Energy (Oil and Gas) Profits Levy Bill

Baroness Bennett of Manor Castle Excerpts

2nd reading & 3rd reading
Wednesday 13th July 2022 Lords Chamber

[Baroness Bennett of Manor Castle (GP)]

My Lords, it is a great pleasure to follow the very powerful speech of the noble Lord, Lord Sikka. I apologise to the Minister for missing the first few seconds of her speech; we had a very long group in Grand Committee on the Procurement Bill.

I must commend the noble Lord, Lord Moynihan, on bravely—in the “Yes Minister” sense—highlighting the importance of stability in government policy, using the example of Norway, which is known for such stability in its policy-making. It has a modern, functional constitution and a Parliament that reflects the view of the people, elected by proportional representation, producing what is generally agreed to be a fine quality of governance. I point out that, whatever the final belated delivery of this very modest—as the noble Lord, Lord Sikka, just highlighted—tax on the oil and gas industry, the renewables sector has seen instability in policy. The sudden pulling out of the rug on the feed-in tariff saw many small, independent businesses—solar installers and small-scale hydro—see their businesses disappear overnight because of government policies and the installation sector was encouraged to build up several times by government policies before having the rug pulled out from under it. So I commend the noble Lord, Lord Moynihan, on being terribly brave in criticising his own Government.

Now we find ourselves in the strange situation that a Government on their way out are finally seeking to tax oil and gas companies that have made huge profits, as the noble Lord, Lord Sikka, just outlined—not through innovation, positive activity or investment, but because of a perturbation in the global energy markets and, as the noble Baroness, Lady Kramer, highlighted, President Putin’s invasion of Ukraine. These are profits made on damaging products that impose heavy costs on us all. We have been experiencing those costs today: of course today’s temperature is just weather, but we are seeing a great deal of notable, extraordinary weather on this overheated planet, for which the oil and gas sectors bear the greatest responsibility.

This tax applies only from 26 May, which means the bumper profits enjoyed by companies such as BP and Shell in the first quarter of 2022 are not covered. The Government say that this is a temporary tax; it was brought in belatedly, long after the Green Party, and then others, called for its introduction. They say it will be dropped when prices “normalise”, whatever that means, or, by the terms of the Bill, on 31 December 2025 at the latest.

Of course, it could also be by government fiat. I would be interested to know if the Minister can tell me the position of the field of Conservative leadership candidates on this dirty profits tax. I had not heard the rumours that the noble Baroness, Lady Kramer, has, but I have not heard any affirmative statements either. Do they intend to maintain the Government’s current policy? We have heard very little about any environmental issues in the leadership debate—astonishingly, given that our nation remains the chair of COP and in the recent integrated defence review identified the climate emergency as a major threat.

The i reported, and I have no reason to disbelieve, that not a single Conservative leadership candidate attended the emergency briefing led by the UK’s Chief Scientific Adviser Sir Patrick Vallance, which outlined the catastrophic impacts of a warmer planet—an updated version of the one that converted Boris Johnson, at least rhetorically, to the cause in 2020. I am sure the party is aware of the fate of the climate change-denying Government of Scott Morrison in Australia—which has so many similarities to our current one—and must be concerned about how the public will see the huge black hole at the centre of the Conservative leadership debate.

With this tax, as with so many of the Government’s so-called green measures, what is on the wrapper does not reflect what is in the tin. There is nothing extraordinary about the tax rate being temporarily introduced; it simply reflects, as the Institute for Fiscal Studies notes, a return to levels

“broadly typical of the historical rates of North Sea taxation since the 1970s”.

Perhaps that is some of the stability the noble Lord, Lord Moynihan, was looking for. That is without counting the super-deduction so many noble Lords have already covered, which means that investing £100 in the North Sea for new production will cost companies only about £8.75. The remaining cost is met by the Government. That is the money of so many hard-pressed citizens, struggling with the cost of living crisis, going into new oil and gas. Dan Neidle of Tax Policy Associates, commenting on this, said that applying this for three years simply did not square with long-term investment planning. He says,

“Short term allowances don't incentivise investment, they just give money away.”


That is that £91 being given away by the Government to the oil companies.

