CIRCA5000 | What is a windfall tax?
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What is a windfall tax?

By CIRCA5000 TeamBack to Mission Control

Investment updates • 3 min read 

What is a windfall tax?

The windfall tax on energy companies also comes with a relief if they invest in oil and gas exploration. We ask: what stopped a push for renewable energy investments instead?

A windfall tax is here. A one-off tax imposed on companies that have benefited due to a sudden positive shift in the industry, leading to exceptionally high profits. Like in the case of energy producers that have recently gained from runaway oil and gas prices.

Shell, for example, recently announced a record profit of £7.3b for the first three months of 2022 despite taking a £3.1b hit on the disposal of their Russian assets.

After all, these profits sit most uncomfortably with a cost of living crisis for the average UK household. Inflation is at 40 year highs and is expected to remain elevated for the rest of 2022. Moreover, the fact that these companies are seen as benefiting from Russia’s war on Ukraine, which has added to the pressure on fuel prices, is even worse. 

The tax sweetener

So after much hue and cry, the UK government finally relented to the tax. It holds back from calling it exactly that — a windfall tax — instead branding it as an “Energy Profits Levy”. But it is essentially the same thing. It expects to raise £5b with this 25% levy. This amount is to be redirected towards households, helping them pay their bills. 

It might appear to be a fair move, but we argue otherwise. It so happens that a sweetener is offered to energy producers as well. 

For every £1 invested by these companies for further oil and gas extraction, 91p is offered tax relief. So the profits that would have otherwise been paid as taxes, could now conceivably be directed towards developing more fossil fuel resources. Moreover, as The Institute for Fiscal Studies notes this incentive could actually wind up helping otherwise unviable oil and gas investments actually become profitable.  

Why not renewable energy investments instead?

But we ask: what stopped the government from incentivising investments in renewable energy instead? Big energy companies are already heavily invested in oil and gas. Consider this: BP has invested $84b worth in oil and gas exploration since 2016. In contrast, it has invested some $3b in renewable energy since 2016, which is peanuts by comparison as per media reports.

Its annual low carbon energy investments are expected to gain speed over the rest of the decade, to be fair. It expects increases of $3-5b by 2025 and another $4-6b by 2030. But much of its investments up to at least 2025 are still expected to be in oil and gas.

Not long after the Russian invasion, the UK government released its Energy Security Strategy document, which pushes forward the clean energy agenda, which was the right way to go. But now, it seems like we are two steps forward, one step backward. Or worse, one step forward, two steps back.

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