Windfall Tax Could Save Northern Ireland Millions from the Cash-for-Ash Scheme

Various media have reported that the Renewable Heat Incentive (RHI) may cost “up to £490million”. A windfall tax would recover much of that money for Northern Ireland, without disrupting the scheme for genuine users who are using the scheme to conserve energy.

Leaving aside the political questions about the RHI, the main question exercising many people in Northern Ireland is how to avoid the scheme costing hundreds of millions of pounds.

Contracts have been signed under the RHI, and the Executive presumably wants to avoid being sued for breach of contract, as that might be just as costly. A tested and fair solution would be to impose a 100% windfall tax on any profit made by users of the RHI.

A “windfall tax” is a just a name for a specific tax, introduced in a targeted way. For example, when he was Prime Minister, Tony Blair brought in a tax on privatised energy utilities (UK budget 1997).

This tax was on ‘the excess profits of the privatised [energy] utilities—excess profits which arose because the companies had been sold off too cheaply…’  (Chennells, 1997).

Another example of a windfall tax include a 80% tax on gains on from land rezoned from agricultural use to residential use and then sold or developed. This was brought in by the Republic of Ireland in 2009, as part of the NAMA legislation.

This tax was intended to remove incentives for property speculation or land hoarding. It was too little, too late as far as the Republic’s property boom was concerned, but it does demonstrate that very high tax rates can be imposed.

(The Commission on Taxation Report 2009 had recommended this tax).

In the USA, the Carter administration introduced the Crude Oil Windfall Profit Tax 1980 after a surge in high prices due to actions by OPEC (Drapkin and Verleger, 1981).

No one was meant to make profit from the RHI, so a 100% profit tax is fair. It would not change anything for those individuals and businesses who were using the scheme to subsidise a switch to more sustainable heating systems.

It is not a tax on the regular RHI payments. The tax would only apply to cases where the cost of fuel was lower than the subsidy and a profit was being made.

However, any windfall tax must be set at 100% of profits, as this entirely removes the incentive to make profit from the scheme. If the tax was set lower, there would still be an incentive to game the system.

From an environmental perspective, a 100% tax would also mean that no one would engage in needless heat production.

Over time, both Labour and Conservative politicians have proposed windfall taxes, including former Conservative PM John Major who called for one in 2013 (BBC 2013). This indicates that this form of tax is widely accepted across 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 any profit to be calculated. The tax could be imposed annually for the duration of the RHI.

In economic terms, no one should have expected to profit from the scheme, so any behaviour change due to a windfall tax could not be deemed undue government interference in the market. On the contrary, a 100% tax would bring behaviour back into line with what was expected from the scheme in the first place.

If the Assembly does not have the power to directly legislate for such a tax, it would be surprising if Westminster was unwilling to introduce one at the request of the Executive and Assembly.

It would have the effect of bringing the cost of the Northern Ireland RHI into line with expected costs for the versions of the scheme introduced in the different UK jurisdictions.

The RHI has already cost money during the time of its operation, but contracts under the scheme continue to operate. A 100% 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, while having no adverse effect 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
BBC (2013) ‘Sir John Major calls for windfall tax on energy profits’ http://www.bbc.co.uk/news/uk-politics-24621391

 

Chennells, L (1997) ‘The Windfall Tax’ Fiscal Studies, vol. 18, no. 3, pp.279-291http://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 (see Rec. 6.5, p. 154, detail on p.163)

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

A version of this article was originally posted on TASC’s blog, www.progressive-economy.ie

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  • Neonlights

    If this is so easy to do, why hasn’t it been done yet? Forgive me for asking, but if a solution seems simple it often isn’t.

  • T.E.Lawrence

    At Last ! A sensible solution ! Rush through the emergency bill now !

  • Dan

    There’s no will to cut the costs, because too many friends and families are enjoying free heating at home.

  • Nat O’Connor

    It is technically simple, but there are two obstacles. Firstly, if politicians have encouraged supporters to sign up to RHI to make money off the scheme, the same politicians are not going to be keen to introduce a tax on those profits. But that’s their problem. The second obstacle is that introducing such a tax would be a Reserved Power for Westminister, so the Executive and Assembly would have to ask London to bring it in. But why wouldn’t they–if asked–as it would bring the RHI costs into line with similar schemes elsewhere. Ironically, even if the Assembly breaks up and goes into election mode, the solution can still be brought in from Westminster. Northern Ireland’s MPs in the Commons could be key to this. NOC

  • Obelisk

    I agree. So now I await the explanation of why it can’t and won’t be done.

  • Mark Anderson

    There are more opportunities to reduce costs with retrospective/voluntary tiers.

    The two main issues for costs are the “outside the ethos” boilers and the genuine boiler which just have very large usage factors.

    For example a genuine 6000hr usage boiler with a windfall tax may still cost the tax payer £30k. Where as a tiered tariff, something similar to the original GB RHI would have a total liability of approx £15k.

  • Anthony O’Shea

    From the users point of view is there any loopholes or gimmicks they can apply to avoid or cut back on paying some or all of the tax? I ask this simply because your idea seems so remarkably obvious and straight forward, it is incredibly worrying if none of our political masters or advisors have not had a look at it.

  • Brian Walker

    Problem is, a windfall tax is levied on perceived excess profits. A base of 2000 max is too small and the rest of taxpayers would surely revolt. And – oh yes – who would legislate for it? .