Many commentators have noted that investments can take decades to produce results, and indeed are expected to. That immediately demolishes any claim about this gas being simply a bridging fuel towards renewables. Instead, what that public money would be doing is adding to the carbon bubble, and I note the latest figures from the respected analytical group Carbon Tracker, which show that global stock markets are currently financing companies sitting on three times more coal, oil and gas reserves than can be burned without beating the 1.5 degree Paris climate target. In its latest report, it also revealed that the embedded emissions in the fossil-fuel reserves of companies listed on the global stock exchange has grown by nearly 40% in the last decade, despite the growing urgency of the climate risk.

Given that a third or more of the money raised goes straight back to oil and gas producers, that suggests that it is the largest companies, the giant multinational companies that can most afford to pay, which are most likely to profit from this provision, while smaller firms may not be in a position to do so.

I am sure I can predict with some degree of certainty, since these issues have been much canvassed, what the Government are likely to say in response—“energy security”—and they will probably know what I am going to say, at least in a general context. I think it is worth highlighting that we are part of a global energy market. This is not gas that is going to go into our market; it is gas that goes into the global market. I have seen in one or two places the Government trying to say, “Well, you know, supply and demand—more supply means the price goes down.” According to 2017 figures, the UK has 0.106% of the world’s natural gas reserves, so the claim that this will make any difference to the global price does not add up. Coming back to the point raised by the noble Lord, Lord Moynihan, there is also the fact that we get we get most of our external gas from Norway and that has a carbon footprint significantly lower than that in the UK.

I come back to the points raised by the noble Lord, Lord Sikka, about the economic context. I think one useful way of framing this is by a recent report the Common Wealth think tank, which noted that workers in the UK would be paid £2,100 a year more on average if wages had grown in the same way as company dividends in the past two decades, in our rentier-dominated economy. The Common Wealth think tank joined in a May Day statement with other groups—including the Women’s Budget Group, reflecting the gendered nature of inequality in the UK—that pointed out that this current cost of living crisis, which is often dated to the start of the Russian invasion of Ukraine, is a long-term trend. The economy has been arranged for the benefit of the few, at the cost of the many—not coincidentally in a political system that is funded largely by the same few. We get the politics they pay for.

I cannot but conclude that this belated, limited, inadequate gesture reflects the political place of the oil and gas companies in our current political system. It is deeply disappointing that the renewables sector is not getting similar incentives—I will not go into detail as the noble Lord, Lord Sikka has already covered this very well.

I come finally to one point about how much the failure to head towards renewables is costing people in this cost of living crisis. We have seen recently the new contracts for difference let, and that is expected to cover about 12 gigawatts of power for the coming year. Had that been done 12 months ago, it would have saved average household energy bills about £100 a year. That is what delays a costing moment by moment, day by day. The renewables sector had ready, and was prepared to go ahead with, 17.4 gigawatts of energy, but the Government did not offer all the contracts that could have been offered. That is going to cost consumers on their bills every day.

This is a belated, inadequate measure, and every government failure every day—this focus towards oil and gas—is costing people in their bills, as well as costing us the planet. We are not doing the long-term, steady renewables policy that could deliver the future we all need.

--- Later in debate ---

[Baroness Penn (Con)]

I thank all noble Lords for their contributions to this debate. In closing, I will focus on responding as far as possible to the many and varied points raised.

As I said at the beginning, the global context of high oil and gas prices has driven extraordinary profits for UK oil and gas producers. It is both fiscally prudent and morally right therefore that, through the Bill, we introduce a temporary and targeted levy on these extraordinary profits, which will help fund more cost of living support. At the same time, companies must have ample incentives to continue to invest and the Bill has been tailor-made to account for this. The new 80% investment allowance will provide them with an additional, immediate incentive to invest. This means that, overall, businesses will get a 91p tax saving for every £1 invested.

Turning to the points raised in today’s debate, the noble Lord, Lord Tunnicliffe, asked about revenue that could have been raised had the levy been in place between January and May this year, and the noble Baronesses, Lady Kramer and Lady Bennett, made similar points. It is not standard for the Government to publish assessments of the fiscal and economic impacts of measures that are not being introduced and it is not clear that doing so in this case would be a beneficial use of public resources. I would also add that since the beginning of the year, three significant things have changed. The situation in Ukraine altered considerably, inflation is considerably higher than previously expected and the Government had concrete information on the indicative levels of the autumn and winter energy price cap, allowing us to design the levy and the related cost of living support to meet the scale of the challenge we faced.

