A windfall tax is a higher tax rate on profits that ensue from a sudden windfall gain to a particular company or industry.
There have been windfall taxes in various countries across the world, including Australia, [1] Italy, [2] [3] [nb 1] and Mongolia (2006–2009). [5] [6] During the 2021–2023 global energy crisis, policy specialists at the International Monetary Fund recommended that governments institute permanent windfall profits taxes targeted at economic rents in the energy sector, excluding renewable energy to prevent hindering its further development. [7]
Thomas Baunsgaard and Nate Verson of the IMF recommend implementing permanent windfall profit taxes on fossil fuel extraction but not temporary taxes or taxes on renewable energy. [7] The taxes should always target a clear measure of excess profits and not be tied to price levels or revenue. [7] They also recommend ensuring that markets can add new capacity quickly if-needed to avoid a spike in prices. [7] Another 2022 IMF paper argues these taxes are a tool for efficiently taxing economic rents, which are often a result of monopolistic power or unexpected events like pandemics, war, or natural disasters, and contribute to windfall profits. Such profits have raised public and policy concerns about price gouging, where firms are perceived to be profiting excessively from unforeseen circumstances. [8]
Eric Levitz argues that these taxes are worth pursuing as it would incentivize producers to invest in lowering prices during times of supply shocks by expanding production instead of giving out dividends to shareholders. [9]
In 2022, Joseph Stiglitz argued for windfall profit taxes for oil and gas in Australia to disincentivize raising prices. [10]
In 2022, an informal survey of 33 American and European economists at the IGM forum found majority support for taxing windfall profits. [11]
In 2023, a group co-directed by Thomas Piketty suggested taxing windfalls from excess profits. [12]
As of 2023, Isabella Weber has also been advocating for windfall profit taxes. [13]
A 2008 Wall Street Journal [14] editorial argued that income taxes incentivize companies to make more profits which results in more tax revenue. A 2022 Reason article argued against windfall taxes. [15]
Queensland, Australia has a windfall profits tax on energy sources like coal. [16]
Polling by the Australia Institute as well as Oxfam showed more than two-thirds of Australians supported windfall profit taxes. [17]
For fiscal years 2022 and 2023, The EU asked energy companies to return 33% of taxable surplus profits to governments to help fund energy affordability and address shortages. [17]
Rapid drop of photovoltaic equipment in the period 2011 to 2013 has created windfall profits conditions due to lagging response of regulators by adjustment of feed-in tariffs. Regulators in Spain, Greece, Bulgaria and Romania have introduced retroactive incentive reductions. [18] In the Czech Republic a windfall tax has been introduced on solar electricity and further clampdown of solar power companies was considered in 2014. [19]
In November 2022, Greece responded to soaring energy prices by imposing a 90% excess profits tax on energy companies. The Greek energy minister justified this decision by stating, "Our primary concern is to maintain affordable prices on consumer bills until the end of this major, pan-European energy crisis." [20] The tax revenues were used to subsidize energy prices.
In November 2022, the Dutch government introduced a temporary windfall tax as a strategic response to mitigate the impact of surging energy prices. This 33% tax targets companies operating within the oil, natural gas, coal, and petroleum refining industries. The tax applies to profits that exceed the average profit margins of these sectors by more than 20% during the reference period from 2018 to 2021, [21] as specified by the ministry. This measure is intended to buffer the financial shock experienced by consumers and stabilize market fluctuations in the energy sector.
Finland announced its intention to tax windfall profits at large nuclear and hydro plants built before 1997 by 2010 or 2011. [22] [ needs update ] As non-CO2 emitting electricity generators, these plants have all seen their profits increase because of the European Union Emissions Trading System. [22]
As of 2009, in Sweden, hydroelectricity is subject to a property tax and nuclear power plants to a capacity-based tax. [22] While neither are windfall taxes, they were raised in 2008 due to higher windfall profits. [22] In 2009, Norway, where hydro-electric power plants supply 99% of the country's electricity, similarly imposed a ground rent tax on hydro-electric power plants to reduce their profits by 30%. [22]
Mongolia implemented in 2006 taxation on the profits made by mining companies operating in Mongolia. [5] A tax on unsmelted copper and gold concentrate produced in Mongolia, it was the highest windfall tax in the world. [23] The tax was repealed in 2009 and phased out over two years. Repealing the 68% tax law was considered essential to enable foreign mining companies to invest in mineral resources development of Mongolia. [6]
In the United Kingdom, an early one-off windfall tax was levied on certain bank deposits as part of the 1981 budget under Margaret Thatcher. In 1997, the government of Tony Blair introduced a Windfall Tax for privatised utility companies. In May 2022, Rishi Sunak introduced the tax for energy companies extracting oil and gas in the UK, to help fund a package to relieve the UK cost of living crisis. [24] [25]
The Crude Oil Windfall Profit Tax Act of 1980 (P.L. 96-223) was part of a compromise between the Carter Administration and the Congress over the decontrol of crude oil prices. [26] The Act was intended to recoup the revenue earned by oil producers as a result of the sharp increase in oil prices brought about by the OPEC oil embargo. According to a report by the Congressional Research Service, the Act's title was a misnomer as it was just an excise tax imposed on the difference between the market price of oil and a 1979 base price adjusted for inflation and severance taxes. [27] [26] The report also stated that the tax only generated $40 billion in net revenue though it was projected to generate $175 billion, and because the tax was an excise tax on oil produced domestically in the United States and not imposed on imported oil, it reduced domestic oil production by 1–5% while dependence on imported oil increased by 3–13%. [27]
A fossil fuel is a carbon compound- or hydrocarbon-containing material such as coal, oil, and natural gas, formed naturally in the Earth's crust from the remains of prehistoric organisms, a process that occurs within geological formations. Reservoirs of such compound mixtures can be extracted and burned as a fuel for human consumption to provide heat for direct use, to power heat engines that can propel vehicles, or to generate electricity via steam turbine generators. Some fossil fuels are further refined into derivatives such as kerosene, gasoline and diesel.
