Why is there pressure for the Government to impose a windfall tax?

The combination of record profits taken by oil and energy geroups, at the same time as record price rises are being imposed on consumers is driving the political case for a one-off levy. Gordon Brown has staked his future on providing some form of means-tested help for people faced with rising fuel, food and housing costs, and needs significant funds to pay for it.

The cost of just one of the options so far floated - the provision of fuel vouchers for child tax credit recipients - could reach £600million, while even the cheapest option related to stamp duty - the suspension of the lowest band - would add another £400million to the total.

With a recent poll suggesting that 67 per cent of voters are in favour of a windfall tax, it appears an obvious move to many Labour MPs, including a number in the Government, to tax record energy profits to raise the necessary funds.

Why are Gordon Brown and Alistair Darling so reluctant?

The short answer is because they think that it could backfire spectacularly.

Mr Darling, in particular, does not want to introduce a measure that he believes would give energy companies an excuse to raise prices further. Even a small levy could lead to bigger rises in gas and electricity prices as the groups simply pass the cost on to consumers.

Ministers are also frightened of “punishing” the very same energy companies that they are relying on to come up with the £100billion needed to fulfil Britain's renewable energy strategy.

Energy companies are being asked to foot the bill for the new generation of nuclear power stations and thousands of new wind turbines and solar panels that Britain needs to build by 2020 to meet its EU target of producing 15 per cent of its energy from renewable resources.

In addition, after a string of unpopular business tax measures - the furore over capital gains tax, non-doms and the proposed changes to foreign profits taxation - both the Chancellor and Mr Brown are keen to get back into the good books of business.

Imposing a windfall tax could lead to threats of companies domiciled in Britain taking their business offshore.

How can they raise the cash instead?

Ministers are known to be considering an increase in the cost of carbon permits. Currently, companies have to bid for 7 per cent of the total of permits available. The rest - up to 10 per cent - are given away free.

The plan would be to charge for the extra 3 per cent too. However, this would raise at most only an extra £100million a year until 2012 - not nearly enough to fund a £1billion package.

The threat of a windfall tax is being kept on the table to force energy companies to come up with their own measures to help the most hard-pressed.

One option could be an “accelerated home-insulation plan” requiring energy companies to bring forward a previously agreed £2.75billion package to help low-income families to make their homes more energy efficient.

Another option, recommended by the Commons Business and Enterprise Select Committee, could see a more limited windfall tax that would raise about £300million, specifically earmarked for the fuel-poor.

Are there any lessons that can be learnt from history?

There's nothing new about windfall taxes. They have been imposed by both Labour and Conservative governments in the past as a way of raising revenue.

When Labour came to power in 1997 Gordon Brown himself imposed a £5.2billion windfall tax on 28 utility companies - privatised under the Conservatives - to fund the welfare-to-work New Deal programme. The difference is that the tax had been announced in the party's manifesto.

In 1981 Geoffrey Howe, then the Tory Chancellor, imposed a windfall tax on bank deposits. He justified the tax because an increase in interest rates had resulted in the main clearing banks making higher profits. The tax raised £350million.

Why are energy bills rising so much - and who is making the money?

Wholesale energy prices - the price paid by energy companies to buy gas or electricity in the market - have surged this year.

Last week the cost of a barrel of crude oil rose 5 per cent, pushing prices in London and New York above $121 (£65) and British gas prices hit records for the coming winter.

The cost of wholesale gas for the first quarter of 2009 reached a new high of 112p per therm because the market, once expecting winter oversupply, now fears shortages in Britain.

For this reason, energy companies say they are left with no choice but to raise their prices. Already this year, E.ON, Scottish and Southern Energy, British Gas and EDF have raised their prices in some cases by as much as 44 per cent.

ScottishPower and npower are expected to follow suit within weeks.

The Big Three energy groups - Shell, BP and British Gas - have reported substantial profits recently.

Shell made £4billion in the second quarter of this year, up 4.6 per cent from 2007, while BP made £3.4billion, a rise of 6 per cent.

Centrica, which owns British Gas, made £992million in the first half of this year while raising prices for customers by 35 per cent.

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