UK slaps one-off tax on oil and gas giants to ease the pain of soaring household energy bills – CNBC

LONDON — U.K. Finance Minister Rishi Sunak has imposed a windfall tax on oil and gas majors as the government scrambles to alleviate the country’s worsening cost-of-living crisis.

The measures come a day after a deeply embarrassing investigation into lockdown parties at Downing Street and amid sustained pressure on the ruling Conservative government to do more as soaring inflation pushes up the price of everything from food to fuel.

“The oil and gas sector is making extraordinary profits not as the result of recent changes to risk-taking or innovation or efficiency but as the result of surging global commodity prices driven in part by Russia’s war,” Sunak told lawmakers in the House of Commons on Thursday.

“And for that reason, I am sympathetic to the argument to tax those profits fairly,” Sunak said, prompting jeers from opposition lawmakers.

Sunak said the government is imposing a “temporary targeted energy profits levy” with a so-called “investment allowance” to incentivize oil and gas firms to re-invest their profits. The new levy will be charged on the profits of oil and gas companies at a rate of 25%, before being phased out when commodity prices return to more normal levels.

The decision to impose a windfall tax on energy companies marks yet another U-turn for Prime Minister Boris Johnson’s government. Sunak had previously rejected the one-off levy, saying that while it sounded “superficially appealing” it would ultimately deter investment.

Opposition lawmakers have repeatedly called on the government to impose a one-off tax on energy majors, saying the move would help to fund a national package of support for households.

Britain’s oil and gas giants BP and Shell reported massive quarterly profits earlier this month, as they benefited from surging commodity prices during Russia’s onslaught in Ukraine. It has fueled calls for the government to tax their surplus cash.

“Today it feels like the chancellor has finally realized the problems that the country [is] facing,” Rachel Reeves, shadow finance minister for the opposition Labour Party, said in response to Sunak’s statement.

Reeves said Labour had first called for a windfall tax on oil and gas companies almost five months ago. And even when Sunak finally announced the one-off levy “he can’t dare say the words,” adding that it is “the policy that dare not speak its name.”

“For months, it has been clear that more was necessary to help people bring their bills down so what took this government so long?” Reeves said. “This government’s dither and dearly has cost our country dearly.”

Sterling traded mixed at around $1.2565 on Thursday afternoon.

Sunak said soaring inflation is causing “acute distress,” with the economic situation becoming more serious over the course of this year.

U.K. inflation jumped to 9% last month as food and energy prices spiraled, reaching its highest annual rate in 40 years. The Bank of England expects inflation to rise above 10% later this year.

Sunak said around 8 million of the lowest income households will be sent a one-off cost-of-living payment of £650 ($819). The first payment will be issued directly to people’s bank accounts in July, with the second payment sent in the fall.

The finance minister announced that 8 million pensioner households will receive an extra winter fuel payment of £300 and a one-off disability cost-of-living payment of £150.

Sunak also said a £200 loan for energy bills now no longer needs to be paid back and increased this support for households to £400.

The total cost-of-living measures announced on Thursday came to £15 billion, Sunak said, bringing the total cost-of-living support provided this year to £37 billion.

“Additional targeted support for the 8 million people on low incomes is the right approach and will help many on the brink,” Miatta Fahnbulleh, CEO of the New Economics Foundation, said via Twitter.

“But a one off payment of £650 doesn’t begin to restore the huge hole in social security that has left these families so vulnerable to the #CostOfLivingCrisis.”

Paul Johnson, the director of the Institute for Fiscal Studies, described the measures as a “big, expensive package” from Sunak.

“Disappointing to hear the chancellor again conclude by claiming to be cutting taxes. He emphatically is not. He is raising them, and to historically high levels,” Johnson said via Twitter. “I think that is the right thing to do. But his tax plan is to raise taxes not, as he keeps saying, to cut them.”

Earlier this week, the head of Britain’s energy sector regulator Ofgem warned that a price cap on the most widely used consumer energy tariffs was set to climb by £800 in October, bringing the typical household bill to £2,800 a year.

The proposed cap would be a substantial jump from the current level of £1,971 which, when it was introduced last month, represented a record-breaking rise of £700.

“The price changes we have seen in the gas market are genuinely a once-in-a-generation event not seen since the oil crisis in the 1970s,” Ofgem CEO Jonathan Brearley told lawmakers on Tuesday during a Business, Energy and Industrial Strategy Committee.

He added that October’s proposed price cap surge could see the number of households in fuel poverty nearly double to 12 million from 6.5 million. Fuel poverty refers to when a household is unable to afford to heat their home to an adequate temperature.

Campaigners have described the prospect of further energy bill rises this winter as a “nightmare scenario,” warning that only an emergency budget could solve the crisis gripping the world’s fifth-biggest economy.

The End Fuel Poverty Coalition has estimated that if fuel poverty levels hit the limits predicted, thousands of additional winter deaths will take place due to cold homes in 2022 and 2023 — mainly among the elderly and vulnerable.

“The injustice of it all is just incredible,” said Brenda Boardman, an emeritus fellow and researcher of low-carbon energies at the Environmental Change Institute at the University of Oxford.

“We desperately need an energy market that is designed around the needs of the consumers, not the needs of the suppliers. This is, after all, a basic necessity, that is ultimately about life and death, as well as comfort, good health and child development.”