Clarity is needed on green taxes

Some energy companies use artificial tax avoidance to reduce their liability

All taxes are unpopular, and some taxes are more unpopular than others. But they are a necessary means of paying for things that we value collectively and that we are unable to provide for ourselves. Our report today that two energy companies have used a loophole to avoid tax brings together two current concerns: one is the rise in gas and electricity bills and the part played by green taxes in making them higher; the other is the way that large companies use artificial devices to reduce their tax bills.

This newspaper supports green taxes and opposes tax avoidance, which may sound like supporting motherhood and opposing sin, but we know that both are harder to sustain than they look.

Green taxes have become unpopular, as our ComRes poll showed last week. Even when we understated the "green" element of energy bills, and suggested that "it is worth paying an extra £2 in every £100 on gas and electricity bills to pay for greener energy", only 34 per cent agreed and 45 per cent disagreed. As we explain today, as much as £9 in every £100 of energy bills actually goes towards green or social objectives, and there is some overlap between the two, such as help for old people with home insulation.

Indeed, the several levies and the schemes for which they pay need to be simplified, and the Prime Minister's promise last week to "roll back" green taxes is sensible if it means bringing some clarity to the mess. One scheme, for example, for "hard to help" rural households, costs the companies more in finding households to help than it does in actually helping them.

The principle of green taxes is right, and it should not be hidden behind schemes to be nice to old people or in piecemeal subsidies for solar panels. The Independent on Sunday has long argued that the most efficient way to mitigate climate change is to make carbon fuels more expensive. If this hits poor people, they should be protected out of general taxation, rather than by adding to the household bills of the rest.

That would make it easier to have a rational debate about the level at which such taxes should be set – not so high as to make Britain uncompetitive, but not so low as to fail to influence behaviour.

Currently, the total tax burden on energy is lower than it could be because some of the energy companies use artificial tax avoidance schemes to reduce their liability. Our investigation with Corporate Watch into the use of the "quoted eurobond exemption" has found that two energy companies appear to have used it to avoid paying more than £100m in tax. The exemption was granted in 1984 to encourage investment in British companies, but it seems that it is abused by parent companies making loans to subsidiaries at unusually high interest rates.

The Government should close this loophole, of course, but we recognise that this would add to the tax burden on companies, including in the energy sector. Again, our argument is that greater clarity would make it easier to decide the right level of taxes.

The criticisms of coalition policy from Ed Miliband and Sir John Major, and the apparently improvised response by the Prime Minister, now promising an annual review of competition in the industry, offer a chance to get to the bottom of whether the energy companies really are making excess profits – and, if so, how they should be taxed. That can only be a good thing.