Blog Splitting the energy bill When oil and gas companies are making more money than they ever imagined, it’s time for a higher windfall tax By Chaitanya Kumar 13 August 2022 While the world’s oil and gas giants are raking in record profits, families are bracing themselves for a predicted energy bill increase to £4,266 a year for an average household by January. This is treble last winter’s price cap, which was £1,277. Even compared to the current cap, which rose to £1,971 in April, a family using an average amount of energy is facing a bill
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Splitting the energy bill
When oil and gas companies are making more money than they ever imagined, it’s time for a higher windfall tax
13 August 2022
While the world’s oil and gas giants are raking in record profits, families are bracing themselves for a predicted energy bill increase to £4,266 a year for an average household by January. This is treble last winter’s price cap, which was £1,277. Even compared to the current cap, which rose to £1,971 in April, a family using an average amount of energy is facing a bill increase of £2,295 for the year, nearly £200 a month. Yet our current PM has recently returned from holiday to preside over a zombie government while we wait for the Conservative leadership election to play out. The two potential contenders for next prime minister have so far only offered vague commitments.
Back in May, following a period of intense pressure from campaigners and opposition parties, the government U‑turned and finally implemented a windfall tax on fossil fuel firms. The then-chancellor Rishi Sunak announced an “energy profits levy”, increasing the tax that North Sea oil and gas producers pay by 25 percentage points. The Treasury estimated that the levy will bring in about £5bn in extra revenue over its first year. However, this tax came with a major loophole: fossil fuel companies can get 91p of tax relief for every £1 they spend on investing in UK oil and gas extraction. Right now, the windfall tax loophole is incentivising oil and gas giants to drill for more dangerous fossil fuels in the UK. This is already leading to companies planning to develop new oil fields that would otherwise not be profitable enough.
Not only has the government opted to undermine its own tax with these tax reliefs, it has decided to offer a tax giveaway towards harmful new fossil expansion mere months after hosting the Cop26 international climate summit. Drilling for new oil and gas is incompatible with cutting carbon emissions fast enough to reach net zero by 2050. The tax is badly designed and allows fossil fuel firms to keep a substantial share of their super normal profits at the same time as millions of families are worrying how they will afford to heat their homes this winter. By addressing these flaws, the government can raise substantial further revenue to support struggling families.
The government has not published the full costings of their energy profits levy, and it is unclear if the expected £5bn in revenue is net or gross after considering the accompanying tax breaks. It is likely that these numbers were calculated based on the oil and gas prices at the time it was introduced. Given the price of UK natural gas has doubled between the end of May and the beginning of August (from £1.82 to more than £3.70 per therm) and the price of crude oil continues to be elevated and forecast to remain so over the next 12 months, it is likely that even in its current form the government levy will raise substantially more than expected.
Building on the work of Tax Justice UK, and after accounting for price increases per unit of oil and gas since the OBR’s March forecast until the beginning of August, we propose that the government boost the rates of the energy profits levy. Increasing the windfall tax by 20 percentage points (to 45%) applied to all profits and removing the loopholes introduced by the government could raise £14.3bn over the next year. This would be £9.3bn more than the initial projection of £5bn raised through the levy. This would almost triple the amount of money the government can raise from fossil fuel companies making excessive profits, which could be used to support families struggling to afford their energy bills this winter. These calculations are based on central estimates of forecasts for oil and gas prices over the next year. Combined with other taxes paid by oil and gas giants, increasing the windfall tax would mean taxing profits at a headline rate of 85%. We estimate this would take post-tax profits of oil and gas firms to the normal levels seen pre-pandemic. These are still significant sums, at an estimated £4.8bn.
The scale of the crisis is so vast that any meaningful government intervention to support everyone through the winter would cost upwards of £30bn. Higher taxes on the super normal profits generated by firms as a direct consequence of this price shock can and should be used to shield families this winter. And if prices remain high for the foreseeable future, as analysts forecast, the case for this windfall tax to be locked in through this decade becomes stronger.
The soaring prices of oil and gas have mainly been determined by changes in international markets. But while the UK can do little to reduce the prices of gas and oil, it has powerful tools to mitigate the impacts of sky-high energy bills. In the medium to longer term, our priority should be reducing our dependence on fossil fuels by scaling up investment in renewables and insulating millions of homes through a Great Homes Upgrade. But immediately, we need urgent support for struggling families and individuals while tackling profiteering energy producers. The current prime minister might be asleep at the wheel, but whoever becomes the next PM should begin with a stronger windfall tax to make sure fossil fuel companies pay what they owe. This way we can make sure everyone can stay warm this winter.