The U.K.’s Windfall Tax Downfall

There’s stiff competition for Europe’s dumbest energy policy in recent years, with reliance on Russian natural gas being top of the list. But windfall profits taxes are a close second, and it’s becoming clear how they are undermining European energy security, though European politicians still don’t get it.

Several companies have announced that the United Kingdom’s version, the Energy Profits Levy, has either pushed them into an after-tax loss or will force them to scale back investment in new production and job creation. The latest on Thursday was Harbour Energy, which accounts for about 15% of Britain’s domestic oil and gas production. The company announced a post-tax loss of $8 million for the first half of the year, owing to the windfall-profits levy. Harbour had previously cut 350 jobs owing to the tax.

This followed Wednesday’s announcement that Ithaca Energy is scaling back investment, and production will fall in 2024. Some 90% of offshore oil and gas firms in the U.K. are reducing investment at least in part because of the windfall tax, trade association Offshore Energies UK warned in March.

What an embarrassment for Prime Minister Rishi Sunak, who introduced the tax when he was Chancellor of the Exchequer last year. Originally the levy was a 25% charge on top of the 40% tax rate oil and gas companies already paid. As Prime Minister, Mr. Sunak and his new Chancellor Jeremy Hunt last autumn increased the levy to 35% and extended the tax to 2028 from the initial sunset of 2025.

This brings the total statutory tax rate on domestic oil and gas production to 75%. And that’s on a good day: Harbour says its effective tax rate on profits was 102% owing to the interaction between the windfall tax’s provisions and factors such as exchange-rate movements.

Messrs. Sunak and Hunt hoped the tax would fund subsidies to help households and businesses cope with higher energy prices. The tax is instead diminishing the energy production on which taxable oil-and-gas profits depend. The U.K. now enjoys less energy security as falling domestic production leaves Britain more beholden to imports.

Most European countries have imposed windfall taxes on energy companies ranging from oil refiners to electricity generators. The continent was shaken by the energy-security shock of Vladimir Putin’s Ukraine invasion last year, but not shaken enough to jog politicians’ memories about the basic economics of tax policy and incentives.