the rent for the Treasury.”
UK oil and gas companies currently pay total corporation tax on their profits of 40 per cent, double what companies pay in other sectors, but still much lower than they paid in the past. In 2015, the corporate tax rate for North Sea operators was above 80 per cent. But these figures also mask a range of tax reliefs for investment and decommissioning that often amount to subsidy, as Michael Jacobs, a professor at the University of Sheffield, highlights. “Most UK oil and gas companies have barely paid any tax over the last five years — 19 North Sea oil and gas companies, including BP and Shell, have actually been net recipients of taxpayers’ money,” writes Jacobs. “These rebates have made the UK tax regime one of the most generous in the world.”
As Nick Ferris wrote recently in the New Statesman, this state of affairs is diametrically opposed to that in Norway, where all profits made from oil and gas extraction are subject to a 78 per cent windfall tax. The money raised goes directly to the country’s sovereign wealth fund and, hence, its citizens. From 1990 to 2017, the UK government collected £181bn in revenues from oil. If its tax rate on extraction had been the same as Norway’s, the UK would have made an estimated £437bn.
At the same time, data shows that since 2010, Royal Dutch Shell and BP have together spent £147.2bn on stock buybacks and dividends — compared to a FTSE 100 average of £10.8bn over the same period. This amount is seven times more than the £20bn required to keep households’ energy bills to their current level during this period of elevated wholesale energy prices, according to the think tank Common Wealth.
Mathew Lawrence, the director of Common Wealth, describes a windfall tax on these “extraordinary profits” as “fair, effective and urgently needed”. Helen Miller of the Institute for Fiscal Studies, another UK think tank, says such a tax “can be an extremely efficient way of raising revenue,” but insists that certain conditions need to be in place for this to be the case. In particular, the Chancellor would need to make it clear this is a one-off measure being used in exceptional times.
“A tax only makes sense if it is temporary and used to help the most vulnerable survive high energy prices,” agrees Arjun Flora from the Institute for Energy Economics and Financial Analysis. “It is a political move to demonstrate action, rather than a deep commitment to reduce household bills for good, such as by improving energy efficiency, expanding renewable power and heat generation and cutting the UK’s dependence on gas.”
Dustin Benton from the Green Alliance, says that these goals amount to the same thing. “We know how to solve the cost-of-living crisis and deprive the Kremlin of funds for its war: pay for insulation and heat pumps… The fairest means of raising the revenue would be a windfall tax on extraordinary fossil fuel profits.”
The danger is that these cash-rich companies, when spared higher taxes, could instead invest in the energy sources that have kept Vladimir Putin in power. “More oil and gas drilling will do nothing to bring down energy bills for households and will only exacerbate the climate crisis,” says Ed Matthew from the climate think tank E3G. “This kind of short-term thinking risks taking us out of the frying pan and into the fire.”
Elsewhere, the EU is likely this week to give the go-ahead to member states that want to “exceptionally” introduce tax measures on energy companies. Likewise, a proposal by the US senator, Elizabeth Warren, and other US legislators on a tax on the profits of American oil majors is making its way through the House of Representatives.
Given all this, few beyond the fossil fuels industry and the Conservative Party are likely to cheer Sunak’s failure to impose a windfall tax on North Sea oil and gas companies. Such a move would have been “widely applauded,” believes Jacobs.
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