Good morning. Feeling chilly? Well, don’t touch the thermostat. Soaring energy prices have been at the forefront of everyone’s mind in recent months: eye-watering bills, inflation, and a rise in national insurance have all compounded to create what has been described as the sharpest drop in living standards in decades.
But as British consumers feel the squeeze, energy giant BP yesterday reported soaring underlying profits of $6.2bn (£4.9bn) – more than doubling last year’s $2.6bn. The story features on the front pages of the Guardian and the Mirror. It’s the kind of announcement that feels precision engineered to drive you up the wall – and it’s re-energised the debate around a windfall tax on energy companies – something the Labour party has been calling for.
But how would it work in practice? And would it benefit those most in need? I spoke to Stuart Adam, a senior economist from the Institute for Fiscal Studies, and Mathew Lawrence, founder and director of progressive think tank Common Wealth, about the problems it solves, and the problems it doesn’t. First though, the headlines:
Five big stories
Ukraine | The EU is expected to announce oil sanctions against Moscow after Russian forces shelled and tried to storm the Azovstal steelworks, the last holdout of Ukrainian troops defending the southern port city of Mariupol.
Abortion | Joe Biden has warned that a leaked draft supreme court ruling which would remove the right to an abortion in the US represents “a fundamental shift” in American law. Biden spoke as the court’s chief justice John Roberts ordered an investigation into the leak.
Politics | Tory MPs, angered by Boris Johnson’s handling of a TV interview on the cost of living crisis, have warned that he may be harming their local election prospects. One said that some voters have “a Boris problem”.
Coronavirus | An elderly person was put in a body bag in Shanghai before mortuary workers noticed they were still alive. The incident sparked a furious backlash in the city, five weeks into a gruelling lockdown.
Housing | Typical green space near new homes has shrunk by about 40% since 2000, a new study has found. The authors said property developers have claimed they cannot afford to build new parks as part of developments.
In depth: So … what is a windfall tax?
Basically, a windfall tax is a one-off levy that the government imposes on a sector that has made huge profits from something that they were not responsible for. To pluck a couple of examples out of nowhere, that might mean a profit caused by a huge increase in demand after a pandemic, or a war.
“You can make a case that a windfall tax has to be [brought in] retrospectively here because no one could have predicted that Russia would invade Ukraine,” Stuart Adam of the IFS tells me. But a company like BP might dispute the idea that it’s not a normal part of the fluctuations of their business: “When you’re investing in North Sea oil and gas, you know that oil and gas prices are volatile, and they go up and down for all sorts of reasons and geopolitical events.”
“People do need to understand that part of the risk they’re taking is the risk on the upside,” he says. Energy companies might experience a big loss – as they did at early in the pandemic when oil prices fell below zero – or they might gain from them in a big way.
This “asymmetry”, as Stuart calls it, supports an argument BP might make about the fairness of a windfall tax policy. “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.”
On the other hand, as Common Wealth’s Mathew Lawrence points out, oil and gas companies benefit from a wide range of tax subsidies – and 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
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Could it solve the cost of living crisis?
Beyond the question of fairness for shareholders, there are the practicalities. It may seem warranted to take a big chunk of money away from fossil fuel companies, but would it work in practice?
The Labour party has been a big proponent of a new tax for a while now, arguing earlier this year that oil and gas companies should pay 10% more in corporation tax, which it was estimated would raise £1.2bn in revenue. Labour leader Keir Starmer wasn’t explicit about whether the tax would be permanent or a one-off, but said that the money raised “could be used to keep energy bills down”. And it’s not just the UK: our energy correspondent Alex Lawson has analysed the measures being taken by countries across Europe to tackle the energy and cost of living crises.
As yet, the British government has resisted such calls – and it’s impossible to say how much that kind of tax would raise without more specifics. The Guardians financial editor, Nils Pratley, wrote last night that “the little secret about the Labour party’s version of windfall tax is that it is very modest.”
But “if you set a pretty chunky tax, then in principle, you could raise enough to make a serious dent,” Stuart tells me. “What you couldn’t do is raise enough just from just oil and gas to protect every household in the country from all rises in the cost of living… but you could be talking about a substantial sum.”
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Could there be unintended consequences?
Unsurprisingly, energy companies aren’t particularly thrilled at the idea, claiming that such a tax would be unfair, reduce their ability to invest in renewables, and is potentially illegal. And there have been suggestions any tax would be felt most keenly by older people, whose pensions are invested in energy company shares. This is something that Mathew Lawrence disputes.
“It’s a really dangerous red herring and it’s pushed deliberately by people who are invested in the status quo,” he says. While it’s true that some BP dividends do make their way down to “ordinary pensioners”, Mathew says, for the most part this isn’t how pensions operate in the UK any more. In reality, only 8% of BP and Shell’s shares are owned by the UK pension fund.
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Are there any alternatives?
The nature of a one-off tax means that the behaviour of these giant oil and gas companies is unlikely to change. That’s helpful if your goal is to extract an immediate financial benefit without harming their businesses, but it does little to incentivise a more serious approach to the climate crisis.
In that context, many have asked: why not just increase corporation tax for the energy sector permanently? Currently oil and gas companies pay 40% in corporation tax, double what companies in other sectors pay. However, this number doesn’t paint the full picture: there are various tax relief schemes in place, which mean that oil and gas companies barely pay any tax on North Sea gas and oil at the moment.
