Extending the windfall tax will help bring down energy bills permanently
At the start this year, I argued in a piece for The House that the Conservatives shouldn’t rule out a windfall tax. Despite some Cabinet ministers expressing opposition to the policy, the government ploughed on and implemented one in May.
Rishi Sunak introduced a new oil and gas profits levy to claim back some of the super-normal profits companies such as BP and Shell were making. The levy was set at 25 per cent and expected to bring in £5 billion.
In five months, three crucial things happened that changed the mind of the government. First, the opposition parties applied political pressure in calling for a windfall tax. Second, the public started to blame energy companies for the cost of living (their number one concern), with our poll showing that 60 per cent of the public in favour of a windfall tax. And finally, the Treasury desperately needed money to help people with their energy bills.
If the energy profits levy was raised to at least the global average, the UK would have greater scope to help in the short-term with energy bills
Now in August, there is a sense of déjà vu. Last week, the Liberal Democrats called for a scrapping of the energy price cap rise – and an extension of the existing windfall tax by 5 per cent. On Monday, Keir Starmer set out Labour’s plan, which also included freezing the price cap at the current level and paying for the extra costs from extending taxes on oil and gas companies. But both candidates for prime minister have indicated they are not keen on this plan. The bookies’ favourite, Liz Truss, even went so far as to say that profit should not be considered “dirty or evil”. In a capitalist society, few would disagree, but there is a difference between profit and profiteering.
International conglomerates like Shell and BP are continuing to experience record profits, not through planned investment, but due to a supply shock. Meanwhile, the Russian sized hole in the European gas market means that, by early next year, energy bills could reach £5,000. At those figures, home energy costs would be £193 billion, higher than annual defence and education spending combined. Once in No 10, the new prime minister will almost certainly have to reconsider their stance.
The argument put forward against windfall taxes is that it raises the cost of capital, dries up investment, and punishes ordinary shareholders like pensioners. The problem is that everyone is being made poorer by energy driven inflation, from pensioners on fixed incomes, to student renters and middle income families. Britain’s main pension funds actually own less than 0.2 per cent of Shell and BP shares, while two-thirds of United Kingdom households will be in fuel poverty by January 2023. It’s a ticking time bomb and its why the opposition parties have been quick to pick their side.
Cornwall Insight are predicting energy bills will stay high for at least the next three years. Over that period, a windfall tax can helpfully claw back some of the cash from profiteering oil and gas companies, helping to ease the pressure on household bills and calm the political storm. But there is a growing argument to extend the windfall tax higher and for longer.
The energy profits levy of 25 per cent raised the total tax rate closer to historical levels for the UK of around 65 per cent. This is below the global average for oil and gas (70 per cent) and well below the level in Norway (78 per cent). If the energy profits levy was raised to at least the global average, the UK would have much greater scope to help people in the short-term with energy bills and also to support the transition away from volatile fossil fuels, which have caused this crisis. Let’s not forget, 96 per cent of the increase in energy bills is due to the wholesale price of gas, which Britain is over-reliant on.
As organisations like Conservative Environment Network have been calling for, we need a national effort to install better insulation – street by street, town by town, so that we increase our energy sovereignty and reduce the risk of energy crises in future. We have some of the oldest and leakiest housing stock in Europe, with people’s energy bills quite literally going through the roof. Nineteen million UK homes are ranked in the bottom rungs for energy efficiency, with EPC ratings of band D or worse. From October, those living in homes with an EPC of C or above can expect to save an average of £916 per year compared to those in homes rated EPC D or worse.
There is an electoral boon in acting too. Recent analysis by the think tank ECIU showed that 37 of 40 most marginal constituencies are being hit harder by the gas crisis because of poor housing quality. Two-thirds now say the government is not doing enough to help with the cost of living, which is politically unsustainable. And three in four Tory voters back Labour’s energy plan to freeze bills and extend the scope of the windfall tax.
For the incoming prime minister, an about-turn on windfall taxes might be a bitter pill to swallow, but it is the right thing politically and for the health of the country. Britain needs energy surgery to bring down bills permanently, but it also needs emergency pain relief ahead of this winter.
Joe Tetlow is the senior political advisor at the Green Alliance.
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