The Windfall Tax: An Overview
2 January 23
In March of 2020 the world was shook by a global pandemic. Global lockdowns affected hundreds of millions of people, as well as most businesses and supply chains. Travelling seized almost overnight, people stopped going to the office, schools, visiting friends, etc.
Low demand caused by the pandemic made energy prices plummet. Energy producers around the world had to lower outputs to match the downwards demand curve. By the end of 2021 and beginning of 2022 a lot of Covid restrictions were getting lifted. Things were starting to get back to normal for people and businesses started increasing global energy needs.
But what made the slowly rising energy prices explode started on the 24th of February 2022 —Russia invaded Ukraine. The war in Europe sparked unprecedented uncertainty in the energy sector as well as Europe’s bid to cut business ties with the aggressor.
Due to high demand and relatively low supply coupled by uncertainty, oil and gas prices shot up, in turn yielding record profits for energy producers.
So, what is the windfall tax?
The windfall tax aims to levy energy firms that are making record profits in 2022 due to the current world’s geoeconomics. The windfall tax is a 33% tax on yearly profits of oil, gas, and coal energy firms which applies if the company’s profit for the year is 20% higher than the average of the previous three years.
The European Commission chief Ursula von der Leyen announced this “crisis contribution” emergency plan in September.
Predictably the energy business giants were not happy. US energy company ExxonMobil is going as far as to sue the European Union, accusing Brussels of exceeding its legal authority. ExxonMobil representatives are calling this act by the EU “counter-productive.”
The US oil and gas giant along with other industry leaders argued that the windfall tax would seriously discourage them from future investment in Europe.
The EU council estimates that the windfall tax could raise up to €140bn which would be used by governments to fund social programs.