Galp refinery in Matosinhos
Five countries want the EU to implement a so-called windfall profits tax to target energy companies benefiting from the price crisis. It’s possible, but it’s complex.
The dramatic rise in energy prices following the war with Iran has led to calls for the European Union to introduce a tax on extraordinary profits for oil and gas companies to use part of their profits to help governments finance aid programs.
Earlier this month, the Finance and Economy Ministers of Austria, Germany, Italy, Portugal and Spain wrote a joint letter to the European Commissioner for Climate, Net Zero and Clean Growth, Wopke Hoekstra, requesting such a tax.
They wrote that this would “send a clear message that those who profit from the consequences of war must do their part to ease the burden about the general public.”
Oil companies made huge profits as a result of rising prices caused by the war in Iran and the closure of the Strait of Hormuz.
An analysis by British newspaper The Guardian, using data from Rystad Energy, revealed that major oil and gas companies will profit another 234 billion dollars (200 billion euros) by the end of the year, if the price of oil remains around 100 dollars.
The analysis showed that companies such as Saudi Aramco, Gazprom and ExxonMobil are among the biggest beneficiaries. The Financial Times reported that French energy company TotalEnergies profited more than a billion dollars after having made a speculative purchase of around 70 shipments of crude oil produced in the United Arab Emirates and Oman, available for shipment in May.
This week, BP announced an “exceptional” performance in the first three months of 2026, with profits more than doubling compared to the same period last year, reaching US$3.2 billion.
“Weak legal basis”
Governments supporting the tax argue that it will provide relief to consumers “without imposing additional burdens on public budgets”.
His letter highlighted 2022 as a precedent, when Brussels imposed a temporary “solidarity contribution” on energy companies, applying a minimum tax of 33% on all oil and gas company profits that exceeded the previous four-year average by more than 20%.
The EU announced a list of measures on April 22 aimed at mitigating the impact on consumers, but stopped short of announcing a tax on extraordinary profits.
However, critics claim that such a tax is based on weak legal foundations. In 2022, the EU used Article 122 of the EU Treaty — an emergency procedure that bypasses the European Parliament — to allow the European Commission to propose the law and the European Council to adopt it by qualified majority rather than unanimity.
There is another important problem, according to Cristina Enache, an economist at the Tax Foundation Europe, a think tank specializing in tax policy. She stated that when implemented at the national level, the taxes can be retroactive.
Enache noted that many of the 2022 taxes were retroactive, which, in his opinion, “contravenes a fundamental legal principle in most EU countries: non-tax retroactivity“.
Enache also highlighted the unequal treatment of similar companies, unclear tax bases and the lack of proportionality as reasons why windfall profits taxes are likely to face legal challenges.
“In short, these taxes may be viable, but they are at the limit of constitutionality and are legally controversial“, she told DW.
However, advocates argue that the 2022 example clearly establishes a precedent and a legal basis for taxes. Antony Froggatt, senior director at Transport & Environment, an NGO that advocates sustainable transport, said it is vital that the EU takes leadership on the issue at a central level, rather than leaving it to member states, targeting multinational companies operating across borders.
“Instead of governments passing the burden onto taxpayers, It’s time for oil companies to pay“, he said. “It is not unprecedented, there is a mechanism and there is already experience in its implementation”, Froggatt told DW. “Five Member States have already requested it and I hope that others will do so”.
Legal challenges
A ExxonMobil sued the EU in 2022 in a bid to block the windfall profits tax, while Jersey-based refining company Klesch has also taken legal action against the levy.
Froggatt acknowledges the challenges of drafting adequate legislation, but says the 2022 tax has largely been successful and that it is important that the principle behind windfall profits taxes is widely recognized.
“Fossil fuel prices are rising and, as a result, companies are making excessive profits“, he said. “Consumers are suffering because they cannot afford the same level of energy service as they have in the past. It is not the only mechanism, but it seems to be a good mechanism to recover some of the excess profits.”
Enache stated that ongoing lawsuits against windfall profits taxes reflect their complexity and fundamental unfeasibility. “There is no precise way to define a ‘windfall’ in a volatile sector without overtaxing normal profits”, he argued.
She also highlighted that tax rates based on a company’s past performance are “inherently gross“, given the volatility of energy markets. “Years of high profits often compensate for years of large losses.”
Does it work?
For businesses and ordinary consumers facing continually rising energy costs, there is little argument against a tax on windfall profits for companies that thrive on rising prices.
However, there are doubts about the precise terms of implementation and the effectiveness of such a tax.
The EU windfall profits tax in 2022 raised more than €26 billion in additional tax revenue. Enache emphasized that this was a “relatively small contributiongiven the scale of the crisis” and noted that it was not worth the risks.
“They may generate some revenue in the short term, but at the cost of greater uncertainty, lower investment and higher prices in the future,” she said.
Both Enache and Antony Froggatt agree that the current crisis shows how the EU needs develop more robust energy securitybut differ on how to do it.
“Instead of adopting temporary policies, legislators should implement long-term tax reforms that boost growth, stimulate economic activity and encourage the diversification of production and energy, supporting private investment”, said Enache.
Froggatt highlighted that any tax on windfall profits must be based on a principle that aims to accelerate the transition from fossil fuels to more sustainable alternativeseven though the current crisis may lead some governments to believe in the need to develop their own sources of fossil fuels.
“This is the ‘tricky middle’ of the energy transition,” he said. “We need to overcome this so-called complicated process to create greater energy stability. And we need to move much further and faster to reduce dependence on fossil fuels if we want to have more stability.”
