On 28 December perennial climate bad boy Exxon delivered Europe with a nasty Christmas surprise. The US company announced that it would sue the European Union in a bid to block the EU’s landmark windfall tax on oil and gas companies.
Exxon challenged the EU’s legal authority to impose the new tax — a power it claims is historically reserved for sovereign countries. The European General Court will now decide on the matter. Its decision could have huge repercussions.
The West’s biggest oil majors pocketed a staggering $200 billion in profits last year off the back of huge volatility in oil and gas prices after Russia’s invasion of Ukraine. That takes their profits to well over 1 trillion dollars since 1993, the year of the Rio Earth Summit, the moment the world formally committed itself to halting global warming. The extreme profitability of the oil industry 30 years on is indicative of our failure to halt climate change.
In Autumn last year, the EU announced its eye-catching €140 billion windfall tax on energy companies’ profits. The move was part of a bigger effort to shield households from extreme energy bills, and to force energy companies to make a contribution.
The majority of the expected revenue comes from a levy on electricity providers – often renewables – but European governments also agreed that oil and gas companies should pay a minimum 33% “solidarity contribution” on their extra profits, which the EU estimated will bring in €25 billion.
€25 billion is a significant sum although it was offset by fuel duty cuts totalling more than that, which have helped to prop up demand for oil. Far more significant is the precedent that EU governments have now given themselves the right to cream off big oil’s profits. If the EU can do it once, it can do it again. It could extend the windfall tax, or decide to force oil companies to absorb part of the carbon taxes they will have to pay from 2027.
If the EU can do it, so can other countries. The Biden administration threatened a windfall tax late 2022 but for now lacks the votes to see it through. That could change in 2024.
Few in Europe seem to grasp the significance of the new oil tax. Exxon did. Its lawsuit against the EU is a blatant attempt to intimidate European citizens as they suffer the biggest energy crisis in half a century. Even by Exxon’s standards this is scandalous.
An Exxon spokesperson said the levy was “counterproductive” and would “undermine investor confidence, discourage investment and increase reliance on imported energy.” This is a classic response by the oil industry, which positions itself as central to the energy transition. In reality the EU has no oil reserves and Exxon is doing close to nothing to develop clean alternatives.
Exxon’s goal is not simply to cancel the 2022 tax. It is to create fear and uncertainty around the instrument and to scare governments into not repeating it. In fact, the EU tax runs for only one year unlike the windfall tax from the UK, say, which runs until 2028.
As usual Exxon is doing the dirty job for the other oil majors. Behind its broad shoulders hide Total, Shell, ENI, BP and Repsol, pretending they’re part of the energy transition but in reality sabotaging it wherever they can. Research done this year shows that oil companies invested just 5% of their 2022 profits on ‘low carbon’ energy.
The oil levy isn’t just about raising revenues although they are most welcome. It will dent the financial firepower of the world’s top polluters, reduce the amount oil majors can spend on dividends and share buybacks and make it less attractive to invest in oil and gas. That’s exactly what needs to happen.
The EU mustn’t be cowed by Exxon. As the war in Ukraine has shown, bullies only respond to strength. The clearest possible sign of strength would be for the EU to develop a permanent framework for climate taxes on oil and gas companies. Going forward, any time oil prices unexpectedly jump and oil majors and traders make bumper profits because of it, part of those profits will be given back to people; or even better invested in solutions that make them independent from oil.
