Climate Change Requires Lasting Tax Policy Shift, Not Cash Grabs

“Our world is in big trouble.”

When United Nations Secretary General António Guterres opens a speech with that line and goes on to implicate tax policy, one takes notice. His words shouldn’t be read without at least an examination. So what problems is he pointing to, and what are his solutions?

You can probably guess one of the problems—it’s climate change. The other is rising food and energy costs. The “solutions” are little more than wrist slaps for the world’s most prolific polluters but which otherwise allow business as usual.

The Problems

As stated, broadly, there are two: the climate crisis and rising food and energy costs. You might say those are three problems, but the causal arrows between energy and food costs suggests the latter is a symptom of the former.

It seems almost like a truism to state that extreme weather events are on the rise, but lest you think they are just being reported more, they are indeed increasing on a massive scale worldwide. Global food costs recently have dipped some from their previous highs but remain higher year over year. Fuel price indexes are six times that of 2016.

The Solution

A windfall tax is a one-time excise tax on a portion of the economy that has seen a windfall gain. The term “windfall” is generally thought to include some idea that the sector didn’t do anything to earn the increased gain, but that it was caused by some external factor such as war, famine, plague, pestilence, or Putin. In the US, the most well-known example of a windfall tax was placed on oil producers through the Crude Oil Windfall Profit Tax Act of 1980. The external factor there was the OPEC oil embargo.

Here’s where it gets a little dicey. Guterres argues for a windfall tax on fossil fuel companies. ExxonMobil Corp. and Chevron Corp. each posted their highest-ever profits following the Russian invasion of Ukraine and, in the same breath, warned the world that global energy supplies likely would remain expensive. In ordinary life, that would seem backward—if profits are way up, there is room for prices to come down. Or at the very least, a price hike would be a tough sell.

Antonio Guterres, secretary general of the United Nations, speaks to reporters after a meeting with British Prime Minister Boris Johnson at United Nations headquarters on Sept. 20, 2021 in New York City.

Photographer: John Minchillo-Pool/Getty Images

Here, the unspoken (by ExxonMobil) major premise is that a large portion of the delta between costs and revenue can be accounted for by the massive externality that is pollution. That isn’t profit—that’s theft on a global scale. Fossil fuel companies are like roofers, underbidding the competition while making gobs of money but dumping all the detritus from my roof on your lawn. It’s easy to corner a market when you don’t have to clean up the mess you leave behind. A windfall tax is charging them a one-time nominal fee for their having used, and by all accounts continuing to use, the world as their trash bin.

The Problem With the Solution

The problem with focusing on a windfall tax as remuneration for climate change is that climate change is ongoing. Further, the portion contributed to by fossil fuel companies is additive.

Take a smoggy taxicab puttering around your neighborhood making all the air taste bad, for example. If the taxi made a windfall profit owing to some external factor, sure, slap the driver with a windfall tax—but don’t tie it to the smog. Lashing the two together suggests then that society has been compensated for the pollution created and whatever may follow. Additionally, when energy prices rise, so does clean energy. If the windfall tax is truly aimed at a windfall for oil and gas producers, should clean energy producers should be taxed as well? (It’s been proposed, but this notion is misguided.)

A windfall tax—or any tax policy that isn’t designed to eliminate the usage of fossil fuels—suggests that climate disasters, like the devastating floods in Pakistan that have displaced millions, can in some way be negotiated and compensated for. Tax policy seeking distributive justice must target and manage a phase-out of fossil fuels, not serve as a one-time cash grab, as satisfying as the latter may feel. Any policy that will include renewable or clean energy producers is counterproductive.

As for the portion of fossil fuel companies’ profits that derive from geopolitical upheaval, it’s as cyclical as the weather. To treat it as some one-off event that ExxonMobil couldn’t have foreseen and led to them stumbling, Mr. Magoo-style, into a giant vat of money, is to ignore the realities of operating a multinational energy corporation. The problem isn’t that fossil fuel companies are profiting from war—it’s that they’re on the frontlines waging a war against nature and giving every indication they plan to continue the assault.

The great grandson of India’s freedom icon Mahtma Gandhi, Tushar Gandhi, holds a Mont Blanc Mahatma Gandhi Memorial Edition 3000 fountain pen during a launch ceremony in Mumbai on Sept. 29, 2009.

Photographer: Indrani Mukherjee/AFP via Getty Images

The Alternative

There is a concept in commercial banking known as “fountain pen money,” or money created by a banker’s pen in approving a loan. You know how you were told that the way banks lend money is they lend out all the deposits from the checking and savings accounts of their customers? But it’s the other way around. Money is created by loans—but that money only exists on a bank database somewhere. The same can be said for the proceeds from a windfall tax on fossil fuel companies.

Governments mustn’t wait for these hypothetical windfall tax checks to throw their weight behind renewable energy and clean(er) transportation such as electric vehicles; the revenue generated for the state is mostly symbolic. Additionally, renewable energy producers are already enjoying higher profits owing to increasing energy prices and, rather than being subject to a broad energy windfall tax, they should see further investment. ExxonMobil doesn’t need to be taxed on their windfall profits owing to geopolitical unrest, because that’s baked into their business. But renewable energy producers similarly should not be subject to a windfall tax when outdated fossil fuel energy systems, coupled with continued reliance on said fossil fuels leads, to a broad increase in energy costs.

To consider alternatives, one must first let go of the idea that any windfall tax applied to the fossil fuel industry is going to help anyone displaced by climate change or harmed by rising food and fuel costs. A better bet is to finance renewable energy right now, and to do so as though our lives depends on it—because they do.

This is a regular column from tax and technology attorney Andrew Leahey, principal at Hunter Creek Consulting and a sales suppression expert. Look for Leahey’s column on Bloomberg Tax, and follow him on Twitter at @leahey