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The windfall trap

Times Online
August 27, 2008

The windfall trap

Energy companies are posting huge profits as consumers suffer, and the Exchequer needs more money, but this does not make the case for a new tax

Gordon Brown’s aides say that he spent the summer working on ways to help poor families to cope with inflation and the credit crunch. Even so, he faces a mutiny over one measure that he has not proposed – a windfall tax on energy suppliers.

Seventy Labour MPs are demanding one. A majority of voters are in favour. Their concerns are real and urgent, but they cannot be allowed to dictate a policy that would be flawed in principle and harmful in practice.

There is no question that Britain’s big six energy suppliers are thriving. British Gas made £2.1 billion in profits last year and £994 million in the first half of 2008. With oil at $140 a barrel, Shell made £4 billion between April and June this year alone, and BP nearly as much, and it is fashionable in some quarters to argue that they did so more by luck than judgment.

The populist case for a windfall tax – whose proceeds would be earmarked for winter fuel payments – is easy to make, but wrong. The Government should instead make a strong, clear argument about the long-term damage that such a tax would inflict on the British economy. It should do so in three ways.

First, arbitrary taxation of profitable businesses is unfair and irresponsible. A sudden raid on the bank balances of law-abiding companies should not be acceptable in a nation that has built its prosperity on honouring the rules of contract law. UK plc cannot afford to squander its reputation as a trustworthy place to do business, least of all in an economic downturn. The scale of the energy industry sometimes masks the risky nature of the business. But BP’s experience in Russia is a reminder that this is an industry that takes big risks in the hope of making big profits, and which can also make big losses.

Secondly, government intervention of this kind can pervert business performance, as companies seek to hide revenues and profits from official eyes. And thirdly, it politicises enterprises that are supposed to compete with each other, not with the Treasury.

Energy is an emotive subject. Everyone depends on it, and the poor are particularly vulnerable. When Labour promised to end fuel poverty ten years ago, it assumed that energy prices would continue to fall and incomes would continue to rise. There has been real shock at leaps of a third or more in some of the most basic costs of living – of heating and lighting our homes and running cars – whose stability was once taken for granted. But start down the road of removing any profit regarded as “excessive”, and every business is at risk. Why stop at energy? What about farmers who have benefited from rising grain prices, which have pushed up the price of bread and other staples? Should they be taxed too?

There is a more legitimate case for diverting some energy company profits towards renewable alternatives, which would eventually release people from their dependence on hydrocarbons. Oil and gas companies protest that a windfall tax robs them of funds with which to invest in future sources of energy. Few of these sources, however, are renewable. This was the intention of the decision to auction the permits to pollute that are issued to energy companies and others under the European Union’s carbon-trading scheme. But any increase in permit prices should be invested in new technologies, not short-term electoral bribes.

With climate change a reality accepted by all responsible governments, it is increasingly hard to argue that people should not pay the real cost of their energy. It may be a bitter pill to swallow for those facing a bleak winter, but the best way to deliver consumers from fuel poverty will be to wean Britain off oil as fast as possible.

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