As the European Union introduces a major windfall tax, the region is pressuring other parts of the world to follow suit. The UK may have already taxed oil and gas companies to subsidize consumers’ rising energy bills, but the EU is going one step further by planning a total overhaul of the energy market. Yet other world powers, such as the United States, have avoided taxing energy companies, turning instead to the oil and gas industry to boost production as it faces major shortages and price increases. Whether the Biden administration will be influenced by European policies remains to be seen.
Ursula von der Leyen, President of the European Commission announcement in a Sept. 14 statement that the EU planned to launch a “deep and comprehensive reform” of the electricity market. She explained that the current market was organized around the order of merit and was not fit for purpose. Von der Leyen said: “Consumers should reap the benefits of low-cost renewables,” adding, “So we need to decouple the gas price dominance from the electricity price.”
In his speech, von der Leyen made his position on the oil and gas industry clear, suggesting that their profits had been far too high during a time of energy shortages, high oil and gas prices and rising consumer costs. She pointed to outdated market metrics. For example, the benchmark in the gas market is still centered on the pipeline, rather than the more common liquefied natural gas. These archaic mechanisms, she suggested, need to be addressed to reflect market realities.
The world has faced increasing energy volatility in recent months, following the Russian invasion of Ukraine and subsequent sanctions on Russian oil and gas. This has led to energy prices soaring as governments scramble to find alternative energy sources to establish new trading partnerships. Yet the one industry that continues to profit from energy scarcity and rising consumer costs is the oil and gas industry.
Earlier this year, the UK government announced it would introduce a one-off tax on oil and gas companies operating in the UK to ease pressure on consumers. Labor proposed such a tax early on, suggesting the government could raise $1.3 billion to provide consumers with subsidies on their home energy bills. Chancellor of the Exchequer Rishi Sunak agreed to introduce an Energy Profits Levy (EPL) in May, to tax oil and gas companies on their profits – which have risen dramatically in recent months. The EPL could be in place until the end of 2025 and aims to raise $5.43 billion as part of a broader $16.3 billion consumer support package.
At the time, Britain’s windfall tax seemed revolutionary in a world that had continually supported the ultra-wealthy oil and gas industry. But now the EU plans to replace the UK’s EPL by further limiting the power and wealth of the oil and gas majors. EU ministers met this month to discuss a five point plan it will reduce Russian gas prices, introduce a one-time tax on fossil fuel companies, limit renewable and nuclear energy revenues, reduce peak-hour energy consumption by 5% and provide emergency credit lines to electricity companies. The plan was quickly met with hostility by Russian President Putin, who threatened to cut off the country’s remaining energy supplies to Europe.
Von der Leyen pointed out that “it is wrong to receive extraordinary record revenues and profits benefiting from war and on the backs of our consumers”, adding, “in these times the profits must be shared and channeled to those who need it the most.” The goal now is to raise $139.8 billion in taxes from fossil fuel companies to be split between member states to support rising consumer energy bills.
Despite acting as a leader in introducing windfall taxes, the UK seems unlikely to expand its oil and gas company laws further. Britain’s new Prime Minister Liz Truss has said she opposes an extension of the windfall tax, saying “I am against a windfall tax” and “I think it is the wrong thing to deter companies from investing in the UK at a time when we need to grow the economy”.
But some world powers have avoided punishing the oil and gas industry for taking full advantage of high energy costs. US President Biden has repeatedly called on US oil and gas companies to increase production to help improve the region’s energy security and reduce costs. Yet he did not push for a windfall tax on oil and gas companies and there is much resistance in the United States to such a move. As the EU takes such a dramatic step to redistribute wealth to consumers, in the face of dramatically higher energy bills, however, pressure on Biden and other world leaders to do something similar will increase.
By Felicity Bradstock for Oilprice.com
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