In September 2022, Shell made over $43.3 billion in record profits. The large profits mostly came from the surge in energy prices, particularly in oil and gas due to the Russian invasion of Ukraine, where prices increased mainly due to oil and gas sanctions imposed on Russia. These restrictions only catapulted the prices of oil and gas, and at the same time, it forced Western governments to stock oil and gas reserves for the winter season of 2022 and into 2023, become self-sufficient in producing their own oil and gas, and sign deals with other large oil suppliers in Africa and the Middle East.
When the revelation came out on Shell earning over $40 billion in profits in 2022, there were calls for a larger windfall tax towards Oil and Gas companies. The British government under the former Prime Minister, Boris Johnson, introduced the Energy (Oil and Gas) Profits Levy Act, which became official legislation and law in July 2022. The legislation stated that corporations in the energy sector, such as Shell, were to introduce a 25% levy on firms such as Shell, a Ring Fence Corporation Tax at 30% with a supplementary charge of 10%. Despite this, Shell stated that there were no plans to pay extra tax in 2023, and whilst having paid the corporation tax under the Energy Profits Levy Act, Shell’s profits mostly came from abroad, and only 5% of its revenue came within the UK, despite its base of operations and headquarters being in the UK.
From an economics standpoint and legal perspective, introducing a higher windfall tax would be problematic for Britain
Shell also was criticised for spending its profits to appease its shareholders rather than investing in non-renewable resources, which only drew anger from the British public. Calls for a rise in Windfall Tax also increased the level of pressure towards both current British Prime Minister, Rishi Sunak, and current Chancellor of the Exchequer, Jeremy Hunt, to increase the amount of money from a rise in Windfall Tax. Britain’s Labour party has pledged that if they were in charge, they would prevent the price cap from increasing in April, and to ensure that Shell would be held to the same standards as other ordinary British people working in the public sector and civil service. Britain’s Trade Union Congress (TUC) has deplored the and “obscene” profits that Shell was making, and Britain’s Liberal Democratic Party Ed Davey, said: “No company should be making these kinds of outrageous profits out of [Vladimir] Putin’s illegal invasion of Ukraine.”
However, from an economics standpoint and legal perspective, introducing a higher windfall tax would be problematic for Britain. One way would be that Shell, if forced to pay higher corporation tax, which with the proposed increase in corporation tax of up to 75% from the current 35%, it would discourage companies not based in the UK from operating or starting operations in the UK due to the increased corporation tax they would be facing. From a financial perspective, this would be ruinous to their profit earnings, and in a way, make it harder for them to hire more workers, pay consistent wages to their workers, and cover their costs of production.
It would increase the rate of unemployment since workers would be laid off from working on oil platforms
If a company like shell also faced a higher Windfall Tax, it would only incentivise them to decommission oil and gas plants; such as Shell being forced to decommission North Sea oil platforms. The consequences mean it would increase the rate of unemployment since workers would be laid off from working on oil platforms, and it would make their lives a lot harder, considering that the UK is facing an inflation crisis and the prices of essential goods and services have increased.
In conclusion, whilst a higher Windfall Tax would allow the government to earn more revenue to then invest in essential infrastructure and services; such as improving education, healthcare, and so on, it would not only disincentivise foreign firms in the energy sector, but also energy firms based in the UK may want to move out of the UK, or find ways to pay lower corporation tax; such as shutting down oil production facilities. It also would force Britain’s government to sign more oil deals with countries that produce large quantities of oil or gas, which would harm Britain because they would be more reliant on foreign oil and gas, rather than being self-sufficient in producing their own, and in a way, Britain may be forced to give into demands from countries that the UK has poor or rather strained relations with.
Featured image courtesy of Natalya Vaitkevich via Pexels. Image license found here. No changes were made to this image.
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