Monday 15 December 2008

Compass' call for a windfall tax aims at the wrong target

Received another email from our friends at Compass today calling for a redoubling of efforts to lobby the government for a one-off windfall tax on the profits of the UK power sector.

The argument goes that energy companies are failing to pass on the lower cost of oil in prices paid by consumers. It is strengthened by the claim that while customers continue to receive record bills, companies continue to make record profits.

But as I've said before on Next Left, while the intention here is sound, it's a rather short-sighted strategy. A one-off windfall tax is hardly an answer to our long-term energy crises.

But there is another way.

First, we need to remind ourselves from where these 'windfall profits' of which we hear so much actually came.

The answer is Brussels (in a roundabout sort of way!)

The EU emissions trading scheme launched in 2005 requires heavy industry to have permits to cover their CO2 emissions. In the early phases of the scheme, most of these permits were handed out for free. Yet companies internalised the extra costs of the carbon, and passed these on to consumers.

So the answer to 'windfall profits' is not a 'windfall tax', but a reformed ETS that will deliver regular flows of additional finance into government coffers - the perfect target for a campaign for progressive hypothecation.

At the end of last week EU heads of state met to thrash out some of the most contentious issues under the EU's plans for tackling climate change from 2013, including the reform of the EU ETS. A key principle on the table for discussion was the amount of permits that European industry would have to pay for in auctions (producing a genuine carbon price signal, instead of unearned profits).

As the FT recognised in its editorial today, and as European NGOs pointed out forcefully in their reactions last week, the final deal was a major let-down in many respects.

But before becoming overly depressed at all that (my Euro-convictions are still to fully recover), it's worth noting that 100% of the UK power sector will have to actually PAY for their emissions permits from 2013.

This won't lead to a fall in prices for consumers, but at a price of around 20-30 euros per tonne CO2, this will generate massive additional revenue for the government - to the tune of hundreds of millions of pounds each year and every year. And the UK, always one of the defenders of the market auctioning principle (shame they didn't shout as loudly in Brussels about this as they did about carbon capture and storage... but that's another story) have even started to auction some permits already.

With a ballooning decifit, one can imagine why.

So the question for progressives concerned with spiralling fuel poverty this year and over the coming decades, is how these new revenues should be spent.

Surely better to argue not for a one-off tax on the energy companies to help people out this year only, but for the government to ringfence these regular additional revenues to be spent on energy efficiency improvements in fuel poor households every year.

Like the would-be reform of another EU policy - the Common Agricultural Policy - reforming the EU ETS gives policy wonks everywhere a picnic in deciding how to spend new money.

My pitch is for climate friendly, progressive causes at home and abroad. That's a long-term vision for tackling fuel poverty and climate change I think we should all get behind.

1 comment:

labourparty said...

//So the answer to 'windfall profits' is not a 'windfall tax', but a reformed ETS that will deliver regular flows of additional finance into government coffers - the perfect target for a campaign for progressive hypothecation.//

True, although it should be noted that the windfall from ETS was £11Bn.