Scrapping North Sea Windfall Tax Would Not Reduce UK Energy Bills, Experts Insist
Easing the windfall tax on the North Sea would provide no relief for hard-pressed consumers and would merely fatten the profits of oil and gas companies, according to economists and experts. Rachel Reeves, the UK chancellor, is understood to be considering reductions to the energy profits levy, or potentially scrapping it and replacing it with a lower duty. This comes as oil prices surged to $100 a barrel on Monday, driven by ongoing tensions in the Middle East, with the US-Israel offensive on Iran showing little sign of halting.
Background of the Windfall Tax
The tax was introduced during the last oil crisis in 2022, following Russia's invasion of Ukraine, which sent oil and gas prices soaring. Producers reaped windfall profits because the cost of production remained unchanged while the prices they could command for their oil and gas increased by more than 50% within weeks. Companies are poised for another bonanza as oil production in the Middle East falters and tankers face disruptions in the Strait of Hormuz.
Political Calls and Expert Counterarguments
The Conservative party has called for the windfall tax to be scrapped, arguing it would bolster the North Sea oil and gas industry. However, experts have dismissed this claim. Simon Cran-McGreehin, head of analysis at the Energy and Climate Intelligence Unit thinktank, explained that the tax operates on the profits of producers, not their output. The price producers receive per barrel is determined by international markets, meaning UK producers subject to the tax cannot pass it on to consumers. "It's an upstream tax, so it does not impact the end consumer," he stated.
Some proponents of easing the tax argue it would encourage more investment in the North Sea to increase production. But Alex Chapman, a senior economist at the New Economics Foundation, countered that if North Sea producers wished to invest, they could do so with the substantial profits they are already earning from soaring prices, rather than requiring tax breaks. "The Treasury should look to real opportunities for growth, not this," he emphasised.
International Comparisons and Economic Impact
Advocates for tax reductions have also claimed it puts the UK at an international disadvantage. Bob Ward, policy director at the Grantham Research Institute at the London School of Economics, pointed out that the 78% tax paid by Britain's North Sea companies on their profits is roughly equivalent to what Norwegian producers pay. The windfall tax has raised approximately £12 billion, a figure dwarfed by the £56 billion spent by the government to assist consumers with high energy prices during the 2022-23 price spike.
Ward added, "It seems a bit premature for the government to consider removal of the energy profits levy now, with energy companies again set to make windfall profits and the possibility that the government may yet again have to spend taxpayers' money to protect consumers."
Long-Term Energy Strategy
New drilling in the North Sea, which some have advocated for, would take over a decade to become operational, thus having no impact on the current crisis. In contrast, expanding renewables and transitioning to electric vehicles would deliver significant benefits much sooner. In the longer term, additional drilling makes little sense as the UK's share of the basin is heavily depleted, with only pockets of oil and gas that are more difficult and costly to extract. Estimates suggest new licences in the North Sea would extend the basin's life by only about three to five years.
Robert Palmer, deputy director of the campaigning group Uplift, described the notion that the North Sea could drive economic growth as "a fantasy, a pipe dream by a declining industry – because this is about geology, not politics." He urged the government to invest in clean energy instead, noting, "All of us are about to get poorer – except the oil and gas companies and their shareholders. It's pretty incredible that these companies are lobbying now for even less tax."
Consumer Advice
The best advice for consumers, according to experts, is for those able to do so to switch away from large petrol and diesel-driven SUVs, which have become normalised in the UK in recent years, in favour of public transport or electric vehicles. Households are also encouraged to install heat pumps, insulation, and solar panels to reduce energy costs and environmental impact.
