6 October 2022

As energy prices soar this year, policymakers in the European Union and the United Kingdom have proposed various measures aimed at limiting energy inflation. These include both price controls (such as price caps on natural gas or electricity) and windfall profit taxes on energy companies.

However well-intentioned, these policies are unlikely to succeed. In fact, they might exacerbate the current crisis. High prices are not a market failure; they are the tool through which well-functioning markets convey a crucial piece of information regarding the scarcity of energy supply relative to the demand. High prices incentivise investments to increase the supply of energy while disincentivising consumption.

This briefing reviews the proposed price caps and windfall taxes and explains why they are short-sighted measures with long-term costs that are likely to exceed expected benefits. It closes by suggesting targeted measures to support low-income households and energy-intensive businesses while reducing red tape and other obstacles that prevent a rapid rise in the supply of energy, including renewable energies, nuclear power, and domestic production of natural gas.