Energy Costs

In her September 2022 State of the Union address, the European Commission president Ursula von der Leyen called for windfall taxes on energy companies’ profits. She also flagged the possibility of price caps to reduce household and business bills for gas and electricity, which have soared in recent months.

In June 2022, we invited our European panel to express their views on such proposals. We asked the experts whether they agreed or disagreed with the following statements, and, if so, how strongly and with what degree of confidence:

a) A windfall tax on the excess profits of large oil and gas companies – with the revenue rebated to households – would be an efficient way to provide temporary relief for the average household in European countries from rising energy costs.

b) Fiscal measures putting a cap on consumer energy prices would be a more appropriate immediate response to increased inflation in the euro area than raising interest rates.

Windfall taxes

Of our 48 European experts, 33 participated in this survey. On the first statement, there is a diversity of opinion. Weighted by each expert’s confidence in their response, 4% of the panel strongly agree, 46% agree, 33% are uncertain, 17% disagree, and 0% strongly disagree.

The experts are able to include short comments in their responses, many of which add considerable nuance to their simple poll responses. For example, among those who agree, there are some notable caveats.

Ricardo Reis at the London School of Economics (LSE) states: ‘Yes in principle, but highly uncertain effect on expectations of future taxes for lucky industries, subsidies when energy prices fall, etc.’ Charles Wyplosz at the Graduate Institute, Geneva, says: ‘It is a poor substitute for a fully-rebated carbon tax, but a better approach to raise revenues than a general tax or a deficit.’ And Franklin Allen at Imperial College London comments: ‘This redistribution may have some long-run effect on investment but seems appropriate given the current situation in many countries.’

Among those who say they are uncertain, several panelists note the challenges of implementing windfall taxes. Patrick Honohan at Trinity College Dublin remarks: ‘The geopolitical circumstances could justify an excess profits tax, but operationalizing it successfully in a multi-country world tricky.’ And Nicholas Bloom at Stanford speaks from personal experience of having worked in government: ‘Having been the official in charge of a windfall tax on oil firms in the UK in 2001, this is much more complex than it sounds.’

Other concerns mentioned by experts who say they are uncertain include those expressed by Jan Eeckhout at Universitat Pompeu Fabra in Barcelona: ‘Tax inelastic supply (resources), by all means. Levy ad hoc taxes on ex post outcomes, not so sure. Norway example: 78% profits tax, always.’ Costas Meghir at Yale adds: ‘Excess profits are very hard to measure and profitability should be measured by the longer-run return to capital.’ And Christian Leuz at Chicago Booth observes: ‘The incidence of this tax is unclear but matters. Moreover, there are many issues with constitutionality and implementation of this tax.’

Among those who disagree with the statement, there are some strong views. Kjetil Storesletten at the University of Oslo protests: ‘People invest because they think they can harvest the return. Ex post taxation infringes on property rights and kills investment incentives.’ And Jan Pieter Krahnen at Goethe University Frankfurt concludes: ‘Windfall profits in the energy sector and relief for poorer households are two different things that must not be connected directly.’

American perspectives

Similarly strong opinions were voiced by some members of our US panel when, in March 2022, we asked effectively the same question about policy on energy costs in the United States:

A windfall tax on the profits of large oil companies – with the revenue rebated to households – would provide an efficient means to protect the average US household from rising energy costs.

Of our 43 US experts, 36 participated in this survey; and while there was a similar diversity of opinion, they were more inclined to disagree with the statement than the European panel: nearly a half of US respondents compared with only a sixth of Europeans. Weighted by each expert’s confidence in their response, 4% of the panel strongly agree, 34% agree, 16% are uncertain, 35% disagree, and 12% strongly disagree (totals don’t always sum to 100 because of rounding).

Among those who disagree, some note the potential effects on the incentives of companies and consumers. Robert Shimer at Chicago replies: ‘It would reduce energy costs now, but anticipation of future taxes reduces the incentive to invest in stable supply.’ And David Autor at MIT objects: ‘I want energy companies to invest right now. I also want consumers to reduce energy consumption. This idea discourages both.’

