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UK government under increasing pressure to introduce oil and gas windfall tax

11/5/2022

Gas hob alight Photo: Shutterstock
As vulnerable energy consumers face escalating energy prices, the UK government is under pressure to impose a windfall tax on energy majors Photo: Shutterstock

Pressure is mounting on the UK government to introduce a windfall tax on North Sea oil and gas companies, driven by bumper first quarter profits recently announced by majors BP and Shell.

The controversial one-off levy is one of several measures being proposed to tackle energy crises which have sent household bills rocketing in the UK and across Europe. 

 

Energy costs have already climbed by 40% across European markets this year, on top of a 13% rise in 2021, driven by the war in Ukraine and other factors affecting wholesale gas prices. A spectrum of governments across Europe have reacted with support packages in response to the price rises. 

 

Escalating energy major profits have added oil to the fire.  

 

BP’s profits more than doubled in 1Q2022 to $6.2bn (£5bn), reportedly the company’s highest quarterly profit in more than a decade. This has fuelled demands by the Labour Party opposition and numerous campaigners to impose measures to ease the burden for energy consumers hit by the cost-of-living crisis. 

 

Shell also reported a record quarterly profit of $9.1bn (£7.3bn), piling pressure on the UK government to relieve energy hardship for consumers struggling with bills. 

 

Despite UK Prime Minister Boris Johnson’s repeated refusal to recommend that the Treasury should impose a windfall tax on the energy giants, fearing a detrimental impact on North Sea and UK renewables development plans, there seems to be some movement in the Cabinet. 

 

Earlier this month, Business Minister Kwasi Kwarteng invited the North Sea oil and gas industry to set out a clear plan to reinvest its profits into British energy projects. In a letter to the industry, Kwarteng wrote: ‘In return for the UK government’s ongoing support for the sector, the Prime Minister, the Chancellor and I want to see a very clear plan from the oil and gas industry to reinvest profits in the North Sea and, importantly, in the clean energy technologies of the future.’ 

 

No sooner said than done, with BP Chief Executive Bernard Looney telling The Times of the company’s ambitious plans to invest $18bn in UK renewables projects regardless of whether or not a windfall tax was imposed. ‘There are none that we wouldn’t want to do,’ he maintained. 

 

Earlier this week, Keith Anderson, Chief Executive of ScottishPower, said on the BBC R4 Today programme that a fresh support package ‘would be vital’ before a further dramatic increase in the cost of gas and electricity bills arrives in October. Energy regulator Ofgem is due to announce the new consumer energy price cap in August, before the new limit takes effect in October. ScottishPower forecasts that the price cap could reach £2,900 for a family home, following last month’s record increase to £1,971. 

 

European action on price hikes 

Governments around Europe have taken a variety of actions in response to the energy price hikes:

 

  • In Italy, Prime Minister Mario Draghi introduced a €14bn (£11.8bn) support package, including subsidies for vulnerable families and a €200 (£171) cash payment for pensioners and those on low incomes.
  • In Germany, Chancellor Olaf Schulz unveiled a €30bn (£25.7bn) package, including a temporary reduction in fuel taxes, and cheaper 90-day public transport tickets. 
  • In the Netherlands, the government raised a one-off energy allowance in March for low income households by €600 (£513) to €800 (£684). The government also lowered VAT on energy from 21% to 9% until the end of the year. Excise duties on petrol and diesel have also been cut for the rest of this year.
  • The Spanish government imposed a windfall tax last September on companies profiting from rising energy costs, and has since introduced a ban on raising gas bills by more than 5% for customers with lower energy consumption.
  • French Prime Minister Emmanuel Macron has forced majority state-owned electricity supplier EDF to lower costs, while electricity taxes have also been reduced for households and businesses.
  • On 1 January 2022, the Norwegian government increased its cost-of-living allowance by €200 (£171) to better protect vulnerable households from rising energy prices.
  • Householders across Ireland are being urged to ‘Reduce your use’ of energy in a move to improve energy efficiency. The government is considering further actions to help people and businesses with rising energy costs. 

 

In most European countries, both energy regulation and levies are set at the national level. Long-term measures to counteract energy-price volatility are considered important. Italy and Spain (among others) are calling for joint action at the European Union (EU) level to implement strategic stocks and joint procurement of natural gas. While others, such as Hungary and the Czech Republic, want to rethink the EU Emissions Trading Scheme (EU ETS). France is also vocal about reforming the pricing mechanism of the European energy market, note energy analysts at Breugel.

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