Tilting at windfall taxes (part 2)

UK government’s bid to claw back profits is riven with dubious trade-offs

“The energy industry is often painted as the villain, but clawing back excessive earnings made at the expense of consumers is easier said than done.” – Energy Flux, January 2022

These are extraordinary times, with the energy world whipsawing from unprecedent pandemic-era blood-letting into a troubled new wartime era of structural shortages, higher prices, frenzied profit-making and profound investment uncertainty. The political response – to redistribute excessive profits to fund consumer subsidies at a time of deep crisis – has an economic and moral logic to it. But windfall taxes are rarely a good idea. They are an admission of failure to adequately regulate a free market. The British government’s attempt to reset the risk-reward balance pursues short-term political objectives at the expense of longer-term investment certainty — at the worst possible time for the energy transition.

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Populist pressure to take action against headline-grabbing energy profits has been mounting for months. The UK Treasury finally caved and imposed an immediate 25% surcharge on “extraordinary” oil and gas profits on 26th May.