by: Murdo Fraser, Scottish Conservative MSP for Mid-Scotland and Fife
When the Energy Profits Levy (EPL) was introduced in May 2022, the reasoning was that the war in Ukraine had distorted the oil and gas market. This had led to far higher profits for energy companies through no improvements on their part, nor from any fault of the British people. It was presented as a one-off windfall tax that would not only keep prices in check but also offer a way of indirectly passing the higher prices back to the British people.
But, as Milton Friedman tells us, nothing is so permanent as a temporary government programme, so no one should have been surprised when the government announced that the initially temporary EPL that started in 2022 would continue until at least 2030.
It is no longer seen as a windfall tax but now as another income source to be squeezed for every penny. Hence from November, the tax rate will be increased and the investment allowance will be removed. Sadly, the 78 per cent headline rate of tax will undoubtedly be applauded by those who operate with the outdated mindset that taxes are like taps i.e. the more they’re turned up, the more money will flow freely forever.
Time and again we have seen that this is not the case. Like it or not, economic decisions are driven by incentives and the expectation of rewards, influencing how individuals and businesses weigh the risks of spending money on one option over another. It may come as a shock to some, but there is no obligation for any energy company to operate in the UK. If there is no benefit to them from doing so, they will simply cease their operations here rather than unnecessarily lose money.
While this almost certainly won’t happen, what will happen is they will see the limited possibility for profits and tone down further investment in our market. When taxes are too high, as they clearly are, there is not only less money for investment but less incentive to spend it in the UK when it would reap better rewards elsewhere. Offshore Energies UK (OEUK) has already calculated that investment in the North Sea would fall from the expected £14.1 billion in 2025 to just £2.3 billion in 2029. This accelerated decline of domestic production will lead to a less efficient sector, and increase the gap between energy supply and demand, which would pass on greater costs to consumers. Less investment will also lead to less innovation and slow our transition towards renewable energy.
OEUK has also estimated the EPL will cost 35,000 jobs. Of course, this will have an economic impact and ultimately lead to decreased tax revenues, but more importantly, that is 35,000 people out of work, their lives changed forever, and their families plunged into anxiety and pain, as a direct result of a tax.
The bulk of those job losses will be in a city I am particularly familiar with. Sir Alex Ferguson led Aberdeen FC to two unexpected European trophies in the 1980s and the ancient university (where I studied law) was established in the 15th century. Most importantly now, though, Aberdeen is the hub for North Sea oil and gas. Rigs are refitted and repaired along the surrounding coast, the offices of energy companies are scattered throughout the city, and at night the bars buzz with off duty rig workers.
Aberdeen has been the beating heart of UK energy for over half a century. From oil and gas to renewables and wind, Aberdeen and the North Sea have kept lights on and homes heated across the nation. Some people might wish it wasn’t true, but the reality is that the UK still relies on oil and gas, so the UK still relies on oil and gas companies - and it is therefore Aberdeen, the energy capital, that will feel the unnecessary consequences of the short-sighted decision to increase and extend the EPL.
Energy companies have already told us time and again that this levy is causing them to scale back investment in the UK and that investment will be scaled back further over the lifetime of the EPL. First, the rate of new hires will decrease, and then existing jobs will be lost. When that happens, it will be the great “granite city” of Aberdeen that feels it first. Less money will be spent in the shops, bars, and restaurants and they will eventually be forced to close. It is a sad, bleak future - and totally avoidable.
In pursuit of a quick buck, the EPL will cause substantial damage to the UK economy and unquantifiable pain, worry, and financial costs for the British people. Before it is too late, before energy prices rise again, before jobs are lost, before the UK loses its place as the world leader in energy innovation and before businesses in Aberdeen start to close - the Energy Profits Levy must be scrapped.