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European governments and the European Commission started to look for stabilising mechanisms to relieve industry, businesses and citizens from high energy bills and to reduce social tensions resulting from increasing costs of living. Among the solutions was a windfall tax, a special levy introduced in history by different states in times of crisis.
This brief is co-sponsored by Visegrad Insight – Res Publica Foundation and the European Climate Foundation. It is part of the larger project on climate and democratic security in Central and Eastern Europe, which you can read more about here.
Key findings show that the windfall tax application is in different phases in the V4 countries:
- There are disparate formats of new taxation, often exceeding the criteria of windfall tax
- The goal of the windfall tax is to regulate the increasing energy prices, not to improve the state budget or penalise any business
- The Ryanair vs. Hungary case shows problems with the tax application
- Some companies might promote windfall tax to fight competition
- Additional tax can demotivate companies from investing
- CEE governments are not using the opportunity to decarbonise
Summary of Windfall Tax Policy Brief
This policy paper tackles the windfall tax proposal suggested by the European Commission and various governments across Europe to stabilise the rising energy prices. In detail, it compares the taxing projects in Visegrad Group countries, ie. Czechia, Hungary, Poland and Slovakia and assess their use, viability and impact on the energy market.
The discussion around the windfall tax, however, did not prompt additional debate on energy transition, materialise in a decrease of energy costs or mitigate any countries’ dependency on depletable resources.
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Recommendations:
- The governments should separate windfall tax from other forms of taxation in order to be able to compare the impact and also prevent legal/constitutional challenges.
- In 2023, the profits from 2022 should be considered as the basis of the windfall tax – following European Commission recommendations
- Tax cannot be retroactive and should be temporary
- Windfall tax income should be marked in the budget to track its spending and make it work for energy pricing stability purposes and energy transition, not other expenses
- Windfall taxes shouldn’t deter businesses from investing, some investment incentives should be considered
Background Context
The post-pandemic economic recovery – further exacerbated by the Kremlin’s market manipulations, decreased energy production resulting from German nuclear phase-out and French nuclear plant failures and finally by the Russian war with Ukraine – increased demand for energy use in Europe and resulted in a surge of energy prices. The spike applied to all primary energy resources (coal, oil and natural gas), as well as to final products, like electricity and gasoline.
The energy sector took advantage of the situation and sold its products on the spot to the highest bidder and profited from high margins. The situation became especially beneficial to the energy producers importing cheaper primary resources (natural gas, crude oil and hard coal) from Russia and then reselling the refined products or electricity.
According to European Central Bank representatives, energy price increases were the dominant cause of overall inflation, it generated a pronounced rise in inflation in the course of 2021 and at the beginning of 2022. In the eurozone, between April and December 2021, energy contributed, on average, more than 50 per cent to the Harmonised Index of Consumer Prices inflation.
The inflation rate in Hungary in October 2022 was 21.1 per cent, in Czechia 15.1 per cent, in Poland 17.9 per cent and in Slovakia 14.9 per cent. At the same time, core inflation in Hungary was 22.3 per cent, in Czechia 14.64 per cent, in Poland 11 per cent and in Slovakia 15.4 per cent.
Windfall tax as a solution to soaring energy prices
European governments and the European Commission started to look for stabilising mechanisms to relieve industry, businesses and citizens from high energy bills and to reduce social tensions resulting from increasing costs of living. Among the solutions was a windfall tax, a special levy introduced in history by different states in times of crisis.
By definition, the windfall tax is a surcharge imposed by governments on businesses or economic sectors that massively increase their profits mainly due to geopolitical perturbation when the demand for products was high and the supply was low. The primary objective of the tax is to regulate unstable price levels and serve as an incentive to lower the prices for the benefit of the consumers.
The European Commission proposed an emergency package, including electricity consumption reduction and a windfall tax proposal, later addressed by European Council regulation. According to the EC plan, a revenue cap of EUR 180 per megawatt hour should be set on electricity produced from solar, wind, geothermal, hydropower, biomass, waste and nuclear. Any excess profits above will have to be given to national governments, who will then redistribute them to final consumers (i.e., if a company has revenue of EUR 220 per megawatt hour, the government will collect EUR 40 and direct it to reduce the energy bills).