Others echo the view that taxing windfall profits and helping households should be thought of separately. Oliver Hart at Yale declares: ‘Arbitrary taxes are bad and a windfall tax is arbitrary. Better to help poor households directly.’ And Larry Samuelson at Yale suggests: ‘The rebate would help households, but is a piecemeal policy. A comprehensive tax reform and coherent energy policy would be more efficient.’

Of the US panelists who agree with the statement, two refer to environmental issues. Maurice Obstfeld at the Peterson Institute notes: ‘Especially in view of climate goals.’ And Daron Acemoglu at MIT concludes: ‘But should be motivated not as windfall but punitive tax for all of their misbehavior on climate and clawing back of fossil fuel subsidies.’

Capping consumer energy prices

On the second statement about whether putting a cap on consumer energy prices would be a more appropriate immediate response to increased inflation than raising interest rates, a majority of panelists say that they disagree. Weighted by each expert’s confidence in their response, 4% of the panels strongly agree, 11% agree, 7% are uncertain, 36% disagree, and 43% strongly disagree.

Among those who agree, Oliver Blanchard at the Peterson Institute argues: ‘This is a case where a larger fiscal deficit can make the job of monetary policy easier.’ But Jan Eeckhout, who says he is uncertain, objects: ‘Messing with the price system leads to disequilibrium, which someone has to pay anyway. Better monetary and fiscal policy plus redistribution.’

Of the panelists who disagree, some focus on alternative ways to help poorer households. Jan Pieter Krahnen says: ‘Thou shall not manipulate market prices, because of adverse allocative consequences. Poorer households may be compensated directly.’ Ernst Fehr at the University of Zurich suggests: ‘Instead of a cap on energy prices, poor households should receive a cash transfer to soften the burden of high energy prices.’ Jean-Pierre Danthine at the Ecole Polytechnique Fédérale de Lausanne adds: ‘I do not favor such a measure for ecological reasons. Direct subsidies to poorer households are preferable.’

Others are also concerned about the impact on incentives for reduced energy consumption. Franklin Allen replies: ‘Such a cap would blunt incentives to reduce usage of energy and so be counterproductive.’ And Charles Wyplosz observes: ‘Energy prices should rise because supply is diminished (and good for the long run too). Inflation is another matter.’

Still others do focus directly on inflation and potential policy responses. Lubos Pastor at Chicago states: ‘Inflation is broader-based, going well beyond rising energy prices.’ Patrick Honohan says: ‘The energy price shift is – and should be – unlikely to be temporary; strongly negative nominal policy interest rate hard to justify now.’ Pol Antras at Harvard comments: ‘Inflation is broad-based. Price controls would reduce energy costs, but would likely foster spending, aggravating inflation. Need tightening.’ And Ricardo Reis explains: ‘Monetary policy is the right tool to deal with inflation’, linking to one of his papers on the topic.

Finally, two experts go back to history. Kjetil Storesletten observes: ‘We tried price caps as an instrument to curb inflation in the 1970s. It didn’t work then and it will not work now.’ And Nicholas Bloom concurs: ‘Price controls don’t work – there is a long history of evidence on this. Indeed, not sure why this is even a question.’

All comments made by the experts are in the full survey results for the European and US panels.

Romesh Vaitilingam
@econromesh
September 2022

 

Question A:

A windfall tax on the excess profits of large oil and gas companies – with the revenue rebated to households – would be an efficient way to provide temporary relief for the average household in European countries from rising energy costs.

Responses weighted by each expert's confidence

Question B:

Fiscal measures putting a cap on consumer energy prices would be a more appropriate immediate response to increased inflation in the euro area than raising interest rates.