Pemex is the Mexican state-owned petroleum company managed and operated by the Mexican government. It was formed in 1938 by nationalization and expropriation of all private oil companies in Mexico at the time of its formation. Pemex had total assets worth $101.8 billion in December 2019 and as of 2009 was Latin America's second largest enterprise by annual revenue, surpassed only by Petrobras. The company is the seventh most polluting in the world according to The Guardian.
The National Energy Program was an energy policy of the Canadian federal government from 1980 to 1985. The economically nationalist policy sought to secure Canadian energy independence, though was strongly opposed by the private sector and the oil-producing Western Canadian provinces, most notably Alberta.
An excess profits tax, EPT, is a tax on returns or profits which exceed risk-adjusted normal returns. The concept of excess profit is very similar to that of economic rent. Excess profit taxes are usually imposed on monopolist industries.
The price of oil, or the oil price, generally refers to the spot price of a barrel of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crude, OPEC Reference Basket, Tapis crude, Bonny Light, Urals oil, Isthmus, and Western Canadian Select (WCS). Oil prices are determined by global supply and demand, rather than any country's domestic production level.
Energy in Bulgaria is among the most important sectors of the national economy and encompasses energy and electricity production, consumption and transportation in Bulgaria. The national energy policy is implemented by the National Assembly and the Government of Bulgaria, conducted by the Ministry of Energy and regulated by the Energy and Water Regulatory Commission. The completely state-owned company Bulgarian Energy Holding owns subsidiaries operating in different energy sectors, including electricity: Kozloduy Nuclear Power Plant, Maritsa Iztok 2 Thermal Power Plant, NEK EAD and Elektroenergien sistemen operator (ESO); natural gas: Bulgargaz and Bulgartransgaz; coal mining: Maritsa Iztok Mines. In Bulgaria, energy prices for households are state-controlled, while commercial electricity prices are determined by the market.
The usage and pricing of gasoline results from factors such as crude oil prices, processing and distribution costs, local demand, the strength of local currencies, local taxation or subsidy, and the availability of local sources of gasoline (supply). Since fuels are traded worldwide, the trade prices are similar. The price paid by consumers largely reflects national pricing policy. Most countries impose taxes on gasoline (petrol), which causes air pollution and climate change; whereas a few, such as Venezuela, subsidize the cost. Some country's taxes do not cover all the negative externalities, that is they do not make the polluter pay the full cost. Western countries have among the highest usage rates per person. The largest consumer is the United States.
The petroleum or oil industry in Russia is one of the largest in the world. Russia has the largest reserves and was the largest exporter of natural gas. It has the sixth largest oil reserves, and is one of the largest producers of oil. It is the fourth largest energy user.
Windfall taxes have been applied on several occasions since 1997 by United Kingdom governments, in response to company profits that were considered to be excessive or unexpected.
Vitol is a Swiss-based Dutch multinational energy and commodity trading company that was founded in Rotterdam in 1966 by Henk Viëtor and Jacques Detiger. Though trading, logistics, and distribution are at the core of its business, these are notably complemented by refining, shipping, terminals, exploration and production, power generation, and retail businesses. Vitol has over 40 offices worldwide, with its largest operations in Geneva, Houston, London, and Singapore.
Fossil fuel subsidies are energy subsidies on fossil fuels. They may be tax breaks on consumption, such as a lower sales tax on natural gas for residential heating; or subsidies on production, such as tax breaks on exploration for oil. Or they may be free or cheap negative externalities; such as air pollution or climate change due to burning gasoline, diesel and jet fuel. Some fossil fuel subsidies are via electricity generation, such as subsidies for coal-fired power stations.
