The War for Ukraine Has Created an Energy Crisis That May Require Higher Corporate Taxes

By Florian Güldner


The war in Ukraine is creating an energy crisis for all of Europe. While Russia has restricted supply and ordinary citizens are finding it harder to pay the bills, energy corporations are reaping record profits. In past conflicts, “excess profit taxes” were implemented to address these issues, and there are increasing calls to do so now.

What Is Excess Profit Tax?

The idea is to tax additional profits that exceed “normal” profit levels by a certain threshold in a given industry. This is indeed something that is currently being discussed in Germany among politicians and demanded by sections of the public. Taxes collected would be used to support low-income citizens struggling with high energy bills. This idea is not completely new. In fact, Italy and UK already have such a tax and Spain, the Netherlands, and the US are discussing it. The excess profit tax, also called windfall tax, was first levied in Georgia (USA) during the American Civil War, and later during both world wars. In all cases, the goal was to tax corporate profit that resulted from the war. Excess profits were taxed at rates of up to 80 percent and was calculated using past data.

Italy’s excess profit tax is linked to the revenue of oil companies and prices at the gasoline pump. In short, if prices increased by 10 percent, then this was identified as excess profit and taxed at 25 percent. In the UK, excess profit is not even defined. Rather, oil companies pay an additional 25 percent tax on profits, which is subject to discounts if they invest in exploration.

As with any other taxes, there are practical problems. First, there is the political debate and discussion that companies in all sectors already pay a lot of taxes. This means that any change in taxation needs to pass the parliament where the business-friendly political parties likely will object to a tax increase. We must differentiate the effective tax rate from the nominal tax rate. For the USA, an analysis of oil & gas companies showed that they paid effectively around 24 percent tax, compared to the statutory rate of 35 percent.

Second, as with income tax, most multinational corporations (MNC) will shift their profit to a country with lower taxation or simply find ways to lower profits. While most mining companies are MNCs, many energy companies are locally focused and have a certain level of state involvement, so in the energy sector, this taxation may be easier to enforce.

Defining the level of “normal” profit is also a challenge. This is affected by factors like country, industry, and geography. Labor costs affect profits, geology affects costs of extraction of commodities, commodities have different levels of purity, and electricity prices are strongly determined by the pricing mechanism, which in turn is political.

Supply Side Shock

In this case, the excess profits are caused by a supply side shock (the war in Ukraine). Other supply side shocks we have experienced include the flood in Thailand in 2011, which destroyed a quarter of the world’s production capacity for hard drives. The earthquake in Japan in 2011 destroyed semiconductor and electronics production capacity. Overall, the tighter the integration and the higher the supply chain dependency on single, world-scale plants, the more vulnerable it is to these shocks.

In the case of energy, we also have very inflexible demand. For heating, electricity, gasoline, and food, it is difficult, costly, and sometimes impossible to switch to another product or to postpone consumption. In these cases, the supply side shock triggers huge price increases. We are leaving aside here the impact of speculation on commodities, but in general, these further increase the price volatility.

As the price increase is on basic goods, it has a huge impact on those with low incomes, who spend almost all their earnings on basic goods. Here the threat is that parts of our society may have to face hunger and cold in the coming winter. People with middle incomes may postpone investments in cars or expensive electronics, which will impact these industries. However, the biggest impact could be in low-income countries, where rising food prices can lead to uprisings, unrest, and even civil war. The Arab Spring, for example, was initiated by rising food prices.

What the Data Says

The current discussion is highly emotional. The reasons are described in the theory: It will impact low-income people. The cause may be an invasion and war in Ukraine by an autocratic regime, but the profiteers are large multinational corporations. And what does the data say? Below are the EBIT/revenue figures from companies tracked in ARC’s CapEx index. The blue line shows the reported EBIT/revenue number seasonally adjusted, while the dashed line is the long run trend. The grey area is the price index from the International Monetary Fund (IMF).

War In Ukraine

The first observation is that we indeed see EBIT/revenue significantly higher than the long run trend. The second is that there are large differences between the mentioned industries and their average EBIT margin, the most profitable being mining. Also, overall EBIT in mining is among the highest globally.



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Keywords: Excess Profit, Ukraine War, Mining, Oil & Gas, Supply Shock, CapEx, EBIT, ARC Advisory Group.

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