A ‘Dirty Profit Tax’ would help to address both extreme levels of poverty and the accelerating climate emergency, argues Tom Scott.
This winter, millions of people in our country are facing extreme poverty. The cost-of-living crisis, largely caused by the dramatic rise in oil and gas prices, means that many are already having to choose between freezing and starving.
As Dame Claire Moriarty, Chief Executive of Citizens Advice, said recently:
“Cost-of-living pressures are at boiling point. April’s price hikes haven’t yet hit and already people are turning to our services in record numbers. Frontline advisers are hearing desperate stories of families living in just one room to keep warm, people turning off their fridges to save money and others relying on hot water bottles instead of heating due to fears about mounting bills.”
Meanwhile, the same rocketing fuel prices that have put people into this terrible situation are also driving the highest profits that the oil and gas industry has seen in many years.
This week, Shell announced a quadrupling of its profits, while BP’s boss recently boasted that his company has become a “cash machine”. Oil industry analysts Wood Mackenzie expect UK North Sea oil & gas operators to generate cash profits of nearly £15 billion this year just from these operations.
Yet these companies are paying less in tax to the UK government on their North Sea profits than is paid on oil and gas extraction anywhere else in the world. In 2019, for each barrel of oil produced, the UK took $1.72 in tax while Norway received $21.35.
How on earth has this been allowed to happen, and what can we do about it?
Fuel poverty gap widens dramatically
In 2019, there are 3.2 million households in the UK estimated to be in fuel poverty, according to government figures. Most of these people are living in homes with little or no insulation – disastrous for them financially, as well as for the climate. And the South West has some of the worst fuel poverty in the country; in Cornwall in 2018, for instance, one in eight households was pushed into poverty by fuel bills. The charity National Energy Action estimates that 10,000 people a year lose their lives as a result of living in a cold home.
The “fuel poverty gap” is the additional income which would be needed to bring a household to the point of not being fuel poor. Overall, the average gap for households that were fuel poor in 2019 was £216, though this was much higher in rural areas, at £585. In September 2020, even before the fuel crisis hit, one in three British households was already concerned about the health impacts of living in a cold home in the coming winter.
Both these figures are now a lot higher. Average household gas and electricity costs last year were £1,277. This is set to rise to around £2,000 in 2022.
So, the average fuel poverty gap will increase to well over £900 this year – and for many households it will be much higher. Behind these numbers is a whole mass of acute anxiety, mounting debt and serious health problems.
Tax on North Sea oil and gas the lowest in the world
When the North Sea oilfields were first opened, the government levied a Petroleum Revenue Tax, over and above Corporation Tax. This was introduced under the Oil Taxation Act 1975 to ensure “a fairer share of the profits for the nation” and was discontinued for fields which went into development after 1993. The tax was charged at 35 per cent and continued to be applied on older fields until 2016, when it was reduced to zero by Conservative Chancellor George Osborne.
But Osborne had not been shy of levying a so-called “windfall tax” on oil and gas producers when this seemed politically convenient. He did this through a mechanism called the Supplementary Charge, an additional tax on North Sea oil and gas profits that had first been introduced in 2002, initially at 10 per cent of profits.
In 2011-12, faced with rising petrol prices, Osborne hiked this Supplementary Charge to 32 per cent and used the proceeds to take a penny off petrol duty. This was later reduced to 20 per cent and in 2016 Osborne cut the Supplementary Charge to 10 per cent, where it remains to this day.
Crowing over the tax breaks offered to the fossil fuel industry – a rich source of donations to the Conservative Party – the government announced in 2016 that “this radical package will ensure the UK has one of the most competitive tax regimes for oil and gas in the world”.
Green Party calls for a ‘Dirty Profit Tax’
In 2011, George Osborne’s 32 per cent windfall tax on North Sea oil and gas producers raised £2 billion. Last week, the Green Party called for the Supplementary Charge to be immediately increased from the current 10 per cent to 35 per cent, as a so-called ‘Dirty Profit Tax’.
The additional £3.725 billion this would raise would represent £1,164 per household if this were distributed to the 3.2 million households estimated to be in fuel poverty in 2019. Although many more households are now facing fuel poverty, a Dirty Profit Tax set at this level could, even without other measures, go a very long way toward closing the fuel poverty gap.
While there’s an obvious need for this to happen as part of the emergency response to the poverty crisis, this shouldn’t be seen as just a temporary measure. This is a tax that can be ratcheted up in subsequent years, reflecting both the likely protracted nature of the fuel crisis and the urgent need to address the climate crisis. It would also help to establish the principle that taxes on the biggest polluters should be used to support people through the transition to zero carbon.
The main argument used against this sort of tax by companies like BP and Shell is that it will discourage investment in new oil and gas capacity. But opening up new fossil fuel extraction is the very last thing we should be doing in an accelerating climate emergency.
Targeting fuel poverty payments
There’s an extremely urgent need to get money to the households that need it most. But the measures announced by the government are both insufficient and over-complex.
The current system of “Cold Weather Payments” makes additional money available (£25 a week) during weeks of severe weather to people on a range of benefits (Universal Credit, Pension Credit, Income Support, and so on). But in many cases people have to meet additional criteria (eg to have a disability or children under five). The system is also complicated to administer (depending on weather monitoring in particular localities) and is not designed to cope with a massive and ongoing increase in fuel prices.
There is also a ‘Warm Home Discount’ scheme currently available to people on low incomes from some (but not all) energy suppliers. Eligibility criteria mean that this too is complex to administer, and many people on low incomes have not been able to take advantage of it. Although the government is planning to expand this scheme, Citizens’ Advice have pointed out that many of the most needy will still fall outside its scope.
A much simpler and more comprehensive approach would be to apply an uplift to everyone currently in receipt of Universal Credit and other income support (on top of reversing the government’s cruel cut to the £20 pandemic-related uplift to Universal Credit), returning the ‘windfall’ money in the form of an uplift to all claimants. Increasing such payments is also seen as the best way of getting financial support to people in fuel poverty by the Trussell Trust and the End Fuel Poverty Campaign.
Demands for a ‘windfall tax’ growing louder
Both the Labour Party and the Liberal Democrats have also been calling for a ‘windfall tax’ on oil and gas firms. In Labour’s case, this would be in the form of a temporary increase in Corporation Tax, aimed at raising £1.2 billion (less than a third of what the Green Party is calling for, and less than what would be raised by lifting the Supplementary Charge to the level George Osborne set it at in 2011).
The Lib Dems have not indicated what mechanism they would use to raise such a tax, but say this would be temporary, for one year. There is no particular reason to expect prices to fall dramatically after a year, however, and there is a strong possibility that they could rise even further (for example if Russia were to cut gas supplies to Europe). If they do, the profits of oil and gas producers will also rise.
Recent Opinium research shows that a windfall tax is seen as a good way to address the fuel poverty crisis even by many Conservative voters (who, interestingly, do not tend to see so-called ‘green levies’ on fuel bills as the problem). A Conservative government has levied such a tax before, and we think this one can be pressured to do so again.
The government has so far dismissed calls for a tax on oil and gas profits, but the pressure is building and the case for such a tax is overwhelmingly strong, both ethically and economically. It is, quite simply, an obscenity that some are profiting massively from sky-high fossil fuel prices while others are – quite literally – struggling to survive.
If you’d like to join your voice to those calling for such a tax, please do write to your MP to explain why.
A version of this piece also appears on Green World