March 3, 2008
What should we do with the energy windfall tax?
Energy companies are coming under pressure to explain their high profits. One of the sticks the government can beat them with is a windfall tax on the money the companies have reaped from quirks in the European Union’s emissions trading scheme.
The biggest groups already put aside a small fraction of their profits to help customers on the breadline. This week they are in talks with ministers about striking a more comprehensive deal to tackle fuel poverty for Britain’s poorest households. In return the government would hold off from imposing the energy windfall tax.
But not everyone agrees that this is the best way forward.
Colin Challen, chair of the All Party Parliamentary Climate Change Group, wants a windfall tax on the industry but says the money should go towards renewable energy rather than lower bills.
“Ofgem’s duty is to try to get prices down for consumers and put the environment on the back burner,” he tells the FT. “My view is that the money should be invested in climate change mitigation. That is the whole point of the European Union’s ETS.”
He continues: “If people recognise that the extra money they are paying goes to environmental causes it would make it far more acceptable to the public.”
The energy companies are likely to claim that they are already putting substantial resources towards renewables, says Mr Challen. But this is unlikely to account for all of the windfall. “They didn’t have to pass this charge on to consumers,” he says.
Elliot Morley, the former environment minister, said during a recent energy debate in the Commons that the energy companies had enjoyed “obscene windfall profits” from free carbon allocations.
People believe the energy companies have reaped a windfall because they get most of their carbon allowance - in the current, second phase of the ETS - for free.
The Select Committee on Environmental Audit said in a report last March that the government should press for the full auctioning of allowances in the future because this would stop companies making “windfall profits”.
The committee suggested that auction revenue should be used both for the development of new low-carbon technologies but also for other tax cuts to change consumption patterns - for example, cutting VAT on low-carbon cars.
