A focal topic on the schedule of the UN Climate Change Conference (COP 29) involves deliberations over the financing mechanisms for climate objectives. Industrial nations had pledged to contribute $100 billion annually from 2020 to 2025 to assist less affluent countries in climate mitigation and adaptation efforts. As this period draws to a close, discussions are underway to enact the New Collective Quantified Goal (NCQG). Yet, the commitments made previously have not been fully honoured, nor have the talks about the NCQG resolved the issue of sourcing the additional funds required.

In this context, an international research team explored one potential funding solution: imposing a tax on the windfall profits of fossil fuel enterprises. This tax type targets earnings that exceed normal expectations under extraordinary circumstances, such as a crisis. The energy crisis after Russia’s invasion of Ukraine in early 2022 represents an unusual situation, which led to a dramatic spike in global energy prices.

The team’s research examined the 2022 profit reports from 93 of the world’s largest oil and gas corporations, comparing them against the forecasts made at the start of the year. Initially, profits were projected to be around $753 billion, but the actual figures reported by these companies amounted to approximately $1.243 trillion, indicating windfall profits in the vicinity of $490 billion. “These additional profits from just one year nearly match the total promised to poorer nations over five years,” stated Florian Egli, the study’s lead and Professor of Public Policy for the Green Transition at the Technical University of Munich (TUM).

Notably, 42 per cent of these windfall profits were generated by state-owned enterprises, particularly those based in Norway. “Governments have the means to directly harness these crisis-generated earnings to combat the climate crisis,” commented Dr Anna Stünzi from the University of St. Gallen, co-leader of the study.

The findings also revealed that 95 per cent of private firms accruing such profits are headquartered in nations committed to climate finance. Egli pointed out, “Through a tax on these windfall profits, several industrialized nations could feasibly raise funds to fulfil their financial obligations to developing countries.” Specifically, companies in the USA represented about half of these profits, while an additional 37 per cent were by companies in the UK, France, and Canada, with nearly all these firms situated in G20 countries.

Egli also proposed that the recent global agreement on a minimum corporate tax rate, endorsed by over 130 countries in 2023 through the efforts of the OECD and G20, could serve as a blueprint. “Such an agreement on taxing windfall profits could also pool funds for climate action, ensuring resources are available even in years without extraordinary profits,” he added. The European Union has already implemented a temporary tax on windfall profits from fossil fuels in 2022, and the UK plans to continue this tax until 2030.

However, the study underlines that the profits disclosed are only a fraction of the actual global earnings, as significant oil and gas companies in countries like Russia, Iran, South Africa, and Venezuela do not disclose their financials and are, therefore, excluded from the study.

“Implementing a tax on these superprofits could temper and eventually reduce investments in fossil fuels, paving the way for a robust and efficient market for clean energy and aligning financial flows with the objectives of the Paris Agreement,” noted Michael Grubb, a professor at University College London (UCL). “Reorienting fossil fuel revenues to support climate goals should be a priority on the global agenda.”

More information: Florian Egli et al, Harnessing oil and gas superprofits for climate action, Climate Policy. DOI: 10.1080/14693062.2024.2424516

Journal information: Climate Policy Provided by Technical University of Munich (TUM)