Windfall Taxes on Oil and Gas Create Negative Consequences

Table of Contents

Key Findings

• Five EU Member States are asking the European Commission to consider taxing windfall profits from high energy prices linked to the war in the Middle East, similar to the 2022 “solidarity contribution.”
• In 2022, the Council of the European Union temporarily imposed an EU-wide windfall profits tax A windfall profits tax is a one-time surtax levied on a company or industry when economic conditions result in large and unexpected profits. Historically, such taxes have targeted oil and energy companies when costs have risen, especially from war or other crises., or “solidarity contribution,” on fossil fuel companies.
• Between 2022 and 2023, 16 of the 27 Member States applied the tax A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities., 7 adopted an equivalent national measure, 3 reported that they did not have in-scope companies, and 1 (Cyprus) never adopted the regulation.
• The tax was intended to be temporary; however, Spain and Hungary have extended it beyond 2023 to 2024, and the Czech Republic extended it to 2025, but all three have since eliminated it.
• Outside of the EU, the United Kingdom also implemented a windfall profits tax on fossil fuel companies in 2022 and has since extended its application to 2030.
• The difficulty of defining supernormal profits makes windfall taxes complex, legally contentious, and highly uncertain, discouraging investment, driving production and jobs abroad, and inadvertently penalizing oil and gas companies’ renewable energy activities.
• In particular, potential EU-wide and British windfall profits taxes are threatening domestic renewable energy investments. While most of the roughly €27 trillion needed for the EU to reach net zero by 2050 must come from private investment, windfall taxes reduce the capital available to energy companies for capital-intensive projects.
• Policymakers should implement long-term, pro-growth tax reforms that incentivize private investment and energy diversification.

Introduction

While the EU economy continues to recover from the high energy prices driven by the Russian invasion of Ukraine, the war in the Middle East is again reducing oil and gas supply and leading to higher oil and gas prices. The dire economic environment for families and the need for greater energy security have heightened policy attention to extracting revenue from fossil fuel companies.

Five EU Member States are already asking the European Commission to consider taxing windfall profits from high energy prices linked to the war in the Middle East. This additional revenue would be used to finance measures to ease price spikes. [1]

Windfall taxes are meant to be one-time taxes levied on a company or industry when economic conditions result in large, unexpected profits, for the purposes of funding relief measures for consumers.

Windfall taxes, particularly those imposed on the oil and gas industry, often appear as a quick fix for governments seeking to raise revenue during periods of high commodity prices. However, while these taxes may offer short-term revenues, they can also trigger negative consequences that undermine their intended purpose. Imposing higher taxes on companies capable of increasing oil and gas output would hinder efforts to address the supply shortage.

This is not the first time the EU has considered windfall taxes to finance measures to ease price spikes. In 2022, the Council of the European Union agreed to temporarily impose an EU-wide windfall profits tax (the “solidarity contribution” in EU terms) on fossil fuel companies. [2] Even though these measures were meant to be temporary, the Czech Republic, Hungary, and Spain extended the application of these windfall taxes beyond 2023. Outside of the EU, the United Kingdom also implemented a windfall profits tax on fossil fuel companies in 2022 and has since extended its application to 2030.

European Countries Worked Together on Windfall Profits Taxes

As early as 8 March 2022, the European Commission recommended that Member States temporarily impose windfall profits taxes on all energy providers in its REPowerEU communication. The Commission suggested such measures should be technologically neutral, not retroactive, and designed in a way that does not affect wholesale electricity prices or long-term price trends. [3]

On 6 October 2022, the Council of the European Union agreed to impose an EU-wide windfall profits tax, or “solidarity contribution,” on fossil fuel companies (oil, gas, coal, and refining sectors), however, with a different design than the Commission’s recommendations.

According to the regulation, Member States had to apply either a solidarity contribution or an equivalent national measure to the surplus profits of the fossil fuel industry in fiscal year 2022 and/or 2023. [4] At the same time, a cap was set on market revenues for electricity generators that used infra-marginal technologies to produce electricity, such as renewables, nuclear, and lignite. The EU anticipated that the two policies would jointly raise about €140 billion, of which €25 billion would be revenues from oil and gas companies collected through the solidarity contribution. [5] The revenue would then be used to partially offset households’ high energy bills “in a non-selective and transparent measure supporting all final consumers.”

