Scrapping North Sea windfall tax would not reduce UK energy bills, say experts | Fossil fuels

Easing the North Sea windfall tax would do nothing for struggling consumers and would only increase profits for oil and gas companies, economists and experts have told the Guardian.

Rachel Reeves, the British chancellor, would consider reducing the levy on energy profits, or even abolishing it and replacing it with a lower duty. Oil prices soared as high as $100 a barrel on Monday as the US-Israeli offensive against Iran showed no signs of stopping.

The tax was introduced during the last oil crisis, in 2022, after Russia’s invasion of Ukraine sent oil and gas prices skyrocketing. Producers made windfall profits because the cost of production remained unchanged, but the price they were able to get for their oil and gas increased by more than 50% in a matter of weeks.

Businesses are poised for another windfall as oil production in the Middle East faltered and tankers remained stuck in the Strait of Hormuz.

The Conservative Party has called for the windfall tax to be scrapped, saying it would help the North Sea oil and gas industry. But experts told the Guardian that was not the case.

Simon Cran-McGreehin, head of analysis at the Energy and Climate Intelligence Unit think tank, stressed that the tax applied to producers’ profits, not their output. The price producers get per barrel is determined by international markets, so UK producers subject to the tax cannot pass it on to their customers.

“This is an input tax, so it has no impact on the end consumer,” he said.

Some have argued that removing the windfall tax would allow more investment in the North Sea and increase production. But Alex Chapman, senior economist at the New Economics Foundation, said if North Sea producers wanted to invest in their industry, they could do so with the windfall profits they get from soaring prices, rather than needing tax breaks. “The Treasury should be looking at real growth opportunities, not this one,” he said.

Supporters of relaxing the tax argued it would put the UK at an international disadvantage. But Bob Ward, policy director at the Grantham Research Institute at the London School of Economics, pointed out that the 78% tax paid by British North Sea companies on their profits was roughly equivalent to the tax paid by Norwegian producers.

The windfall tax raised around £12 billion, but that figure is dwarfed by the £56 billion the government spent to help consumers facing high energy prices during the 2022-23 price hike.

He said: “It seems a little premature for the Government to now consider scrapping the Energy Profits Tax, when energy companies are once again set to make windfall profits and the Government may once again have to spend taxpayers’ money to protect consumers. »

New drilling in the North Sea, which some have also called for, would take more than a decade to become operational and therefore would have no impact on the current crisis, while the development of renewable energy and the switch to electric vehicles will have a much greater impact, much sooner.

In the longer term, more drilling does not make sense either, as the UK’s share of the basin is largely depleted, leaving only pockets of oil and gas that are harder and more expensive to extract. New licenses in the North Sea would only extend the life of the basin by around three to five years, according to estimates.

Robert Palmer, deputy director of campaign group Uplift, said the idea that the North Sea could bring economic growth to the UK was “a fantasy, a pipe dream of a declining industry – because it’s about geology, not politics”, and that the government should instead invest in clean energy.

He added: “We are all on the verge of getting poorer – except the oil and gas companies and their shareholders. It is quite incredible that these companies are now pushing for even lower taxes.”

The best advice to consumers, experts say, would be for those who can to ditch the large petrol and diesel SUVs that have become standard in the UK in recent years, in favor of public transport or electric vehicles, and for households to install heat pumps, insulation and solar panels.