Responses weighted by each expert's confidence

Question A Participant Responses

Participant University Vote Confidence Bio/Vote History
Allen
Franklin Allen
Imperial College London
Agree
6
Bio/Vote History
This redistribution may have some long run effect on investment but seems appropriate given the current situation in many countries.
Antras
Pol Antras
Harvard
Agree
6
Bio/Vote History
Though energy pricing appears to need a much broader reform.
Blanchard
Olivier Blanchard
Peterson Institute
Agree
7
Bio/Vote History
Because Europe is a net importer of energy, it cannot raise this way close to enough to subsidize consumers. Different in US
Bloom
Nicholas Bloom
Stanford
Uncertain
8
Bio/Vote History
Having been the official in charge of a windfall tax on oil firms in the UK in 2001 this is much more complex than it sounds.
Blundell
Richard William Blundell
University College London Did Not Answer Bio/Vote History
Bénassy-Quéré
Agnès Bénassy-Quéré
Paris School of Economics Did Not Answer Bio/Vote History
Carletti
Elena Carletti
Bocconi
Agree
5
Bio/Vote History
Danthine
Jean-Pierre Danthine
Paris School of Economics
Uncertain
3
Bio/Vote History
De Grauwe
Paul De Grauwe
LSE
Agree
7
Bio/Vote History
Eeckhout
Jan Eeckhout
UPF Barcelona
Uncertain
8
Bio/Vote History
Tax inelastic supply (resources), by all means. Levy ad hoc taxes on ex post outcomes, not so sure. Norway example: 78% profits tax, always
Fehr
Ernst Fehr
Universität Zurich
Uncertain
5
Bio/Vote History
Freixas
Xavier Freixas
Barcelona GSE
Strongly Agree
8
Bio/Vote History
Fuchs-Schündeln
Nicola Fuchs-Schündeln
Goethe-Universität Frankfurt
Uncertain
4
Bio/Vote History
Galí
Jordi Galí
Barcelona GSE
Agree
8
Bio/Vote History
Giavazzi
Francesco Giavazzi
Bocconi Did Not Answer Bio/Vote History
Griffith
Rachel Griffith
University of Manchester
Agree
7
Bio/Vote History
Guerrieri
Veronica Guerrieri
Chicago Booth Did Not Answer Bio/Vote History
Guiso
Luigi Guiso
Einaudi Institute for Economics and Finance
Disagree
6
Bio/Vote History
Guriev
Sergei Guriev
Sciences Po
Uncertain
5
Bio/Vote History
Honohan
Patrick Honohan
Trinity College Dublin
Uncertain
5
Bio/Vote History
The geopolitical circumstances could justify an excess profits tax, but operationalizing it successfully in a multi-country world tricky
Javorcik
Beata Javorcik
University of Oxford Did Not Answer Bio/Vote History
Krahnen
Jan Pieter Krahnen
Goethe University Frankfurt
Disagree
6
Bio/Vote History
Windfall profits in the energy sector and relief for poorer households are two different things that must not be connected directly.
Kőszegi
Botond Kőszegi
Central European University Did Not Answer Bio/Vote History
La Ferrara
Eliana La Ferrara
Harvard Kennedy Did Not Answer Bio/Vote History
Leuz
Christian Leuz
Chicago Booth
Uncertain
5
Bio/Vote History
The incidence of this tax is unclear but matters. Moreover there are many issues with constitutionality and implementation of this tax.
Mayer
Thierry Mayer
Sciences-Po Did Not Answer Bio/Vote History
Meghir
Costas Meghir
Yale
Uncertain
10
Bio/Vote History
Excess profits are very hard to measure and profitability should be measured by the longer run return to capital.
Pagano
Marco Pagano
Università di Napoli Federico II
Agree
8
Bio/Vote History
Pastor
Lubos Pastor
Chicago Booth
Uncertain
5
Bio/Vote History
Persson
Torsten Persson
Stockholm University Did Not Answer Bio/Vote History
Pissarides
Christopher Pissarides
London School of Economics and Political Science Did Not Answer Bio/Vote History
Portes
Richard Portes
London Business School
Agree
4
Bio/Vote History
Prendergast
Canice Prendergast
Chicago Booth
Disagree
7
Bio/Vote History
Propper
Carol Propper
Imperial College London
No Opinion
Bio/Vote History
Rasul
Imran Rasul
University College London
Agree
6
Bio/Vote History
Reichlin
Lucrezia Reichlin
London Business School Did Not Answer Bio/Vote History
Reis
Ricardo Reis
London School of Economics
Agree
3
Bio/Vote History
Yes in principle, but highly uncertain effect on expectations of future taxes for lucky industries, subsidies when energy prices fall, etc.
Repullo
Rafael Repullo
CEMFI
Agree
8
Bio/Vote History
Rey
Hélène Rey
London Business School Did Not Answer Bio/Vote History
Schoar
Antoinette Schoar
MIT
Uncertain
7
Bio/Vote History
Storesletten
Kjetil Storesletten
University of Minnesota
Disagree
6
Bio/Vote History
People invest because they think they can harvest the return. Ex post taxation infringes on property rights and kills investment incentives
Sturm
Daniel Sturm
London School of Economics
Agree
5
Bio/Vote History
Van Reenen
John Van Reenen
LSE
Agree
4
Bio/Vote History
Vickers
John Vickers
Oxford Did Not Answer Bio/Vote History
Voth
Hans-Joachim Voth
University of Zurich
Disagree
8
Bio/Vote History
Whelan
Karl Whelan
University College Dublin Did Not Answer Bio/Vote History
Wyplosz
Charles Wyplosz
The Graduate Institute Geneva
Agree
5
Bio/Vote History
It is a poor substitute for a fully-rebated carbon tax but a better approach to raise revenues than a general tax or a deficit.
Zilibotti
Fabrizio Zilibotti
Yale University Did Not Answer Bio/Vote History

