UN chief wants oil companies to pay windfall tax on 'immoral gains' but why are some countries resisting it?

The prices of oil and gas have been shooting up this year and so have the profits for oil companies, who are now being persuaded by campaigners to share their 'luck' with millions who do not benefit from the war. UN chief Antonio Guterres added his voice to the chorus, calling out some oil companies’ “grotesque greed” that was “punishing the poorest and most vulnerable people, while destroying our only common home.”

“I urge all governments to tax these excessive profits, and use the funds to support the most vulnerable people through these difficult times,” Guterres said.

Addressing the cost of living crisis ushered in by the war in Ukraine that has raised the cost of food and fuel, the UN Secretary General said that one way to fund energy solutions and chart a course away from fossil fuel was to impose windfall taxes on the largest oil and gas companies and divert this money to the green energy transition efforts.

According to a BBC report, four of the biggest energy firms - Exxon, Chevron, Shell and TotalEnergies - earned nearly $51bn in the most recent quarter. They nearly doubled their earnings made in the same period the year before, indicating that they benefited from the elevated prices this year.

While countries like India, Italy, Bulgaria, Romania and Spain have imposed windfall taxes on energy companies, some others are reluctant to do so and economists are divided on the benefits of such a one-off special tax.

What is a windfall tax?

Windfall tax is a one-time levy imposed on companies that made unusual profits due to circumstances that were not under their control. That is, their profits were not a result of their business acumen or ingenuity, rather external factors supported their income – in the present case this factor was the war.

There is a general corporate mistrust on windfall taxes because those against such a tax say it discourages investment. The recent war in Ukraine however has converted some people into believers.

India imposed a windfall tax on oil producers in July with an aim to review it fortnightly – it slashed the special tax on diesel and Aviation Turbine Fuel in the latest revision but raised levies on domestically produced crude.

Analysts in India said that frequent tinkering with the tax rates create uncertainty but they agreed that the last two revisions have been in line with the global oil and product prices.

According to an IANS report, Morgan Stanley said in a statement, “While the (windfall tax) policy is still ad hoc, the last two revisions have been consistent with the move in global oil and product prices. There are now no export taxes on gasoline and jet fuel and the remaining US$10/bbl export tax on diesel has a minimal impact on most companies, including Reliance.”

Italy, which is among several European Union countries to have imposed the tax, has had a shortfall in estimated collections, an August 2^nd report revealed. Several energy companies complained that volatile energy prices were also creating problems for their businesses, so a windfall tax was not fair.

Hungary has imposed a windfall tax not only on energy firms but insurers, banks and airlines among others.

European legislation passed during the Covid-19 pandemic and the war in Ukraine called for one-time windfall tax to be imposed on energy firms, and countries like Italy, Spain, Greece, Romania and the UK have already followed with taxes ranging between 10 and 25 per cent.

Last month, the UK approved a 25 per cent 'windfall tax' on energy firms even as the Tory leadership including former Prime Minister Boris Johnson and PM hopeful Rishi Sunak do not favour the tax.

Experiments with windfall tax

Governments have imposed windfall taxes before depending on the economic assessments in their own countries. The US experimented with a windfall tax in the 1980s but that did not bear good results. The Crude Oil Windfall Profit Tax Act was enforced in 1980 in response to sharp oil price increases during the 1970s. It was unable to earn the expected revenue because oil price estimates were highly exaggerated. The tax was abolished in 1988 after oil prices fell.

Since 1988, the US has not had windfall taxes and when a discussion arises, naysayers point to the failed ‘80s trial.

Frank Macchiarola, a senior vice president for oil and gas lobby group the American Petroleum Institute, told BBC that windfall tax was misguided. “Policymakers should be focused on increasing energy supply and reducing costs for Americans. Imposing new taxes on our industry will do the exact opposite and only discourage investment at a time when it's needed most,” he said.

Right wing French lawmakers continue to resist a move by their colleagues on the Left (socialists and communists) and centre to bring in legislation that taxes energy companies. France’s Economy Minister Bruno Le Maire said, “When we are the most taxed country of all European countries, we do not add an additional tax to all the taxes that already exist.”

Some economists argue that windfall profits are important in a free market economy because they expose a shortage and the market, they say, will supply the shortage by boosting production eventually. The question of fairness and social justice over making such profits amid an international crisis, however, still persists.