Unfair Gains? Let's Talk About A European Windfall Tax

Unfair Gains? Let's Talk About A European Windfall Tax

Authored by Mark Nayler via FEE,

After another summer of heatwaves and wildfires, Spain is petitioning the EU to create a climate adaptation fund. In a letter sent to the EU's climate commissioner Wopke Hoekstra, the Spanish minister for the ecological transition Sara Aagesen Muñoz said that Europe needs a blanket strategy to help its member states cope with climate change, and to mobilize the "resources needed to deliver the necessary investments." The mobilizing strategy favored by Muñoz is a permanent windfall tax on energy companies, many of which have cashed in on higher gas and oil prices resulting from the wars in Ukraine and Iran. She also recommends more mutual debt financing, similar to the (supposedly one-off) Next Generation EU scheme introduced to help member states recover from the pandemic - an unpopular idea that is unlikely to be a feature of the EU's next seven-year budget.

It wouldn't be the first time that the EU has taxed exceptional profits. In 2022, in reaction to Russia's invasion of Ukraine, Brussels imposed a minimum levy of 33% on fossil fuel companies' surplus profits, defined as being 20% above their annual averages from 2018 (this in itself highlighted one problem with windfall taxes - namely, defining "surplus" profit). So far, however, the EU has resisted reintroducing what Meg O'Neill, the CEO of BP, calls a "highly flawed response to the situation", instead pointing out that individual countries can introduce their own windfall taxes. Last month, Portugal imposed a tax of 33% on oil companies benefiting from the Iran war, saying that it was "both fair and necessary to create a solidarity mechanism."

The fairness of windfall taxes, of course, is one of the most questionable things about them. As the Portuguese finance ministry said when introducing its windfall levy, the elevated profits of oil and gas providers this year have resulted "solely from external market conditions." So why punish them? Advocates of an EU-wide windfall tax base their argument on this fact; but precisely the same circumstance provides a compelling reason to oppose them.

On this view, such taxes penalize oil and gas companies for benefiting from the operation of neutral market forces. These companies are also, of course, susceptible to market downturns - so one might expect to see them compensated by the state in hard times as well as heavily taxed during booms. That they are never compensated in this way suggests that windfall levies aren't really about fairness. One suspects that many of their advocates want to punish energy companies, even when their extraordinary profits have been achieved without subterfuge, corruption, or creative bookkeeping. Proponents of windfall taxes also tend to assume that the resulting money would be better invested by governments than private entities. But as several controversies around the Next Gen EU scheme have reminded us, that is not a given.

Muñoz's letter to the EU's climate ministry comes less than a month after several EU member states put the idea of a EU-wide windfall tax to Ireland, which currently holds the six-month, rotating presidency of the Council of the EU. Germany, Spain, Portugal, Italy, Poland, and Austria are requesting that the presidency puts this idea on the agenda at the next meeting of EU finance ministers, due in Dublin on September 18 - 19. Echoing Muñoz's call, they said that the EU needs a "common approach, one that ensures that those who are profiting from the crisis do their part to ease the burden on the general public."

This is another questionable assumption - that an EU-wide tax on energy providers would transubstantiate into lower prices for consumers. But in some countries, it might have the opposite effect: as with Trumpian tariffs, higher operating costs could simply be passed on to customers. Patrick Pouyanné, CEO of TotalEnergies, has already warned that the company's price caps of €1.99 ($2.30) and €2.25 ($2.60) for petrol and diesel, respectively - introduced in March and so far estimated to have cost the company around €200 million ($233 million) - would be scrapped if the French government imposed a windfall tax on profits connected with the Iran war.

Windfall taxes also create an unstable regulatory environment, which in turn can dramatically reduce share values. In July 2022, when Spain's Socialist prime minister Pedro Sánchez announced a one-off "solidarity" tax on Spain's biggest banks, Spanish-listed banking groups slumped by €5 billion ($5.8 billion; along with fossil fuel companies, banks are the most common target of morally-motivated windfall taxes). This "temporary" tax, which now operates on a sliding scale, has been rolled over until at least next year, highlighting another problem - that windfall levies often stick around well past their stipulated deadlines. The longer they exist, the less attractive the affected companies become to investors.

This was the main reason why ExxonMobil sued the EU over its "solidarity" tax in 2022, a year in which the American energy giant's third quarter profits hit almost $20 billion, the largest it had ever posted and triple those of the previous year ("more money than God," as then-US President Joe Biden put it). Filed through its Dutch and German subsidiaries at Luxembourg's general court, ExxonMobil's complaint stated that Brussels's windfall tax would "undermine investor confidence, discourage investment, and increase reliance on imported energy and fuel products." The case has yet to be resolved - but European courts would surely see many more like it if Spain's recommendations are acted on.

The most devastating criticism of Spain's proposal of a permanent windfall tax to combat climate change, however, is that it would be utterly self-defeating. It will cost an estimated €27 trillion ($31 trillion) for the EU to reach its 2050 climate neutrality goals, with the majority of that capital expected to come from the private sector. According to the European Central Bank: "Public policies should aim to remove structural rigidities, improve regulatory and administrative efficiency and foster green innovation." The EU's recent deregulation drive has those aims in mind; but a windfall tax on energy companies - especially if it remained in place for years, as Muñoz recommends - would have the opposite effect, by restricting the private sector's ability to invest. Oil and gas companies are going to need more money than God to help facilitate the green transition.

In its focus on long-term prevention, rather than short-term reaction, the EU's new wildfire strategy shows the direction in which the bloc should be heading with its climate policies. Punishing companies that have profited from geopolitical turmoil might cater to public anger at their windfalls; but in the long run it won't benefit consumers, nor will it help Europe reach its climate goals. To realize those, the EU needs to work with its biggest energy companies, not against them.

Tyler Durden
Mon, 09/14/2026 - 06:30