Ways to Tax the Excess Profits of Energy Firms

Gabriel Zucman
UC Berkeley & Paris School of Economics

Panayiotis Nicolaides
Research Director at the EU Tax Observatory, Paris School of Economics

The invasion of Ukraine by Russia in February 2022 and the ensuing war have brought hardship to the global economy, and to the economy of the European Union in particular. The upsurge in energy prices—with oil prices rising from about $70 in 2021 to a high of $120 in June 2022—has dramatically increased firms’ input costs and households’ energy expenditures.

According to the latest Eurostat’s bi-annual statistics on energy prices for the first semester of 2022, Greece has recorded the highest electricity prices among EU countries for both household and non-household consumers at 0.332 €/kWh and 0.353 €/kWh respectively. The effects of higher prices are even higher when one accounts for purchasing power, which remains below the EU-average. Higher prices increase inequalities, erode consumers’ living standards and affect business competitiveness negatively.

For some companies, however, this conflict has come as an opportunity. While productivity remained the same, many energy firms have seen their profits and stock prices rise, earning rents from the increase in oil and gas prices. The result is a redistribution of wealth from the general population to a few lucky investors and business owners.

To attenuate the energy shock, we propose to tax the rise in the stock market capitalization of energy companies. This modern excess profit tax would efficiently redistribute windfall profits from the war in a simple manner.

We estimate that a 33% tax on the 2022 increase in the market capitalization of energy firms headquartered (or with sales) in the European Union would generate around €80 billion in revenue for the European Union, the equivalent of 0.4% of the EU GDP.

If fully and equally redistributed to all EU households, this one-time tax could fund a transfer of €180 per person, more than €700 for a family of four. With a 50% tax rate, the transfer would exceed €1,000 for a family of four.

Our proposal modernizes traditional excess profit taxes and adapts them to the economic realities of the 21st century. Excess profit taxes have been successfully used in the past, especially in wartime. For example, the United States introduced an excess profit tax in 1940, in force until 1950, with a rate of 95%.

However, the organization of global economic activity has changed substantially since World War II. Today, a large share of output is produced by multinational companies that can shift profits to subsidiaries in low-tax territories. A recent study shows that 36% of the profits made by firms in countries other than their headquarters are shifted to tax havens globally, a dramatic increase since the 1970s. This complicates the taxation of profits.

The problem of defining which profits to tax and by how much, also extends to smaller countries that rely less on multinationals and more on domestic energy firms. In Greece, in particular, oil refineries and energy companies have profited substantially from higher energy prices. The government introduced a 90% tax on excess profits in response. Yet, the estimation of the tax base on which this tax should apply remains a hotly debated topic: about €400 million are expected to end up in public coffers, while the actual profits could be as high as €2 billion.

Meanwhile, financial markets have developed. Ratios of stock market capitalization to GDP exceed 100% in many countries. Even though some are still closely held, the vast majority of large energy companies are publicly traded. This makes targeting market capitalization appealing.

Our proposal has two main advantages relative to standard excess profit taxes. First, because stock market capitalizations are observable and hard to manipulate, the tax we propose would be easy to enforce. Companies would not be able to avoid it by shifting profits to tax havens or by manipulating losses.

Second, this tax would capture all rents earned by energy firms, including those earned from oil and gas extraction (“upstream activities”), as opposed to only rents on refining and other “downstream activities”. The latter are the ones mainly targeted by other excess profit taxes currently implemented in the European Union, such as the temporary solidarity contribution introduced in September 2022.

Because the tax we propose is much more comprehensive, it would generate about three times as much revenue as this solidarity contribution: €80 billion vs. €25 billion for a tax rate of 33%.

How would the tax work in practice? For energy companies headquartered in the European Union, we propose that the EU taxes 100% of the increase in market capitalization from January 1st, 2022 to December 31st, 2022.

For energy companies headquartered outside of the European Union, the rise in market capitalization would be apportioned to the EU proportionally to the fraction of global sales made in the EU. For example, if the market valuation of a non-EU gas producer rose by €100 billion in 2022 and the company made 20% of its sales in the European Union, then €20 billion would be subject to taxation in the European Union.

Thus, the tax would apply not only to European firms, but also to companies that extract oil and gas outside of the European Union and sell to EU consumers. This is critical to effectively redistribute windfall profits and address the hardships caused by surging energy prices.

In the lack of a pan-European initiative, countries can also unilaterally impose the tax on local energy markets.

The tax we propose is straightforward to administer. It could be collected by Securities and Exchange commissions in each country, which already collect fees on listed companies. It is hard to avoid, because market capitalization is readily observable and cannot be manipulated.

It is often in time of war that innovative tax instruments have been developed. The one we propose responds to the specific circumstances of the current crisis, and to the practical challenges of taxing companies in a globalized world.