Windfall taxes on energy companies

Should the government impose windfall taxes in the energy companies?

The Business Secretary, John Hutton, will not answer the question save as to say that the government is looking at all the options. That is a hint that the windfall tax may be a possibility. The idea that is being strung up the flagpole to see if anyone will salute it, is that the energy companies – the electricity and gas suppliers and the oil companies should be relieved of some of their record profits by the taxman, who would, Robin Hood like, pay them over to people who cannot afford soaring energy bills.

At first sight it seems like an attractive solution, provided that you or your pension fund does not own shares in any of the energy companies that might be targeted. If the energy companies had made windfall profits then what harm will do to take away the windfall?

Certainly the energy companies have profited from a very active and rising energy market. However, you must remember that a windfall crop of profits does not bring unexpected profits. Like fruit blown from apple trees all a windfall does is bring down some of the fruit a little earlier; the size of the crop remains unchanged and there are no more fruit trees to be had.

And so it is with the energy companies’ windfall. In the case of oil companies, like Shell and BP, they are able to charge more on stocks of oil that they have because the oil price has gone up. The amount of oil they have remains the same but people are prepared to pay for oil because the markets have suddenly cottoned on (as markets do) to the fact that there is a finite supply to service a hugely growing demand.

In the case of the poor energy suppliers they have in some cases apparently been losing money on domestic sales but with swingeing price increases announced and more on the way they are set to make higher profits from their near monopoly position in the UK market. Taxing them hard and giving the money away may sound attractive but it is a bit like giving a handkerchief to someone who is very sick. The handkerchief is very useful, and in some cases essential, but it will not cure the disease.

Some have pointed out that the government gave the energy supply companies some six million pounds worth of carbon credits this year. To me that event is one of life’s great mysteries. The idea was, I suppose, to bed the energy companies into the carbon credit regulations slowly, so they can get used to it. Why this was thought to be necessary I do not know. The citizens of this country were not given time to get used to other governmental devices. We did not have, for example, free home information packs for the first year to enable us all to get used to them.

So if we take away the gift of the free carbon credits which the energy companies are now busy selling (good business that – the government gives you something for nothing and you can turn round and sell it for hundreds of millions straight away) we are not taxing windfall, but correcting an error.

So I agree with the oil companies and the Confederation of British Industry that a windfall tax is not the answer. It will at most be a temporary diversion because you cannot impose a windfall tax every time the oil, gas and coal prices rise.

Energy is of central critical importance. It provides both benefits and terrible problems. Because it is central to every economic activity and because it is critical it strikes me that energy should not, in today’s conditions, be in the hands of private companies at all, but it should be state controlled, rather like the Northern Rock is state controlled, for the benefit of everyone.

I know that Governments are notoriously bad at running things; most of the times they cannot even run their own affairs- look at the way in which Members of Parliament’s expenses are administered. But governments would not dream of having the most important things run by private enterprise? They run the police, the fire service, the National Health Service, and the armed services; running energy companies should much easier than running any of these. They are relatively simple businesses, like all utilities.

Nationalisation (the dreaded word) will enable the government to set some basic tariffs. It will enable them to plan for future energy supplies instead of fondly relying on the market. It will enable us to reduce some carbon emissions, genuinely, rather than in our imagination. Let us therefore not bother with windfall taxes, but take back the energy companies into state ownership.

2 Responses

  1. One very important aspect of taxes you did not mention is discussed in my first blog at

    That being that Corporations, including oil companies, in finality, do not pay taxes they collect them for the government. Oil companies are not going to lose one cent of profit when they are taxed. They simply raise their prices to cover their taxes and pass the tax on to those purchasing their product.

    IT IS TIME THE WORD GETS OUT AND PEOPLE UNDERSTAND THIS. Please read my blog and help get the facts out. Thanks, Grady

  2. You are certainly right when it comes to VAT and excise duty; corporations are simply collectors of the taxes that end consumers pay. Oil companies are multinationals and pay taxes in various countries and try to arrange their affairs so as to pay the least tax, They do soemtimes pay corporation tax, which is not offset against the dividends that they distribute.
    That is the technical position; I suspect the actual non technical position may well be as you describe it.

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