Campaigners are pressing the British government to impose a “windfall tax” on energy companies following record profit announcements in the past week from Shell (£7.9 / $15.5 billion) and British Gas parent firm Centrica (£2.97 / $5.8 billion).
Energy companies have become flush with cash following high margins from record oil prices and a government sponsored carbon permit give-away used to justify a consumer price hike.
Despite campaigners and Labour politicians describing recent profits as “grotesque” and “indecent”, and calling for additional taxes on recent gains to subsidize increasing household energy costs, there are several reasons why energy windfall taxes are fundamentally wrong, with the potential to worsen, and not improve the current energy crisis:
1. Windfall Taxes Will Not Relieve Fuel Poverty
The British government’s refusal to ‘ring fence’ green taxes for environmental projects does little to provide any guarantee that windfall tax revenues will be spent on addressing the issue of fuel poverty which millions of Briton’s find themselves facing. It is unlikely that an overspent government will be able to resist using additional revenues to address other pressing deficits.
2. Energy Conservation Initiatives Will Suffer
Plans to make energy suppliers partly responsible for promoting efficiency, through the mandatory provision of energy saving services and products such as insulation and solar panels will likely suffer a set-back as heavy additional tax burdens will provide wounded energy firms with the perfect excuse for back-peddling.
Since private industry almost always invests money more effectively than governments, it would be better to push energy suppliers for tougher efficiency services commitments, leaving the required investment capital in the hands of experts rather than bureaucrats.
3. Reduced Long Term Investment
After a decade of dithering on energy policy by government ministers, a massive investment in energy infrastructure (both nuclear and renewable) is needed now more than ever. A sudden, and arbitrary tax on the energy industry will reduce available development funds and scare off long term investors at a time when investment is needed the most.
4. The Real Answer is Effective Cap & Trade
Cap & trade provides a market based mechanism to control long term emissions, but without an effective market price for carbon, such schemes are worthless.
By introducing the European Emissions Trading Scheme, but giving away large quantities of free carbon credits for free, European governments made an attempt to appease both industry and environmental lobbyists at the same time – and effectively failed to reduce carbon emissions.
However, what was achieved was the provision of an excuse for energy firms to factor an estimated market price for carbon credits in to consumer energy bills – one of the principle causes of windfall profits in the first place. It would be far more effective and transparent to resolve such issues at source, aiming for effective policy implementation rather than appeasement.
5. Windfall Taxes Divert Attention Away From The Real Issues
Energy prices are not increasing due to government taxation, greedy energy firms, or wealthy energy traders. Energy is expensive because one of our principle sources, in the form of oil, is in increasing demand, of limited supply, and subject to geo-political turbulence due to the nature of the places in which much of it is found.
The Real Issue…
The real issue, which has been ignored for far too long, is that we need to boldly commit to a future energy strategy that ensures our energy needs can be met without dependence on volatile and environmentally damaging resources such as oil.
Until the UK government can commit to such a strategy, statements calling for windfall taxes from within the same government can only be described as pure folly.
Photo Credit: phillip via flickr Under a Creative Commons License
Well said. This is another crackpot short sighted left wing reaction to the idea that somebody else might be turning a profit. When will they learn that their comfortable superannuated lives depend upon other people taking risks with their money and their careers and for that, they must and will be rewarded.The current high reporting of high profits are the result of last year's trading, not next year's.
I am no “crackpot short sighted left wing” observer, but I am having some real difficulty with the idea that major oil companies should be able to continue banking oodles of cash extracted from the rest of us.
Here is my problem – oil company profits are based on selling less of the same product that they sold last year, the year before that and the year before that. It just so happens that their product is a basic ingredient in our society, so when there is less of it, we will pony up more money instead of doing without (at least up to a point.)
Oil companies are in a far better position than the rest of us to influence the market – they are professionally engaged, spend a lot of time researching and trying to predict the future and have the ear of many important influencers in capitals all around the world. Tacit agreements to restrain production are pretty simple to arrange.
If there are truly hard or soft technical limits on their ability to expand production to meet ever increasing demand, then why should we be happy about the fact that companies like ExxonMobil spend more money each year in marketing expenses to convince us to use more than they do in R&D to figure out how to develop new sources of energy? (According to XOM 2007 annual report, marketing expenses were about $1 billion, R&D was about $814 million.)
The word “windfall” is usually applied to accidental gains that did not result from effort by the receiver.
In this case, however, we have two choices. We can accept the oil company public line that they are simply victims or beneficiaries of the market so their profits are just a result of market conditions. In that case their profits are definitely a windfall that could be shared with others who fell on the wrong side of the market forces.
The other choice is oil company investor line that profits have been enhanced by management decisions that have included the “best practices” conservative investment strategy and the consolidation efforts that have resulted in record profits so the managers should be rewarded with huge salaries, perks, retirement plans (paid for out of the pension plan supposedly set aside for rank and file employees) and golden parachutes.
Those high profit management decisions simple dialed down the available supply of energy to less than what the market demands, thus moving the price curve to a more profitable point.
In that case, the managers are doing well for their stockholders at the expense of all of the rest of us and quite possibly coming close to violations of the laws regarding collusion and price fixing by working in concert to constrain supplies.
Yep, call me angry about greed and lack of leadership, but do not call me a left wing nut. Just think about all of those “left wing” chemical, auto, and airline executives who are trying to figure out how to deal with the market conditions their oil company friends helped to establish.
BTW – we do have a huge energy supply readily available, but oil company executive have not yet decided to invest much in nuclear power developments.