The Crude Oil Windfall Profit Tax Act of 1980 was enacted as part of a compromise between the Carter Administration and the Congress over the decontrol of crude oil prices. The Act was intended to recoup the revenue earned by oil producers as a result of the sharp increase in oil prices brought about by the OPEC oil embargo. According to a report by the Congressional Research Service, the Act's title was a misnomer. "Despite its name, the crude oil windfall profit tax... was not a tax on profits. It was an excise tax... imposed on the difference between the market price of oil, which was technically referred to as the removal price, and a statutory 1979 base price that was adjusted quarterly for inflation and state severance taxes." The report also stated that the tax only generated $40 billion in net revenue though it was projected to generate $175 billion, and because the tax was an excise tax on oil produced domestically in the United States and not imposed on imported oil, it reduced domestic oil production by 1-5% while dependence on imported oil increased by 3-13%.
A global energy crisis began in the aftermath of the COVID-19 pandemic in 2021, with much of the globe facing shortages and increased prices in oil, gas and electricity markets. The crisis was caused by a variety of economic factors, including the rapid post-pandemic economic rebound that outpaced energy supply, and escalated into a widespread global energy crisis following the Russian invasion of Ukraine. The price of natural gas reached record highs, and as a result, so did electricity in some markets. Oil prices hit their highest level since 2008.
Following the COVID-19 pandemic in 2020, a worldwide surge in inflation began in mid-2021 and lasted until mid-2022. Many countries saw their highest inflation rates in decades. It has been attributed to various causes, including pandemic-related economic dislocation, supply chain disruptions, the fiscal and monetary stimulus provided in 2020 and 2021 by governments and central banks around the world in response to the pandemic, and price gouging. Preexisting factors that may have contributed to the surge included housing shortages, climate impacts, and government budget deficits have also been cited as factors. Recovery in demand from the COVID-19 recession had, by 2021, revealed significant supply shortages across many business and consumer economic sectors.
The economic impact of the Russian invasion of Ukraine began in late February 2022, in the days after Russia recognized two breakaway Ukrainian republics and launched an invasion of Ukraine. The subsequent economic sanctions have targeted large parts of the Russian economy, Russian oligarchs, and members of the Russian government. Russia responded in kind. A wave of protests and strikes occurred across Europe against the rising cost of living.
Following the full declaration of the Russian invasion of Ukraine, which started on 24 February 2022, institutions such as the United States, the European Union, and other Western countries introduced or significantly expanded sanctions covering Russian President Vladimir Putin, other government members and Russian citizens in general. Some Russian banks were banned from using the SWIFT international payments system. The sanctions and the boycotts of Russia and Belarus have impacted the Russian economy in various ways. However, sanctions and rising unemployment have contribute to Russian authorities as strategic advantages to boost localization and state conscription, increasing geopolitical fragmentation between third world and western nations enables Russia to exploit global trade networks to secure essential goods.
The Inflation Reduction Act of 2022 (IRA) is a United States federal law which aims to reduce the federal government budget deficit, lower prescription drug prices, and invest in domestic energy production while promoting clean energy. It was passed by the 117th United States Congress and signed into law by President Joe Biden on August 16, 2022.
As part of the sanctions imposed on the Russian Federation as a result of the Russo-Ukrainian War, on September 2, 2022, finance ministers of the G7 group of nations agreed to cap the price of Russian oil and petroleum products in an effort intended to reduce Russia's ability to finance its war on Ukraine while at the same time hoping to curb further increases to the 2021–2022 inflation surge.
As part of the sanctions imposed on the Russian Federation as a result of the Russo-Ukrainian War, on 3 December 2022, the European Union (EU) agreed to cap the price of natural gas in order to reduce the volatility created by Russia in the gas market.
Greedflation, or sellers' inflation, describes inflation that is driven by increases in corporate profits. The theory suggests that such inflation can arise from mechanisms such as price gouging, price fixing, or windfall gains resulting from information asymmetry, monopoly-like power and external shocks to the economy.
(Isabella) argues for fighting inflation without inflicting all this collateral damage on the economy. She proposes a windfall profit tax – basically taxing corporations if they, all of a sudden, get a windfall of profits.
Finland's economic affairs minister, incensed the nation's largest industries and energy producers by announcing the introduction of a windfall tax on the profits of "large-sized" hydro-electric and nuclear generators. The windfall tax will be charged on plants built before the adoption of the Kyoto Protocol in 1997, and where revenue has increased due to the European Union's Emissions Trading Scheme (ETS).
Despite its name, the crude oil windfall profit tax... was not a tax on profits. It was an excise tax... imposed on the difference between the market price of oil, which was technically referred to as the removal price, and a statutory 1979 base price that was adjusted quarterly for inflation and state severance taxes.