By Anna Cooban, CNN
London (CNN) — The UK government plans to scrap its windfall tax on oil and gas companies if energy prices fall below certain levels, abolishing a levy that has raised around £2.8 billion ($3.5 billion) since it was introduced a year ago.
The country’s finance ministry announced Friday that it would repeal the 35% additional tax on firms’ profits if the average price of oil and gas fell to, or below, $71.40 per barrel for oil and £0.54 ($0.68) per therm for gas.
That would bring down the overall tax rate for energy producers from 75% to 40% — its level before the extra levy was introduced last year in response to surging commodity prices.
The move follows warnings from the energy industry that the levy had caused companies to cut back on investment, according to the UK Treasury.
“This puts the long-term future of the UK’s domestic [energy] supply at risk, meaning we would be forced to import more from abroad at a time when reliable and affordable energy is a focus for families and businesses,” the Treasury said in a statement.
Oil and gas prices would need to fall below the thresholds — which are based on 20-year historical averages — for two consecutive quarters to trigger the tax cut, the department said.
Help with energy bills
In May 2022, the government introduced a 25% windfall tax on the profits of oil and gas producers operating in the North Sea, upping the levy to 35% six months later.
The tax helped subsidize the energy bills for millions of UK households and businesses after they soared following Russia’s full-scale invasion of Ukraine. The levy will remain in place until March 2028 unless oil and gas prices fall enough to abolish it, which, according to forecasts by the government’s fiscal watchdog, is unlikely over that time frame.
Energy prices have fallen sharply over the past few months. On Friday morning, Brent crude, the global oil benchmark, was trading at $76 a barrel. UK natural gas was trading at £0.67 ($0.84) per therm, according to Michael Hewson, chief market analyst at stockbroker CMC Markets UK.
“It seems that the prices for both [oil and gas] would need to fall to those levels — and not one or the other — for the [windfall tax cut] to kick in, which in the current environment seems unlikely,” he said.
There are a number of ways to measure oil and gas prices and the Treasury didn’t specify which prices it would use as a reference for its thresholds.
“This will be set out in a document with further detail on the policy in the coming month,” a spokesperson said.
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