Will taxing the windfall profits of oil giants fix countries’ economies?
MAJOR oil and gas companies have raked in multibillion-dollar profits at unheard-of levels. Households around the world are reeling from soaring energy prices, while governments are struggling with outsize spending and slowing economic growth.
The British government tried to close the gap in those inequities on Thursday by announcing additional taxes to capture energy companies’ windfall profits and to use the money to defray the staggering cost of energy bills – similar to what governments across Europe have done. It is something President Joe Biden has threatened to propose.
The logic seems straightforward. Energy suppliers are benefiting from an unexpected bonanza because of Europe’s sudden move away from Russia’s gas and oil after its invasion of Ukraine, as opposed to any savvy strategy by the companies themselves.
Shell, based in London, recently reported that it had earned US$20 billion in just six months, its biggest haul on record; BP earned US$16.6 billion. TotalEnergies, based in Paris, reported profits of nearly US$29 billion over the same period. American energy companies are also taking in gobs of profit. Net income for the world’s oil and gas suppliers will reach US$4 trillion, the International Energy Agency estimated, double last year’s total.
Such staggering figures spurred United Nations secretary-general, António Guterres, to “urge all governments to tax these excessive profits and use the funds to support the most vulnerable people through these difficult times”.
Yet there is fierce debate over whether imposing an extra tax on windfall profits to subsidise energy users would ultimately worsen the problem rather than solve it: Lower profits could discourage suppliers from producing more energy, while lower prices could encourage consumers to use more.
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Such warnings, however, have done little to deter European governments from seeking to plug cavernous budget holes with some of the Smaug-size piles of cash that energy companies have accumulated.
On Thursday, Jeremy Hunt, Britain’s chancellor of the Exchequer, announced that he would raise US$16.5 billion next year by increasing the windfall tax on oil and gas companies from 25 per cent to 35 per cent, and introducing a temporary 45 per cent levy on electricity producers.
Many of these producers – including those that use solar, wind and nuclear power – have enjoyed enormous profits even though their costs haven’t increased.
The European Union last month announced a temporary tax – euphemistically labeled a “solidarity contribution” – on some fossil fuel producers. An additional 33 per cent levy will apply to “surplus” profits and is expected to raise US$145 billion. There is also a cap on electricity profits.
Individual nations have gone further. Last week, the Czech Parliament approved a measure to impose a 60 per cent tax on energy companies’ and banks’ windfall profits.
Germany is considering taxing 90 per cent of profits that electricity companies generated above the cost of production.
Biden, too, accusing major oil and gas companies of wartime profiteering, has said he wants a new windfall tax unless the companies increase production, although such a proposal is unlikely to win congressional approval.
Designing any kind of energy policy is particularly challenging at the moment because of conflicting goals. One involves climate change. Policymakers want to quickly step up energy production of coal, gas and oil to meet immediate shortages, but want to phase out all fossil fuels in the long run.
They want to capture some of the huge profits earned by solar, wind and nuclear-powered electricity providers, while encouraging those companies to invest even more in renewable energy sources.
And there is the balance that governments must strike between helping households afford the brutally high cost of heating and fuel this winter and encouraging them to consume much less of it.
Although many energy companies have challenged particular tax proposals, others have conceded such a policy may now be inevitable. “I think we have to accept it, and we have to embrace it,” Ben van Beurden, the departing chief executive of Shell, said after announcing the company’s quarterly profits in September.
Critics also argue that windfall taxes, which tend to apply only to profits earned within a country’s borders, hurt domestic energy production. NYT
In a survey of more than 30 European economists conducted in June by the University of Chicago Booth School of Business, half agreed that a windfall tax on excessive oil and gas profits should be used to help households afford high energy costs. Seventeen percent were opposed, while one-third were undecided.
Antony Froggatt, deputy director of the environment and society program at Chatham House in London, said that “from a political perspective it’s unavoidable,” given the large sums governments were having to pay to help individuals and businesses survive the winter. And, he added, “it is fair.”
John Van Reenen, an economics professor at the London School of Economics, was also in favor of such a policy. “I think there is a pretty good case for having windfall taxes on the producers because the high profits they are currently getting are not rewards for past investment or risk-taking activities,” he said, “but due to the Russian invasion of Ukraine.”
With such “eye-wateringly high” prices facing consumers, Van Reenen said, this may be one of those fortuitous moments when the economic case and the political case for windfall taxes overlap.
This article originally appeared in The New York Times.
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