Rising energy and fuel prices are affecting everyone but it's the poorest and those on fixed incomes who are paying the heaviest price. The warm summer weather will not mask the anxiety and anger at dramatically rising bills for the essentials of life - light and heat. We believe that the moment is right for the government to levy a sensible one off windfall tax to guarantee social and environmental justice both now and in the future. This is why.

The average annual spend on domestic energy per household has now breached £1200. Since 2000 we have faced gas price rises of 100% and electricity price rises of 61% - with further increases including British Gas raising its gas bills by a record 35%. Simultaneously the main energy providers have seen their profits rise from £557 million in 2003 to now over £3 billion. This alongside the recent news of profits made by oil companies - BP is now making £37 million a day with a 23% increase in profits to £6.7 billion for the first 6 months of 2008.

The current spike in the price of oil means these companies are receiving unearned and undeserved windfall profits that are damaging to the rest of society, not least because the unprecedented price rises are fuelling inflation and therefore the cost of borrowing and repaying mortgages.

The government estimates that 2.5 million families are living in fuel poverty, whilst Energywatch puts the figure at over 4 million. Yet despite the billions made in profits, the energy industry spends just £50 million a year combating fuel poverty and has only agreed to raise this to £150 million a year by 2010. But every 10% increase in energy prices mean an extra 400,000 people go into fuel poverty.

At the same time there is a lack of investment in securing renewable energy to help Britain become energy independent and more carbon neutral. By 2020 the UK wants 15% of all energy to be from renewable sources, this is currently only 2%. Increased investment is urgently needed if the government is to meet its target.

Just as government responded to the oil shocks of the 1970s and invested in North Sea oil - to the ongoing benefit of the now privatised energy and oil companies - so government must intervene again to secure sustainable energy supplies for the 21st century and reduce the fear of fuel poverty. It's absolutely right that the corporations who are benefiting from that original investment and the later privatisation pay their fair share to society.

As precedent a similar windfall tax was levied when Labour came to power in 1997 on the unearned profits of the newly privatised utilities and raised £4.5 billion. Similarly in 1981 the Conservative government levied a windfall tax on the main clearing banks - justified on the grounds that increased interest rates led to substantial unearned profits. In 2008 the spike in the price of oil has today lead to substantial unearned profits for the main oil and energy companies - we therefore call on the government to levy a windfall tax.

Revenues from the tax should be ring-fenced to deliver social and environmental justice for all. Part of the money raised should be used to immediately help those struggling with rising fuel bills and should be particularly targeted at families in or facing fuel poverty. However the best strategy to eliminate fuel poverty forever is to ensure every home is insulated and energy efficient to the highest standards. Therefore much of the money raised should be used to kick-start a national programme of home energy efficiency and installing renewable energy, starting with the homes of the fuel poor.

Used in the right way this could benefit the UK economy as a whole - just as the New Deal in 1997 created new jobs for the long term unemployed, such an investment could see the creation of hundreds of thousands of new jobs in renewable energy production, insulation, building renovation and other sectors.

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Bloggers4Labour said...

The windfall tax idea has been comprehensively rebutted here:

[...] 1. A misallocation of investment, as a result of over-riding the market mechanism. Market forces are telling us that there’s been over-investment in house building and under-investment in gas and power generation. Taxing energy companies and subsidizing builders exacerbates this problem.
2. It worsens the quality of business decision-making... these twin policies would subsidize bad judgment and penalize good. What incentive does this give firms to do well?
3. In showing that the government caves into pressure groups, it gives everyone an incentive to invest in lobbying and rent-seeking rather than in running their own affairs well. [...]

What we’re seeing in these proposals, then, is just what to expect when the state and business collude - the drawbacks of arbitrary government, without the offsetting benefit of any genuine egalitarian principle.


I don't expect Compass to support radical measures, or indeed egalitarianism, rather a kind of media-friendly Blairism filtered through a few sheets of Guardian Comment pages, but what I do expect is something a little bit more robust and thought-through than:

"Revenues from the tax should be ring-fenced to deliver social and environmental justice for all."

Left-wing politics should be about hard choices - across politics, philosophy, and economics - not Fresher's Fair slogans.

Lee Griffin said...

Thanks for your comments, however I think it's pertinent for people to think about what this will actually achieve?

bloggers4labour has posted a very good set of points about why this is a bad idea. But on top of this think about what would actually happen if a windfall tax was proposed.

The tax would have to be at least 3% of profits to do as much as lift only 3% of those households in fuel poverty out of it immediately...and this is if all of the windfall tax goes directly in to taxpayer pockets.

The reality is you're asking for investment in renewable technologies. This is naive because it ignores firstly that companies are already doing this. No company like Centrica wants to be in a situation where they are reliant on one or two streams of resources and at the providers whim as to prices. I doubt if you ask Centrica that they are happy to be rising prices as much as they are, but the reality is that finally (for once) they're not raising prices with the huge increases in wholesale cost, and they're TAKING the profit hit for it.

Secondly it assumes investment will breed instant results, that Labour can somehow reap the benefit of renewable energy from a windfall tax that will be collected next year. I'm sorry but the benefits will trickle rather than flood, and they'll disproportionately benefit the rich more than the poor due to the shocking way in which companies charge for utilities usage in this country. By the time anyone feels any of the benefits, if such small amounts of investment offset against the background of shutting down funding for physics...the one area that could give us the answers on this'll be when Labour are long out of power.

It sounds very nice to say windfall tax for the gas companies, I'm sure the naively anti-capitalist students it's pitched to will lap it up without thinking about the bigger picture. Can't you be more responsible in the message being sent, right now you're about as responsible as the Daily Mail when it comes to delivering a rounded, thought out and fact driven opinion.

noel said...

It amazes how many of you criticising the tax that oil companies have to pay when a company like BP makes £6.75 billion a year, a 23% increase on last year. Wait a minute, what BP makes in an hour, someone on the minimum wage would need to work over two years to make the same amount.

People will argue BP invests in millions of people's pension funds, but show me the evidence that they have seen an increase in their pensions as a result of this amazing profit margin? If so, how come pensioners so hard hit by fuel poverty?

The windfall tax will fall mostly on the petrol companies because demand for oil is more elastic than supply. The proceeds for the tax will make energy cheaper (i.e. investment in better insulation) and more sustainable (i.e. investment in renewables) for people. The cost of insulation and renewable energy is much more elastic than the cost of petrol (unless you think the UK can buy off OPEP and at the same time prevent any externalities affecting the cost?), so with greater investment to make sustainable energy solutions cheaper, people will see which energies are the most cost-effective for them. Unless the cost of oil goes down, private investors will be more likely to put their money in these solutions too, especially if they aren’t as affected by externalities that petrol is impacted by. I forgot, this also creates jobs in that sector…

Obviously, windfall tax isn’t the only answer, we could also introduce smart tariffs for energy where people would get access to cheaper energy up to a reasonable level and then charge higher rates if you consume more than that.