Report: Taxing fossil fuel profits, not consumers

Executive summary

Corporate Income Tax (CIT) rates have fallen during the past decades in a continuous race to the bottom in all economic sectors, both globally and in Europe. With the exception of the extractive sector, inclusive of upstream fossil fuel extraction, corporate taxes on downstream fossil fuel industries have followed the same trend, i.e., lower CIT rates and lower tax base. Combined with generous tax incentives and tax exemptions, these trends have reduced the effective taxation of fossil fuel companies, leading to a decline in tax payments relative to profits over time. In recent years, EU environmental tax differentiation has focused mainly on green investment incentives and carbon pricing instruments such as CBAM and ETS2, with little attention paid to taxing company profits. A rare exception was the 2022 EU solidarity contribution on fossil fuel companies’ windfall profits. The EU should build on this experience to develop a differentiated corporate tax system that applies to all fossil fuel companies. Read the full report Read the full report

Tax design is critical from a social equity perspective

A tax on the profits of fossil fuel companies, or on the capital income of their asset owners are less likely to be passed on to consumers than product-based carbon prices or emissions-based taxes.

Expected pass-through to consumers

Only in exceptional circumstances – in high volume and low profit margin sectors, or for specific goods – are consumer prices likely to be impacted, depending on the elasticity of demand, volume sales, profit margin, market concentration and the possibility of tax planning/avoidance. A variety of structural factors influence energy and electricity prices. CITs are generally not mentioned in the literature as a determinant of the energy price and a higher or lower CIT does not significantly correlate with higher or lower electricity prices. Even if a robust tax design were to minimise the risk of companies passing on the cost to consumers, the law should explicitly prohibit fossil fuel companies from shifting the tax burden onto households or other businesses. Such a ban has been put in place in several countries, notably in the framework of the solidarity contribution. Given companies can increase prices for a variety of reasons, to enforce such a ban, policymakers in the EU should establish a common methodology to monitor whether fossil fuel corporate profit taxes are being passed on through higher prices. It would allow legislators to underpin such a ban with effective sanctions. While a sound tax design should significantly limit pass-through risks, additional measures can still be needed to protect consumers from high energy prices and guarantee the right to energy for all, while also encouraging energy savings. Many relevant tools already exist; they were deployed during the energy price crisis of 2022–2023. Further, policymakers should support households and firms to shift to renewable energy in heating, cooling and transport, improve energy efficiency and reduce energy consumption, which will lower dependence on fossil fuels. This in turn reduces the ability of the fossil fuel industry to raise prices to offset the tax. Importantly, the revenue from a tax on fossil fuel profits could be used to finance such measures, as well as international climate finance – especially the Green Climate Fund and the Fund for Responding to Loss and Damage, to help communities already living with irreversible climate impacts driven largely by the burning of fossil fuels.

Expected pass-through to workers

Literature suggests that between 18 and 47% of a CIT increase could be passed onto the labour force. The Joint Committee on Taxation (JCT) in the US Congress, for example, assigns 25% of the corporate income tax burden to labour and the rest to firm owners. These assessments are not sector-specific though. In fact, the fossil fuel sector currently has high profit margins, which makes wage pass-through less likely than in low-margin sectors. However, given the importance of dividend stability for investors in the oil and gas sector, firms may be reluctant to reduce shareholder payouts, which suggests that limited adjustment pressures on labour costs cannot be fully excluded. It is also important to note that the fossil fuel phase out will inevitably have an impact on workers in the fossil fuel sector and those in the direct supply chains. Policies must be in place to ensure workers in the fossil fuel industry don’t lose out from the transition away from fossil fuels, which a tax on fossil fuel profits would encourage.

Expected impact on investments

Some studies argue that higher CIT rates can affect investment rates. Other economic studies show that a variety of other factors drive investment decisions, and do not exclude a zero effect of corporate taxes on growth. In 2022, the overwhelming majority of the profits of oil and gas largest companies were spent on fossil fuel projects – and only a tiny share on renewable energy. In 2025, major oil and gas corporations cut their targets for future low-carbon investments. In light of that situation, a tax on fossil fuel profits, potentially combined with a tax deduction for investments in renewable energy and related storage capacity, would usefully support a gradual reallocation of capital to investment in renewable energy and related storage capacity, thereby contributing to EU energy security and to curbing climate change.

Recommendations:

1️⃣ Introduce a differentiated corporate tax framework for fossil fuel companies, building on the experience of the 2022 EU solidarity contribution, to reverse the long-term decline in effective corporate taxation in the sector. 2️⃣ Prioritise profit-based taxation to complement existing consumption-based carbon pricing when raising revenue from fossil fuels, as the risk of pass-through of taxes on corporate profits and capital income on to consumers are minimal. 3️⃣ Extend and institutionalise taxation of fossil fuel windfall and excess profits, moving beyond one-off or temporary measures towards a more stable and predictable fiscal approach. An EU Regulation would ideally be needed to ensure the coordinated introduction of such a tax in all Member States. This would reduce the scope for aggressive tax planning and tax avoidance (profit shifting) within the EU. 4️⃣ Explicitly prohibit the pass-through of fossil fuel profit taxes to consumers (households and businesses) in the legal design of any new tax. Establish a common EU-level methodology to monitor price pass-through, enabling effective enforcement of pass-through bans and the application of sanctions where violations occur. 5️⃣ Ensure strong flanking measures for workers in the fossil fuel sector, so that the transition encouraged by higher taxation does not affect income, employment or working conditions. These measures include social conditionalities in public aid to companies to incentivise the creation and protection of quality jobs in the EU; a Just Transition Directive to anticipate and manage changes for workers in the fossil fuel industry; and full implementation of the Adequate Minimum Wage Directive target of collective bargaining coverage of 80%, including in new emerging green sectors. 6️⃣ To avoid profit shifting and tax abuses, put an obligation on fossil fuel companies to report their taxes on a public country-by-country reporting basis. The threshold for fossil fuel companies to report on their tax payments should be lower than the current €750 million consolidated group revenue, and made public to all jurisdictions (as opposed to only EU jurisdictions and named harmful tax jurisdictions under the EU country-by-country reporting Directive). 7️⃣ Recycle revenues from fossil fuel profit taxes into the energy transition, including: Support targeted consumer protection measures to guarantee vulnerable households and firms the right to energy, for renewable energy deployment, energy efficiency improvements, and reduction of fossil fuel dependence in heating, cooling, and transport, and for international climate finance. 8️⃣ Use fossil fuel profit taxation as a structural signal to investors, discouraging continued investment in fossil fuel activities while allowing space for incentives that support genuine investments in renewable energy and related storage capacity. Research author: Matti Kohonen – Financial Transparency Research Ltd Contributors: Isabelle Brachet (CAN Europe), Federico Terreni (T&E) Read the full report Read the full report