Energy Windfall Tax

The energy windfall tax or commonly known as the energy profits levy has generated around £2.8bn extra revenue up to June 2023 according to the government.

The windfall tax is in place until March 2028 and is specifically for fossil fuel companies because of the bumper oil and gas profits they have made following the invasion of Ukraine.

The revenue collected has been allocated to aid residential energy programs including the energy price guarantee which caps the usual home energy expenses until the end of June this year (2023).

Projections indicate that by March 2028 the energy profits levy will have accrued nearly £26bn however the levy might be adjusted during it’s lifetime depending on the cost of oil and gas.

Gareth Davies MP, Exchequer Secretary to the Treasury, said:

“It is right that we recover excess profits resulting from Putin’s war and use the money to help people with their energy bills. Thanks to the revenue raised from windfall taxes on energy profits, we will have helped save the typical household £1,500 on their energy bill by July.

How much is the energy windfall tax?

This tax will be charged in addition to the regular 30% business tax rate and a 10% additional charge on these firms’ earnings, leading to a total tax rate of 65%.

These corporations will be unable to use their past losses or decommissioning expenses to offset profits that the levy targets.

Sunak the then chancellor of the exchequer mentioned that the government would gradually eliminate the levy “if oil and gas prices revert to their historically typical levels”.

The tax on the commodities is reported to reduce to 40% when the cost drops to $71.40 for each barrel of oil and 54p for each therm of gas sustained over a half year period.

At the time of writing the market price for a barrel of Brent crude oil hovers around $75 and a therm of gas is approximately 60p.

To stimulate new investments in the north sea an 80% investment allowance will be granted to firms for any new investments in oil and gas extraction within the UK.

Energy windfall tax effects

The energy windfall tax will be enforced on any gains earned post the declaration date meaning it’s not a retroactive tax akin to prior windfall taxes.

UK government officials have pointed out that this absence of retroactivity is deemed as an advantage.

Nonetheless by being applicable to future profits instead of previous ones this new tax could be more susceptible to influencing behaviour than a retrospective windfall tax would have been.

The provision for investment is intended to heighten the motivation for firms to invest.

Yet the actual effect of it will be contingent upon the available investment opportunities and the speed at which oil and gas firms can initiate this process.

North sea oil investment and the environment

With climate goals high on the political agenda increasing oil and gas production does unfortunately bring with it an increase threat to the environment.

The increase in the north sea gas and oil production will effect the UK’s climate ambitions but the treasury has argued that abruptly halting north sea oil production would be reckless.

Exchequer Secretary to the treasury Gareth Davies explained that without the UK’s own oil and gas the country would be compelled to increase imports endangering our supply security.

Gareth Davies MP, Exchequer Secretary to the Treasury, said:

“While we stepped into help, never again can our energy supplies be at the whim of petrostate despots like Putin. That’s why it’s so important that we secure investment in our own domestic supply, protecting the tens of thousands of British jobs that come with it.

“It would be beyond irresponsible to turn off the North Sea taps overnight. Without oil and gas from British waters, we would be forced to import even more from overseas, putting our security of supply at risk.”

Historical examples of windfall taxes

In the UK a one time windfall tax was imposed on privatised utilities in 1997 which aimed at addressing perceived excess profits made by these companies after privatisation.

Outside the UK In 1980 the United States implemented the crude oil windfall profit tax act which imposed a tax on oil companies’ excessive profits due to increased oil prices.

The crude oil windfall profit tax act was repealed in 1988 as it led to reduced domestic production and increased dependence on foreign oil.

Should windfall taxes be used more often?

A completely fair tax system for all is quite likely unachievable with so many interests and agendas at government and corporate levels.

Windfall taxes may hinder business growth and spark debates between shareholders but they also raise important questions about fair wealth distribution on a global scale.

The use of windfall taxes on both corporations and the most wealthy individuals governments could be used to promote a more balanced society by redistributing sudden or unanticipated income gains.

A good example of what could be achieved was reported on by Oxfam on the 8 June 2023 where they raised awareness of the European citizens initiative which is a group of experts in economics, advocates, political figures, and affluent individuals from seven European nations.

They are urging the European Union (EU) to implement an enduring yearly wealth tax on the largest fortunes in Europe.

The aim of this initiative is to increase revenue that can be used to mitigate both domestic and international poverty and inequality, as well as address the pressing issue of climate change.


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