The regulation defined surplus profits as those generated in 2022 and/or 2023 above a 20 percent increase of the average profits generated in fiscal years 2018-2021. Those profits would be subject to the solidarity contribution at a rate no lower than 33 percent. In-scope companies had to have at least 75 percent of their turnover generated in the field of extraction, mining, refining of petroleum, or manufacturing of coke oven products. Alternatively, Member States could have enacted an equivalent national measure.

Between 2022 and 2023, 16 of the 27 Member States applied the solidarity contribution, while 8 adopted an equivalent national measure. Additionally, three countries— Luxembourg, Latvia, and Malta—reported that they do not have in-scope companies. [6]

Of the 16 Member States that had a windfall profits tax in place, 7— Belgium, Czech Republic, Hungary, Italy, Portugal, Spain, and Sweden —had their own equivalent national windfall tax. Apart from the EU Member States, the United Kingdom also adopted its own windfall profits tax.

The implemented windfall taxes in Europe differed significantly in their tax rates, the sectors they targeted, and their structures. The tax rates ranged from 25 percent in the United Kingdom to 75 percent in Ireland and 80 percent in Slovenia.

Windfall Taxes Collect Little Revenue

Although the revenue collected for fiscal years 2022 and 2023—€26.15 billion—slightly exceeded the €25 billion estimate, the figures show notable discrepancies. Apart from the three countries that reported no companies in scope, three others— Finland, Lithuania, and Sweden—reported zero revenue from this policy to the European Commission, and no other data is publicly available. Cyprus never adopted the regulation. Additionally, since Croatia applied the windfall tax to all sectors in the economy, it hasn’t reported any revenues from this policy specifically.

Therefore, out of the 27 EU Member States, only 19 have revenue data available on the solidarity contribution or an equivalent measure. Furthermore, the Commission’s report reveals that revenues from the solidarity contribution accounted for just 7 percent of the total cost of the energy support measures implemented by Member States, which amounted to €340 billion. Additionally, policymakers need to consider the loss of future revenue due to a slowdown in investment that these policies might trigger.

Temporary, but How Temporary?

Although the EU regulation clearly stated that windfall profits taxes should have been a temporary mechanism and “the duration of the measure should be limited and tied to a specific crisis situation,” Hungary extended its application to 2024, and the Czech Republic and Spain extended it until 2025. [7] Though not bound by the EU regulation, the United Kingdom has also recently extended the application of its tax to 2030. Additionally, in February of 2026, Italy introduced a surcharge on the regional tax on production activities (IRAP) for energy companies that would apply from 2026 to 2027.

On 2 December 2022, the Czech Republic introduced the 2023 Tax Package, which, among other tax reforms, introduced a new 60 percent windfall profits tax for a period of three years (from 2023 to 2025). [8] The government also extended the scope of the tax to cover the banking sector.

The Czech finance minister announced early in 2024 that he planned to scrap the windfall tax for 2025; however, in August 2024, he changed course since “the overall revenue from the special levy on the biggest energy companies and banks still hasn’t covered the state’s expenditure on mitigating the impact of Europe’s energy crisis.” [9]

Hungary was an early adopter of the windfall profits tax. However, it did not follow the design of the EU-wide windfall tax and implemented a series of windfall taxes on different sectors, from producers of petroleum products and mining companies to pharmaceutical distributors and airline companies. Hungary applies a variety of tax bases and tax rates across its package of windfall taxes.

As an example, Hungary uses a modified corporate income tax A corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. base for a windfall tax on energy suppliers. For producers of petroleum products, the tax base The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. is the refinery spread reduced by $7.5 per barrel. Additionally, most of these windfall taxes are applicable for three years (from 2022 to 2024).

Spain implemented a temporary mechanism in 2021 to tax excess revenues of energy companies that benefited from higher energy and gas wholesale prices. [10] However, over time, a series of exclusions were approved, and many energy providers were left outside the scope of the mechanism.

In December 2022, Spain adopted a new windfall profits tax on the largest operators engaged in activities related to crude oil or natural gas production, coal mining, and oil refining. However, the tax differed greatly from the EU-wide windfall tax.

First, the Spanish approach used net turnover as the tax base instead of taxable profits. [11] A tax rate of 1.2 percent applied to the sales of domestic power utilities. This means the tax base was not designed to tax profitability, whether the profits were windfall or not. Instead, it resembled more of an excise tax An excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections..

Second, it only applied to companies with an annual turnover exceeding €1 billion in 2019.

Third, the tax applied through the fiscal years 2023 and 2024.

Overall, the Spanish design deviated from both the temporary nature of the contribution and the prescribed tax base that the EU mandated.

