IMF Notes

Taxing Windfall Profits in the Energy Sector

Author/Editor:

Thomas Baunsgaard ; Nate Vernon

Publication Date:

August 30, 2022

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:

The surge in fossil fuel prices in 2022 has generated substantial windfall profits in the energy sector. Policymakers in many countries are exploring policies to tax part of these profits. Excess profits can be taxed by tax instruments targeted at economic rents that avoid discouraging investment and limit any impact on further price increases. Many fossil fuel producing countries already have an adequate rent-capturing fiscal instrument in place. Others may consider introducing a permanent tax on windfall profits from fossil fuel extraction but should be more cautious about temporary and possibly poorly designed windfall profit taxes. Given the importance of encouraging decarbonatization of energy generation, it seems counter-intuitive to introduce exceptional tax measures on renewable electricity generation.

Series:

IMF Notes No 2022/002

Subject:

Economic sectors Financial crises

Frequency:

occasional