How lawful is an energy windfall tax?

Whilst the debate surrounding a possible 'windfall tax' on the profits of energy companies has concentrated on political and economic issues, would such a tax be lawful?

It may now be less likely, given the package of energy efficiency measures recently agreed by Government and industry, that we will see an attempt to introduce a so-called 'windfall tax' on Britain's energy companies. In most discussions about such a tax, the debate tends to centre on the economic and political wisdom of imposing a measure of this sort. But would a windfall tax in this context be lawful?

In looking at the legality of a windfall tax of this sort, there is a range of arguments one can consider. There are, for instance, points that could be raised under domestic constitutional law, such as the Human Rights Act and the common law doctrine of legitimate expectation. Much could potentially be made of the absence of any manifesto commitment to introduce such a measure and on any explicit assurances given about the 'one off' nature of the last utility windfall tax in 1997. In addition, there are perhaps obstacles to the introduction of a windfall tax in terms of EC Treaty law, such as those provisions aimed at avoiding the distortion of competition between firms. These rules are of particular relevance when it comes to considering the detailed implementation of any such measure and, for example, the exemption or exclusion of particular classes of person from coverage.

However, in the context of the current discussion, it is also important to consider arguments based in EU environmental law. This article focuses on that area and, in particular, on the legal difficulties that could arise under the EU Emissions Trading Directive (ETD) (Directive 2003/87/EC of the Parliament and Council). The ETD is of course the foundation of the EU Emissions Trading Scheme (the EU-ETS) in which many energy utilities currently participate.

The EU-ETS operates on a 'cap and trade' basis and enables those who do not use up their capped entitlement to emit greenhouse gases to sell their unused allowances for cash to those who need more to stay within their own caps. The scheme has been running since 2005. During the first phase of the scheme (2005-2007) a minimum of 95% of allowances were allocated free of charge. This has been reduced to 90% for the next phase of the scheme, which runs from 2008 to 2012. The balance of allowances are made available through the market, e.g. via auctions. In future phases of the scheme, the percentage of allowances allocated free of charge will be reduced drastically.

The profits made by selling these free allowances (to the extent they are not required) have become a major focus for the windfall tax campaigners. The suggestion is that either these profits should be clawed back directly by the Treasury by taxing them (presumably over and above the normal corporate taxes to which they would be subject) or that the free allocation of allowances should be cancelled, at least in part, and suppliers should be forced to pay full market price for them.

However, what these arguments do not appear to take into account is that the free allocation of allowances (otherwise referred to as 'grandfathering') is an explicit part of the EU scheme. Indeed, Article 10 of the ETD states: "For the three-year period beginning 1 January 2005 Member States shall allocate at least 95% of the allowances free of charge. For the five-year period beginning 1 January 2008, Member States shall allocate at least 90% of the allowances free of charge". On the basis of these minimum requirements, the UK submitted its National Allocation Plan for Phase II of EU-ETS to the Commission in August 2006 and had the plan (which envisages allocating 93% of allowances free of charge during Phase II) accepted by the Commission in November 2006. The approved plan and DEFRA's Final Allocation Decision, which includes the list of individual allocations of Phase II allowances, were published on 16 March 2007.

The requirement to allocate a (gradually diminishing) proportion of allowances free of charge is, of course, designed to permit industry time to adapt to the caps imposed under the scheme. The profits generated from the sale of these free allowances means that industry can invest in new, cleaner plant or in other ways of reducing emissions. The imposition of a harmonised, minimum level for free allowances across all Member States is also designed to ensure that competition across the EU is not distorted, as might well be the case if the bulk of allowances were allocated on the basis of auctioning in one Member State but allocated free in another.

So, given that the ETD clearly requires allowances to be allocated on a "free of charge" basis, is it legally open to the UK Government to impose a windfall tax or other claw-back mechanism aimed at the profits generated from selling these free allowances? It is suggested that the answer to that question is likely to be 'no'. As is noted above, the ETD clearly confines any Member State discretion on this point to the 10% of Phase II allowances (which, in terms of Article 10, can either be allocated free of charge or auctioned) that are not required to be allocated free of charge. However, it seems clear that the effect of a windfall tax directed at profits generated from the sale of freely allocated EU-ETS allowances would be to impose a price for the allocation of these allowances. They would, in other words, cease to be "free of charge".

