The dramatic rise in energy prices in the wake of the Iran war has led to calls for the European Union to introduce a so-called windfall tax on oil and gas companies, to use some of their profits to help governments fund relief schemes.
Earlier this month, the finance and economy ministers of Austria, Germany, Italy, Portugal and Spain wrote a joint letter to EU Climate, Net Zero and Clean Growth Commissioner Wopke Hoekstra, asking for such a levy.
They wrote that it would “send a clear message that those who profit from the consequences of the war must do their part to ease the burden on the general public.”
Oil companies have made massive profits as a result of the spike in prices caused by the war in Iran and the closure of the Strait of Hormuz.
An analysis by the UK’s Guardian newspaper, using data from Rystad Energy, found that leading oil and gas companies will make an extra $234 billion (€200 billion) by the end of the year, if the oil price continues to average around $100.
It found that companies such as Saudi Aramco, Gazprom and ExxonMobil are among the biggest beneficiaries. The Financial Times reported that the French energy companies TotalEnergies made more than $1 billion after making a speculative purchase of around 70 cargoes of crude produced in the UAE and Oman available to load in May.
This week, BP reported an “exceptional” performance in the first three months of 2026, with profits more than doubling on the same period last year to hit $3.2 billion.
‘Fragile legal ground’
The governments calling for the tax said it would provide relief for consumers “without placing additional burdens on public budgets.”
Their letter highlighted 2022 as a precedent, when Brussels put a temporary “solidarity contribution” on energy companies, imposing a minimum 33% tax on all oil and gas company profits that exceeded the average of the previous four years by more than 20%.
The EU announced a list of measures on April 22 aimed to mitigate the impact for consumers, but stopped short of announcing a windfall tax.
However, critics say such a tax sits on fragile legal ground. Back in 2022, the EU used Article 122 of the EU Treaty — an emergency procedure that bypasses the European Parliament — to allow the European Commission to propose the law and the European Council to adopt it by qualified majority rather than unanimity.
There’s another major problem, according to Cristina Enache, an economist with Tax Foundation Europe, a think tank that focuses on tax policy. She said that when implemented at the national level, the taxes can be retroactive.
Enache noted that many of the 2022 taxes were retroactive, which in her view “clashes with a core legal principle in most EU countries: non‑retroactivity in taxation.”
She also highlighted unequal treatment of similar companies, unclear tax bases, and a lack of proportionality as reasons why windfall taxes are likely to face legal challenges.
“In short, these taxes may be feasible, but they are on the edge of constitutionality and legally contentious,” she told DW.
However, those in favor say the 2022 example clearly establishes a precedent and legal basis for the taxes. Antony Froggatt, senior director at Transport & Environment, an NGO advocating for sustainable transport, said it’s vital that the EU take leadership on the issue at a central level, rather than leaving it to member states, to target multinational firms that operate across borders.
“Instead of governments putting the burden on taxpayers, it’s time that oil companies pay up,” he said. “It’s not unprecedented, there is a mechanism, and there is an experience with doing it,” Froggatt told DW. “Five member states have called for it, and I hope that others do.”
Legal challenges
ExxonMobil sued the EU in 2022 in an attempt to block the windfall tax, while the Jersey-based refining company Klesch also took legal action against the levy.
Froggatt recognizes the challenges of getting the legislation right but says the 2022 tax was largely successful and that it is important that the principle behind windfall taxes is widely acknowledged.
“Fossil fuel prices are rising, and there are excessive profits from companies as a result of that,” he said. “Consumers are suffering because they can’t afford the same level of energy service that they had in the past. It’s not the only mechanism, but it seems to be a good mechanism to get some of the excess profits back.”
Enache said ongoing legal actions against windfall taxes reflect their complexity and fundamental unworkability. “There’s no precise way to define a ‘windfall’ in a volatile industry without over‑taxing normal profits,” she argued.
She also pointed out that tax rates based on the previous performance of a company are “inherently coarse,” given how volatile energy markets can be. “Years of high profits often compensate for years of heavy losses.”
Does it work?
For businesses and ordinary consumers grappling with the dramatic and sustained hike in their energy costs, there is little argument against a windfall tax on companies that are booming on the back of the price surge.
Yet there are doubts about the precise terms of the implementation and effectiveness of such a tax.
The EU’s 2022 windfall tax gathered over €26 billion in additional tax revenue. Enache stressed that was a “relatively small contribution given the scale of the crisis” and noted it was not worth the downside risks.
“They can generate some short‑term revenue, but at the cost of higher uncertainty, weaker investment, and higher prices down the line,” she said.
Both Enache and Antony Froggatt agree that the present crisis shows how the EU needs to develop stronger energy security, but they differ on how to do so.
“Rather than pursuing temporary policies, policymakers should implement long-term, pro-growth tax reforms that stimulate economic activity and incentivize production and energy diversification by supporting private investment,” said Enache.
Froggatt underlined that any windfall tax should be underpinned by a principle which aims to accelerate the transition away from fossil fuels towards more sustainable alternatives, even if the current crisis may make some governments think they need to develop their own fossil fuel sources.
“This is the ‘messy middle’ of the energy transition,” he said. “There is a need to power through this so-called messy middle in order to create more energy stability. And we need to move much further and faster to reduce the reliance on fossil fuels if we want to have more stability.”
Edited by: Srinivas Mazumdaru
