The UK government has announced that it will introduce a new power to impose a windfall tax on energy firms if wholesale gas prices rise sharply again. The windfall tax is a levy on the excess profits of energy firms that benefit from factors beyond their control, such as market fluctuations or geopolitical events.
The windfall tax is intended to help fund the government’s £15 billion ($19.8 billion) package to support households and businesses with their energy bills, which have soared due to the global gas crisis. The UK chancellor, Rishi Sunak, said that the windfall tax would ensure that energy firms “pay their fair share” and that consumers are protected from “unfair price hikes”.
The windfall tax would apply to both gas and electricity suppliers, as well as to low-carbon generators, such as nuclear and offshore wind, which have also benefited from the high gas prices. The windfall tax would be triggered if the average wholesale gas price exceeds a certain threshold for a sustained period, which has not been disclosed yet.
The Office for Budget Responsibility (OBR), an independent fiscal watchdog, estimated that the windfall tax could raise up to £14 billion ($18.5 billion) in 2023-24, if gas prices remain high. The windfall tax would be temporary and would expire in March 2028, unless extended by the government.
The windfall tax is part of the government’s strategy to address the energy crisis, which also includes providing grants and vouchers for energy efficiency measures, expanding the warm home discount scheme, and capping the standard variable tariff. The government said that these measures would help millions of households and businesses cope with the rising energy costs and reduce their carbon footprint.
The windfall tax is controversial and has faced opposition from the energy industry, which argues that it would discourage investment, innovation, and competition in the sector. The industry said that the windfall tax would penalise the energy firms that have invested in low-carbon technologies and that have helped the UK achieve its climate goals.
The energy crisis was caused by a combination of factors, such as low gas storage levels, high demand, reduced supply from Russia and Norway, and disruptions from extreme weather events. The energy crisis has led to a surge in wholesale gas prices, which have increased by more than 500% since January, reaching record highs in October.
The energy crisis has had severe impacts on the UK economy and society, such as forcing dozens of energy suppliers to go bust, pushing millions of households into fuel poverty, and threatening the survival of energy-intensive industries. The government said that it was working closely with the energy regulator, Ofgem, and the industry to ensure the security of supply and the protection of consumers.
The energy crisis has also raised the stakes for the upcoming UN climate conference, also known as COP28, which will take place in the United Arab Emirates, a major oil producer. The man who will chair the climate talks, Sultan Al Jaber of the UAE, has been criticised for prioritising carbon capture and storage over reducing fossil fuel consumption.
The UK government said that it was committed to leading the global effort to tackle climate change, and that it would urge the oil and gas producing countries to diversify their economies and invest in renewable energy. The government said that it would also showcase its own achievements and ambitions in cutting emissions and reaching net-zero by 2050.