A new study suggests that the excess profits made by oil and gas companies during the 2022 energy crisis could have financed almost five years of climate payments promised by industrialized nations to poorer countries, highlighting a potential solution for COP 29 negotiations.
As world leaders converge for the UN Climate Change Conference (COP 29) starting on November 11, a pressing topic will be the funding of climate targets. A new study by an international team of researchers, including those from the Technical University of Munich (TUM), sheds light on a viable funding solution by taxing windfall profits from oil and gas companies.
According to the study, the extraordinary profits earned by these companies during the 2022 energy crisis could have funded nearly five years of the promised financial commitments from industrialized nations to poorer countries for climate protection and adaptation. The agreement known as the New Collective Quantified Goal (NCQG) aims to renew the commitment of $100 billion annually, from 2020 to 2025.
The 2022 Energy Crisis and Windfall Profits
The 2022 energy crisis, triggered by the geopolitical aftermath of the Russian attack on Ukraine, saw a significant spike in international energy prices. The researchers analyzed the financial data from 93 of the world’s largest oil and gas companies, comparing the expected profits to the actual figures reported.
The anticipated profits were around $753 billion, while the actual profits totaled $1.243 trillion, resulting in windfall profits of approximately $490 billion.
“These additional profits from just one year are close to the total amount promised to the poorer countries for a five-year period,” lead author Florian Egli, a professor of public policy for the green transition at TUM, said in a news release.
Potential for Redistributing Windfall Profits
The study also considered the ownership structure of the companies, revealing that 42% of the windfall profits were earned by state-controlled enterprises, with Norway leading the charge.
“The governments have the ability to take direct action to skim off the profits earned due to a crisis and use them to fight the climate crisis,” co-author Anna Stünzi, a postdoctoral researcher at the University of St. Gallen, said in the news release.
The findings show that 95% of the windfall profits from private companies are based in countries that have already pledged to contribute to climate financing.
“With a tax on windfall profits from oil and gas, at least some industrialized countries could generate income to meet their commitments to the poorer countries,” added Egli.
A Global Minimum Tax as a Possible Solution
Michael Grubb, a professor at University College London (UCL) and a study author, emphasizes the potential long-term benefits.
“Taxing superprofits could tamper and phase down investment in oil and gas, building a stable and efficient clean energy market and helping to align financial flows with the goals of the Paris Agreement,” he said.
The paper, published in the journal Climate Policy, argues for the establishment of a fund that could collect such taxes, ensuring consistent availability of funds even in years without windfall profits. This mechanism mirrors the global minimum tax rate for companies agreed upon by over 130 countries under the OECD and G20 in 2023.
Looking Forward
The findings from this research suggest that a well-structured tax on windfall profits could significantly bolster climate finance. As COP 29 discussions progress, this proposal might gain traction among policymakers seeking innovative ways to fulfill climate commitments and foster global environmental justice.