Windfall tax may solve political headache, but issues mean it may be ineffective says Quilter Cheviot’s Maddock

With so much talk in the national media around whether Boris Johnson and his government will decide on imposing a windfall tax on energy companies which is being campaigned for by opposition  parties, Jamie Maddock, equity research analyst at Quilter Cheviot, outlines why it will be more complex and potentially less effective than hoped.

“The idea of a windfall tax on oil and gas producers is politically extremely attractive, but in reality, is a complex issue and may not be quite as effective as hoped.

“You firstly have the issue with who to tax. Changing the corporate tax rate would bring many services that have not benefitted in the same way as oil and gas production into scope and thus be quite penal on some firms. Instead, the government could look at ways to change it in such a way that the increased tax take only applies at the oil and gas field production level as opposed to targeting the corporate tax rate.

“The second big issue is whether or not this windfall tax leads to a reduction in investment from oil and gas companies remains to be seen. These companies are transitioning away from fossil fuels and are loathe to increase conventional fossil fuel related spend [particularly after having had to stop North Sea oil and gas investment only recently after being put under significant political and societal pressure]. They are very much increasing their spend in low carbon energy to ensure they can deliver net zero by 2050. As a result, It’s unlikely a windfall tax would deter conventional energy or renewable energy project investment by the oil majors, however, it could potentially lessen the ability of mid-size independents to invest assuming it doesn’t exclude them.

“Finally, while a windfall tax could raise much needed taxes to mitigate the impact of the higher fuel and power prices, and help solve a political headache, due to the international nature of these companies it may not raise as much as is hoped. The figure will very unlikely be in the billions hoped for by some.

“The good news for consumers is that due to oil and gas companies’ products being tied to international benchmarks, it is unlikely they could pass the cost on to the end user. The only exception to this would be domestic fuel, for example petrol and diesel, so we could still see higher pump prices as a result of any windfall tax, but general energy prices should be unaffected.”