  • SeaanUiNeill

    Together with the land re-zoning tax!

  • SeaanUiNeill

    Important people might be effected, explaination enough!

  • Nat O’Connor

    I don’t see a problem with the small tax base. Say 2,000 individuals/organisations used the scheme. They will all get their fuel cheap or for free (since the subsidy is larger than the price of wood pellets), but when they claim their subsidy, they won’t be allowed to make profit. Not all of them will profit anyway. They’ll just get some or all of their money back for fuel. (And the benefit to Northern Ireland is a shift towards more sustainable heating systems, fewer CO2 emissions). No one will burn more fuel than they need to, because they will have incidental costs like transporting the fuel, operating the burner, etc. The other taxpayers should see this as an improvement. The RHI will still cost money, but a lot less. If that’s still a problem for other taxpayers, well it may just be too late to pull out of the signed contracts.

  • Nat O’Connor

    I agree that this would go beyond the proposed windfall tax, and would potentially reduce the RHI costs even more. But getting people to agree to a voluntary change in their contracts is unlikely, except for a small number of organisations who might do it for PR. Imposing such a change is legally problematic, as it would be interference with lawful contracts. However, taxation is a legally different angle. We could actually just tax the subsidy payments going further to de facto reduce them, but that might be perceived as more unfair than only taxing the profits.

  • Nat O’Connor

    I’m assuming people need to keep records of their fuel purchases to claim the subsidy, which is how we can calculate any profit to be taxed. If that is the case, I don’t see any major loophole.

  • JOHN TURLEY

    We must not forget the alleged corruption or at best incompetence,We need that inquiry if only to find out if those boilers that went on fire in
    Fermanagh were been too well fed.

  • SDLP supporter

    If poultry processor suppliers and farmers are the illicit beneficiaries of the RHI scheme, is it a case of ‘fowl play’? I’ll get me coat.

  • johnny lately

    Why can’t the DUP and Arlene herself be forced to come up with the money to pay for their own mistakes after all it was Arlene Foster who gaurenteed the banks the money tree would be there for 20 years.

  • Stephen Lewis

    I thought the higher tariff was designed to allow recovery of capital expenditure – and therefore, for some part of the payments, a profit was essentially planned- ie to recover the capital investment. If I am incorrect, please correct me if not, 100% windfall tax will essentially have changed the incentive to invest, and the whole character of the scheme – not sure many would agree to that. So maybe we have to foot the bill for the capital investment. (Even at that 2000 boilers must be much less than £400M).

  • murdockp

    Mick, the problem with the RHI is the profit making element, the fraud. If I was formulating a strategy it would be a strategy to encourage the removal of boilers and plant from premises they should not be located in.

    So take an unheated shed that is now being heated. What should be done, personally i would slap rates on it to reflect its “enhanced capital value” and you will see the boilers will be pulled out faster than they went in.

    I would also bring in building standards legislation across all industries that state that all existing buildings that are heated have minimum building fabric standards of insulation.

    This legislation will result in (1) less energy being consumed to generate heat and (2) will result on heating systems being removed from buildings were the cost up upgrading the building fabric is prohibitive to the owner, again reducing RHI payments.

    While they are at it they should slap business rates on all the farms to ensure their RHI boilers are removed as well but also to get some revenue from them. Why should farmers be rates exempt, they are no more special to our economy than builders and manufacturers just because they produce food and most own their land and modern farming does not create jobs as mechanisation has transformed the industry.

    The farmers can well afford it despite what their trade body bleats to us about their financial hardship. The fact agricultural land values in NI are 40% more expensive than the rest of the UK tells you all you need to know about farmers wealth. If land starts to fall in value then I agree they are structural financial issues in the industry, but the facts are land values keep rising.

    Farmers paying their fair share would lessen the financial rates burden for the rest of us.

  • Nat O’Connor

    You can still have a 100% windfall tax in that case. You simply divide the capital cost by X years, and include the annual share of that cost alongside the subsidy for the fuel. Any profit above that wouild be taxed.
    It does mean society is paying for new boilers to be put in, but that was the whole point of the RHI in the first place, to get rid of old ineficient heating systems and to move people towards renewable fuels. (And there are still real public benefits from the RHI, not least giving an income stream to those businesses developing sustainable fuels).

  • GEF
  • Stephen Lewis

    Agreed – but that then will effectively be less than 100% as I thought was being suggested. Anyhow – it will definitely not end up with a bill for £0! Any private sector ‘executive’ would have had their marching papers for signing off clearly rubbish contracts. Hopefully the users will play ball….

  • Didn’t Jim Alister suggest this over a month ago on Nolan? Sure he did. Of course Westminster would have to introduce the tax, and given that we still know very little about exactly the monies in question other than broad estimates not sure how this would be done. Other than on the basis of reverse engineering the scheme to introduce tax that effectively creates a cap.

    Not sure either that a regional tax of this nature would be a good thing either. Might set a precedent. Anyway for Westminster the money isn’t a problem as Whitehall has defined how much money is available. This would be a putative tax to make up for a shortfall in the NI Budget, which would mean a very small number of people acting in good faith would be paying for the political incompetence of Stormont.

    Hard to believe that our ‘businessman’ Finance Minister couldn’t find waste of around $20million. Would have thought he’s have been working on that since he read the Comptroller report back in July that said £140m was likely to be needed over next five years. Reducing the number of pointless quangos and Commissions would be a useful start.