How Fair Are Windfall Taxes: Balancing Energy Poverty With Structural Energy Incentives

The UK and recently also Germany have decided to introduce windfall taxes to offset part of the pain caused by the elevated energy prices with economical support financed with an extra tax on the tremendous profits energy producers currently are generating. However, from an anti-fragility perspective this decision is more controversial than it looks.

As energy inflation keeps on soaring, governments in all of Europe face the same economic challenge: How much to support struggling businesses and households facing up to ten times higher energy bills compared to the previous year. And secondly, how to finance these proposed relief bills.

While the introduction of windfall taxes seems obvious and fair, it is a highly controversial and unusual measure when looking at it from an anti-fragility standpoint. After all, the elevated prices are the best incentive for economic actors to invest in new sources of energy. While high energy prices are also an incentive to lower demand, this rational does not hold when these prices are disrupting businesses and creating energy poverty that undermines overall welfare and thus productivity.

The increased adoption of renewables such as wind and solar energy has decreased the total part of the energy mix that is consistent and stable. This has created a relatively higher dependence on Russian energy imports for full-day energy demand. While higher adoption of renewable energy sources is not a bad development, this crisis highlights the need to boost energy storage possibilities for renewable energy sources to create reserves in times of scarcity.

In terms of future energy generation, it is highly advisable for governments to not only look at short-term economic relief but mainly focus on strategies to secure energy independence in the future. Therefore, it would make more sense from an economic perspective to use these windfall taxes for structural investments in new energy projects through which the harmed energy companies will be compensated for their current solidarity.

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