Pros and cons

The arguments for and against a windfall tax on oil and gas profits

A one-off levy could fund measures to ease the cost-of-living crisis, says Labour

Energy companies are reporting bumper profits as millions in the UK struggle with the cost of living, prompting Labour to call for a one-off windfall tax.

People across the country are feeling the effects after the energy price cap rocketed by 54% for the average household in April, with bills set to rise even further when the cap is adjusted again in October. 

But high prices for oil and gas have led to record profits for energy companies, with BP’s underlying profit doubling in the first business quarter of the year to $6.2bn (£4.9bn), while Shell’s profits have tripled in the same period to $9.13bn (£7.3bn), which is “its biggest-ever quarterly profit”, said the BBC.

A windfall tax is usually a one-off tax imposed by the government on businesses who have enjoyed record profits as a result of something “they were not responsible for”, explained Sky News

In the case of energy companies, they are setting “sky-high prices” due partly to the fact that “demand has increased as the world emerges from the pandemic” and also because of “supply constraints following sanctions imposed on Russia after its invasion of Ukraine”.

But should the UK government impose such a levy on energy companies?

1

Pro: helping households with bills

Labour argued for a 10% increase in corporation tax, a tax paid on profits, for North Sea oil and gas producers in the year beginning in April. 

The party said a one-off levy could raise as much as £2bn, reported The Guardian, money that could go towards helping households struggling with rising energy prices. 

A windfall tax has the backing of other major parties, with the Liberal Democrats saying that energy companies should “pay a little more to help the most vulnerable”, and the SNP and Green Party also supporting such a tax, said the BBC. 

Such a proposal has been mooted by Labour for some time. In its 2019 manifesto the party argued that a windfall levy could raise up to £11bn, to help the UK “transition towards a green economy”, said Sky News.

2

Con: fears surrounding investment

Prime Minister Boris Johnson has so far pushed back on a windfall tax, telling Good Morning Britain earlier this month that a levy on energy companies could “discourage them from making the investments that we want to see that in the end will keep energy prices lower for everybody”.

However, Chancellor Rishi Sunak has warned energy companies that such a tax could be on the table if they did not significantly invest back into the UK economy. In an interview with the BBC on Friday, he said that he was not “naturally attracted” to the idea but he was nevertheless “pragmatic” about introducing one. 

“What I want to see is a significant investment back into the UK economy to support jobs, to support energy security, and I want to see that investment soon,” he told the broadcaster. “And if that doesn’t happen, then no options are off the table.”

And Johnson’s fears over investment could prove to be unfounded. When asked by The Times if any of BP’s planned investments would not go ahead if a windfall tax were introduced, chief executive Bernard Looney said: “There are none that we wouldn’t do.”

3

Pro: already a historical precedent

If the government did introduce a windfall tax, it wouldn’t be the first time such a tax has been imposed on British industries. 

In 1981, Conservative chancellor Geoffrey Howe levied the banks after arguing that they had benefited from high interest rates. And in 1997, Labour chancellor Gordon Brown raised £5.2bn over two years from a windfall tax on privatised utilities to pay for his “welfare to work” programme.

4

Con: the impact on private pensions

Critics of a windfall tax have said that older people could suffer disproportionately, as many pension funds “benefit from the profits of big oil companies”, explained the BBC. As some private pension funds own shares in energy companies, they benefit from profits through dividends. 

But this argument has been disputed by progressive think tank Common Wealth, whose director told The Guardian that the pensions argument was a “dangerous red herring”. 

He said that while it’s true that some BP dividends do make their way down to “ordinary pensioners”, this isn’t how the majority of UK pensions operate any more. “In reality, only 8% of BP and Shell’s shares are owned by the UK pension fund,” said the paper.

5

Pro: big firms can take the hit

“The little secret about the Labour party’s version of windfall tax is that it is very modest,” wrote Nils Pratley, The Guardian’s financial editor, earlier this month. An increase from 40% to 50% in the tax rate on North Sea oil and gas profits would, for example, turn BP’s expected “£1bn tax bill for the relevant assets this year into one of £1.25bn”.

This extra £250m “would not explode BP’s precious ‘long-term financial framework’”, argued Pratley, which has already endured a massive divestment from Russian state oil company Rosneft, and is still planning to pay investors £4bn in dividends this year, “with possibly the same again via share buybacks”.

Oil and gas companies might argue that such a windfall tax is unfair. “No one’s proposing a one-off windfall subsidy when they make a loss… it might discourage investment if energy companies think that if all goes well they’ll get a heavy tax, whereas if it goes badly, they won’t get cushioned,” argued the Institute for Fiscal Studies’ Stuart Adam to The Guardian. 

But the paper points out that the UK is already “one of most generous fiscal regimes for oil and gas producers”. Analysis of OECD data by campaign group Paid to Pollute shows that between 2016 and 2020 oil and gas companies received £13.6bn in subsidies, reported The Independent.

6

Con: not enough to solve the crisis

While Labour’s proposed levy could stand to raise some £2bn, giving the government “some firepower” to help with energy bills, more than this sum may be needed “to help the millions of households struggling with bills as rampant inflation forces Britons to pay more for everything from food to petrol, adding to the cost of living crisis”, said The Guardian

The chief executive of Scottish Power, Keith Anderson, has said that a £1,000 discount on bills, to be repaid at a later date, would be an effective mechanism to help struggling households, ultimately offering up to £10bn of support for 10 million households.

Meanwhile, Julian Jessop, an independent economist writing in The Telegraph, has called the argument that revenues from a windfall tax could be used to cut energy bills “a red herring”. He said that if there is a “strong case” to provide support to struggling households, this could be financed in “many other and better ways”.  

“It rarely makes sense to link any type of spending to one particular source of revenue,” said Jessop, especially when it comes to the energy market, “where prices are so volatile and the tax base so uncertain”.

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