No to a Windfall Tax

Labour Party voices, especially on the left and in the unions, are increasingly demanding a windfall tax on energy companies (and on banks and anyone else they can think of).  When criticising the government for failing to get its act together, they beg the question “OK, so what would you do?”.  And the easy, stock answer is, “Let’s have a windfall tax.  Let’s confiscate these obscene profits that the energy companies (and the banks — except that they’re mostly not doing so well).  are making.  Then we can reduce prices at the pumps, address fuel poverty, and so on”.  It’s amusing that a Labour politician can readily propose to take one sum of money and spend it three times over.
 
Windfall taxes may be tempting to those on the left, but they should stay their hand, for two sets of reasons.  Windfall taxes are wrong in principle, and perverse in practice.
 
A windfall tax is, in effect, retrospective legislation.  We are saying to business that no matter how carefully companies plan, no matter how successful they are, we will come along afterwards and confiscate any profits which we deem excessive.  On that basis, do we also have to pay subventions to companies that make an unexpected loss?  Government should not be in the business of telling companies what is an appropriate level of profit, not should they be in the business of moving the goalposts in the middle of the game.  By all means let them change the rules on taxation in an orderly way, in a budget, with due notice.  But they have no business to undermine, in an arbitrary way, work that has already been done and profits already earned.
 
In fact the so-called “obscene” profits are usually nothing of the kind.  An energy company may well make tens of billions of pounds.  But “A million pounds a minute” is a tabloid headline, not economic analysis.  The first question should be “What is their return on capital employed?”.  After that we can enquire about investment in R&D, exploration of new reserves, investment in recovery and refining capacity and so on.  A headline profit figure is meaningless.
 
A particularly amusing European angle is Brussels’ Emissions Trading Scheme (ETS), which has had the unintended effect of awarding quite substantial funds to energy companies.  But we have no right to offer a novel system, invite companies to plan on that basis, then ask for our money back because we got our sums wrong.  Again, let them reform the system (in this case they’d do better to abandon it), and proceed on a rational basis.  Not confiscate the money they solemnly guaranteed a couple of years ago.
 
But a windfall tax also has perverse and unintended consequences.  First, an energy company will look to strengthen its margins to respond to any attack on its profit.  In other words, we will create a new incentive for market players to increase prices — hardly what we wanted.  Second, they will try to cut costs.  This may mean less investment in exploration, just when we need new reserves.  Less investment in new technology, just when we need alternative energy technologies.  Less investment in extraction and refining capacity, just when demand and prices are going up.
 
A windfall tax may make leftist politicians feel good, but it will result in less energy and higher energy prices.  Not a very good day’s work.

Advertisements
This entry was posted in Energy and tagged . Bookmark the permalink.

18 Responses to No to a Windfall Tax

  1. Ryan Lavelle says:

    Roger

    Did read the article in the Telegraph this week about how these “energy companies” (read financial market speculators) are profiteering on the basis of the EU emissions trading scheme?

    I would urge you to do so.

    I would also urge you to think about how you are going to explain to the millions of people that are being plunged into fuel poverty by this criminal “free market” system that you and your co-thinkers have created, how they are going to feed themselves and their families, as their household bills explode with hyperinflation created by financial speculation.

    You cannot claim that you have not been warned about this, since as you well know I have been personally on your case about it for six months AT LEAST now.

    You must either make a decision to go with the general welfare of your fellow citizens, or continue parroting a bankrupt and failed economic order that will soon be responsible for more death and misery than even Hitler could have dreamed of. But then, “surivial of the fittest” is as “survival of the fittest” does, right?

  2. Roger Helmer says:

    Ryan, How can you get things so consistently wrong? If you create an incentive scheme, you cannot then blame people for doing what you incentivised them to do. Blame those who designed the scheme — in this case, the EU. The only alternative is state central planning. They tried that in the Soviet Union, and it didn’t work too well.

  3. Ryan Lavelle says:

    Roger

    It is you who have got things consistently wrong. The “free market” in natural gas and other “energy commodities” is now killing people.

    Today we hear that British households are paying 42% more for their gas than at the start of this year. The EU did not create the free market, Thatcher, the Mont Pelerin society, and friedmanite “flat earthers” did, and now it is biting us all on the arse.

    Are you going to answer to the charge of genocide that is implicit in this?

  4. Ryan – you clearly have strong views but please back this up with some evidence. 1) The definition of genocide is quite clear – so what examples do you have of rising prices of gas that British people are having to fork our for, causing genocide?

  5. Ryan Lavelle says:

    UK faces looming electricity supply gap – families face £4,000 bill for renewables

    A new report commissioned by the WWF and Greenpeace attacks plans to build new coal plants in response to Britain’s looming electricity supply gap, predicted to reach 20GW by 2020. The report argues that if the UK meets its EU targets of sourcing 15% of energy from renewables (translating to 35-40% of electricity), together with a 20% improvement in energy efficiency, new coal plants will not be needed.

    However, the FT notes that keeping the lights on without increased use of fossil fuels may not be possible if the UK fails to meet the EU targets – which all sides agree will be a struggle. Paul Golby noted in the Guardian yesterday that the necessary investment in renewables would cost the equivalent of £4,000 for every household in the country.