After the approval of the EU-wide windfall tax, the Spanish government vowed to adjust its windfall tax to the EU design. [12] However, no amendments were introduced. In 2023, the government again announced that it planned to review the energy windfall tax during the 2024 budget approval. Although a budget for 2024 was never presented for discussion, the tax was extended through 2024. [13]

Although no longer a part of the EU, the British government also implemented a windfall profits tax. The UK’s design diverges significantly from the outline of the EU-wide windfall tax regarding the targeted sectors, tax rate, tax base, and tax period. First, the windfall tax exclusively targets companies engaged in oil and gas extraction. Second, the current 38 percent rate (25 percent in 2022, and 35 percent up to 1 November 2024) comes on top of an existing 40 percent headline tax rate on oil and gas. The combined policies result in an overall tax rate of 78 percent. Third, the UK has opted to tax all profits of the targeted companies from May 2022 to March 2030.

On 20 February 2026, Italy approved a decree that, among other tax measures, increased the regional tax on production activities (IRAP) rate from 3.9 percent to 5.9 percent for all companies that produce, distribute, and supply energy products. However, the decree must be converted into law by the Italian Parliament within 60 days (before 20 April 2026). If approved, the temporary surcharge would apply from 2026 to 2027. [14]

The Downsides of Windfall Profits Taxes

Principled tax policy should be simple, neutral, transparent, and stable. By not following these principles, windfall profits taxes fail to achieve their revenue goals and distort the energy market in the long term. While the political upsides seem obvious, the economic upsides are limited.

Defining Supernormal Returns Is Hard

Windfall profits, or supernormal returns, are payoffs to investment greater than the typical market rate of return. They are often approximated as company profits that exceed a standard rate or return in corporate equity or debt markets (such as 10 percent). Windfall profits that exceed normal returns can come from unique advantages like leading technologies, market power, investment risk, or temporary power to set prices due to innovation.

In recent decades, the energy sector has been one of the most volatile sectors in the stock market, [15] since energy producers are exposed to market risk (as macroeconomic conditions impact demand) and geopolitical risk (as oil and gas prices are heavily affected by certain international actors). When oil and gas prices increase exponentially in one year, oil and gas producers may appear to earn windfall profits, but the years of high profits often offset heavy losses when energy prices collapse.

Leaving aside the challenges of clearly and consistently defining windfall profits, many of the taxes implemented by European countries are not proper windfall profits taxes—they go beyond merely taxing windfalls. For oil and gas companies, European countries (following the EU’s recommendation) defined the windfall tax base as the difference between current profits and the profits generated over a baseline period. Nevertheless, these incremental profits are not necessarily excess or supernormal returns, and a windfall tax could instead double tax regular profits.

Although the EU-wide windfall tax was introduced to homogenize the myriad windfall taxes European countries had already implemented as early as 2021, and tackle some of the problems these taxes had generated, [16] its final implementation has generated uncertainty for investors by allowing countries to implement their own windfall taxes. [17] Additionally, Spain refused to change its tax base from net turnover to taxable profits. Spain’s largest electricity companies filed a motion with Spain’s High Court claiming that the new tax is “discriminatory and unjustified.” [18] Spanish companies announced that they would accept paying a tax on the windfall profits generated from the natural gas business, but not a tax on all domestic revenue. [19] The Spanish government vowed on several occasions to adjust the Spanish windfall taxes and modify the tax base. However, those commitments were not fulfilled, and the tax remained unchanged until it was finally abolished at the end of 2024.

Italy was also confronted with the complexity of defining the “super” nature of the profits with uncertainties in the calculation of the taxable base. The Italian legislators had to intervene multiple times to fine-tune the taxable base and restore some certainty to the tax system. [20] Additionally, the decree that Italy approved in February 2026 is already under scrutiny for the uncertainty in the calculation of the taxable base. [21]

Policymakers should acknowledge that the impact of tax policy on investment decisions depends on the type of return the investment generates. Normal returns are the most affected by taxes, supernormal returns from risk and innovation are still responsive, and supernormal returns from market power are the least responsive. Targeting supernormal returns with windfall taxes can be economically counterproductive, as these returns often come from risky, entrepreneurial activity. [22]

On the Edge of Unconstitutionality

Many European countries implemented the windfall tax retroactively. Even the EU proposal in October of 2022 required that the EU-wide windfall tax be implemented for the years 2022 and/or 2023.

