Here comes the windfall tax

UK ministers are preparing to meet in the morning with oil and gas industry bosses, who face scrutiny for announcing bumper profits at a time when soaring energy bills are plunging millions into fuel poverty.

The Treasury is reported to be considering increasing the planned windfall tax on energy companies, following on from the 25% levy on the profits of North Sea oil and gas operators announced in May. The energy firms will be asked to submit a breakdown of expected profits and detail future investment plans.

Shell posted record earnings of almost £10bn for the three-month period from April to June, while BP tripled its profits to nearly £7bn, promising to give shareholders payouts worth £6.5bn.

These eye-watering profits have been described as an “insult” to the millions of households facing punishingly high energy bills – with the average annual bill forecast to rise above £4,000 in January. Some have also voiced distaste that these companies are in part profiteering from the horrors in Ukraine: Russian sanctions have caused oil and gas prices to surge higher. 

A windfall tax is a one-off tax on the profits of a company which have arisen from market events as opposed to any new activities undertaken by that company. 

Rishi Sunak did, reluctantly, impose a windfall tax on energy profits back in May, which, if it goes ahead, will raise about £5bn in its first year to “help fund support for millions of the most vulnerable households”.

But others believe this levy doesn’t go far enough. The extra 25% oil and gas giants will now pay on profits only applies from May, meaning fortunes made before that will be left untouched. Liberal Democrat leader, Sir Ed Davey, is urging the government to backdate the tax to October 2021, insisting this expanded levy would raise around £20bn. 

In terms of design, windfall taxes are fairly easy to impose on firms and difficult for them not to comply with. There’s a strong case to be made that it’s fair in some circumstances, since companies aren’t being rewarded for their own efforts, but rather profiteering off pure geopolitical luck. If others have been grossly disadvantaged by those same external forces, this fortune should be shared widely, runs the theory.

But windfall tax critics argue that the measure reduces further investment from oil companies and, crucially, discourages them from investing in green energy. Though it’s worth noting: BP has pledged to invest up to £18 billion in renewable and fossil fuel projects in the UK by 2030 and the company’s own CEO has declared that a windfall tax wouldn’t stop any of these investments from going ahead. 

When we look at global approaches to a windfall tax on energy giants, it’s a decidedly mixed picture. After some agonising, France and Germany ruled out the measure. Spain has imposed a modest 1.2% windfall tax while Italy has matched the UK’s 25%. Greece has imposed a whopping 90% levy on the windfall profits of domestic power producers while Norway chooses instead to permanently tax oil giants at 56%, on top of the 22% corporation tax. 

International comparisons do, however, remind us there is no easy solution to tackling soaring energy costs. 

President Macron was, for instance, lauded by many for taking action to protect households from rising costs by fully nationalising France’s EDF energy firm. However, the 4% limit he imposed on bill hikes meant EDF was forced to sell energy at a loss. Today, it has emerged that the company is now suing the French government for £7bn.

Tomorrow there will be a lot soundbites and talk of justice for consumers. It’s not that simple, though. A windfall tax may be popular, and it may be justified this time, but the UK urgently needs more investment on energy. Ministers have to be careful to get the balance right.