OhN March On the 7th, the day the price of Brent crude oil rose above $ 127, the European Commission unveiled its master plan to fight the cost of stratospheric living. Claiming that “crisis situations” are necessary for exceptional measures, it has recommended that member states impose a one-point tax on power-generating companies. The revenue raised can then be used to keep household bills low. The next day, Elizabeth Warren, a Senator from Massachusetts, tweeted that she and other lawmakers were working on a tax on “war-going profits” from major American oil companies. The proposal is now making its way through the House of Representatives.
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Politicians have reached out for such “windfall” taxes before. Bulgaria, Italy, Romania and Spain have imposed them on power generators in recent months, as benchmark energy prices have risen. The United States began imposing taxes on oil producers in the 1980s, hoping to make a profit after the price was out of control. Britain’s new Labor government taxed utilities in 1997, when the Conservative government sold them cheaply.
Levies are understandably tempting for the taxman. Big windfall means big receipts. The common concern with a tax is that it could change the company’s behavior, encouraging them to reduce their investment in order to reduce future tax bills. But the phenomenon is happening in a one-stop, unconnected investment. Helen Miller of the think-tank Institute for Fiscal Studies in London says they are “a very effective way to increase revenue”. At least, in theory.
The UK tax is probably the best standard fit. There was an obvious reason for this: when companies were privatized, there were additional gains from lower share prices. Post-privatization profits were multiplied by the price-to-earnings ratio; After deducting public revenue from privatization, what was left was taxed at 23%. Even then, however, the tax has failed to target the beneficiaries of the extra profits. British Telecom, the first utility to be privatized, was listed in 1984. Many early punters came and went, having to bear the burden of shareholders in 1997.
Elsewhere, the Levites faced other obstacles. In 2006, Mongolia introduced a 68% charge on profits from the sale of copper and gold, in the hope of making a profit on a new mine during a commodity-price increase. Instead, investors withheld funds for the project until regulators agreed to cut taxes. Distorted the behavior of US tax agencies, with oil production falling by 4.8% between 1980 and 1986, according to some estimates.
There are flaws in the European Commission’s plan. While this does not explain why the current situation guarantees a one-point tax, it adds to the uncertainty about when such tariffs could be used again. Moreover, the energy industry buys and sells electricity using long-term contracts, which blurs the connection between today’s prices and tomorrow’s profits. And the sooner the price goes up, the lower it can go. By March 16, for example, oil prices had returned to about $ 100 a barrel.
Recent tests provide little basis for optimism. Romania, Italy and Spain are targeting renewable-power generators, which have not increased costs as much as generators that use fossil fuels. Richard Howard, a consultant at Aurora Energy, says it raises the “risk premium” of investing in renewables – exactly what lawmakers want to avoid. Peter Stiles of the European Federation of Energy Traders, a trading firm, notes that Spain’s scheme prevents green-energy generators from initially making extra profits, which would distort market pricing practices.
Their move across Europe also creates a financial opening that can be difficult to stop. The commission recommends that all windfall taxes be stopped by the end of June. But Spain has already extended its hand once. And the Italian system will last until December. 3
Correction: An earlier version of the article stated that the US tax on oil producers was imposed in 1986. In fact, it started in 1980. Sorry.
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This article was published in the Finance and Economics section of the print edition under the title “Seizure of Power”.