Labour’s call for a windfall tax on North Sea oil and gas follows in Thatcher’s footsteps
The call has gone up to raid oil and gas profits as crude prices soar and the cost-of-living crisis bites. But would it do more harm than good, asks Jon Yeomans
Bernard Looney was feeling confident. After a bumpy couple of years for BP, he had some good news to impart. Oil prices had rebounded from their Covid-induced lows and money was pouring back into its coffers. Presenting BP’s fulsome third-quarter results last November, the chief executive remarked that it was “literally a cash machine”.
Looney may wish he had been more circumspect. The throwaway comment has become a stick with which to beat the industry, emblematic of oil producers making out like bandits while ordinary people suffer. Global gas prices are soaring and millions of households face the prospect of bills rocketing from April, when the energy price cap goes up.
On the same day that industry regulator Ofgem announced that the cap would rise by £693 a year to just shy of £2,000, Shell said it would buy back $8.5 billion (£6.25 billion) of its own shares and raise its dividend. The optics, as they say, were not good. Now oil is heading towards $100 a barrel and the Labour Party is calling for a windfall tax on oil majors to keep down energy bills. “North Sea oil and gas producers who have made a fortune... should be asked to contribute,” said Ed Miliband, the shadow climate secretary.
Calls for a fresh levy may play well with an electorate crying out for relief from the cost-of-living crisis. And it would not be the first time the UK has slapped a windfall tax on a big industry — even if such measures have been used sparingly in the past. But chancellor Rishi Sunak has indicated his aversion to the idea; after all, he needs to burnish some low-tax credentials with his Conservative backbenchers. In truth, the Tories are no strangers to a tax raid, yet the question remains: would a windfall tax on the oil and gas giants be an effective or desirable tactic at a time of national turmoil?
The key definition of a windfall tax is that it should be a one-off. It typically targets an “unearned windfall that has occurred to somebody not as a result of their own actions”, said Chris Sanger, head of tax at the accountancy firm EY.
Moral maze
There is also a moral dimension to a windfall tax. Dibb believes a line can be drawn between large oil and gas profits “and the fact that wide numbers of the general public are facing quite severe economic hardship” because of those same prices. “That is a fundamental injustice within our economy and it can be remedied with a relatively small tax,” Dibb said.
North Sea oil and gas companies already pay a surcharge on top of corporation tax, bringing their tax rate to 40 per cent; Labour’s proposal is to lift this to 50 per cent, raising about £1.2 billion. It would use this, along with a couple of other measures, to cut VAT on energy and expand the Warm Homes Discount, lowering bills for 9 million households most in need.
Unsurprisingly, the sector is opposed to a fresh tax, pointing out that surging gas prices mean that the Treasury will still rake in £3 billion in extra tax revenue if it leaves rates alone. A windfall tax would “send financial shockwaves through the industry”, trade body Oil & Gas UK (OGUK) warned; it would discourage firms from investing in North Sea gas and make Britain more dependent on imports.
SPONSORED
However, there is a precedent for a moralistic windfall tax, and it comes from Margaret Thatcher’s first government. In 1981, then-chancellor Geoffrey Howe imposed a 2.5 per cent levy on bank deposits to raise about £400m from the giant profits banks were making through interest rates as high as 15 per cent. At the time, millions were struggling through recession and high unemployment. Thatcher recalled: “Naturally, the banks strongly opposed this. But the fact remained that they had made their large profits as a result of our policy of high interest rates, rather than because of increased efficiency or better service.”
Labour also imposed a windfall tax in 1997 on a string of privatised companies such as British Airways and British Gas — sell-offs that were deemed to have been priced too cheaply and to have left the businesses too loosely regulated, allowing them to bank huge profits. Labour raised £5.2 billion from the measure. Sanger of EY, who worked on the tax for then-chancellor Gordon Brown, noted that the measure had been in Labour’s election manifesto, giving companies plenty of notice. “By including it in the manifesto, it was clear that there would be no other windfall tax,” he said.
In 2009, after the advent of the financial crisis, Labour levied a one-off 50 per cent tax on bankers’ bonuses, which brought in £2 billion — far more than the £550 million that had been expected. It differed from the previous windfall taxes in being prospective, rather than retrospective. It was supposed to discourage bank largesse, but instead, it encouraged companies to hand out even more to make up for the shortfall in take-home pay.
Banks continued to feel the pain under the subsequent coalition and Conservative governments, with the introduction of the banking levy and bank surcharge, the latter of which exists to this day — though neither was strictly a windfall tax in the sense they were not one-offs.
ADVERTISEMENT
Likewise, North Sea oil has been a regular target of tax hits. As early as 1980, Howe imposed an extra levy on the oil and gas industry, only to abolish it two years later. In 2002, Brown introduced a supplementary charge of 10 per cent on energy company profits, and doubled it in 2005 after the likes of BP and Shell reported bumper profits from higher prices. The déjà vu does not end there: Brown committed the funds raised towards the “Warm Front” scheme — to help poorer households with energy bills and home insulation. The industry warned that the measure would “severely undermine business confidence”, but this did not stop the coalition from raising the charge in 2011.
