New Climate Taxes May be Closer Than You Think

Democratic Lawmakers Demand New Tax on Oil & Gas Profits

Last week, a group of Democratic lawmakers known for their advocacy of climate policy gathered outside the U.S. Capitol building to call for a new tax on the immense profits earned by oil and gas companies since Russia invaded Ukraine last year. The lawmakers argued that the U.S. should tax the profits earned by companies like ExxonMobil, Shell, and Chevron and redistribute a portion of the money back to consumers. These companies alone made more than $130 billion in profits in 2022 due to high prices, and the lawmakers believe that these profits were made by exploiting consumers. Senator Sheldon Whitehouse, a Democratic senator from Rhode Island with a history of fighting for action against climate change, said, “We know truthfully how much money they made by gouging consumers. We’re working to try to take that back.”

Taxation has always played a crucial role in climate policy. For many years, climate advocates pushed for a carbon tax to penalize emissions, but when this failed to gain support, they instead advocated for tax incentives to promote clean energy. These two tax policies have dominated the debate over taxation and climate change. Now, a new set of policies has entered the field, including windfall profit taxes being pushed by politicians in Washington and levies on high-emitting industries such as aviation and shipping being called for by leaders in Europe. Even ordinary taxes like the personal income tax and corporate income tax are now being linked to climate change in policy discussions in new and surprising ways.

While the idea of a windfall tax is unlikely to gain support in the current U.S. Congress with Republicans controlling the House of Representatives, it is making progress in some conservative-led countries. This means that it could eventually become one of the tax tools used to finance the transition to green energy in the U.S. and other countries as they compete for the technologies of the future. Economist Lucas Chancel from the World Inequality Lab of the Paris School of Economics, who studies environmental policy and inequality, says, “Contrary to what people might think, taxes have good days ahead. They are necessary tools and solutions to the climate crisis.”

The links between climate policy and taxation begin with the carbon tax. Carbon taxes, long considered the preferred tool by economists for fighting climate change, require polluters to pay for the carbon they emit, incentivizing companies to decarbonize and raising money that can be used for clean energy projects and helping workers transition to a new economy. Despite years of effort and some positive early examples, the carbon tax failed to gain widespread acceptance. On the other hand, positive incentives for renewable energy were easier to implement, and the U.S. has passed renewable tax credits on and off since the 1990s. The Biden administration’s landmark climate law, the Inflation Reduction Act (IRA), contains more than $200 billion in tax credits for everything from nuclear energy to electric vehicles.

An analysis from Princeton University’s REPEAT Project shows that by 2025, annual additions of wind capacity could more than double and additions of solar capacity could quintuple thanks to the IRA. However, the IRA does not address the core goals of the carbon tax, such as penalizing emissions and raising revenue from companies that harm the climate. As the prospects of a global carbon tax have diminished, other levies have entered policy discussions. Democrats in the U.S. have called for a windfall profits tax on the oil and gas industry, stating that these companies are using high energy prices to enrich shareholders. Current proposals focus on redistributing the profits to taxpayers, but other versions could exempt profits reinvested in clean energy, incentivizing a shift in behavior.

Across the Atlantic, the ideas for windfall taxes have taken off at the same time, the new conversation about windfall taxes and other climate-related taxes is not just limited to the United States and Europe. Across the globe, governments are exploring different ways to raise revenue to fund their energy transition efforts, and many are looking at new tax tools to help them achieve their goals.

In Australia, for example, the government is exploring the possibility of a carbon tax, even though its past attempt at introducing one was met with opposition and ultimately failed. Meanwhile, in Canada, a recent proposal has been made to impose a carbon border adjustment, which would charge importers for the carbon emissions associated with the goods they bring into the country.

The debate over taxation and climate policy is complex, and there is no easy answer. However, one thing is clear – taxes will play an increasingly important role in the fight against climate change. As the world looks for new ways to raise revenue for the green energy transition, it is likely that we will see more and more countries exploring innovative tax policies that can help them achieve their goals.

“Contrary to what people might think, taxes have good days ahead,” says Lucas Chancel, an economist at the World Inequality Lab of the Paris School of Economics who studies environmental policy and inequality. “They are necessary tools and solutions to the climate crisis.”

Whether it is through a carbon tax, a windfall tax, or a new tax tool yet to be created, the role of taxation in addressing the climate crisis will only become more critical as time goes on. Governments, policymakers, and businesses alike must be proactive in exploring new ways to raise revenue to fund the transition to a cleaner and greener energy future. Only then will we be able to successfully tackle the challenges that lie ahead and ensure a sustainable future for generations to come.