Windfall profits from oil and gas could cover climate payments

A central issue at the UN Climate Change Conference, set to start on November 11, will be the negotiations on new payments from industrialized nations to poorer countries. However, the question of whether and how these payments will be financed remains highly controversial. The study by an international team of researchers, with participation by the Technical University of Munich (TUM), has now revealed: The windfall profits alone taken in by oil and gas companies due to the 2022 energy crisis would have been sufficient to cover the existing commitments of the industrialized nations for nearly five years. The researchers therefore recommend collecting taxes on these so-called windfall profits from fossil fuels.

A key point on the agenda of the UN Climate Change Conference (COP 29) will be the negotiations on the funding of the climate targets. The industrialized nations made a commitment to pay 100 billion dollars annually between 2020 and 2025 to poorer countries for climate protection and adaptation to climate change. Now the follow-up agreement, the New Collective Quantified Goal (NCQG), is to be passed. However, the countries have not fully delivered on their previous commitments nor have the negotiations on the NCQG clarified how the additional funds are to be raised.

An international team of researchers has therefore investigated one of the proposals under consideration: a tax on windfall profits of companies that make their money with fossil fuels. A windfall profit tax imposes a levy on profits that exceed what would be expected in normal circumstances due to a special situation, generally a crisis. The energy crisis following the Russian attack on Ukraine at the beginning of 2022 was a special situation of this kind. In that year international energy prices soared.

The research team studied the profits reported for 2022 by 93 of the world’s biggest oil and gas companies and compared them with analysts’ forecasts at the beginning of the year. The total expected profits amounted to around 753 billion dollars. The actual profits earned by the companies totalled around 1.243 trillion dollars. Consequently, the companies took in windfall profits of around 490 billion dollars. “These additional profits from just one year are close to the total amount promised to the poorer countries for a five-year period,” says study leader Florian Egli, Professor of Public Policy for the Green Transition at TUM.

42 percent of windfall profits earned by state companies

To assess whether governments could have redistributed these excess profits, the researchers considered the countries where they are domiciled and whether they are publicly or privately owned. 42 percent of the windfall profits were earned by state-controlled companies, with the largest proportion earned in Norway. “The governments have the ability to take direct action to skim off the profits earned due to a crisis and use them to fight the climate crisis,” says the second study leader Dr. Anna Stünzi of the University of St. Gallen.

Of the private companies that earned windfall profits, 95 percent were headquartered in countries that have made commitments to contribute to climate protection financing. “With a tax on windfall profits from oil and gas, at least some industrialized countries could generate income to meet their commitments to the poorer countries,” says Florian Egli. Among the private companies, companies in the USA accounted for around half of these profits (143 billion dollars). An additional 37 percent of the profits were taken in by companies in the UK; France and Canada. Nearly all of the companies are located in G20 countries.

“Agreement on minimum tax could be a role model”

“More than half of the worldwide greenhouse gas emissions result from the burning of oil and gas. At the same time, the oil and gas industry has been one of the most profitable sectors for a long time,” says Florian Egli. “It would undoubtedly be hard to reach an international agreement to tax these profits. But the agreement on a global minimum tax rate for companies, reached by more than 130 countries in 2023 under the auspices of the OECD and G20, could be a role model.” The taxes could flow into a fund, for example, so that money would also be available in years without windfall profits. So far, the EU had introduced a temporary windfall profits tax on fossil fuels in 2022; in the UK, such a tax will apply until 2030.

The researchers note that the worldwide profits of the industry are larger than those stated in the study. That is because some of the biggest companies, for example in Russia, Iran, South Africa and Venezuela, do not publish their figures and could therefore not be included in the study.

“Taxing superprofits could tamper and phase down investment in oil and gas, building a stable and efficient clean energy market and helping to align financial flows with the goals of the Paris Agreement” says study author Michael Grubb, professor at University College London (UCL). “The reorientation of fossil fuel revenues for consistency with climate goals should be next on the global agenda.”

Further information:
Prof. Florian Egli leads the new Transformation Finance Lab of the TUM Think Tank. The TUM Think Tank brings together actors from the realms of science, civil society, politics and business to jointly develop proposals and instruments to address urgent problems.