The effectiveness and distributional consequences of excess profit taxes or windfall taxes in light of the Commission’s recommendation to member states

Abstract

The current energy crisis is in essence a shock in natural gas prices, which also affects electricity prices. Energy prices had been increasing in Europe for over a year before the Russian invasion of Ukraine in February 2022. With the economic recovery in 2021, global natural gas demand bounced back to pre-pandemic levels and outstripped supply. European natural gas prices increased further following the invasion of Ukraine, and surged after Russia began restricting its exports to the EU in June 2022. Since many power plants are gas-fired, the lower natural gas supply induced an increase in electricity prices. Wholesale electricity prices are not homogeneous across Member States and reflect different levels of dependency on natural gas imports and of electricity interconnection with neighbouring countries. This upsurge in energy prices has dramatically increased firms' input costs and households' energy expenditure.