As for whether an earlier commencement date for the levy was an option, as noble Lords would no doubt expect, the Government carefully considered several options. Indeed, following thought and with time to consider, the levy has a more appropriate tax base. The result is that it is not depressed by historical losses and has an investment incentive that is not only more generous but more effectively targeted at new investment. The Government are also very careful when it comes to the retrospective application of taxes. Although this tax will apply from 26 May—the date it was announced—there needs to be careful consideration whenever the question of retrospection is raised, particularly in relation to tax.

The noble Lord, Lord Tunnicliffe, also asked about the Government’s plan to phase out the energy profits levy if oil and gas prices return in future years to historically more normal levels. As the former Chancellor told the Treasury Select Committee, the Government are discussing that with industry. The former Chancellor also mentioned the Brent crude price over the last five or 10 years, which is along the lines of $60 or $70 a barrel. Similarly, companies have communicated to their shareholders what they would consider normal oil prices; they tend to use numbers in the range of $60 or $70, so that gives a sense. The situation is complicated because prices have changed at different rates, with gas, for example, reaching a peak in March. However, as the noble Lord mentioned and other noble Lords noted, there is a sunset clause of just over three years in the legislation as a backstop. If prices come back to the range that the former Chancellor discussed, one might expect the levy to fall away sooner.

The noble Lord, Lord Tunnicliffe, also mentioned that fossil fuel investment will be subsidised in the tax system at a rate of 20 times the incentives available to renewable energy schemes. Other noble Lords expressed concern around the investment incentives in the Bill and whether these challenge our commitment to net zero. Having an element of independence of oil and gas in our energy system is important, and sourcing gas locally, through the North Sea, makes us less dependent on imports. As set out in the Government’s energy security strategy, the North Sea will still be a foundation of our energy security, so it is right that we continue to encourage investment in oil and gas. Our oil and gas have lower emissions intensity compared to imported liquid natural gas.

As I noted in my opening speech, in meeting our net-zero target by 2050 we might still use a quarter of the gas that we use now, so to reduce our reliance on imported fossil fuels we must fully utilise our great North Sea reserve. However, that does not in any way contradict our commitment to our net-zero targets. I take issue with the noble Baroness, Lady Bennett, claiming that this Government are in any way climate change denying. The UK has decarbonised its economy further and faster than any other G7—

[Baroness Bennett of Manor Castle (GP)]

Just to clarify, I was referring to the Scott Morrison Government of Australia when I said “climate change denying”.

[Baroness Penn (Con)]

I believe she was comparing that Government to this one. This Government have legislated for our net-zero targets—the first major country to do so. We have decarbonised further and faster than our G7 counterparts, and we have shown global leadership on climate change and wider nature and biodiversity through our chair of the G7 and COP 26. I know that noble Lords will continue to push the Government to do better, go further and do more. That is absolutely right and appropriate. The noble Baroness believes in effective campaigning; I am not sure that an effective way to campaign is not to recognise some of the progress made on the journey.

The noble Lord, Lord Tunnicliffe, said that investment will be subsidised in the tax system at a rate of 20 times the incentives available to renewable energy schemes. We do not recognise these figures. Oil and gas companies within the ring-fence regime are already paying tax on their profits at more than three times the rate of other companies, so any tax relief is reducing a higher tax bill. Although oil and gas companies save an additional 45p in tax for every £1 they invest—91p in total from the levy—they will pay tax at 65% of remaining profits. In contrast, outside the oil and gas ring-fence regime, profits on companies such as those in the renewables sector are taxed at 19%. So if a company made £100 in profit it would pay £65 in tax in the oil and gas regime but only £19 if it were outside the regime. If it then reinvested £25 of that profit, an oil and gas company would still pay more than twice the tax of a normal company—just over £42 compared with just under £13 for a company outside the regime.

The noble Lords, Lord Sikka and Lord Teverson, expressed concern that a large proportion of the estimated £5 billion of revenue raised in the first 12 months of the levy being in place would be lost to the investment allowance. I reassure noble Lords that the £5 billion estimate is net of the effect of the investment allowance.