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  1. Environment
20 May 2022

Would a windfall tax really be spent on reducing energy bills?

Fossil fuel firms are making a fortune. There is no reason not to make them pay to help struggling voters.

By Philippa Nuttall

On Tuesday 17 May, Labour lost a vote in the House of Commons which proposed imposing a windfall tax on the North Sea oil and gas firms enjoying ballooning profits from soaring energy prices. The Conservative government has echoed the industry line that a windfall tax would only discourage energy companies from investing in the UK. This week, however, under increasing pressure, Boris Johnson insisted that he was not ruling out a one-off levy and would “look at all sensible measures” to support people through the cost-of-living crisis.

At Prime Minister’s Questions on Wednesday 18 May, Keir Starmer said “a one-off tax on huge oil and tax profits would raise billions of pounds, cutting energy bills across the country”. The Green Party MP Caroline Lucas said: “A windfall tax on the obscene profits of energy giants” would put money “directly into the pockets of those who are struggling the most.” Greenpeace UK’s political campaigner, Ami McCarthy, says such a tax is the “only fair way to tackle the cost of living and climate crises simultaneously”. If the Prime Minister were to reverse course on the issue – the Labour leader has suggested a U-turn is “inevitable” – what would it mean for struggling British households?

Who’s for and who’s against?

The windfall tax proposed by Labour is supported by the SNP, the Liberal Democrats, the Green Party, and some backbench conservatives (though under different rubrics: the Greens are championing a “dirty profits tax“, while “a one-off energy duty rebate” might be the catchy phrase with which the Tory party cloaks its volte-face if the government eventually decides to embrace the policy). Mel Stride, the Conservative chair of the Treasury Select Committee, said that although he would normally oppose such a tax, “extraordinary circumstances” meant there was a case for considering imposing one.

Some business leaders are also breaking rank with the general corporate mistrust of one-off taxes. John Allan, the chairman of Tesco, says there is an “overwhelming case” for a windfall tax. Sharon White, the CEO of John Lewis, also believes that “due to the severity and the urgency of the situation,”  a windfall tax would be reasonable. Even former CEO of BP, John Browne, agrees that calls for a North Sea windfall tax “are justifiable”.

How would it work?

UK oil and gas companies currently pay total corporation tax on their profits of 40 per cent. This is double what companies in other sectors pay, but much lower than energy corporations paid in the past: in 2015, the corporate tax rate for North Sea operators was above 80 per cent. It is also much lower than in many other countries, including Mexico, India and Norway, where profits made from oil and gas extraction are subject to a 78 per cent levy.

The parties differ on how high a one-off tax should be. Labour wants to raise corporation tax on oil and gas companies to 50 per cent, while the Greens, backed by NGOs such as Greenpeace, propose pushing it up to 70 per cent. Labour’s plan would raise around £2bn, while the Greens say their proposal would generate at around £4bn. Research by Greenpeace and Oil International suggests as much as £13bn could be raised.

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The Greens would use the extra cash from the windfall tax to increase Universal Credit payments by £40 – double the temporary uplift introduced in April 2020 in response to Covid-19 – and to extend emergency fuel payments, providing each household with an additional £320.

If the government were to adopt a windfall tax, it would have to decide whether to ringfence or “hypothecate” the money raised, where the revenue is pledged to a specific purpose. Greenpeace argues Westminster “can and should 100 per cent direct the windfall tax to supporting people on low incomes with their energy bills”. Other commentators, including Sam Alvis, the head of economy at the Green Alliance, a UK think tank, suggests that rather than fixating on the amount raised by the tax – and making the amount of support offered to households dependent on it – the measure should be seen as a “political tool”. In other words, adding extra cash into the coffers in an economic crisis would give the government the political legitimacy to offer people extra help with energy bills and energy efficiency measures, such as home insulation.

Have we had windfall taxes before?

Boris Johnson and Rishi Sunak’s reluctance suggests windfall taxes aren’t in the Tory playbook. However, Margaret Thatcher when prime minister and George Osborne as David Cameron’s chancellor backed their own versions of windfall taxes on North Sea oil and gas. And there is a more recent precedent for such a policy: Spain and Italy have already opted to place higher taxes on fossil fuel companies in response to the current crisis. Matthew Lawrence, the director of the left-wing UK think thank Common Wealth has described the UK government’s refusal to do the same “a failure of fairness and common sense”.

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