Oil profits could save the planet if governments tax them now

In November, the United Nations Climate Change Conference is set to commence. The spotlight will shine brightly on one contentious issue: the negotiation of new payments from industrialized nations to their less affluent counterparts – especially using profits from oil and gas companies.

The debate on the financing of these payments is, to put it mildly, a heated one. But now, a revelation from a study led by the Technical University of Munich (TUM) could change everything.

It turns out, the windfall profits raked in by oil and gas companies during the energy crisis of 2022 were enough to fulfill the existing commitments of industrialized nations for almost five years. The researchers’ solution? A tax on these so-called windfall profits.

Oil profits bridge the funding gap

The funding for climate targets is a key item on the agenda at the forthcoming UN Climate Change Conference (COP 29).

Industrialized nations had pledged annually $100 billion from 2020 to 2025 to assist less developed countries in climate protection initiatives and adaptation to climate change. However, the promised funds have not fully been delivered.

This leads us to the New Collective Quantified Goal (NCQG), a follow-up agreement set to be passed. The NCQG commits to additional funding, yet there is no clarity on sourcing these funds. So, what do we do?

Windfall profit tax

One proposed solution under consideration is a tax on windfall profits of companies dealing in fossil fuels.

A windfall profit tax imposes a levy on profits that exceed normal expectations during a crisis. Think of it as a situation where the companies hit the jackpot owing to the crisis.

Taking the energy crisis following Russia’s attack on Ukraine in 2022 as an example, international energy prices rocketed sky-high.

Using oil and gas profits

The research team meticulously scrutinized the profits reported by 93 of the world’s largest oil and gas companies for 2022, and compared them with the analysts’ predictions at the beginning of the year.

The figures are staggering. The projected profits were about $753 billion. However, the actual profits earned exceeded this by a whopping $490 billion, totaling around $1.243 trillion.

“These additional profits from just one year are close to the total amount promised to the poorer countries for a five-year period,” noted study leader Florian Egli, professor of Public Policy for the Green Transition at TUM.

Is it plausible?

To consider the feasibility of redistributing these excess profits, the research team acknowledged the domicile countries of these companies and whether they were state-owned or private entities.

A remarkable 42% of these windfall profits were reported by state-run companies, with the lion’s share originating from 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,” said Dr. Anna Stünzi of the University of St. Gallen.

On the other hand, the private enterprises that garnered windfall profits, which is a whopping 95%, were headquartered in nations that pledged towards climate protection funding.

“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,” said Professor Egli.

It is important to note that companies in the United States, the UK, France, and Canada collectively accounted for about half of these profits. Almost all of these companies are based in G20 countries.

Can oil profits fund climate solutions?

Global greenhouse gas emissions are predominantly linked to burning oil and gas. Meanwhile, the oil and gas industry continues to rake in substantial profits.

“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,” said Professor 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.” 

Oil profits drive clean energy

The worldwide profits of oil and gas the industry are larger than those acknowledged in this study.

Some of the industry giants – such as those in Russia, Iran, South Africa and Venezuela – do not disclose their figures and therefore, were not encompassed 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,” noted 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.”

The study is published in the journal Climate Policy.

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