Windfall Tax Could Lower the Costs of Cash-for-Ash

Nat O'Connor10/01/2017

While it may not be possible to renege on contracts already signed under the Renewable Heat Incentive (RHI) scheme in Northern Ireland, one option open to the Executive and the Assembly is to introduce a windfall tax of 100% on any profits made under the scheme, along similar lines to the windfall tax introduced by UK Prime Minister Blair on privatised energy utilities in the UK budget of 1997.

This would not effect anyone who is receiving the scheme as a subsidy for heating, but it would dissuade anyone from excess heat production as any profit incentive would be removed.

Chennells (1997) reviews the original windfall tax, which was on 'the excess profits of the privatised [energy] utilities—excess profits which arose because the companies had been sold off too cheaply…’. Both Labour and Conservative politicians have proposed windfall taxes subsequently--including former Conservative PM John Major--which indicates that it is a widely accepted form of taxation among the UK's main parties.

Administering such a tax should be fairly straightforward. When individuals or organisations apply to receive their RHI payment, they should provide receipts for their fuel, which allows the profit to be calculated. The tax could be imposed annually for the duration of the RHI scheme. In economic terms, companies should not have expected to profit from the scheme, so any behaviour change by companies cannot be deemed undue interference in the market. On the contrary, the windfall tax would bring behaviour back into line with what was expected from the scheme in the first place.

Another example of a windfall tax was the 80% tax imposed by the Republic of Ireland in 2009 (as part of the NAMA legislation) on gains on from land rezoned from agricultural use to residential use and then sold or developed. This tax was intended to disincentive property speculation. It was not successful in raising revenue, as the horse had bolted by 2009 in terms of property development. But it demonstrates the feasibility of imposing high rates of profit taxation. The Commission on Taxation Report 2009 recommended this tax (Rec. 6.5, p. 154, detail on p.163)

A US example is The Crude Oil Windfall Profit Tax 1980, introduced by the Carter administration after the surge in high prices, due to actions by OPEC, discussed by Drapkin and Verleger (1981).

The RHI has already cost money during the time of its operation, but contracts under the scheme continue to operate. A windfall tax would be a suitable policy to claw back any future profit made under the scheme, and to remove the incentive for any wasteful burning of fuel. It should be possible to significantly reduce the future cost to Northern Ireland's taxpayers, while having no adverse affect on those who benefit from the RHI scheme for the purposes for which it was created.


Nat O'Connor is a lecturer in public policy and public management at Ulster University, and a member of TASC's economists' network.

References
Chennells, L (1997) ‘The Windfall Tax’ Fiscal Studies, vol. 18, no. 3, pp.279-291 http://search.proquest.com/docview/236813363?accountid=14775 (paywall or library access needed)

Commission on Taxation Report 2009, http://www.finance.gov.ie/sites/default/files/Commission%20on%20Taxation%20Report%202009.pdf

Drapkin, D B and Verleger, P K (1981) ‘The Windfall Profit Tax: Origins, Development, Implications’ Boston College Law Review. http://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?article=1679&context=bclr

Dr Nat O'Connor     @natpolicy

Nat O'Connor

Nat O’Connor is a member of the Institute for Research in Social Sciences (IRiSS) and a Lecturer of Public Policy and Public Management in the School of Criminology, Politics and Social Policy at Ulster University.

Previously Director of TASC, Nat also led the research team in Dublin’s Homeless Agency.

Nat holds a PhD in Political Science from Trinity College Dublin (2008) and an MA in Political Science and Social Policy form the University of Dundee (1998). Nat’s primary research interest is in how research-informed public policy can achieve social justice and human wellbeing. Nat’s work has focused on economic inequality, housing and homelessness, democratic accountability and public policy analysis. His PhD focused on public access to information as part of democratic policy making.


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