Reports: Sunak orders plan for windfall tax on power companies and oil and gas producers

The Chancellor has ordered Treasury officials to draw up proposals for a windfall tax on the excess profits of oil and gas companies, according to a report that suggests the government is gearing up for a major u-turn following weeks of political pressure.

The government has for weeks insisted it is against a windfall tax on the record profits accrued by oil and gas companies as a result of the soaring energy prices triggered by Russia’s invasion of Ukraine, contending the policy is inherently “unconservative” and could disenctivice infrastructure investment in the UK.

But political pressure has been growing on Ministers to shift their position from a broad coalition of campaigners, MPs, and business leaders, who have argued the profits of oil and gas firms should be redistributed to provide relief to households and businesses currently struggling with soaring energy bills.

Last week, Conservative MPs voted against a Labor amendment to the Queen’s Speech which called for a tax on the profits of oil and gas companies after being instructed to do so by government whips. But a growing number of Conservative MPs have signaled they are minded to support such a tax and Chancellor Rishi Sunak is said to be warming to the idea.

Now a report in the Financial Times The government is considering the introduction of a windfall levy that is broader in scope than Labor’s plan and would see a new tax extended to cover the profits of electricity generators, such as gas-fired power stations and wind farm operators, in addition to oil and gas companies.

The paper reported last night the Chancellor had ordered officials to draw up plans for such a levy, which would apply to clean energy companies such as SSE, E.ON, ScottishPower, EDF, and RWE, as well as companies engaged in the extraction and sale of fossil fuels, such as BP and Shell.

Household gas and electricity bills have surged to record levels as the wholesale price of gas has increased by 335 per cent over the last year, prompting energy companies and campaigners to warn that up to four out of 10 households in Britain could be plunged into fuel poverty by October.

Meanwhile, oil and gas companies have recorded bumper earnings in the last quarter as surging gas and oil prices fed straight through to the bottom line. Greenpeace predicted earlier this month that fossil fuel companies were set to reap £11.6bn in profits as a result of rising energy prices that have been driven in large part by the war in Ukraine and Russia’s stranglehold on European gas markets.

Labor has calculated that a windfall tax applied to North Sea oil and gas producers would raise £1.95bn for Treasury coffers that could be channelled towards measures that would protect households from rising energy costs.

The FT reported that Treasury officials are working on proposals for a windfall tax model for North Sea oil and gas producers similar to the one introduced by the Conservative government in 2011, which mobilized £2bn by temporarily raising the supplementary corporation tax charge on fossil fuel production to 32 per cent.

The extra charge was restored to its original 20 per cent threshold when the wholesale oil price settled below a trigger price of $75 a barrel.

As such, those briefed on the Treasury’s current plans said oil and gas producers could continue to pay a higher charge for a number of years, if wholesale prices continue to remain high.

The Treasury and Department for Business, Energy and Industrial Strategy (BEIS) had not responded to BusinessGreen‘s request for comment on the latest reports at the time of going to press.

Any move to raise taxes on clean energy generators would likely prove controversial, with opponents fearing the move couldly future investment that the UK desperate needs if it is to deliver its climate goals. However, advocates of a windfall tax will counter that the UK still has a highly competitive corporate tax regime and it is policy mechanisms, such as clean power contracts and planning regulations, that are more likely to determine levels of investment in new offshore wind and nuclear projects.

Moreover, environmental campaigners have argued that the proceeds from a windfall tax could be used to increase investment in energy efficiency programmes, which would deliver lower bills, reduced carbon emissions, and enhanced energy security in the long term.

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