OECD Backs Windfall Taxes On Energy Cos. Amid Ukraine War

Governments should consider taxing energy companies' windfall gains and sending cash to low-income households as the war in Ukraine disrupts the energy market and adds to spiraling inflation, the Organization for Economic Cooperation and Development said Thursday.

Policies to combat energy price spikes enacted prior to Russia's Feb. 24 invasion, such as one-off taxes on energy companies benefiting from consumers' soaring bills, should be strengthened, the OECD suggested in a report on the war's economic and social impact. Cuts to value-added taxes on energy consumption and excise taxes on fossil fuels were examples of nontargeted price support measures, the most common type of policy response to higher energy prices, among 28 member countries studied.

"Lower tax rates and price caps directly reduce the cost of energy, but benefit higher-income households as well as those most in need of help due to fuel poverty," the OECD said. "Cash transfers can be better targeted, and have higher multiplier effects if focused on low- and middle-income households, but may take greater time to put in place and do not affect market prices."

The 38-member club of mostly rich nations said tax measures enacted in response to rising energy prices have also included lowering electricity tariffs for low-income households and imposing energy price freezes. The U.S. and Canada created the OECD's predecessor in 1948 to facilitate the Marshall Plan to rebuild Europe after World War II.

"Just as the world economy appeared to be emerging from two years of the COVID-19 crisis, a brutal and devastating war has broken out in Europe," said Laurence Boone, the OECD's chief economist and deputy secretary-general, in a news release accompanying the report. "We do not yet know how this will fully play out, but we do know this will hurt the global recovery and push inflation up even higher."

Three million refugees have fled Ukraine into neighboring countries, the OECD said.

"In Europe, this is far higher than in [the] wake of the recent Syrian refugee crisis," the organization said in the news release. Since the ongoing Syrian civil war began in 2011, more than 6.6 million Syrians have been forced to flee their country, according to a March 2021 report published by the United Nations High Commissioner for Refugees. Turkey has taken in 3.6 million refugees, and the European Union has accepted around 1 million, mostly in Germany and Sweden, the report said.

So far, most refugees from the war in Ukraine have gone to Hungary, Moldova, Poland, Romania and Slovakia, the OECD said, adding that more people are expected to be on the move in the coming weeks.

"Immediate spending priorities for governments include the costs of supporting refugees in Europe while temporary, timely and well-targeted fiscal measures are needed to cushion the immediate impact of the crisis on consumers and businesses," the organization said.

Well-designed and carefully targeted fiscal support could reduce the negative impact on growth with only a minor extra impetus to inflation, according to the OECD's report, which added that in some countries, this could be funded by taxation of windfall gains.

Uganda's government passed a windfall tax in December that would apply to oil companies' income whenever the price per barrel rises above $75. On Wednesday, the Dutch government said it would slash the VAT rate on energy while cutting excise taxes on gasoline and diesel. Weeks before Russia's invasion, Belgium's government announced a sharp VAT rate cut on energy.

Germany's government said it was exploring tax relief options to deal with rising energy prices just days after war broke out in Ukraine. The EU's executive branch on Feb. 18 said it was considering a proposal for member states to capture windfall profits generated by high energy prices through taxation. Elsewhere in the region, the U.K.'s Labour Party had floated a windfall tax on oil companies' profits in January.

On March 10, U.S. Sen. Sheldon Whitehouse, D-R.I., and Rep. Ro Khanna, D-Calif., announced a bicameral bill called the Big Oil Windfall Profits Tax to "curb profiteering by oil companies and provide Americans relief at the gas pump." A day earlier, Democratic California Gov. Gavin Newsom said he wanted to help consumers pay for gas with state tax rebates.

Mathias Cormann, secretary-general of the OECD, noted that the EU relies heavily on Russia for its energy supply.

"Twenty-seven percent of EU crude oil imports, 41% of its natural gas imports and 47% of solid fuel imports come from Russia," he said. "It will take a few years to fully offset this dependency and build energy security in Europe, but action should start now."

The OECD did not respond to a request for comment.

--Editing by Neil Cohen.

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