Throwing Caution to the Windfall: The Impact of Windfall Taxes on Energy Companies

By Dylan Remmer-Riley

For years, many green activists and left-wing politicians have called for a windfall tax on energy companies. Ed Miliband, the former Labour Leader, stated in May: “Another day, another oil and gas company making billions in profits, and yet another day when the Government shamefully refuses to act with a windfall tax to bring down bills.” Needless to say, those in favour of this measure were delighted when the incumbent Chancellor, Rishi Sunak, announced a 25% “Energy Profits Levy” earlier this year The principal argument against the government levy revolves around the potential side effects on the wider economy. In November, David Bunch (Head of UK Shell) indicated the company would “have to evaluate each project on a case-by-case basis” as the levy would lead to Shell having “less to invest”. However, taxing the profits of energy companies is a Europe-wide measure. This follows Russia’s invasion of Ukraine and wider aims by governments to redistribute wealth more evenly across their populations. (BBC 2022a), (UK Government 2022)

Windfall or Wonderful?

A windfall tax is a levy imposed by a government on a company or sector which has benefitted from excessively high profits. British Petroleum (BP) has seen a 37% rise in its share price over the last year. This is remarkable considering the UK economy shrunk by 0.2% in the third quarter of 2022. As the image below demonstrates, oil and gas firms are set to break profit records. (CNN 2022)

Greenpeace UK’s Phillip Evans supports the windfall tax. He said: “By using a big chunk of the bloated profits that Shell, BP, and others are raking in… the Government could start to really tackle the climate and cost-of-living crises simultaneously” (Guardian 2022a)

The Guardian’s Financial Editor, Nils Pratley, believes the windfall tax “would not explode BP’s precious ‘longterm financial framework’”. The size of the big oil and gas firms protects them from any measures imposed by the UK government. Although investment conditions may be unfavourable, the reality is that this is the case across much of the Western world. Additionally, the UK is already “one of the most generous fiscal regimes for oil and gas producers”. A study by ‘Paid to Pollute’ highlights that between 2016 and 2020, oil and gas companies received £13.6 billion in subsidies. (Guardian 2022b)

The UK's Approach

The government currently allows energy firms to reclaim 91p for every £1 spent on new oil and gas infrastructure, however, it is not all sunshine and rainbows. Following Chancellor Jeremy Hunt’s announcement that the ‘Energy Profits Levy’ will be raised from 25% to 35%, TotalEnergies has announced a withdrawal in their UK investment. The French company will cut £100m in spending in the North Sea. This move will have a detrimental impact on both the local Scottish and wider British economies. The Scottish Government put out a statement saying: “This decision highlights the fiscal and economic turmoil caused by the UK government is already having very real implications for Scottish industry” This presents a clear opportunity for energy companies. Questions will arise internally as to whether it is worth investing in the UK, or prioritising projects in Africa, Asia, and the Middle East. (BBC 2022b)

This is a common theme across the EU, as well. Jukka Leskela, the Managing Director of Finnish Energy, fears Finland’s 33% windfall tax will deter necessary investments into the energy sector. He stated: “Firms must be able to continue their investments so that we can get past the energy crisis” (Euractiv 2022). Elsewhere in Scandinavia, Equinor’s (Norway’s state-owned energy company) bosses are taking this scepticism one step further. The Norwegian company are considering scrapping the Rosebank Project. Rosebank is a large oil and gas field in the Shetland Islands. The project is expected to generate £24.1 billion across its lifespan. (Independent 2022).

In the UK, the trade association Offshore Energies has warned that the windfall tax will “deter investors and destabilise the industry in the short term”. The energy industry supports 200,000 jobs in the UK and the sector has pledged £200 billion in investments by 2030 For comparison, this figure is equivalent to around 18 months of NHS spending The windfall tax substantially threatens one of the UK’s biggest industries Deirdre Michie, CEO of Offshore Energies stated: “This proposed tax will disrupt planning and investment and, above all undermine investor confidence”. (OEUK 2022)

The imposition of the 35% windfall tax is ultimately beneficial. Although energy companies may have decisions to make regarding investment, it is unfair that conglomerates should benefit from Putin’s invasion of Ukraine and the turbulent economic climate. In its very nature, a windfall tax promotes greater equality when those in fortunate positions profit from something they were not responsible for Natural resources are one of the United Kingdom’s greatest assets. The gains made from overseeing the extraction of these resources should be reinvested in the nation, instead of going into the hands of some of the wealthiest companies in the world.

References

BBC (2022a) What is the windfall tax on oil and gas companies? Available at: https://www.bbc.co.uk/news/business-60295177 (Accessed: 10 December 2022)

BBC (2022b) Oil Giant TotalEnergies to cut North Sea investment over windfall tax Available at: https://www.bbc.co.uk/news/business-63834419 (Accessed: 11 December 2022)

CNN (2022) UK to raise $65 billion from windfall tax on energy companies Available at: https://edition cnn com/2022/11/17/economy/windfall-taxnuclear-uk-budget/index.html (Accessed 11 December 2022).

Euractiv (2022) Finnish energy industry stunned by government's high windfall tax plan. Available at: https://www euractiv com/section/politics/news/finnishenergy-industry-stunned-by-governments-high-windfall-taxplan/ (Accessed: 09 December 2022)

Guardian (2022a) Shell profits soar to $9.1bn amid calls for windfall tax. Available at: https://www theguardian com/business/2022/may/05/shell-profitswindfall-tax. (Accessed: 10 December 2022).

Guardian (2022b) Windfall tax wouldn't stop BP'S £18bn parade of projects Available at: https://www theguardian com/business/nils-pratley-onfinance/2022/may/03/windfall-tax-debate-bp-profits-labour. (Accessed: 11 December 2022)

Independent (2022) Norweigan oil giant 'threatens to dit £4 5bn North Sea project over Rishi Sunak's windfall tax'. Available at: https://www independent co uk/climate-change/north-seawindfall-tax-equinor-b2104381.html (Accessed: 10 December 2022).

OEUK (2022) New oil and gas exploration key to UK energy security and the energy transition finds OEUK report. Available at: https://oeuk org uk/windfall-taxes-risk-lasting-damage-to-the-uksoffshore-sector-and-energy-security-warns-offshore-energies-uk/ theweek co uk/energy/956757/the-arguments-for-and-against-awindfall-tax-on-oil-and-gas-profits (Accessed: 10 December 2022)

UK Government (2022) Energy Profits Levy Factsheet. Available at: https://www gov uk/government/publications/cost-of-livingsupport/energy-profits-levy-factsheet-26-may-2022 (Accessed: 11 December 2022)

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