By Matteo Chiadò Piat (MPA-ESP ’23)

Over the past year, the price of energy in Europe has soared dramatically. In Italy, an average household’s annual electricity bill was €632 in 2021. By the end of 2022, this is expected to reach €1,322, more than twice as much.

Three weeks ago, European Commission President Ursula von der Leyen proposed a revenue cap on energy companies in her State of the European Union address before more than 700 members of the European Parliament. “These companies are making revenues they never accounted for, they never even dreamt of,” she declared. “It is wrong to receive extraordinary record profits benefiting from war and on the back of consumers. In these times, profits must be shared and channeled to those who need it the most.”

The implication is clear: renewable energy producers, the heroes of the net-zero story, will pay higher taxes for as long as energy prices are abnormally high.

While this might sound like a paradox on the environmental front, this initiative has strong social justice implications.

In the energy industry, the price of energy is set by the most expensive producer. Producers that are more efficient — that is, able to make energy at a lower cost — will make a profit.

Driven by Putin’s invasion of Ukraine, the price of gas, which composes 25% of the European energy mix, has skyrocketed. Energy companies that do not rely on gas for their production — such as those using solar, wind, and nuclear technology — are therefore able to sell their energy at unusually high prices, even though their cost of production has hardly changed.

Essentially, because of a war incited by an external and hostile power, this year we are seeing a redistribution of wealth from the savings accounts of European citizens to the pockets of the energy sector’s shareholders.

What President von der Leyen proposed is called a windfall tax, and it aims to balance this inequality. By setting a cap on revenues for energy companies, a proportion of the war-caused profits will be redistributed back to consumers. The proposed cap is at €180 per megawatt-hour, higher than the average price of electricity in the last few years. In other words, only a portion of the surplus profit will be collected, keeping appetite for renewable investment high.

This initiative did not go unchallenged. The libertarian pushback to government intervention in the free-market economy is best exemplified by a Bloomberg opinion article describing the windfall profit taxes as “pure economic populism.” In a cold-hearted analysis of the tax, the author blames ideology as the culprit of the EU’s actions.

A criticism proposed by the article goes like this: The bold and innovative companies that make up the renewable energy industries, against all odds, have invested their capital in riskier and newer technologies. “If they’re able to profit from the unusual market situation, it’s because they invested in the past in equipment, technology and know-how to be ready,” says the Bloomberg opinion columnist, Andreas Kluth.

Let’s consider what the ‘unusual market situation’ is and where the profits are coming from. Additional profits are not created from newfound efficiency by these companies, or a better product being offered, or, for that matter, any market-savvy decision by the corporations’ executives. These additional profits stem from a war, and they are coming strictly from the consumers — from families and small businesses paying their electricity bills to energy companies running their operations.

Accusations of moral prejudice against the energy industry are equally unfounded. In fact, the energy companies targeted by the windfall tax are mostly solar, wind, biomass, and nuclear power companies — the same ones that the EU has incentivized for years, most recently with the European Green Deal. This is not a betrayal of values: it is in line with the EU’s interventions that try to balance any accumulation of wealth in too few hands.

This windfall tax shows that renewable energy companies are now an integrated part of the economy, and not just an untouchable entity because of their emission benefits. Up until now, these companies have benefited from an aura provided by the environmental movements: they are necessary for the radical transformation we need to reach a carbon-neutral society, and nothing but more of it will do. With this tax, they step down from this pedestal and join the rest of the market, with both their good and their evil.

The EU estimates that the windfall tax could collect over €140 billion, which would be redistributed out to struggling energy consumers throughout the winter.

On a recent visit to Columbia, Frans Timmermans, European Commission Executive Vice President for the European Green Deal, summarized it best: “These companies are making these incredible profits, making their shareholders very rich, and [European citizens] can’t pay their energy bills. That is a matter of social justice that needs to be corrected.” In his words, “Not everyone in the traditional market economy orthodoxy — this is something people don’t like — but I think the time has come to also address the collective responsibility in the energy sector.”

Last Friday, EU Energy Ministers agreed to embrace the windfall tax, and it will be left to each country to implement it. 

With winter approaching, the pressure is on to start collecting and alleviating the weight on consumers’ shoulders.

Matteo Chiadò Piat is in the MPA in Environmental Science and Policy program at Columbia University.