Windfall Energy Taxes: A Bad Idea Or An Idea Whose Time Has Come?
The war in Ukraine and sky high energy prices has created the expectation of sky high profits for oil and gas companies.
This, in turn, is leading to calls for windfall taxes on those same energy companies.
These are a bad idea, especially now.
Here is why.
A windfall tax is simple enough: typically, it is a one-off levy imposed on a company or industry when they have incurred abnormal levels of profits for reasons or circumstances beyond their control.
On the surface, the catastrophic Russian invasion of its neighbor seems like a perfect use case for such a tax.
3 big reasons:
Being lucky isn't the same as being good.
Energy companies based their investments on far lower price levels.
These high prices are incurring costs elsewhere in society.
To take each point in turn:
To put it mildly, Western energy companies did nothing to deserve the unreasonably high profits they are making every week. They are just lucky.
And while it is true that companies require clear and consistent tax policies before making investments, no well run enterprise requires oil and gas prices at these levels to make a good return on their capital and reward the faith and loyalty of their long term shareholders.
Their (sizable) capital investments around the world were modeled on earning far cheaper prices for their core products. Therefore, though oil and gas companies may shriek at the injustice of it all, they will be just fine.
Lastly, "dumb luck" may be responsible for a lot in this world but there is no law that says governments should to have to sit back and watch a few companies (and their executives) get excessively rich while the vast majority of their citizens, corporations and communities (especially many of their most vulnerable) suffer the pain of high energy costs.
And so appeal and structure of such a one off tax is clear: as a result of unexpected events, governments try and take from the lucky winner (energy companies) and redistribute to the unlucky (people most impacted by eroding living standards).
As a logistical exercise, a windfall tax may be a bad precedent to set but it certainly isn't hard.
Government's can quickly impose such a tax - even retroactively.
You simply pass a law raising the amount and then submit the new (and far higher) bill to the energy companies for each barrell they extracted. They will yell and scream and squirm but then have to pay up.
Easy peasy, energy squeasy.
There are two problems with this neat story:
The first is that many of these same companies are - voluntarily - divesting themselves of huge amounts of Russian oil and gas assets. They are unlikely to get much, if anything, in return for doing so.
They have their own shortfalls to make up.
See chart here:
More importantly however, than the narrow question of oil majors' balance sheet, we have just had a powerful lesson about what happens when you encourage an industry to stop investing in new capacity.
Surprise, surprise when you shame, regulate and politicize investments in oil and gas while still relying on fossil fuels economically, you get less supply and higher prices.
Thus, the present challenge is that we have spent years discouraging energy companies from productively investing in their core businesses and have suddenly flipped to doing the very opposite and, incredibly, even shaming the same corporations for NOT doing the very thing we were recently telling them NOT to do.
Ask yourself, how would you react to this state of affairs? Would you trust the policymakers and think that you have a good faith partner who will help you plan for the long term success of your industry?
But the problem isn't just that we might upset some well paid executives.
This reveals an inherent tension involved in taxing abnormal profits. Do we want more production or do we want more revenue? We may not be able to have both. As we have detailed in depth, muddled energy strategy has already produced muddled energy production and a windfall tax now would only be doubling down on that incoherence.
These are also global companies operating in a global energy market. All of these enterprises are supposed to be investing in new capacity to extract fossil fuels to "do their part" in the struggle with Putin's Russia while at the same time pouring billions into a broader shift into renewables and also competing, of course, with other global oil giants that are not belabored by such an erratic set of policies, regulations and shifting moral matrices.
So, a windfall tax will likely harm Western oil and gas production while leaving foreign producers - many of which are state owned or controlled - to capture more of the market and gain the majority of the benefit - lucky or not - from the effort to remove Russian crude from the global market.
Thus, we would be sending a higher percentage of the excess profits to Petrobras or Aramco rather than Exxon or Shell. That would further harm our economy.
At the very least, the US can and should be an energy superpower - for both traditional fossil fuels and renewable sources. Those are not necessarily conflicting (or even competing) goals.
The importance and imperative of a clear and coherent western energy strategy is self-evident. We must make a break with our recent past of pushing for no more fossil fuel extraction while still relying on fossil fuels.
It risks a political backlash and only hurts the most vulnerable members of our society. We can afford neither.
A windfall tax isn't the only current energy policy we can't afford either.
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