Adam believes there is a pretty compelling argument for just such an increase. Because the sector in the UK is inextricably tied to the North Sea, “the worry about needing to keep corporation tax rate internationally competitive just doesn’t really apply”.
Then there’s the point that the way corporation tax works with offshore oil and gas is different to other sectors “because the investment costs are deductible, and that means that you can have a higher tax rate without discouraging investment,” he explains. It is important to point out that while BP’s profits in the North Sea are important, they’re also a relatively small part of its bottom line.
Ultimately, if we want to deal with the dual crises of unsustainable costs of living and the climate crisis, a windfall tax simply isn’t enough. For Lawrence, there are fundamental problems about hitching our future to companies like BP or Shell because, to him, “the for-profit private company or corporation is structurally ill equipped to drive an energy transition in a world in which fossil fuels have higher profitability rates than renewable energy projects.”
A windfall tax might provide some cash to allow the government to alleviate sky-high energy bills – but there are some credible arguments on the other side, too. Either way, until government gets serious about investing in a greener energy policy, our bills (and the health of the planet) will remain subject to the whim of the oil and gas giants.
Roe v Wade latest
After yesterday’s newsletter on the extraordinary leak of a draft US supreme court decision which would overturn Roe v Wade, the 1973 ruling that enshrined the constitutional right to abortion, we thought it’d be useful to point out some responses to the news in the Guardian and elsewhere:
Experts warn that as well as an immediate ban on abortion in much of America, the decision could lead to bans on women travelling out of state for an abortion, too. Meanwhile, the Washington Post reports that anti-abortion activists may now push for a strict nationwide ban.
“So here we are again,” writes Marina Hyde. “Today, there is a sense that even restating the arguments feels like something pro-choice women have been doing every day of every decade since they apparently won the argument.”
Jessica Bruder’s long piece in the Atlantic, published in April, is an extraordinary survey of a mobilising network of covert abortion providers ready to step in as state-regulated access disappears.
This Twitter thread by a historian of the religious right, Neil J Young, explains how varied Christian conservative views on abortion were before a political movement started to build in the 1970s.
In the US conservative magazine the National Review, David Harsanyi writes that voters will not be motivated by the decision in the midterm elections. Claiming “little will functionally change”, he predicts that voters “will likely turn back to worrying about inflation and energy prices.”
Today in Focus
Walls, ‘gates’ and Britain’s local elections
Whether its a focus on the ‘red wall’ or the ‘blue wall’, Partygate or Tractorgate, local elections are an important guide to the prospects of the national government and opposition alike, says Heather Stewart
What else we’ve been reading
Rory Carroll’s report on Sinn Féin’s strategy to win power in Thursday’s Northern Ireland assembly election explains why the party is being ultra-cautious as it stands on the brink of victory. Read more from Rory and other Guardian correspondents when we preview the local elections in tomorrow’s First Edition. Archie
Filmmaker Tamanna Rahman examines the toxic culture in the music industry that allows allegations of sexual assault to fester. Rahman spoke to a number of women about their experiences in the business — it’s a difficult but important read. Nimo
Anton Jäger makes a really interesting case for why progressives should resist using courts to take on the right: he sees the strategy as an “expression of political weakness” that can galvanise support for their opponents. Archie
The annual Met Gala — the biggest day in fashion — has once again come and gone, and it has, once again, disappointed onlookers. Jess Cartner-Morley is hilarious in this piece asking if social media has killed good taste. Nimo
I loved reading Arifa Akbar’s reflections on the limits of theatre criticism when a play is bound to change over time. Her ability to recognise that problem only emphasises how good a critic she is. Archie
Sport
Football | Liverpool beat Villarreal to seal their place in the Champions League final. Jurgen Klopp’s team survived a scare in the semi-final second leg, going 2-0 down before coming back to win 3-2.
Football | The sale of Chelsea is in serious doubt over fears Roman Abramovich is attempting to renege on his promise to write off his £1.6bn loan to the club. The possibility emerged in talks between the club and the government last week.
Olympics | The modern pentathlon is to trial a radical new 45-minute format which will be “like James Bond meets the Krypton Factor” as part of plans to transform the event after discarding show jumping in favour of obstacle racing. The move is designed to give the sport a higher profile.
The front pages
The Guardian leads today with “Biden: leaked anti-abortion ruling ‘imperils civil rights’” while the Mirror has “Beyond Pathetic”, about BP’s profits. The Financial Times says “BP’s bumper earnings stoke calls for windfall tax to offset fuel bills”. “Man who just can’t answer a straight question” – the Daily Mail continues to press Keir Starmer and Labour for answers on what it calls “Beergate”. “Rwanda migrant plan in chaos” says the i. The Express leads with “PM: I’ll fire up economy to beat cost of living crisis”. The Times has “Privately educated to lose places at Oxbridge”. The Telegraph reports “France urged to come clean on Exocets”, about missiles used by Argentina in the Falklands war. The Metro’s top story is “Covid loans given to Isis” about allegations that a claimant of money meant to help businesses in the pandemic sent it to militants in Syria.
Cartoon of the day | Ben Jennings
The Upside
A bit of good news to remind you that the world’s not all bad
An all-female collective of oyster harvesters in the Gambia has already introduced new methods of stewardship and reforestation to protect the environment that provides their living. Now the organisers of the group are trying to set up designated market areas to sell their wares so they can avoid working in roadside stalls. “The harvesters matter,” said the social worker who founded the group, Fatou Janha Mboob. “They’re the ones who protect the environment, who protect … the mangroves. The harvesters take care of each other.”
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