Let’s face it, a windfall tax will not solve the cost of living crisis or help stave off climate collapse. It is time for a more radical solution to the intersecting crises we face. We should seize the assets of Shell, BP and other climate criminals and use them to cut energy bills and fund a fair transition to net zero including renewables, insulation and free public transport. Anything less is throwing our young people, the fuel poor and the global south under a bus.
The Labour party is putting forward an amendment to the Queen’s speech today calling for a windfall tax on oil and gas companies – a one off levy on companies enjoying unexpected profits. They say it is shameful not to introduce the measure to help tackle the rising cost of living and have called the government obscene for refusing to bring in the policy.
There are precedents for such measures. For instance, the Italian government has unveiled a £11.8bn energy support package to help vulnerable people and businesses, which will be financed by increasing the windfall tax on energy firms to 25%.
Meanwhile Kwasi Kwarteng, the Business Secretary has suggested that such a move would deter firms from investing in the UK and would therefore hinder the necessary investment from the sector in moving to net zero carbon emissions.
The reality is that Shell and BP would barely notice a windfall tax and, however much it raises, it will barely make a dent in the cost of living crisis.
As always the picture on the ground is a little more complex than politicians soundbites would have us believe. The international oil companies follow the money wherever it leads and right now it is moving away from the North Sea – a mature and increasingly challenging basin – towards easier pickings elsewhere. There are of course exceptions, the Shell Jackdaw development, for example, is small, low risk and cheap, but there is no disguising the general trend – the oil majors are selling their North Sea holdings to private companies. Some 30% of the sector is now privately owned, while foreign governments such as Russia, Iran, China and Norway also own significant assets.
This presents the government with a major quandary. Kwasi Kwarteng wants oil and gas from the North Sea “for decades to come”. Kwarteng’s only option is to give generous inducements. Under his ‘energy security’ plan the public will carry the risks, the costs, and the climate consequences, while the oil industry makes the profit!
A windfall tax is a mechanism for capping profit. The government already employs a mechanism analogous to a windfall tax that puts a cap on excess profit and provides what BP calls – ‘a stable fiscal environment’. It is called a Contract for Difference (CfD). These contracts limit the profit that the renewable energy sector can make through a ‘strike price’. If the electricity price rises above the strike price then the difference goes to the government. In return for this, if the price falls below the strike price the government supports the renewable sector up to the level of the strike price.
The government also incentivises producers and protects consumers of oil and gas, to the sum of £12 billion per year pre-covid. Public money is used to encourage investment in oil and gas by reducing upfront costs on long term projects and reducing the lifetime cost by subsidising decommissioning.
There is a difference though. The CfD provides incentives at a cost – the strike price. The oil industry receives incentives but with no equivalent of a strike price. The North Sea provides no cost-of-living security. We pay the international price of oil no matter where it comes from. Protection to consumers is not tied to the North Sea. Fluctuations in the oil price both up and down are felt directly by us. If the prices are high as they are now (about $100 per barrel) we pay that. If they are low, then the North Sea becomes unprofitable. We saw this in 2015 where production was threatened with rapid job losses. There is no security from the North Sea either for jobs or fuel prices or supply.
Kwarteng also links the profit of the oil and gas sector specifically to investments in clean energy. This linkage is misleading. It is a way of justifying the continued investment in the oil and gas sector, but investment in the renewables sector is not about the North Sea – it is about the financial framework for investment in the renewable sector itself . There is a vast pool of capital to invest – when the market feels this is a safe place to invest in, it will.
The government’s current position is a certain pathway to collapse. Climate change will devastate our economy. Let us recognise that we can have a healthy, vibrant country with high levels of employment and security without our dependence on oil and gas. The question here is not whether we should shut down the oil and gas sector – on this we have no choice – it is how we build something to take its place that removes our dependence on fossil fuels and who pays for it?
We do not need the largess of the North Sea oil and gas industry. The oil industry is not part of the solution. We should be seizing the assets of Shell, BP and other climate criminals and using them to cut energy bills, finance a just transition to zero carbon and fund a major energy efficiency and home insulation programme. Anything less will be a complete betrayal of our young people, the small island states and those losing their lives and livelihoods to heatwaves and drought, right now across the global south. They will not forgive those responsible.