14 September 2022 EU considers electricity revenue cap and windfall tax as part of emergency package
On 9 September 2022, EU Energy Ministers met in an extraordinary Council meeting to exchange views on possible emergency measures to mitigate high energy prices and the risk of supply shortages in Europe. Their discussions included two possible tax-related measures, targeting companies in the energy sector that the EU considers have benefited disproportionately from the current high energy prices. These measures are:
During the meeting, Member States agreed on a common direction for temporary emergency measures and requested the Commission to come forward with legislative proposals by mid-September. The Council Presidency expressed its determination to handle the forthcoming Commission proposals in an expedited manner. Another extraordinary Council meeting is scheduled for 30 September 2022. On 9 September 2022, an Extraordinary Transport, Telecommunications and Energy Council (Energy) meeting was held in Brussels to address the energy situation in the EU. The background is that the wholesale price of electricity within the EU has reached sustained and unprecedentedly high levels, causing significant increases in consumer energy bills. This situation has arisen partly because reduced Russian gas supply to Europe has caused regional gas prices to reach extreme highs; since gas is generally the marginal fuel for electricity production, gas and electricity prices are closely linked. And it has arisen partly because Europe has experienced other electricity supply shocks during the summer: an extreme drought has reduced hydropower production and impeded the passage of coal barges along waterways to power stations; and there has been a reduction in nuclear generation in Germany and France, due to closures and maintenance of nuclear plants. The 27 EU Ministers expressed their preferences on different policy options which could be implemented across the EU in a short timeframe to alleviate the burden of high energy prices on households and industrial consumers. The Ministers agreed that immediate action must be taken to implement short-term exceptional emergency measures, noting that such emergency interventions should be temporary, preserve the fundamentals of the internal energy market and cross-border trade, and be consistent with current efforts to reduce gas demand. The meeting considered a note from the EU Presidency, as well as informal documents prepared by the Commission and circulated to Ministers to set out possibilities for discussion (so-called "non-papers"). These documents state that the unprecedented high wholesale gas and energy prices have disproportionately benefited two groups of companies: the "inframarginal" electricity producers (i.e., renewables, nuclear, etc.) whose production costs are unrelated to high gas prices, but who may have been able to benefit from high electricity prices; and fossil fuel producers. The meeting considered two potential tax-related measures: For inframarginal electricity producers, a possible EU-wide measure would temporarily apply to limit the revenues that electricity generators could earn from producing electricity from sources that are less expensive than current price-setting technologies. One possible mechanism would be for generators to be treated as if they had entered a long-term contract for difference on sales of their electricity (i.e., to be treated as if they received a fixed price per unit of energy, rather than a floating market price or any other price). Any difference or excess revenue above the revenue cap would be paid to the government, while leaving wholesale energy prices unchanged. Affecting, for example, solar, wind and nuclear energy, the difference between the price that these generators actually charge their customers and the cap would generate extra financial revenues for Member States, with the idea that these revenues should be used to support households and businesses in need. A temporary "solidarity contribution" which would be levied over the profits of companies in the oil, gas, and coal sectors Essentially, this contribution would be an additional sector-based tax on corporate profits that could be linked to the existing corporate tax framework. It is expected that the contribution would be collected at a national level and would be calculated with reference to the profits before tax as calculated for national purposes already in each Member State. The rationale for linking this contribution to existing measures of profit before tax is that the design could thereby be simple. Again the idea is that Member State revenues from this contribution would be used to finance reduced energy bills for vulnerable households and (energy-intensive) businesses, and support a faster move to green energy. To that end, it was discussed whether a share of the revenue could be allocated towards Member States' national plans to implement the "RePowerEU" initiative: this is the EU's plan, announced in May 2022, to reduce reliance on Russian gas and accelerate the transition to renewable energy sources. As a conclusion from the meeting, the Ministers for Energy invited the Commission to propose concrete measures by mid-September, including proposals to implement the revenue cap for inframarginal producers and to introduce a solidarity contribution from fossil fuel companies. The Council Presidency expressed its determination to handle the forthcoming Commission proposals in an expedited manner. Another extraordinary Council meeting is scheduled on 30 September 2022. The measures are expected to be proposed under the provisions of Article 122 of the Treaty on the Functioning of the European Union (emergency and solidarity) through which the unanimity requirement that normally applies to the adoption of direct tax legislation in the EU will not be required. Given the urgency that the Ministers and the Commission gave to the matter during the meeting on 9 September, it seems likely that some form of revenue cap and solidarity contribution will be approved in September. Also, it is worth noting that many existing tax policies have been introduced as temporary measures, but end up becoming permanent or at any rate have a longer impact than expected. Businesses potentially in scope should therefore start assessing the potential tax implications of the EU's energy package in light of their current operating structure. While likely limited to the energy sector for now, the possible introduction of windfall taxes and other emergency levies in the EU could spark a trend that spreads to other industries. It is thus important for businesses in other sectors to monitor these developments.
Document ID: 2022-1372 | |