Non-retroactivity is a general principle on which fiscal and legal systems are built. [23] Non-retroactivity is normally considered an absolute and non-negotiable condition in criminal law, and most constitutions would consider a retroactive tax unconstitutional. [24]

Non-retroactivity is not the only reason why these windfall taxes could be unconstitutional. The constitutionality of Italy’s first windfall tax was questioned for not allowing for the deduction of certain taxes when calculating the tax base or for the distinct tax treatment of companies operating in similar sectors. [25]

Additionally, the complexity of the design of these taxes led to legal disputes and increased compliance costs for both governments and businesses. [26] Oil companies even sued the European Council for exceeding its powers. [27]

Last but not least, the EU used the EU Treaty’s Article 122, an emergency procedure that excludes the European Parliament, to enact the legislation. Under Article 122, the Commission initiates a legislative proposal, but the Council adopts the measure via a qualified majority vote of EU Member States. The EU-wide windfall tax passed the Council without unanimity. [28]

Windfall Profits Taxes Impact Investment, Jobs, and Economic Activity

When companies are heavily taxed through windfall profits taxes, they may be less inclined to invest in new explorations, production, research and development, or risky projects. This reduced investment can lead to a decrease in future supply, exacerbating energy shortages and leading to higher prices for consumers in the long run. [29]

The flawed design of these windfall profits taxes has created problems in almost all countries that have implemented them. An EU Commission report finds that the “diverging implementation strategies across Member States have reportedly led to significant investor uncertainty,” and, therefore, the Commission’s report proposed to end these measures. [30]

Contrary to that recommendation, Spain announced in 2023 (through a government coalition agreement) that it planned to make permanent two windfall taxes introduced temporarily for 2023 and 2024. [31] One of Spain’s biggest oil producers criticized this policy for creating a challenging investment environment as it considers where to locate its green hydrogen business. [32] Just six months later, in July 2024, the Spanish government announced that €0.8 billion of EU funds would be invested in Spanish companies to develop green hydrogen plants. [33]

The Spanish wind sector association warned in a recent press release that a new EU-wide windfall tax could adversely affect renewable technologies if applied indiscriminately to companies in the electricity sector: “requesting new potential taxes that impact the electricity sector creates legal uncertainty and scares away investors, precisely at the moment when it is most necessary to invest in technologies such as wind power, as a substitute for imported fossil fuels.” [34]

Similarly, in the UK, the constant changes to the windfall tax have triggered a strong response from the business sector. Forty-two companies warned that the official plans threatened £200 billion of investment in all forms of energy, including renewables. [35] By increasing the windfall profits tax and eliminating the investment allowance, the policy threatened not only the oil and gas industry but also the firms that invest in renewable energies. Before the last reforms, the “investment allowance,” together with other reliefs available, enabled companies to obtain relief of up to 91.25 pence in the pound when they reinvest profits in the UK oil and gas sector. Currently, the outbreak of the Iran war led the Chancellor to row back on plans to announce an early termination of the windfall profits tax, due to expire in 2030, following internal discussions about reversing the policy. [36]

These windfall taxes are taking capital away from more carbon-intensive energy production, but they are also removing greatly needed capital from the companies that are investing in clean energy. [37]

Additionally, apart from reducing investment, windfall profits taxes can accelerate the decline of domestic oil and gas production. [38] Companies might choose to invest in regions with more stable and predictable tax environments, leading to a loss of jobs and economic activity in the home country. This shift can also reduce the country’s energy security as domestic production declines. [39]

Windfall Profits Taxes Are Hurting the Green Transition

If not taxed under the distortive windfall profits taxes, oil and gas revenues can help fund investment in renewable energy and provide the necessary investment for the green transition. [40]

The European Court of Auditors estimates that the EU financial support could help provide over €87 billion per year from 2021 to 2027 of the nearly €1 trillion per year of the total investment needed to reach the 2030 climate goals. To move the European economy to net zero by 2050, the €1 trillion per year investment must be continued through 2050. [41]

Therefore, the EU would need around 90 percent of the roughly €27 trillion to come from national and private investments. Additionally, in a previous report, the Court of Auditors estimated that EU financial support could help provide roughly 20 percent, compared to the current 10 percent, of the €1 trillion needed yearly. [42] The Court of Auditors also found that the Commission had overstated the climate spending by at least €72 billion during the 2014-2020 period. [43] Given this lower commitment from the EU and that the measures outlined by Member States are currently too vague on financing, the EU will need to shift its focus to private investment to reach any of the above-mentioned targets.

