14th June 2026
The dramatic spike in oil and gas prices following the US-Israel war on Iran has prompted governments around the world to implement or consider higher taxes on oil and gas companies. Assessing the case for these taxes Ashfaq Khalfan argues that this is an opportune moment to enact permanent taxes, rather than temporary windfall ones, as a regulatory tool to incentivise investment in renewable energy.
In April 2026 representatives of countries comprising a third of the world’s GDP met in Santa Marta, Colombia for the first conference on transitioning from fossil fuels. The 57 governments discussed the need to “co-ordinate reform of fossil rents, royalties and extraction taxes and windfall profits” and agreed that “taxation should send clear signals to fossil fuel companies and investors to redirect capital toward new sectors.”
This was not the first time taxing oil and gas companies hit the international spotlight. In reaction to the fuel price rises following the Iran war, India introduced windfall taxes on fuel exports and Portugal announced plans for windfall taxes on energy company profits. Austria, Germany, Italy, Portugal and Spain called on the European Commission to introduce windfall taxes on oil and gas companies, arguing these would redistribute the war’s burdens from companies profiting from the price spike to affected consumers through temporary financial relief. The EU Commission did not adopt these measures, but it has committed to support member countries that wish to adopt such taxes nationally.
Oil and gas taxation is necessary regulation to shift markets
After the price shock caused by Russia’s invasion of Ukraine, in 2022, countries in Europe and elsewhere accelerated public investments in green energy. But banking, and the oil and gas sectors failed to follow. The four largest European oil and gas companies allocated only 5 per cent of their 2022 and 2023 profits to renewables and low-carbon solutions. And the 250 largest oil and gas companies own just 1.42 per cent of global renewable energy capacity currently in operation. Although renewable energy is generally cheaper to produce than energy from fossil fuels, companies can often obtain higher profits in oil and gas than in the more competitive renewables market.
A recent report by LSE, based on consultations with over 60 major investors, asked what investors can do about climate change. It concludes that without government policy to align incentives with climate goals, investors cannot on a sustained basis force companies to act against their economic interests. Taxes can be a key part of such policy, steering company and investor behaviour towards more sustainable choices.
The type of tax matters – and windfall taxes are not enough
Windfall taxes are temporary increases to the taxes levied on corporate profits that comprise fortuitous gains from unanticipated events. They skim off the top of company profits and thus can reduce incentives for further investments in that sector, given uncertainty over the extent of future profit capture. Permanent and significantly higher profit taxes in a particular sector would turn that risk into a certainty, making clear to investors that they will not capture these profits, and more clearly incentivise them to reduce investment in that sector.
Windfall taxes in response to price hikes are now familiar. In 2022 the EU agreed that each member state would impose windfall taxes of at least 33 per cent on oil and gas company profits above 120 per cent of their previous four-year average. These taxes raised over €26 billion ($28 billion) for the 2022 and 2023 fiscal years combined. While significant, this represents only around 14 per cent of the estimated €186 billion in EU fossil fuel company profits over the same period, according to analysis by PwC Belgium commissioned by Transport & Environment, a European NGO. It was evidently insufficient to counter the trend of European oil and gas companies to reduce investments in renewables. Some countries, such as Italy and Spain, diluted the green potential of the intervention even further by levying windfall taxes not just on oil and gas companies, but also on energy companies focused on renewable energies.
For taxes on oil and gas to have a meaningful regulatory impact, governments should go beyond windfalls and impose permanent profit taxes on oil and gas companies, structured so that after-tax profits would be higher in renewable energy than in fossil fuels. Such taxes could create incentives for companies to shift investment to renewable energy production, to increase advertising of products that run on renewable energy and offer these products at more competitive prices.
Consumers can be protected
A reasonable concern is that such taxes could lead to increased prices on consumers. Yet profit taxes have different effects from carbon taxes, which are levied on volumes of fossil fuels. On average, at least 70 per cent of carbon taxes are passed on to consumers. In contrast, the burden of corporate income taxes falls primarily on capital owners. The US Congressional Budget Office estimates that 75 per cent falls on capital owners, and 25 per cent on households in proportion to their labour income.
Given the potential impact of increased prices on the human right to an adequate standard of living, governments imposing such taxes should monitor prices and where necessary adopt mitigating measures. In the longer term, if companies reduce investment in fossil fuels and demand does not correspondingly fall, prices will rise. Thus, governments should use all the regulatory tools and resources at their disposal to encourage and support consumers to shift to renewable energy-based forms of technology. In line with international legal obligations on climate finance recently re-affirmed by the International Court of Justice, countries of the global north will need to provide financial support to those of the global south.
There is a political path for such taxes
Such taxes have precedent. Colombia, the co-host of the Santa Marta conference with the Netherlands, adopted a permanent profit tax on oil and gas in 2022. After enacting a windfall tax on oil and gas generators in 2022, Britain’s government announced in 2025 that this would be replaced with a permanent price-linked tax after 2030. Public opinion surveys show appetite for taxes on profits in many more countries. Surveys ranging from Brazil, Germany and India, show strong majority support for taxing fossil fuel companies, including from a majority of supporters of right-wing parties. America stands as an exception, with polls showing support between 39 per cent and 66 per cent of Republicans, a sizeable level of support, even if not consistently a majority.
In contrast, carbon taxes are much less popular. Research by Jared Finnegan at UCL and a LSE Visiting Fellow found that, as a result, they are levied primarily by governments during periods where they face lower electoral competition.
To send a clear signal to global markets, a critical mass of countries would need to enact permanent taxes on fossil fuel profits. Two forums are particularly relevant. The 2027 follow-up conference to the Santa Marta conference, co-hosted by Ireland and Tuvalu, will create an opportunity to build a coalition of the willing. Members of the United Nations are also currently negotiating the UN Framework Convention on Tax Cooperation, the first global tax treaty-making process open to all UN members. The process will continue until at least the end of 2027 but the current draft treaty includes an article providing for taxation for sustainable development. In December 2025 Britain proposed that this text incorporate the “Polluter Pays Principle”, (a term which could encompass either carbon taxes or profit taxes). Britain’s proposal was supported by Brazil and Sweden among others. Provisions on sustainable development or polluter pays taxes could therefore prompt national tax authorities to consider profit taxes on oil and gas companies and facilitate international coordination.
A proverb from Zanzibar, my parents’ birthplace, is apt: “If you are going to eat a pig, eat a big one!” Or, to make it more halal: if governments are willing to face down fossil fuel lobbies and tax oil and gas companies, they should go the whole hog and make those taxes permanent.
Author
Ashfaq Khalfan is the director of the Sustainability Regulation Observatory at the Global School of Sustainability at the London School of Economics and Political Science.
Source
https://blogs.lse.ac.uk/businessreview/2026/06/09/it-is-time-to-permanently-increase-taxes-on-oil-and-gas-companies/