Also, EU nations will be able to collect a temporary “solidarity contribution” from fossil fuel (oil, natural gas, coal) companies earning over 20 per cent more than their average over the last three years. This would amount to 33 per cent of the excess profits they made in 2022. The European Commission expects it will raise EUR 140 billion.
Slovakia is the only Visegrad Group country belonging to the eurozone; therefore, its macroeconomic response to the rising inflation was limited to European Central Bank actions. Central banks of Hungary, Poland and Czechia raised the interest rates and prepared shielding measures, such as mortgage rate freeze and gasoline price cap for the citizens in Hungary or VAT reduction on basic food products and electricity, as well as household coal subsidies in Poland.
The first capital in the V4 to propose additional taxing on post-pandemic windfall profits was Bratislava. On 18 May 2022, the cabinet agreed on a windfall tax on Russian oil. However, due to political instability, the proposal was stalled until October.
Therefore the first country to fully introduce the windfall tax in Central Eastern Europe was Hungary, which started to levy the duty in June 2022.
Poland considered a windfall tax idea; the government planned to put an additional 50 per cent levy on all companies employing over 250 people, but in mid-October, decided to set a cap on energy prices instead.
Czechia is finalising the regulations regarding the 60 per cent windfall tax.
Goals and Challenges
The experts consulted for this paper agree the primary objective of the windfall tax applied to energy companies should be to regulate unstable price levels and serve as an incentive to lower the electricity bills for households and businesses. In their opinion, the tax should support energy transition programmes, prosumerism and investments in solar and wind energy production.
They are concerned the income from the tax could disappear from the state budgets and could be used for any purpose, not only for stabilising the energy prices nor technology or energy investments which would lower energy costs in future.
The critics point out that the tax could be counterproductive; the energy companies in Europe in recent years made a lot of low-emission technology investments and carbon-neutral goal policy adjustments; therefore, it would be unfair to put additional levy when they finally make a profit, especially if that profit could later be reinvested and serve as additional leverage for further development. In the future, that might stop the business from investing its money and make it look for more profitable markets and sectors.
Conclusions
The discussion around the windfall tax in the countries of the region did not prompt additional debate on energy transition, enable a further decrease the energy costs or mitigate dependency on depletable resources, especially on the fossil fuels imported from undemocratic regimes.
Taxing the windfall profits might provide funds for social programs aimed at easing energy costs for vulnerable groups or for the development of new sources of energy to lower its prices in future. Implementation is, however, not a trivial issue and is approached from different angles in the region and, as proved by Hungary, can serve any budgetary need.
The new renewable energy resources are available at low entry cost and can be constructed as well as be productive relatively fast, they are also eligible for European funding. All the V4 countries are instead investing in expensive nuclear technologies, which will bring additional powers within several years from now at the earliest (with the exception of Slovakia, which has just booted a new atomic reactor in the Mochovce nuclear facility).
Slovakia, Czechia and Hungary already have operational nuclear power plants, and Poland is planning to build at least two. However, currently, Poland’s energy mix is mainly based on hard coal and lignite power plants and is subject to additional price fluctuations due to the CO2 emissions allowances costs.
Other already implemented solutions involve the development of gas infrastructure (Baltic Pipeline between Norway, Denmark and Poland, Stork II pipeline between Czechia and Poland, transboundary interconnectors), which in future, instead of strengthening Visegrad Group’s energy independence, could lock it for years in fossil fuel use.
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Visegrad Insight is the leading analytical community in Central Europe, operating its own research, policy recommendations, conferences, events online and more. We partner up with leading businesses, think tanks and public administration organisations to deliver the best intelligence in the field of democratic security.
Authors: Michal Zablocki – Climate & Democracy Editor and Albin Sybera – Foresight Editor.
This project is realised together with the European Climate Foundation to address the changes in areas of energy security, environmental policy and social policy, which are the crucial pillars of climate and democratic security in the Visegrad Group countries.
