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There has never been a better time to be an oil company. In 2022, the West’s six largest oil and gas producers (British Petroleum (BP), Chevron, Equinor, ExxonMobil, Shell, and TotalEnergies) turned a combined profit of over $200 billion—their highest in history. Was anyone surprised? Energy prices hit record highs in the summer of 2022 as the post-pandemic reopening and Russo-Ukrainian War upended energy markets. In Europe, a reliance on cheap Russian fuel dating back to Soviet times caused the cost of living to soar and plunged the future of the continent’s energy supply into uncertainty. Nearly a year later, Europe is at the same painful crossroad: either the continent replaces its fossil fuel dependence with American and African supplies or accelerates the transition to clean energy and risks short-term hardships.
Nor was anyone surprised that they cried foul when the European Union (EU) placed a 33% windfall tax–a temporary tax on goods with sudden dramatic price increases–on gas to curb their profits. The most publicized response came from ExxonMobil, which sued the EU Council to block the tax in December despite more than doubling its net income last year.
But critics of the tax come from all sides. For radical environmentalists and anti-capitalists, the tax is a performative effort to help governments save face during an ongoing cost-of-living crisis. Meanwhile, free-marketeers claim fossil fuel companies need the profits to survive in the oil industry’s boom-and-bust markets. In their view, taxing oil and gas companies will only reduce the energy supply, making the problem worse.
What neither side wants to admit is how important a test this messy, frustrating tax is for Europe’s energy transition and climate commitments. The success of the windfall tax would mark a shift in the EU’s climate strategy from one seeking to cautiously slow the continent’s fossil fuel dependence to a firmer approach that undercuts the material motivation behind continued oil and gas production. Its failure at the hands of oil and gas lobbyists would be a significant blow to the EU’s capacity to enforce its already shaky energy transition and climate goals. A lukewarm outcome, where the tax remains a temporary ‘solidarity’ measure meant to support consumer energy consumption, means further procrastinating climate action and missing targets again.
Still, Europe is close to something serious. Windfall tax and price caps are in motion. If results are positive, the case for setting clear limits on dirty energy profits and moving the excess to sustainable industries will grow. A stricter policy addressing climate change in the global economy is the key to meeting goals and preventing a climate crisis, and if done right, it could make the EU a global leader in climate action.
Solidarity (but not forever)
So far, the tax’s results have been mixed. Since the EU established a baseline tax rate of 33% above usual profit levels last September, member-states have implemented it in their own ways. Wealthier nations and those with greater stakes in fossil fuels, such as Germany, The Netherlands, and Poland, complied with the bare minimum.
Other members were more ambitious. In December, Slovakia raised the tax to 70% of excess profits until 2025, while the Czech Republic set their tax at 60% and expanded it to include banks that profited from oil and gas investments. Greece proposed an extraordinary 90% tax on profits, including elevated profits from as far back as October 2021.
The oil and gas lobby has been somewhat successful in squashing these efforts. By January, pressure from oil companies MOL Group and Slovnaft forced Slovakia to dial the tax down to 55% and limit it to profits made in 2022. Despite the concessions, MOL Group plans to sue the Slovak government. The bloc-wide tax altogether hangs on the outcome of three EU Court cases, including ExxonMobil’s. Since the European Union cannot enact bloc-wide taxes without the consent of all member-states, the Council had to frame the measures as “solidarity contributions.” A court ruling that the measures are illegal taxes would therefore kill the tax.
Even if the tax survives, forecasts expect oil giants to deepen their investments in fossil fuels. The US Energy Information Administration and S&P Capital IQ report project oil and gas profits to dip 25% next year, making 2023 the second-most profitable year in history. These sunny prospects are dangerous for the planet. BP, once leading the industry in renewable investment, announced in February that it would slow its transition to green energy to increase investment in its fossil fuel business. BP is not alone. In March, Norwegian oil giant Equinor’s chief economist, Eirik Wærness, told the Financial Times that energy companies are all responding to energy insecurity and favourable prices by slowing “investment in renewables” in favour of fossil fuels.
Why the Optimism?
Though they are not a cause for celebration, the EU’s windfall taxes have opened the door to climate policy that addresses the material incentives behind climate change.
If markets are not developing clean energy fast enough to avoid climate crises, strict intervention is the only option. A recent United Nations Intergovernmental Panel on Climate Change report warned that meeting even modest global climate requires a three to six-fold increase in clean energy investment. Setting a firm limit on profits from fossil fuels that maintain energy security for the time being and redirecting the rest to renewables would help close this gap without ignoring energy realities in the short run.
There may never be a better time to implement this, since high oil prices would only accelerate investment in climate-friendly industries. An influx of investment in the sustainable industry may also hold political advantages given Europe’s recent anxiety about falling behind in green tech. These flared up recently when Volkswagen paused plans for electric vehicle (EV) battery factories in Europe to chase €10 billion in North American subsidies. Plus, action at the EU level would give the tax greater weight and involve many of the world’s largest energy gluttons.
What Europe Needs
Europe has work to do if they choose to seize this opportunity.
First, the way the EU spends money from the energy tax needs to change. Up to now, the EU has used the tax to subsidize high electricity and gas prices. But as Wærness concluded, this is unsustainable. The bloc must stop hiding the true cost of energy and carbon consumption behind these subsidies to reduce the underlying demand that fuels climate change. Limiting energy subsidies applies to EVs and reindustrialization efforts as much as household heating and electricity. Yet such a plan is understandably unpopular given high inflation and economic uncertainty today. Hence, the policy’s success will hinge on governments’ abilities to offset short-term impacts on household pocketbooks with impressive sustainable economic growth.
The next (and perhaps greater) challenge is moving the tax beyond a temporary emergency contribution to a permanent fixture. EU regulations make this difficult because bloc-wide taxes require the agreement of all EU members. This rule has prevented climate agreements in the past as Central and Eastern European member-states with more industrial and fossil fuel-oriented economies have held out. Hence, a successful tax has to address Europe’s longstanding regional disparities with extra support for hard-hit economies.
But if the EU has put aside competing interests for a windfall tax during an energy crisis, they can do the same for the climate crisis. And whether they intended to or not, the EU Council has outlined the real path to meeting their energy transition and climate commitments: reshaping the energy economy.
Edited by Light Naing