EU agrees to tax windfall oil and gas profits amid ‘insane race’ to tame energy crisis

By Anna Cooban, CNN Business

London CNN Business  —  EU governments agreed Friday to tax the windfall profits of oil and gas companies and to cap the revenues of some electricity generators as the cost of Europe’s energy crisis spirals higher.

But energy ministers from the 27 EU member states failed to reach an agreement on a proposal by the European Commission to impose a price cap on imports of Russian natural gas. The energy crisis has largely been sparked by Russia’s invasion of Ukraine

“We don’t yet have a consensus on this step,” Kadri Simson, the European Commission’s top energy official, said in a Friday press conference.

United Nations’ Secretary General António Guterres last week accused oil and gas giants of “feasting on hundreds of billions of dollars in subsidies and windfall profits while household budgets shrink and our planet burns.” He urged rich economies to impose windfall taxes to fund help for people struggling with energy bills and countries hit by the climate crisis.

Claude Turmes, Luxembourg’s energy minister, said Europe needed to find alternatives to the “insane race” between countries trying to outspend each other to protect consumers and businesses from painful increases in their bills.

He was speaking less than 24 hours after the German government said it would borrow €200 billion ($195 billion) to help bring down energy costs, including a cap on natural gas prices for households and companies.

“It sends the wrong signal because it looks like Germany is flexing its fiscal muscle to subsidize gas consumption in Germany at the expense of gas consumers elsewhere in Europe,” Jeromin Zettelmeyer, director at Bruegel, a Brussels-based think tank, told CNN Business.

$700 billion and rising

Germany’s borrowing adds to the €530 billion ($518 billion) European governments and the United Kingdom have so far committed to shield consumers against unaffordable rises to their bills, according to Bruegel.

That €730 billion ($712 billion) total covers spending commitments made since September 2021 — when global energy prices started to rise — and includes some measures taken to help with other cost-of-living pressures.

The United Kingdom is also planning a borrowing spree to contain the energy crisis. Last week, finance minister Kwasi Kwarteng said a plan to freeze energy bills for households and businesses would cost £60 billion ($66 billion) for the first six months alone.

But the total cost of the price cap — which will last for two years for households — could come to around £150 billion ($166 billion) according to some experts, a figure that was included in Bruegel’s analysis.

The price tag will be funded entirely through additional government debt, a spokesperson for the UK’s finance department told CNN Business on Friday.

The measures agreed by EU energy ministers on Friday include a mandatory electricity demand cut, a cap on the revenues of some electricity producers which don’t use natural gas, and a tax on the windfall profits of fossil fuel companies, which the Commission hopes will raise $140 billion.

Retail energy prices are expected to increase by 40.8% in September, up from 38.6% in August, across the 19 countries that use the euro, the EU statistics office said on Friday.

The wholesale cost of gas — which feeds directly into the retail price for heating and power paid by consumers — started to rise last fall as economies opened from their pandemic lockdowns, causing a spike in demand.

But Russia’s invasion of Ukraine in late February, and the resultant energy standoff between Moscow and the European Union, has pushed up the European benchmark price of natural gas by 327% from a year ago.

Recession ahead

Soaring energy prices are pushing up costs across the economy and weighing on growth.

Eurozone inflation hit a record high in September, driven by the price of energy.

Consumer prices across the 19 countries that use the euro rose by 10% from the same month last year — the highest rate of inflation in the 25 years since the currency was introduced.

The European Central Bank raised interest rates by a record 0.75 basis points earlier this month in a bid to tame spiraling prices, and could do so again in October at its next meeting.

The Organization for Economic Cooperation and Development forecasts that food and energy price shocks will reduce economic growth in Europe by more than 1.25 percentage points next year.

“This would push many countries into a full year recession in 2023, while GDP growth would also be weakened in 2024,” the OECD said in a report earlier this week.

— Eve Brennan, Xiaofei Xu and Livvy Doherty contributed reporting.

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