The windfall tax announced by the chancellor will be "damaging" for the UK's net zero plans and energy security, the Confederation of British Industry (CBI) has said, while BP has signalled the measure is more harsh than it expected.

Rain Newton-Smith, CBI chief economist, said the tax "sends the wrong signal to the whole sector at the wrong time", pointing to a "backdrop of rising business taxation".

Chancellor Rishi Sunak said oil and gas firms will pay a 25% levy on profits, which will be phased out when energy prices return to normal - but companies will get tax breaks worth 91p for every £1 invested. The funding will be used to help families with soaring energy bills.

Oil and gas companies are being targeted because they have enjoyed bumper profits as a result of soaring energy prices.

However, such firms also suffered at the height of the COVID crisis as demand for oil, and therefore prices, slumped.

Ms Newton-Smith said the government needs to work with businesses on a "genuine" plan to increase investment and "get growth going again, particularly in areas like energy efficiency".

"Despite the investment incentive, the open-ended nature of the energy profits levy - and the potential to bring electricity generation into scope - will be damaging to investment needed for energy security and net zero ambitions," she said.

BP, which had announced earlier this month an £18bn investment over the next eight years to bolster domestic energy security, gave a guarded response to the measure.

A spokesperson said: "We know just how difficult things are for people across the UK right now and recognise the government's need to take action.

"As we have said before, we see many opportunities to invest in the UK, into energy security for today and into the energy transition for tomorrow.

"Today's announcement is not for a one-off tax - it is a multi-year proposal. Naturally we will now need to look at the impact of both the new levy and the tax relief on our North Sea investment plans."

Shell said the tax relief on investments is a "critical principle in the new levy".

"We have consistently emphasised the importance of a stable environment for long term investment," a spokesperson said.

"This is fundamental to our aim to invest between £20bn and £25bn in the UK in the next decade, mostly in low and zero-carbon products and services, with a significant amount also focused on ensuring security of energy supply for the UK."

Sam Alvis, head of economy at climate think tank Green Alliance, said the windfall tax is the "vital thing to do to help households".

"It isn't the tax that will hurt net zero, but potentially the investment allowance that comes with it," he told Sky News.

"There is nothing to prevent that investment going to volatile oil and gas that are largely responsible for driving up people's energy bills.

"The chancellor should be using tax reliefs and public investment to rapidly expand the cheap and secure renewables we need to solve this crisis."

'The chancellor has failed'

Green groups also said Mr Sunak needed to go further to address underlying issues fuelling growing energy bills.

Shaun Spiers, executive director at Green Alliance, said: "Unless the transition from expensive gas to cheap renewables and energy efficient homes is accelerated, the government will be continually forced into emergency fixes."

Ed Matthew, campaign director at independent climate change think tank E3G, agreed, saying: "The chancellor has failed to fix the underlying crisis."

He said the windfall tax should have been partly used to improve home insulation, which would make homes warmer and reduce energy bills by as much as 50%.

He said the UK has the worst insulated homes in western Europe but this cannot be fixed without more government funding, adding: "We will all pay the price for this missed opportunity."