President Joe Biden‘s endorsement of a windfall tax on oil and gas profits puts him in the company of an increasing number of European governments that have sought to tax companies’ earnings, inflated by Russia’s invasion of Ukraine, in response to inflated energy prices.
The cost of refined products and natural gas are high in the United States, but prices have been multifold higher in Europe, where they’re upending energy-intensive industries and hammering household budgets. Levying taxes on energy companies’ profits is a popular method governments there have adopted to respond to the price crisis, which has forced countries to impose energy-saving measures and, in some cases, to intervene and redesign their gas and electricity markets.
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Ballooning prices for European natural gas, which is used both to generate electricity and to heat homes, has driven much of the inflationary pressure. Benchmark gas prices averaged 46 euros per megawatt-hour in 2021 but have increased some 187% so far this year to 134 per MWh, according to research firm Rystad Energy.
European energy ministers responded most recently by agreeing on Sept. 30 to impose a “solidarity levy” against the profits of companies in the petroleum, natural gas, coal, and refinery sectors as part of a larger emergency legislation to reduce electricity demand and redistribute some of the energy sector’s earnings to customers.
Ministers drew up the tax to apply to any taxable profits, as determined under national tax rules, that are above a 20% increase of the average yearly taxable profits since 2018. Revenues would then be distributed by member states to households and companies specifically to alleviate the effects of high retail electricity prices.
The solidarity levy built upon new taxes that several European Union members had already imposed or introduced to raise revenue and help consumers.
Italy imposed a windfall tax on energy companies in March, later raising it from 10% to 25%, and in Germany, the government will tax the windfall profits of power generators.
The Greeks, Romanians, and Spaniards have also implemented windfall taxes, as have the British. Before he became prime minister, then-Chancellor of the Exchequer Rishi Sunak oversaw the imposition of a 25% levy on energy firms in May to subsidize energy bills.
“We need to think about the fairest way to fund as much of that cost as possible,” Sunak said at the time. “The oil and gas sector is making extraordinary profits, not as the result of recent changes to risk-taking or innovation or efficiency but as the result of surging global commodity prices.”
Biden, in remarks on Monday, focused on oil and gasoline prices, singling out the largest and wealthiest multinational oil firms whose financial performances this year have blown 2021 out of the water. Exxon Mobil posted a record quarterly profit of $19.7 billion on Friday.
Biden urged companies to invest more of their profits in raising oil production levels and refining capacity. If they don’t, “they’re going to pay a higher tax on their excess profits and face other restrictions,” he said.
“Oil companies’ record profits today are not because they’re doing something new or innovative,” Biden said in remarks that mimicked those of Sunak. “Their profits are a windfall of war.”
The White House has yet to release any kind of windfall tax proposal, although Democratic lawmakers have floated one.
Sen. Sheldon Whitehouse (D-RI), who alongside Rep. Ro Khanna (D-CA) proposed legislation in the weeks after Russia invaded Ukraine that would take a share of profits from oil companies and rebate the money to drivers, embraced Biden’s call for a windfall tax and promoted his proposal.
“Big Oil is exploiting Putin’s invasion of Ukraine and a cartel-driven market to rake in tens of billions of dollars, and the American people are paying the price. As the President made clear today, the fossil fuel industry’s price gouging must stop,” Whitehouse said in a Monday tweet following Biden’s remarks.
Lukas Ross, program manager for environmental nongovernmental organization Friends of the Earth, backed Biden’s windfall tax push but said his ask for more investment was ill-founded.
“While a windfall profits tax is sorely needed, yet another incentive to drill for oil is not,” Ross said Monday.
The industry has disputed Democrats’ charges of gouging, arguing that companies drilling for oil and manufacturing gasoline are “price takers,” meaning they sell their products for whatever the market price is at a given time.
Republicans, meanwhile, have criticized Biden’s windfall tax threat as an endorsement of hiking taxes when prices are already high.
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Some have also questioned the utility of a windfall tax, saying it could work against the goal of increasing production and reducing prices.
“I’m not sure [I] understand the argument for a windfall profits tax on energy companies,” said Larry Summers, the Harvard University economist and former treasury secretary who also advised former President Barack Obama. “If you reduce profitability, you will discourage investment, which is the opposite of our objective.”
