Major oil and gas companies have reaped billions in profits at unprecedented levels. Households around the world are reeling from rising energy prices, while governments grapple with excessive spending and slowing economic growth.
On Thursday, the UK government sought to plug the gap in that inequality by announcing extra taxes to absorb windfall profits from energy companies and use the money to cover the staggering cost of energy bills – similar to what governments across Europe have been doing and President Biden has threatened to propose.
The logic seems simple. Energy suppliers benefit from an unexpected success as Europe suddenly distances itself from Russian gas and oil after the invasion of Ukraine, contrary to a smart strategy by the companies themselves.
London-based Shell recently reported making $20 billion in just six months, its biggest ever profit, while BP made $16.6 billion. TotalEnergies, based in Paris, reported profits of nearly $29 billion over the same period. American energy companies are also taking in chunks of profit. Net revenue for the world’s oil and gas suppliers will reach $4 trillion, the International Energy Agency estimated, double last year’s total.
Such staggering numbers urged United Nations Secretary-General António Guterres to “urge all governments to tax these outrageous profits and use the funds to support the most vulnerable people in these trying times.”
Still, there is fierce debate about whether imposing an additional tax on windfall profits to subsidize energy consumers would ultimately exacerbate the problem rather than solve it: lower profits could discourage suppliers from producing more energy, while lower prices could discourage consumers. can encourage you to consume more.
Such warnings, however, have done little to stop European governments from trying to plug the huge budget gaps with some of the Smaug-sized piles of cash that energy companies have accumulated.
On Thursday, Britain’s Chancellor of the Exchequer, Jeremy Hunt, announced he would raise $16.5 billion next year by raising the tax on oil and gas companies from 25 percent to 35 percent and imposing a temporary 45 percent levy on electricity producers in to feed. Many of these producers – including those using solar, wind and nuclear power – have made huge profits even though their costs have not increased.
The European Union last month announced a temporary tax – euphemistically labeled a ‘solidarity contribution’ – for some fossil fuel producers. An additional 33 percent levy will apply to “excess profits” and is expected to raise $145 billion. There is also a limit on electricity profits.
Individual nations have moved on. Last week, the Czech parliament approved a measure to levy a 60 percent tax on windfall profits from energy companies and banks. Germany is considering taxing profits generated by electricity companies above production costs by 90 percent.
Mr Biden, who accuses major oil and gas companies of wartime profit, has also said he wants a new windfall tax unless the companies increase production, though such a proposal is unlikely to be approved by Congress.
Designing any energy policy is particularly challenging at the moment because of conflicting goals.
One of them relates to climate change. Policymakers want to quickly increase energy production from coal, gas and oil to compensate for the acute shortages, but want to phase out all fossil fuels in the long term.
They want to take a share of the huge profits from solar, wind and nuclear energy suppliers while encouraging those companies to invest even more in renewable energy sources.
And there’s the balance governments need to strike between helping households pay the brutally high costs of heating and fuel this winter and encouraging them to use much less of it.
Windfall loads can further some of these goals, but can be extremely difficult to achieve due to so much technical complexity. After all, how do you define excessive profits?
David Goldwyn, a top State Department official in the Obama administration, said he was concerned about governments swallowing extra profits from renewable energy companies because they had often had very lean years.
“Renewable energy companies are facing cost pressures from inflation and are trying to raise massive amounts of capital to scale their investments,” said Goldwyn. “It is not clear that Europe can achieve its energy security or energy transition goals by making these companies less profitable to invest in.”
In Britain, officials did not want to hinder oil and gas investment, so they gave companies a tax exemption for 91 pence of every pound invested in new production. But such government support for new fossil fuel yields not only hinders efforts to reduce carbon emissions by 2030, but also significantly reduces yields.
For example, Shell has not paid taxes on gas and oil production in Great Britain since 2017 due to exemptions related to money spent on new investments and the decommissioning of old fields.
While many energy companies have challenged certain tax proposals, others have admitted that such policies may now be unavoidable. “I think we have to accept it and embrace it,” Shell’s outgoing CEO Ben van Beurden said after the company’s quarterly results were announced in September.
Critics also argue that unexpected taxes, which usually only apply to profits made within a country’s borders, harm domestic energy production. The Tax Foundation, a research organization that favors low taxes, points to a congressional inquiry into a windfall tax introduced by the Carter administration in the 1980s that found it reduced domestic production and increased reliance on foreign resources. oil increased.
But as several economists have pointed out, regardless of the drawbacks, a windfall profit tax makes the most sense when energy companies make gigantic profits and families and businesses face financial ruin from staggering energy costs.
Concerns about curtailing investment may also be exaggerated, they noted, when so many of the oil and gas companies use the new earnings to increase shareholder payouts and buy more of their own shares to drive up the price.
“It won’t have a significant effect on supply in the long run,” said Richard Portes, an economics professor at London Business School. It will, he said, “redistribute revenue to consumers, ordinary households and businesses, from companies buying back shares and raising dividends.”
In a survey of more than 30 European economists conducted in June by the University of Chicago’s Booth School of Business, half agreed that a windfall tax on excessive oil and gas profits should be used to help households avoid high energy costs. to pay. Seventeen percent were against, a third doubted.
Antony Froggatt, deputy director of the environment and society program at Chatham House in London, said it was “inevitable from a political point of view” given the large sums governments had to pay to help individuals and businesses survive the winter. And, he added, “it’s fair.”
John Van Reenen, professor of economics at the London School of Economics, was also in favor of such a policy. “I think there are pretty good reasons to levy windfalls on the producers, because the high profits they are currently making are not a reward for past investments or risky activities,” he said, “but because of the Russian invasion of Ukraine. ”
With such “eye-popping” prices facing consumers, this could be one of those serendipitous moments where the economic arguments and the political arguments for windfalls overlap, Mr Van Reenen said.
