The call for a windfall tax on oil and gas companies, whose profits have rocketed over the last year, has now become something of a clamour. Originally proposed by Labour a month ago, the idea has been taken up by both the Liberal Democrats and Greens, and even some Conservative MPs. Jeremy Kyle’s conversion to the cause by the climate activist Tessa Khan has gone viral.
The basic idea of a windfall tax is very simple. Over the past year the huge rise in global oil and gas prices has provided oil and gas companies with vastly expanded profits. BP has just announced 2021 profits of £9.5bn (compared with a loss of £4.2bn the year before) and Shell £14bn (a four-fold increase). If these additional profits were taxed, the revenues could be used to help reduce energy bills for hard-pressed consumers.
Unsurprisingly, a fightback has now begun. BP and Shell have been explaining the importance of their North Sea investments and their commitment to renewable energy. Commentators on the right have attacked the windfall tax as “economically illiterate”. But the problem is that none of the arguments used by opponents of a windfall tax are very convincing. There are five being widely made.
The first is that, as a retrospective measure – levied on past profits, when the companies could not plan for it – a windfall tax would be unfair, possibly illegal and certainly not the kind of thing we do in Britain. But it was actually Margaret Thatcher who first introduced a windfall tax – in 1981, on the banks, whose profits had ballooned after a rise in interest rates. In 1997, the New Labour government imposed a windfall levy on the inflated value of the utilities privatised under the Conservatives. Neither measure was ruled illegal.
The second argument being widely made is that the oil and gas companies already pay twice the tax rate of other companies, so the Treasury will be raking in increased revenue. This is true in itself, but it paints a rather false picture. UK oil and gas companies pay total corporation tax on their profits at 40%. But they also benefit from a wide range of tax reliefs for investment and decommissioning. The result is that most UK oil and gas companies have barely paid any tax over the last five years. Nineteen North Sea oil and gas companies, including BP and Shell, have actually been net recipients of tax payers’ money. These rebates have made the UK tax regime one of the most generous in the world, with an average levy per barrel of oil of under $2, compared with, for example, $21 in Norway.
This makes it hard to stand up the third argument against a windfall tax: that it would prevent much-needed investment in the North Sea, which is vital for the UK’s energy security. In the first place, no one is proposing a 100% windfall tax rate. Labour suggests a modest 10% increase, taking the total tax rate to 50%. The companies would still be left with plenty of money for investment.
Investment in the North Sea actually contributes little to the UK’s energy security: 80% of North Sea oil and gas is exported, and its price is set by the global market. The only geopolitically secure forms of energy are renewables, nuclear and energy efficiency measures, which are not exportable.
Further investment in the North Sea is also not compatible with the UK’s climate crisis commitments. Last year, the International Energy Agency warned that new exploration and development of oil and gas globally had to stop immediately if global heating were to be limited to the Paris climate agreement goal of 1.5C.
But, say the windfall tax critics, BP and Shell are not just investing in oil and gas. They are both now committed to net zero, with major investments in renewables. Taxing their profits more highly will therefore hit their contribution to the low-carbon transition.
Again, that could only be true if the proposal was for a 100% tax rate. But in any case, the claim that these companies are going green is seriously overblown. BP is certainly shifting the balance of its energy portfolio. This week the company announced that by 2025 40% of its spending budget would be in greener technologies, rising to 50% by 2030. But this will still leave half of its budget devoted to fossil fuels. Meanwhile, Shell is not even doing this. Its 2030 goal is merely to reduce the net carbon intensity of its operations (that is, emissions per unit of output) by 20% from 2016 levels. Far from accelerating the energy transition, this is entirely compatible with rising emissions.
The final argument used by opponents of a windfall tax is that it would hurt pensioners. Much of the oil and gas companies’ profits go back to their shareholders, and BP and Shell shares provide important dividend income for many UK pension funds. Both statements are true, but they miss the point. Less than a tenth of BP and Shell’s shares are owned by UK pension funds; over 90% of their distributed profits will therefore go to their shareholders in the rest of the world.
Far from being economically illiterate, a windfall tax is economically very rational. A huge spike in oil and gas prices is being passed on to UK consumers, with those on low incomes catastrophically hit. On the other side of the ledger, these costs appear as huge windfall profits to oil and gas companies, unrelated to anything they have done. This is grossly inequitable. Taxing some of these profits to provide help to low-income energy bill payers is an entirely sensible way of rebalancing the costs and benefits. But it will need political will to make it happen.
Michael Jacobs is professor of political economy at the University of Sheffield, and managing editor of NewEconomyBrief.net
