By: Maxwell Sears
Russia’s invasion of Ukraine in 2022 resulted in a significant burden on Europe in regard to their energy sector.[1] As a result of this conflict and the European Union’s (“EU”) subsequent restriction of oil and coal from Russia to the EU, the prices of the energy supply as a whole increased.[2] However, companies in the EU were responsible for replacing much of the materials and energy that were once imported from Russia.[3]
Wholesale electricity prices of the main EU electricity markets were in excess of 350 EUR/MWh, demonstrating an increase of four times the average price before the conflict.[4] While the new demand would reasonably result in a higher price, the “increase in prices greatly benefited energy companies.”[5]
While there have been multiple occasions of windfall taxes imposed on energy companies in the EU in the past, “one has noticed a growing pressure on policymakers to act and tax the windfall profits of the companies…”[6] Interest in windfall taxes have been rising and have been generally seen as a just response to the increase in profits to redistribute said profits for the benefit of society in a time where a fiscal pressure exists to do so.[7] Windfall profits are simply “profits that do not stem from direct and planned actions of a firm but from unanticipated external changes in the market conditions, changes that could not have been foreseen at the time when the initial investment decision had been taken.”[8] The purpose of windfall taxes are simply to “absorb excess profits in a given tax period in addition to the regular corporate tax burden.”[9] These taxes are primarily derived from the idea that the good fortune of a company—fortune that came at the cost of a societal good or value—should be taxed at a higher rate than normal. This may be especially necessary during times of war of crisis.[10] Many might say that we have seen such crises in recent times with the global Covid-19 pandemic or the Russia-Ukraine War.
In response to the Russia-Ukraine Conflict, the EU agreed to include mandates for its nations, requiring each nation to introduce a windfall tax and limit profits from power plants, reduce gas demand by fifteen percent, and enact measures to save energy while putting caps on energy profitability.[11]
The U.N. mandates were fairly general which allowed nations to get creative in implementing their own approach. The “Iberian approach” includes a national windfall tax, but also additional mechanisms to regulate the price of gas used to generate electricity in order to lower consumer electricity prices.[12] This method does not regulate the energy prices themselves, but only the prices of raw materials such as coal and gas which is used for the generation of energy. [13] Further, these two states assist in financing their power plants partly through income from the Spanish transmission system operator, which is the state-owned entity responsible for transferring energy throughout the region.[14] While this approach includes additional interventional steps along with its national windfall tax, some may see it as a less punitive approach with similar results in relation to consumer pricing.
This opportunity among EU states to enact windfall taxes opened the narrative beyond the scope of energy companies. The lower house of parliament in the Czech Republic approved a whopping sixty percent windfall tax on not just energy companies, but also banks, miners, and oil refiners.[15] Italy, for example, has enacted its windfall tax on not only oil and gas producers, but also distributors and traders of most forms of energy.[16] More recently, Italy—even with its conservative government—is imposing a windfall tax on banks in response to the banks raking in higher net profits than typical.[17]
Yet, there is little discussion to be found in the United States regarding windfall taxes outside of the oil sector. Much of this may be attributable to the right-wing ideology commonly held in the United States, which would make it difficult to successfully sway the public that changes in the market were not anticipated by those running the organizations making record profits. Adversaries of windfall taxes in the United States have existed since before the early 20th century, claiming these taxes “penalize success” and “punish the profiteer.”[18]
In the United States’ political arena, we have seen one bill proposed for a windfall tax: Ending Corporate Greed Act proposed by Senator Bernie Sanders which would impose a windfall profit tax on the largest corporations in the United States.[19] Senator Sanders claims the tax would raise an estimated $400 billion in a single year from the thirty most profitable corporations, and $31.9 billion exclusively from the top three oil companies.[20] As expected, the bill has failed to receive support and has been sitting inactive for almost two years. While the discourse on inflation was at its highest in late 2022, President Biden threatened to seek new windfall profits tax himself, citing to record profits in the oil industry; nevertheless, no result has been seen.[21]
Maxwell Sears is a Staff Editor at CICLR.
[1] Manon François, Carlos Oliveira, Bluebery Planterose & Gabriel Zucman, A Modern Excess Profit Tax, EU Tax Observatory 1, 4 (2022).
[2] Id. at 6.
[3] Id.
[4] Report from the Commission to the European Parliament and the Council on the Review of Emergency Interventions to Address High Energy Prices in Accordance with Council Regulation (EU) 2022/1854, at 6, COM(2023) 302 final (May 6, 2023).
[5] Manon François et al., supra note 1.
[6] Wim Moesen, The Interchange Between Democratic Institutions and the Globalisation of the Economy, DemoTrans 2 (2023).
[7] Katharina Nicolay, Daniela Steinbreenner, Nikolas Woelfing & Julia Spix, The effectiveness and distributional consequences of excess profit taxes or windfall taxes in light of the Commission’s recommendation to Member States, Policy Department for Economic, Scientific and Quality of Life Policies 12 (2023), https://www.europarl.europa.eu/RegData/etudes/STUD/2023/740076/IPOL_STU(2023)740076_EN.pdf.
[8] Id.
[9] Claudia Kettner, Michael Böheim, & Margit Schratzenstaller, Time for a Windfall Profit Tax? Electricity Market Design in Times of Crises, in Taxation and the Green Growth Challenge, 114-30, 125 (Alberto Comelli, Janet Milne, Mikael Anderson, & Hope Ashiabor, eds., Critical Issues in Environmental Taxation, Volume XXV, Edward Elgar Publishing, 2023).
[10] Zana Radoniqi & Uran Radoniqi, Windfall Taxes for Windfall Profits: A Delphi Approach for Western Balkans 6 Countries, 15 J. Acad. Res. Econ. 2, 464, 466 (July 2023).
[11] Izabela Surwillo, Examining the Czech President’s Role in the Convergence of the EU’s Energy-Climate Agenda, 58 Czech J. of Int'l Relations 136 (2023).
[12] Claudia Kettner et al., supra note 9.
[13] Id.
[14] Id. at 124-25.
[15] Jason Hovet & Jan Lopatka, Czech Lawmakers Approve Windfall Tax on Energy Firms, Banks, Reuters (Nov. 4, 2022), https://www.reuters.com/world/europe/czech-lawmakers-approve-windfall-tax-energy-firms-banks-2022-11-04/.
[16] Claudia Kettner et al, supra note 9, at 10.
[17] Patricia Kowsmann & Eric Sylvers, Italian Bank Stocks Fall on Windfall Tax Plan, The Wall St. J. (Aug. 8, 2023), https://www.wsj.com/livecoverage/stock-market-today-dow-jones-08-08-2023/card/italian-bank-stocks-fall-on-windfall-tax-plan-6DhvUiwI7R0uT81zFvrE?mod=article_inline.
[18] Thomas S. Adams, Should the Excess Profits Tax be Repealed, 35 Q.J. Econ. 363, 366 (1921)
[19] S. 3933, 117th Cong. (2022) (as introduced in the Senate, Apr. 7, 2022).
[20] Sen. Bernie Sanders, Summary of the Ending Corporate Greed Act (Mar. 23, 2022), https://www.sanders.senate.gov/wp-content/uploads/WPT-Fact-Sheet.pdf.
[21] Peter Baker & Clifford Krauss, Biden Accuses Oil Companies of ‘War Profiteering’ and Threatens Windfall Tax, N.Y. Times (Oct. 31, 2022), https://www.nytimes.com/2022/10/31/us/politics/biden-oil-windfall-tax.html.