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.
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