Deep freeze
Dire warnings that fresh taxes could send oil and gas investment into a deep freeze have returned to the fore. The industry argument goes that gas will be needed for decades to come as a “transition fuel” while countries target net-zero emissions by 2050. In particular, gas will have to plug a shortfall as coal-fired power stations close and ageing nuclear plants are retired. As recent price spikes have shown, demand for gas could remain higher than usual for years to come.
“If anything, the UK needs more gas, not less right now,” Looney said last week. “That’s going to require more investment … A windfall tax probably isn’t going to incentivise [that].”
BP and Shell have both been reducing operations in the North Sea to focus on easier, and more profitable, basins. In their place have come smaller operators, such as Serica Energy, which reckons it can still eke out profits from older wells.
Mitch Flegg, Serica’s chief executive, said UK gas had lower emissions than imports, such as the liquefied natural gas that comes from the likes of Qatar. But he warned: “A windfall tax may make it more difficult for companies such as ours to continue making the level of investment we’re planning in the next few years. That may lead to further shortages and price volatility.”
Looney argued that BP’s profits would be reinvested in green energy such as offshore wind and hydrogen — exactly the type of investment, and jobs, that the UK needs. Moreover, energy companies were racking up huge losses as recently as 2020, when oil prices briefly turned negative. BP and Shell recorded combined losses of $42 billion that year. As another industry executive put it: “You take the risk, but you do expect a reward. What you don’t expect, after years of hardly any money coming in, is to get that money taken off you.”
The economic theory holds that a windfall tax should not change the behaviour of the market because it is a unique event. Not everyone buys that. “Nobody would believe it was a one-off,” said one chief executive. “And the history of these things is that even when governments promise to remove it when prices go down, they are slow to take it away.”
ADVERTISEMENT
OGUK points to figures that show exploration for new fields cooled rapidly after the tax hike in 2011. But Professor Michael Jacobs, specialist in political economy at the University of Sheffield, said: “It cannot be the case that this is going to hit investments, because these companies have got much more money than they were expecting.” The former adviser to Brown, who described Labour’s proposed tax increase as “modest”, said: “You would expect them to invest more, not less.”
Labour’s proposed tax would only hit the profits made by oil companies in the North Sea, rather than their global earnings. Some have questioned how this would work in practice as some big firms do not break out UK profits. Moreover, not all energy companies make money at the market, or “spot” price, of gas; many sell forward their product at fixed prices. Those that have hedged sales in this way will not be banking as much profit. Nor would a windfall tax apply to Norweigian producers, who supply a large proportion of UK gas.
Dibb of the IPPR argued that the physical location of oil and gas resources lowered the likelihood of firms quitting the North Sea. “It’s not like a tech firm moving from New York to Dublin,” he said. “It’s highly unlikely they’ll go elsewhere.”
There is another argument that a windfall tax may simply miss the point. While it can act as a sticking plaster to help households facing the dire choice between heating and eating, it would do little long term to address energy supply, security and prices — let alone the transition to net zero. “With a windfall tax, you’re not discouraging people from consuming energy, which is what the UK should do if it wants to achieve climate neutrality,” said Alice Pirlot of the Centre for Business Taxation at Oxford University. Such a move would most probably require a “rethink of the entire UK tax system”, she said. Professor Jacobs suggested a more creative approach: “We need to insulate homes better so people don’t need to use as much energy. That’s the way to keep bills down.”
History of one-off hits
November 1980 Magaret Thatcher’s chancellor, Geoffrey Howe, raises tax on oil and gas producers
March 1981 Howe’s budget introduces a windfall 2.5 per cent tax on bank deposits
July 1997 New Labour implements a manifesto commitment to bring in a windfall tax on privatised companies such as BT, British Gas and the airports authority BAA
ADVERTISEMENT
April 2002 Gordon Brown introduces supplementary tax on oil and gas profits. It is raised again three years later
December 2009 Alistair Darling, the chancellor at the time, imposes one-off levy of 50 per cent on any banking bonus above £25,000
January 2011 Coalition government introduces banking levy; the rate is adjusted over time. The same year, George Osborne raises the surcharge on the North Sea to 32 per cent, before reducing it again.
July 2015 Conservative government announces the bank surcharge – an extra 8 per cent on profits in addition to corporation tax, while reducing the bank levy
December 2019 Labour proposes windfall levy on oil and gas companies in election manifesto
March 2021 Rishi Sunak raises corporation tax from 2023 but reduces the bank surcharge; overall tax for banks will go up slightly to 28 per cent
January 2022 Labour and the Liberal Democrats call for windfall tax on oil and gas producers
No comments:
Post a Comment