Debate: Taxing windfall profits of energy companies
Date: WEDNESDAY, 6 JULY 2022
Speaker: Věra Jourová
Language: EN

Against a backdrop of strong post-pandemic demand, the unresponsive supply of gas and the uncertainty created by the war in Ukraine have driven gas prices and by extension, the prices of oil products such as petrol and gas oil used in road transport, up in Europe and globally.  In a global market and a unified European energy market, a higher price for gas translates into higher energy electricity prices overall. The impact of these gas prices increases against a backdrop of broader inflationary tendencies is most severely felt by vulnerable households, transport users and vulnerable micro enterprises.  As mentioned in the letter addressed by my colleague, Paolo Gentiloni, to ECOFIN Ministers in April, our policy response needs to be guided by the principles of effectiveness, consistency and equity. We should avoid going for seemingly convincing solutions that are easy to implement, whose effectiveness in helping those most in need to afford energy is questionable.  Let me also stress that we have a duty and commitment to tackle the climate crisis. Measures taken to address short-term issues of energy affordability or security of supply should not undermine but accelerate our long-term ambition for climate neutrality by 2050 and have to be consistent with the European Green Deal.  Thirdly, and more importantly, this is about equity. Yes, all of us are paying higher prices at the gas station, in our energy bills or in the supermarket. But not all of us require help to the same extent. We should strive to put in place measures that target those households that are most in need.  Today we discuss a specific proposal that is intensively discussed at the moment, both in academia and in the political debate – so-called windfall profit taxes. Indeed, there is growing evidence that some companies in the energy market, such as the infra-marginal electricity generators, currently obtain excessive extraordinarily high profits resulting from the current energy market situation. These are also known as windfall profits.  So what is a windfall profit tax? A windfall profit tax is a tax on companies that have seen their profits surge extraordinarily and unexpectedly, not because of any clever investment decision they have taken or an increase in efficiency or innovation, but simply because of a sudden favourable change in market conditions.  As economists explain, properly implemented taxes on these windfall profits is efficient because it raises revenues without affecting business decisions. Resources will still be allocated in order to maximise their economic potential and not to avoid taxation. Revenues raised in such an efficient manner again and should therefore be used to support vulnerable consumers as Member States can distribute such revenues among final consumers, offsetting the negative impact of current high energy prices. This can be encouraged as contrary to measures that directly intervene in the functioning of the market, that the taxation of windfall profits leaves markets’ economic efficiency intact.  Therefore, already in the REPowerEU Communication from March this year, the Commission stated that Member States may exceptionally consider implementing such a tax, but such a measure needs to be carefully designed to avoid undesirable market distortions and avoid discouraging investments in renewable energy.  The guidelines put forward by the Commission in March indicated in particular that the measure should not be retroactive, should be technologically neutral, and allow electricity producers to cover their costs, should protect the long-term market signals, and protect the carbon price signals of the EU emissions trading system. That is crucial for the decarbonisation of the power system.  Moreover, it should be time limited, a one off temporary measure. One of the key challenges, both from an economic and legal perspective, is the definition of excessive profits. The method for that calculation would have to be clearly specified and justified and should be directly linked to real additional profits generated by higher energy prices.  Since the March communication, a number of Member States such as Spain, Bulgaria, Romania and Italy have introduced temporary tax measures on such excessive windfall profits of some energy-generating companies to capture part of these extraordinary profits. But despite these measures and considerable efforts in other areas by both Member States and the Commission, we have to acknowledge that the many issues we are trying to tackle persist.  Other measures are discussed, including, as you are well aware, a gas price cap that has been recently discussed at the G7 summit in Elmau, possibly through coordinated purchases. Acknowledging the magnitude of the challenge means also developing a policy response, building on a mix of measures that are complementary and consistent.  As regards the windfall profit taxes, our services are intensifying the legal and economic analysis of such measures to see if there is additional scope for the Commission to help this coordinated and sensible approach in the EU to windfall profit taxes.  With this in mind, I would like to thank you for scheduling this timely debate on this important issue – a debate that I am sure will continue in the weeks to come.