Why a windfall tax on energy companies?

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The arguments for a windfall tax on energy companies are complex. I am in favour of such a tax at this time. In forming that opinion I have, I admit, ignored much of the complexity and have fallen back on instinct. I see no harm in that: the reality is that almost all management decisions are based on pure gut instinct, data is only used to support that feeling. The instinct is, however, supported by logic.

First, let's not suppose for a moment that the increased energy costs are not paid to someone, somewhere. We often hear about the incidence argument of corporation tax, which says that all tax burdens are eventually suffered by people. In extremis, I do of course agree (although I also argue that as the tax is used to change the people who pay the burden it remains important that it is charged). The incidence argument also applies completely and utterly to the cost of energy. None of the payment we make is used to fill the holes in the ground from which oil is extracted. All of it is used to pay someone. This means that right now someone, somewhere is obtaining a massive benefit which they had not anticipated from the increased price of energy. It is in that circumstance completely untrue to argue that business is completely dependent upon there being a predictable and certain tax system or it will not invest in additional energy facilities. That industry did not anticipate the price increases they are enjoying. For that reason I entirely reject their argument that an additional tax will impose a disincentive or destroy their capacity to plan for the future by creating conditions of uncertainty. They have not refused the upside of the price increase because it was not predicted; they cannot refuse the additional tax for that reason either. And let's stress this point: even after the windfall tax they and their owners will be better off than they were before the unexpected price increase. Energy companies will remain the big net winners of what is happening: they just won't win by as much as they would like.

Second, to claim as downstream operators that their costs have increased upstream is a perfectly acceptable argument, if it is true. But it is wholly inappropriate that profits generated from end consumers on sales of energy in the UK are transferred upstream and outside the UK tax net simply to avoid liability in this country. I suspect that this is happening.

Third, I would buy the argument that companies needed to retain profit and not be taxed upon it if there was no evidence that the excess profit was being paid as a dividend to shareholders. Centrica has however entirely disproved that theory. It increased its profit and substantially increased its dividend, at a rate well above inflation whilst raising prices, and therefore, to follow the theory of incidence, this increased energy price is being used to be reallocate income from those least able to bear the additional energy cost in our society to those most able to bear that energy cost, being the wealthiest segment in society.

Lastly, and noting the argument that the cash needs to be retained by the energy companies for investment purposes, I would accept this point if I believed they were going to invest in alternatives to carbon energy. Carbon energy is, as we all know, threatening the very existence of life on Earth. I have not however seen that evidence. All I hear about is the need for additional carbon energy based extraction, and for the sake of my children that scares me rigid. Long before they are old they will come to curse the generation who used the increase in energy prices to increase the rate of global warming. In other words, and to be unsubtle about it, I do not think energy companies can be trusted with all this money.

For all these reasons I think the windfall tax now is essential for the ordinary people of this country, is essential to correct market imperfection, is essential to rebalance the government's books, is essential to send an important lesson to the energy companies that it is not within their right to use the resources which they had been allowed to use without consideration of their social consequences, and that they have a duty to minimise carbon emissions both now and in the future, which must be reflected in their investment policies.

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