Yes, Windfall Taxes on Big Oil Are Warranted--But That's Not All

Windfall taxes are utterly defensible as levies on unexpected pure rents that recipients did nothing to deserve and that they receive only by virtue of enjoying a position of market power within an economy. The usual criticisms of taxation as market-distorting, price-signal-jamming, investment-deterring state intervention do not hold. No one can argue convincingly against a windfall tax being imposed on an electricity-generating company that uses solar, wind, or hydro power, but suddenly is flooded with cash because the price of natural gas has skyrocketed.

But while windfall taxes are undoubtedly justified, their efficacy is suspect. We know that electricity companies belong to multinational corporations skilled in the dark arts of obscuring their profits through complex intra-organizational (fake) trades. We also know that, unwilling to be content with profits from electricity, they indulge themselves in derivative trades that can wipe out--or seem to wipe out--much of their windfall profits during times like this.

For these reasons, windfall taxes are necessary but insufficient. Governments should aim to prevent the windfall profits from reaching these companies in the first place, by imposing wholesale price caps on non-gas-using electricity producers, which reflect their average cost plus a reasonable net return.