Leading article: A windfall tax is an easy solution – but a wrong one

There are several better ways to respond to soaring energy prices

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When governments are in trouble they are especially keen to score easy political goals. And several voices around ministers believe they have identified one. The eye-watering price increases announced by British Gas this week have stoked concerns about the number of people being pushed into "fuel poverty". And the high profits of the energy producers, including Centrica, which owns British Gas, have raised popular hackles at a time of downturn for just about every other sector of the economy.

The solution being pushed in Westminster is for the Government to impose a windfall tax on energy producers to pay for a sweeping programme to subsidise the energy bills of the poor. It is certainly a neat solution, but Gordon Brown should, nevertheless, resist the temptation to go down this path.

This is not to argue that British Gas and the other energy suppliers are models of fair dealing and upright capitalism. They were suspiciously slow to cut customer prices when the global wholesale price of energy was low a few years ago, but have been very quick to pass on the costs now that the market price of gas and electricity is rising. This raises serious doubts regarding the competitiveness of the energy sector post-privatisation. Yet there is no clinching evidence that these firms are profiteering from soaring global energy prices. The profits of Centrica are actually declining, despite its increased revenues from the North Sea's gas and oil fields.

And the windfall tax is inadvisable for other reasons too. Perhaps the most significant is that it would be counter-productive for the long term national interest. A windfall levy would produce revenue for a cash-strapped Treasury, but it would send a dangerous message to the energy production sector. Producers need consistent tax signals from governments if they are to invest in long-term projects in a rational manner. The imposition of unpredictable taxes would be likely to deter investors from putting up the cash for the renewable energy projects that Britain so urgently needs.

There are other ways to get the energy companies to behave better to customers. As the Liberal Democrat Treasury spokesman Vincent Cable has argued, there is a good deal that could be done on the regulatory front. A good place for the Government to start would be by addressing the scandal of pre-payment meters, which end up charging the poorest customers a particularly high tariff.

That is related to another important, and often missed, point. As with soaring gasoline prices, the high price of electricity and gas should be a signal to all that we need to do more to conserve our use of power in our homes and business. No one disputes that there is a need to target some financial relief at poor pensioners who will find it a struggle to heat their homes this winter. But we cannot afford to lose sight of the fact that a huge amount of energy is wasted through inadequate insulation in our buildings.

If ministers want to take the right long-term decisions for the economy they should demand that energy companies roll out smart meters, to show each household clearly how much energy it is consuming. It should also get on with working, through the European Union, to liberalise the continental energy industry, which should help ease prices over time.

A domestic windfall tax will be heralded as an easy score. But, in time, it could very well be seen as a lamentable own goal.

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