Conclusion

These “temporary” windfall profits taxes failed to collect enough revenue to cover the total cost of the energy support measures implemented by Member States and instead further distorted the energy markets. These taxes penalize domestic production, reduce investment in green energy, and punitively target certain industries without a sound tax base. In the face of a supply shortage, countries should learn from past mistakes and abandon windfall tax proposals targeting oil and gas companies and repeal the existing ones. Temporary crisis measures cannot become the new normal, and windfall profits taxes in the oil and gas sector, or any other industry, are not principled tax policy.

Rather than pursuing temporary policies, policymakers should implement long-term, pro-growth tax reforms that stimulate economic activity and incentivize production and energy diversification by supporting private investment through full expensing Full expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.. Full expensing allows businesses to deduct the full cost of a capital investment in the year of acquisition, rather than following a multiyear depreciation Depreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco schedule, for investments in new or improved technology, equipment, or buildings. It incentivizes companies to invest more, which, in the long run, raises production, worker productivity, boosts wages, and creates jobs. [44]

Unlike windfall profits taxes, which retroactively penalize firms for responding to high prices, full expensing works prospectively by lowering the after‑tax cost of investment and encouraging supply expansion when it is most needed. Especially in energy markets, this matters: windfall taxes deter long‑term, capital‑intensive investment, while full expensing rewards risk‑taking and capacity building, making it a more effective way to reduce price volatility without distorting incentives.

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References

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[31] Sam Edwards, “Spain’s Left Wants to Push Through Windfall Profit Tax Extension,” Bloomberg Tax, Oct. 25, 2023, https://news.bloombergtax.com/daily-tax-report-international/spains-left-wants-to-push-through-windfall-profit-tax-extension; Spain also has a windfall tax on the banking sector.

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[35] Simon Jack, “Plan to hike windfall tax sparks energy jobs warning,” BBC News, Aug. 22, 2024, https://www.bbc.com/news/articles/cje2ynege5zo.

[36] Greg Heffer, “Rachel Reeves’ oil and gas windfall tax is blocking £17.5bn investment in North Sea, firms warn,” Daily Mail, Apr. 8, 2026, https://www.dailymail.co.uk/news/article-15715117/Rachel-Reeves-oil-gas-windfall-tax-blocking-17-5bn-investment-North-Sea-firms-warn.html.

[37] Sean Bray and Cecilia Perez Weigel, “The EU’s Windfall Profits Tax: How ‘Tax Fairness’ Continues to Get in the Way of Energy Security,” Tax Foundation, Feb. 13, 2023, https://taxfoundation.org/blog/windfall-profits-tax-eu-energy-security/.

[38] Eleanor Thornber, “North Sea Oil Producers Say New Tax Rules Mean Faster Decline,” Bloomberg Tax, Jul. 31, 2024, https://news.bloombergtax.com/daily-tax-report-international/north-sea-oil-producers-say-new-tax-rules-mean-faster-decline.

[39] R. Gordon, “Global Energy Markets and the Role of Taxation,” International Journal of Energy Economics 54 (2018).

[40] Sean Bray, Daniel Bunn, and Joost Haddinga, “The Role of Pro-Growth Tax Policy and Private Investment in the European Union’s Green Transition,” Tax Foundation, May 4, 2023, https://taxfoundation.org/research/all/eu/eu-green-transition-tax-policy/.

[41] European Court of Auditors, “EU climate and energy targets – 2020 targets achieved, but little indication that actions to reach the 2030 targets will be sufficient,” 2023, https://www.eca.europa.eu/ECAPublications/SR-2023-18/SR-2023-18_EN.pdf.

[42] European Court of Auditors, “Sustainable finance: More consistent EU action needed to redirect finance towards sustainable investment,” 2021, https://www.eca.europa.eu/Lists/ECADocuments/SR2122/SRsustainable-finance_EN.pdf.

[43] European Court of Auditors, “EU climate and energy targets – 2020 targets achieved, but little indication that actions to reach the 2030 targets will be sufficient.”

[44] Cristina Enache, “One US Tax Policy OECD Countries Should Copy,” Tax Foundation, Jul. 23, 2025, https://taxfoundation.org/blog/us-bonus-depreciation-oecd-tax-policy/.

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About the Author

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Cristina Enache

Economist Cristina Enache writes on the economics of tax policy and is the author of the Spanish Regional Tax Competitiveness Index. She was formerly the Director of Research at Civismo, an economic research organization based in Spain. She also served as head of research at Institución Futuro, a regional think tank based in Navarra in northern Spain. She is also currently Secretary-General at the World Taxpayers Associations and General Manager of the Spanish Taxpayers Union, which she joined in 2016.

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