5 Reasons Why We Don’t Need a Windfall Tax on Energy Firms

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.

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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

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