For further information on any of the above please contact either Gordon Downie or James Saunders from our Energy and Utilities Group.

10 October 2008

Freedom of Information – Guidance on what to publish

The Information Commissioner's Office recently published new practical guidance to help public authorities understand what information should be made public under the Freedom of Information Act 2000 (FOIA) and Environmental Information Regulations 2004 (EIR).

The guidance focuses on when minutes and agendas of meetings should be disclosed. It is intended to help public authorities decide what they should be publishing and if they can edit before publishing. We have picked out some of the key points from the guidance note, concentrating on the FOIA rather than the EIR, but you can access the full text on the Information Commissioner's website. 

The information commissioner recommends that public authorities adopt a model publication scheme where it commits to making information available to the public as part of its normal business activities. As part of its policy a public authority should be clear about what information it will routinely make public. This new guidance note follows on from that by concentrating on the example of agendas and minutes of meetings.

The guidance note recommends that public authorities should proactively publish unedited agenda and minutes for all public meetings and senior level strategy meetings. Lower level internal meetings and meetings which took place more than three years ago are not considered to be of particular interest and it is not recommended that these be published.

Sometimes information will be exempt from disclosure because of the exemptions in the FOIA or EIR, e.g. if it would prejudice the effective conduct of public affairs or if it is commercially sensitive information, or if it is personal information under the Data Protection Act 1998 and it would be unfair to disclose it. In this situation, minutes can be edited to remove the offending sections. The public authority must specify however that the minutes have been edited so that the public are aware that a fuller version does exist.

In nearly all cases it will be fair to release the time and date of meetings and to give broad headings of what was discussed. It will also generally be fair to disclose the names of individuals who attended the meeting in a professional capacity, but it may not always be fair to attribute specific opinions to named individuals.

Overall, this new guidance seems to be a call to public authorities to become more proactive and transparent by routinely publishing minutes and agendas of meetings.

10 October 2008

The year ahead in the Scottish Parliament

The Scottish Government recently unveiled their legislative plans for the year ahead at Holyrood. In total, 15 Bills will be brought before the Scottish Parliament in the coming year covering a wide range of subjects. Some of the headlines include:

• Council Tax Abolition Bill: the controversial proposal to abolish the Council tax and introduce a local income tax will be brought before the Parliament in the current year. As a minority administration, the Scottish Government will be reliant upon cross-party support for this measure to pass;
• Health Bill: this Bill will include two of the Scottish Government's flagship policies. Firstly, measures will be introduced to ban the open display of tobacco products in shops. Secondly, it will also seek to set minimum prices for alcoholic drinks whilst increasing the age at which alcohol can be purchased from an off-licence to 21;
• Scottish Climate Change Bill: the Scottish Government are seeking to set a target of an 80% reduction in omissions by 2050;
• Scottish Parliament and Local Government Elections Bill: following on from the confusion at the time of the last elections to the Scottish Parliament and local government, the Bill seeks to separate the polling date for each of these elections. What the Bill cannot do, however, is to transfer responsibility for the running of these elections to the Scottish Government: these remain the responsibility of the UK Government;
• Legal Profession Bill: in a move welcomed by the Law Society of Scotland, the Scottish Government are to introduce a Bill which, amongst other things, should allow for law firms to adopt alternative business structures which in turn, it is hoped, will increase the competitiveness of the legal profession in Scotland.

These Bills, along with ten others, are expected to be introduced in the Scottish Parliament in the course of the coming Parliamentary year. Unlike Westminster, it is not necessary for the Scottish Parliament to pass these Bills during the same legislative year. They do, however, require to be passed in advance of the next Scottish general election, in 2011.

One Bill from last year has recently completed its passage through Parliament: the Judiciary and Courts (Scotland) Bill, which we have considered in earlier bulletins, has passed the final stage in the Scottish Parliament and will now be sent for Royal Assent. This Act will introduce a unified judiciary, headed by the Lord President and will re-enforce statutory guarantees of the independence of the judiciary in Scotland.

It promises to be a busy year ahead in the Scottish Parliament and we shall no doubt return to many of the topics above when the time comes for the Scottish Parliament to consider them in detail.

10 October 2008