Energy prices: what is a windfall tax and how would it work?

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Boris Johnson refused to rule out a windfall tax on Thursday as the clamour for a one-off levy grows. Supporters of a tax on energy giants’ profits argue the funds raised could be used to ease the pressure of rising bills on struggling households. Here’s how it could work:

What is a windfall tax?

A windfall tax is a one-off levy that the government imposes on a sector that has made huge profits from something they were not responsible for. The government has imposed them on industries before – in 1981, the then Conservative chancellor, Geoffrey Howe, levied the banks, arguing they had benefited from high interest rates. In 1997, the Labour chancellor at the time, Gordon Brown, raised £5.2bn from a windfall tax on privatised utilities.

How much could it raise?

Labour originally argued that a one-off, year-long windfall levy could raise £1.2bn to fund discounts on home energy bills, which are already at a record high of £1,971 for an average dual-fuel tariff. A further eye-watering rise is expected in October. However, the party now believes the levy could raise £2bn due to soaring energy prices.

The party has proposed levying an extra 10% on the corporation tax levied by the British government on the profits companies derive from drilling in the North Sea. The Tesco chairman, John Allan, has said there is an “overwhelming case” for the tax.

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Who would be taxed?

This would not only affect well-known firms such as BP and Shell but also lesser-known ones such as Harbour Energy – which actually produces more oil from the North Sea than any other extractor.

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The oil majors do not split out their North Sea earnings but have posted bumper profits in recent weeks. BP’s profits more than doubled in the first three months of the year. Its chief executive, Bernard Looney, has described the company as a “cash machine” and said a windfall tax would not stop it making any of the renewable energy investments it plans. Shell also reported a surge in first-quarter profits, to £7.3bn.

Companies have moved to champion the investments they are making in the UK. Shell said it planned to invest £20bn to £25bn in the UK energy system over the next decade. The North Sea operator Neptune Energy is spending $1bn over the next five years.

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Meanwhile, the chief executives of the largest North Sea oil producers have enjoyed a pay bump during the energy crisis.

What is the government’s position?

Boris Johnson has repeatedly argued that a windfall tax would force companies to abandon other investments in domestic energy projects. The chancellor, Rishi Sunak, has reportedly asked Treasury officials to examine plans for a levy. Johnson refused to rule out the levy but told LBC on Thursday: “The disadvantage with those sorts of taxes is that they deter investment in the very things that they need to be investing in – new technology, in new energy supply.

“I don’t like them … I don’t think they’re the right way forward. I want those companies to make big, big investments.”

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Would a windfall tax solve the energy crisis?

The levy could raise £2bn, providing some government firepower to help with energy bills.

However, more may be needed to help the millions of households struggling with bills as rampant inflation forces Britons to pay more for everything from food to petrol, adding to the cost of living crisis.

The Scottish Power chief executive, Keith Anderson, has said a £1,000 discount on bills – to be repaid at a later date – would be an effective mechanism to help, offering £10bn of support for 10m households.

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