Windfall tax impact on UK's energy transition and net-zero goals
In response to an oral question in the House of Lords about oil and gas windfall tax, Peers have raised concerns over the impact of windfall taxes on investment and the UK’s path towards achieving net-zero objectives. Amidst differing opinions, the government emphasised its commitment to a sustainable and diverse energy future, with a focus on technologies such as hydrogen to address intermittent power supply.
Lord Bruce of Bennachie (Lib Dem) asked about the government’s assessment of the impact of the oil and gas windfall tax on investment and jobs, as well as the capacity of the energy sector and supply chain to deliver key components of the transition for achieving the UK’s net zero objectives.
Lord Callanan, Department for Energy Security and Net Zero minister, highlighted that the government has introduced the energy profits levy for this sector, along with generous investment allowances, noting that “we want to see producers reinvest profits to support the economy, jobs and the UK’s energy security”.
Lord Bruce pointed out that while efforts are being made to meet net zero, “through all the projections to and through net zero, we will continue to use fossil fuel, albeit on a declining basis”. He emphasised the importance of investing in technologies such as carbon capture and storage, hydrogen and green electricity. The minister agreed with Lord Bruce’s comment and stated that it ‘makes sense’ to obtain these resources from UK fields rather than importing them.
“The Energy Profits Levy (EPL) has had a dramatic effect on investment in North Sea oil” suggested Lord Leigh of Hurley (Con). He asked the minister if he could provide some analysis of the bids that have been made by North Sea oil companies that are no longer investing in the North Sea.
The minister replied that “[t]axation levels are obviously a matter for the Chancellor and the Treasury” and raised concerns about several investments in the North Sea who have pulled out due to a more ‘stable tax environment’ elsewhere.
Lord West of Spithead (Lab) asked if the minister was in agreement that the best net-zero way is to ensure that the UK has energy to provide to the electrical baseload is to “press ahead rapidly with Hinkley C and Sizewell” and added that “if we do not get this nuclear power online, we are not going to make it”.
Lord Callanan agreed with Lord West, emphasising that the government would like to diverse energy supply.
Lord Stern of Brentford (Crossbencher) enquired whether the minister acknowledges that the Paris agreement implies the use of oil and gas in the 2030s than now. As a result, he suggested that “issuing permits for exploration that usually requires at least seven years to generate flows makes little sense”.
The minister challenged Lord Stern’s argument and reported that with even with any new licences issued, UK production will continue to decrease at the rate of approximately 7 per cent annually. This is much higher than what is required globally (3 to 4 per cent).
Lord Teverson (Lib Dem) observed that the oil and gas windfall tax taxes profits and also gives ‘a substantial kickback’ on investment. “On renewables, the levy is against revenue and there is no such kickback.” He asked when the government would “stop discriminating against renewables”
Baroness Blake of Leeds (Lab) discussed Office for Budget Responsibility data, which showed the extent to that oil and gas firms were able to decrease their energy profits levy and still make good profits. “It is estimated that over £10 billion of potential tax will be missed between 2022-23 and 2023-24”, she added and urged the government to consider fixing the ‘loopholes’ in the levy.
“I realise that the Labour Party’s policy is to tax firms into extinction, but we need to leave them with some profits,” argued the minister. These profits go towards pension funds and other shareholders which many pensioners and others rely on for their income, he added. He said that the levy, which has been set at a rate of 75 per cent, is one of the highest in the world.
Baroness Sheehan (Lib Dem) stressed the importance of “equipping our workforce with transferable skills for the energy transition” and asked the government to ensure that “a single offshore energy skills passport that aligns training standards in all offshore energy sectors is introduced”. Lord Callanan said the Baroness was “essentially right”.
You can read the full debate here.