A third or more of any revenue raised by the chancellor’s new windfall tax on oil and gas profits could be handed back to the firms in tax breaks, according to analysis by the Labour Party.
Submitting an urgent question in parliament on Monday, shadow chancellor Rachel Reeves said the government’s decision to introduce the levy last month was a “welcome U-turn” but added that Rishi Sunak had also “created a tax giveaway for oil and gas producers that undermines it”.
Mr Sunak recently announced a temporary 25 per cent windfall tax on the profits of oil and gas companies to help support struggling households with the cost of living crisis gripping the UK.
But in order to ensure that companies are not deterred from investment by the new levy, energy firms will get a 91p tax saving for every £1 they invest in oil and gas extraction in the UK to the end of 2025 or until oil and gas prices return to historically more normal levels.
Ms Reeves called on the government to share how much the tax breaks on investment in oil and gas extraction would cost.
“How can the minister be sure how much this new levy will actually raise when the chancellor has added this gigantic get-out clause?” she asked.
Her question comes after the The Independent previously reported The New Economics Foundation’s claim that the new tax relief will cost taxpayers around £1.9bn a year, and following the reporting of analysis that dozens of prospective fossil fuel projects that qualify for the tax relief could together pump up to 899 million tonnes of greenhouse gases into the atmosphere.
“Why is the government incentivising investment in fossil fuels over investment in home-grown renewables which do not benefit from the tax breaks in this announcement?” Ms Reeves asked. “Have the government even bothered to check what this means for our country’s net zero target and climate commitments?” she added.
In response, the financial secretary to the Treasury, Lucy Frazer, said that when Labour had called for a windfall tax in January it was the wrong time, because inflation was lower and the government did not know what the price cap on energy bills would climb to in the autumn. Ofgem then announced an expected surge in the energy price cap in the week of the chancellor’s announcement, she said.
“The chancellor has taken this decision carefully, considering the circumstances, not just making policy on the basis of ideology,” she said.
Ms Frazer said the government had estimated that the windfall tax would raise £5bn to support the package of measures it had put forward to help the cost of living crisis.
As for the government’s net zero targets, Ms Frazer said there were many other tax levers for green energy, citing super-deduction tax relief.
She also said the government was consulting on developing the UK emissions trading scheme, aimed at regulating emissions from power stations, industrial plants and aviation.