Question B Participant Responses

Participant University Vote Confidence Bio/Vote History
Allen
Franklin Allen
Imperial College London
Disagree
6
Bio/Vote History
Such a cap would blunt incentives to reduce usage of energy and so be counterproductive.
Antras
Pol Antras
Harvard
Disagree
8
Bio/Vote History
Inflation is broad based. Price controls would reduce energy costs, but would likely foster spending, aggravating inflation. Need tightening
Blanchard
Olivier Blanchard
Peterson Institute
Agree
8
Bio/Vote History
This is a case where a larger fiscal deficit can make the job of monetary policy easier.
Bloom
Nicholas Bloom
Stanford
Strongly Disagree
9
Bio/Vote History
Price controls don't work - there is a long history of evidence on this. Indeed, not sure why this is even a question.
Blundell
Richard William Blundell
University College London Did Not Answer Bio/Vote History
Bénassy-Quéré
Agnès Bénassy-Quéré
Paris School of Economics Did Not Answer Bio/Vote History
Carletti
Elena Carletti
Bocconi
Agree
5
Bio/Vote History
Danthine
Jean-Pierre Danthine
Paris School of Economics
Strongly Disagree
7
Bio/Vote History
I do not favor such a measure for ecological reasons. Direct subsidies to poorer households are preferable
De Grauwe
Paul De Grauwe
LSE
Disagree
8
Bio/Vote History
Eeckhout
Jan Eeckhout
UPF Barcelona
Uncertain
8
Bio/Vote History
Messing with the price system leads to disequilibrium, which someone has to pay anyway. Better monetary & fiscal policy plus redistribution
Fehr
Ernst Fehr
Universität Zurich
Strongly Disagree
9
Bio/Vote History
Instead of a cap on energy prices poor households should receive a cash transfer to soften the burden of high energy prices
Freixas
Xavier Freixas
Barcelona GSE
Strongly Disagree
10
Bio/Vote History
Fuchs-Schündeln
Nicola Fuchs-Schündeln
Goethe-Universität Frankfurt
Disagree
8
Bio/Vote History
Galí
Jordi Galí
Barcelona GSE
Agree
8
Bio/Vote History
Giavazzi
Francesco Giavazzi
Bocconi Did Not Answer Bio/Vote History
Griffith
Rachel Griffith
University of Manchester
Agree
4
Bio/Vote History
Guerrieri
Veronica Guerrieri
Chicago Booth Did Not Answer Bio/Vote History
Guiso
Luigi Guiso
Einaudi Institute for Economics and Finance
Disagree
7
Bio/Vote History
Guriev
Sergei Guriev
Sciences Po
Uncertain
5
Bio/Vote History
Honohan
Patrick Honohan
Trinity College Dublin
Disagree
7
Bio/Vote History
The energy price shift is — and should be — unlikely to be temporary; strongly negative nominal policy interest rate hard to justify now.
Javorcik
Beata Javorcik
University of Oxford Did Not Answer Bio/Vote History
