Claimed as a tax on the ’extraordinary profits’ of the oil and gas sector, the levy is accompanied by a tax relief incentive that nearly doubles the tax relief available for oil and gas companies
The head of the UK Treasury, Chancellor of the Exchequer Rishi Sunak, announced a 25% windfall tax on oil and gas company profits as part of a fiscal package of policies aimed at assisting UK residents in paying for spiralling energy costs that are driving historic inflation rates.
The tax, dubbed the Energy Profits Levy, comes with what the UK Government called a "generous investment allowance built in" to encourage investment in oil and gas extraction projects in the UK.
The new levy is expected to raise around £5.0Bn (US$6.3Bn) in its first 12 months. "It will be temporary, and if oil and gas prices return to historically more normal levels, will be phased out," the UK Government said.
The accompanying incentive, referred to by the government as the Investment Allowance, promises to save oil and gas companies 91p for every £1 they invest. "This nearly doubles the tax relief available and means the more a company invests, the less tax they will pay," the UK Government said.
In 2021, UK Prime Minister Boris Johnson set a target for all of the UK’s energy to come from clean sources by 2035. According to a UK Government press release, it took the decision "to set in law the world’s most ambitious climate change target, cutting emissions by 78% by 2035 compared with 1990 levels," using its sixth Carbon Budget to incorporate the UK’s share of international aviation and shipping emissions into its metrics and commmitting to reduce its greenhouse gas emissions to net zero by 2050.
The new policy measures announced by the UK do not offer incentives for investment in renewable energy.
The new levy does not apply to the electricity generation sector, the UK Government said, despite similar ’extraordinary’ profit percentages occuring in the sector.
"As set out in the Energy Security Strategy the government is consulting with the power generation sector and investors to drive forward energy market reforms and ensure that the price paid for electricity is more reflective of the costs of production. The Chancellor announced today that the Treasury will urgently evaluate the scale of these extraordinary profits and the appropriate steps to take," the UK Government said.
"Surging commodity prices, driven in part by Russia’s war on Ukraine, has meant the oil and gas sector is making extraordinary profits. Ministers have been clear they want to see the sector reinvest these profits in oil and gas extraction in the UK."
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