Nothing is certain but death and taxes, goes Benjamin Franklin’s famous quip. As war grinds on in Ukraine, we have no shortage of the former. The question occupying the Treasury today is whether one should lead to the other. Should the energy giants’ huge recent profits – a direct result of the war in Ukraine – lead to a ‘windfall’ tax to ameliorate Britain’s cost of living crisis?
The Labour Party thinks so. So does the Tesco Chairman John Allan, who spoke in support this week. Yesterday, the Chancellor threatened energy firms with one, though the Prime Minister is thought to be opposed.
The energy sector, needless to say, is hardly welcoming. Centrica’s Chris O’Shea wins first prize for the most memorable argument against. A windfall tax, he argues, would be “burning the furniture to keep warm.”
It isn’t only O’Shea’s turn of phrase that should be commended. His argument is right.
The old case against windfall taxes is that they stifle investment and it is just as true today. An energy firm hit by an unexpected tax on their profits in Britain might well decide that they will invest elsewhere tomorrow.
This isn’t merely true in theory, it has been true in practice. In 1980, US President Jimmy Carter faced a political crisis as energy prices soared. In 2006, the Congressional Research Service estimated that his Crude Oil Windfall Profits Tax reduced domestic production by 8 per cent and increased oil imports by 15 per cent in the years that followed.
The war in Ukraine has illustrated how dependent Britain is on energy produced abroad, leading to a call for greater energy independence. That demands one thing: more investment in energy production in Britain. A desire to tax energy firms’ profits and achieve greater energy independence are therefore mutually incompatible.
It is also worth bearing in mind that, as profits at energy companies soar, they are not always so high. In the United States, twelve senators have called for a windfall tax on energy firms’ profits equal to half the difference between today’s oil price and the average between 2015 and 2019. In doing so, they selected two years in which energy firms’ margins were negative.
And, in 2020, lest we forget, the oil futures market briefly dipped into the negative. There was a time, in our very recent history, in which you could be paid to receive a barrel of oil. The energy sector is one of feast and famine. Tax the feasts too much and more famines will follow.
This is not, I should note, an argument in favour of unmitigated fossil fuel production. In fact, it is quite the opposite.
If we are to successfully transition to renewable energy, the big energy firms are going to have to be part of the solution. After all, only they can invest at the scale required. That makes this a particularly foolhardy time to discourage their investment.
For all this, a windfall tax would raise little. Though energy firm’s profits are indeed vast, only a small proportion of them come from energy production in the UK. The Labour Party thinks that a windfall tax of its design could raise an additional £1.9bn.
That may sound like a lot, but it vanishes all too quickly when compared against the £20bn of additional energy costs that UK consumers are expected to pay in 2022. And it is infinitesimal when compared to the £1tn that the government is already due to spend this year.
The impact of a windfall tax is, in this context, little more than symbolic. It would be a tax to show that the government is doing something, rather than a tax that actually allows it to do anything. The cost, on the other hand, could be very real indeed.
That is not to say that one won’t happen. The Prime Minister is looking for popular policies, and few tears will be spilled for the depleted profits of energy companies. But, in doing so, we take a lot from tomorrow to do a little today. That is no way to address the magnitude of the challenges we face.