Krahnen
Jan Pieter Krahnen
Goethe University Frankfurt
Disagree
5
Bio/Vote History
Thou shall not manipulate market prices, because of adverse allocative consequences. Poorer households may be compensated directly.
Kőszegi
Botond Kőszegi
Central European University Did Not Answer Bio/Vote History
La Ferrara
Eliana La Ferrara
Harvard Kennedy Did Not Answer Bio/Vote History
Leuz
Christian Leuz
Chicago Booth
Uncertain
1
Bio/Vote History
Mayer
Thierry Mayer
Sciences-Po Did Not Answer Bio/Vote History
Meghir
Costas Meghir
Yale
Strongly Disagree
10
Bio/Vote History
Pagano
Marco Pagano
Università di Napoli Federico II
Strongly Agree
9
Bio/Vote History
Pastor
Lubos Pastor
Chicago Booth
Strongly Disagree
10
Bio/Vote History
Inflation is broader-based, going well beyond rising energy prices.
Persson
Torsten Persson
Stockholm University Did Not Answer Bio/Vote History
Pissarides
Christopher Pissarides
London School of Economics and Political Science Did Not Answer Bio/Vote History
Portes
Richard Portes
London Business School
Disagree
4
Bio/Vote History
Prendergast
Canice Prendergast
Chicago Booth
Disagree
7
Bio/Vote History
Propper
Carol Propper
Imperial College London
No Opinion
Bio/Vote History
Rasul
Imran Rasul
University College London
Disagree
6
Bio/Vote History
Reichlin
Lucrezia Reichlin
London Business School Did Not Answer Bio/Vote History
Reis
Ricardo Reis
London School of Economics
Strongly Disagree
8
Bio/Vote History
Monetary policy is the right tool to deal with inflation.
-see background information here
Repullo
Rafael Repullo
CEMFI
Strongly Disagree
8
Bio/Vote History
Rey
Hélène Rey
London Business School Did Not Answer Bio/Vote History
Schoar
Antoinette Schoar
MIT
Strongly Disagree
8
Bio/Vote History
Storesletten
Kjetil Storesletten
University of Minnesota
Strongly Disagree
9
Bio/Vote History
We tried price caps as an instrument to curb inflation in the 1970s. It didn’t work then and it will not work now
Sturm
Daniel Sturm
London School of Economics
Uncertain
2
Bio/Vote History
Van Reenen
John Van Reenen
LSE
Disagree
7
Bio/Vote History
Vickers
John Vickers
Oxford Did Not Answer Bio/Vote History
Voth
Hans-Joachim Voth
University of Zurich
Strongly Disagree
9
Bio/Vote History
Whelan
Karl Whelan
University College Dublin Did Not Answer Bio/Vote History
Wyplosz
Charles Wyplosz
The Graduate Institute Geneva
Disagree
8
Bio/Vote History
Energy prices should rise because supply is diminished (and good for the long run too). Inflation is another matter.
Zilibotti
Fabrizio Zilibotti
Yale University Did Not Answer Bio/Vote History