    In the Guardian Simon Lewis, a Royal Society research fellow at the Earth & Biosphere Institute, University of Leeds, argues that E.on’s use of the EU Emissions Trading Scheme “won’t deliver real cuts, as its own business case shows”.

    I say that if the monarchy of this country wishes to impose ecofascism on us, they should be forced to abdicate and move back to Germany where they belong. We need a British ruling family who wishes to defend this nation and the wellbeing of it’s citizens, not kill us all by economic attrition.

  6. Roger Helmer says:

    Ryan, Try a little logical thinking for once. Without a free market in fuel, the UK might have to rely on its own resources. This would cut our available power by around 50% overnight. Does that sound to you like a solution to our energy problems?

  7. Paul G says:

    I completely agree with Mr. Helmer’s argument here. I think that proponents of the nonsensical windfall tax idea need to bear in mind two things.

    The first is that the root problem behind high prices – scarce energy resources and high, inelastic worldwide demand – is here to stay. Britain in the past benefitted from (relatively small) domestic supplies of gas and oil which are now dwindling. And, like it or lump it, developing countries simply have more to spend than they used to. We all benefit from increased global prosperity, but, partly because we simply take rising living standards for granted, we place disproportionate emphases on relative price rises like these. Yet, however you interpret the evidence, energy is a much, much smaller part of average household expenditure than it used to be fifty or sixty years ago. Despite what the scaremongers about ‘fuel poverty’ claim, our average well-being has dramatically increased.

    And the second point is that the UK government(s – the Tories are also partly responsible here) have not taken the opportunities they have had over the years to help provide the UK with more security in times like this. On the one hand, if you accept that nuclear power is necessary, we have too few nuclear power stations and have waited too long to think about building more. And on the other, through North Sea Oil’s good times we have not thought a jolt about what we would do once the oil and gas started to dry up. Our ability to store gas, for instance, is pitiful. In a country where the state controlled the energy industry for decades, this is laughable.

    So, on the first point, a windfall tax is going to have no effect on the underlying problems we face. High prices are here to stay, and if that means we all have to spend less on non-essential items, well, that’s the nature of scarcity. And on the second point, as Mr. Helmer rightly argues, if we want the energy industry to improve some of our structural difficulties the last thing we want to do is punish them, retrospectively, for success.

    Also, a quick point. I’ve often thought that when people use the term ‘fascism’ in a flippant way, their points are usually purile. Mr Lavelle’s use of the term is no exception.

  8. Sean Melody says:

    Once again spot on. We claim to be a competitive society that encourages enterprise but when a company makes more money than the Government thinks it should make, they are to be punished. This flies in the face of a truly free market.

    This windfall tax punishes successful businesses, remembering these companies pay millions in tax, adhere to endless regulation and employ thousands of staff, why punish them further?

    Maybe it is our very own Government who is taking “excessive” monies from the price of fuel, maybe just maybe to relieve the current burden of fuel prices across the nation the Government could cut fuel duty never mind just freezing it.

  9. Ryan Lavelle says:

    I am tired of hearing the same old hogwash about the only two choices of political economy being liberal free markets or state central planning.

    Was the Marshall Plan communist?
    FDR’s New Deal?
    Lincoln’s reconstruction?
    The Bismark reforms in Germany?

    The point here is that every single successful economic miracle in history has been based on dirigist national banking methods, not speculative market driven finance.

    A fascist system of economics is one which insists on the primacy of market values over the general welfare, even if maintaining the “laws of the market” means killing people.

    The economic shocks we are now living through, as a result of the iodicies of global deregulation, are now MURDERING people.

    These policies are a crime against humanity, and those who continue to promote and defend them will eventually be brought to justice.

  10. Ryan Lavelle says:

    Roger

    We don’t need a “free market” in any essential commodity.

    What we need is long term trade agreements for fixed physical capital exchange, as like high tech for oil.

    Is the BAE arms for oil (Al Yamamah) a “free market”?

  11. Tim W says:

    Hey Ryan.

    You claim that ‘every single successful economic miracle in history has been based on dirigist national banking methods’. What utter drivel. The biggest economic miracle ever – the British Industrial Revolution, which changed the possibilities of human output and standards of living forever – was only possible because the government was actively NOT involved, and allowed people and firms to get on with what they know best – improving their own situation. This prime example of economic advancement, built on by every rich/emerging economy, looked on objectively is the best illustration of the benefits of the free market.

    And as far as I can tell, it is an absolute truism that there is no situation which government intervention cannot make worse – collectivisation, anyone?

  12. Ryan Lavelle says:

    Tim

    The British industrial revolution was ultimately betrayed by the city of london financial oligarchy.

    This was why the fledgling American system under Franklin, Carey, Hamilton ultimately defeated the British Empire.

    Get your facts straight lad.

  13. Tim W says:

    Ryan, I believe you to be a comic genius. I hope you mean to be.

  14. Roger Helmer says:

    I think it was the Red Queen, in Alice Through the Looking Glass, who was able to believe six impossible things before breakfast.

Leave a Reply to Paul G Cancel reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s