Windfall profits from oil and gas could cover climate payments
Companies took in half a trillion dollars more than expected in 2022
Technical University of Munich (TUM)
A central issue at the UN Climate Change Conference, set to start on November 11, will be the negotiations on new payments from industrialized nations to poorer countries. However, the question of whether and how these payments will be financed remains highly controversial. The study by an international team of researchers, with participation by the Technical University of Munich (TUM), has now revealed: The windfall profits alone taken in by oil and gas companies due to the 2022 energy crisis would have been sufficient to cover the existing commitments of the industrialized nations for nearly five years. The researchers therefore recommend collecting taxes on these so-called windfall profits from fossil fuels.
A key point on the agenda of the UN Climate Change Conference (COP 29) will be the negotiations on the funding of the climate targets. The industrialized nations made a commitment to pay 100 billion dollars annually between 2020 and 2025 to poorer countries for climate protection and adaptation to climate change. Now the follow-up agreement, the New Collective Quantified Goal (NCQG), is to be passed. However, the countries have not fully delivered on their previous commitments nor have the negotiations on the NCQG clarified how the additional funds are to be raised.
An international team of researchers has therefore investigated one of the proposals under consideration: a tax on windfall profits of companies that make their money with fossil fuels. A windfall profit tax imposes a levy on profits that exceed what would be expected in normal circumstances due to a special situation, generally a crisis. The energy crisis following the Russian attack on Ukraine at the beginning of 2022 was a special situation of this kind. In that year international energy prices soared.
The research team studied the profits reported for 2022 by 93 of the world’s biggest oil and gas companies and compared them with analysts’ forecasts at the beginning of the year. The total expected profits amounted to around 753 billion dollars. The actual profits earned by the companies totalled around 1.243 trillion dollars. Consequently, the companies took in windfall profits of around 490 billion dollars. “These additional profits from just one year are close to the total amount promised to the poorer countries for a five-year period,” says study leader Florian Egli, Professor of Public Policy for the Green Transition at TUM.
42 percent of windfall profits earned by state companies
To assess whether governments could have redistributed these excess profits, the researchers considered the countries where they are domiciled and whether they are publicly or privately owned. 42 percent of the windfall profits were earned by state-controlled companies, with the largest proportion earned in Norway. “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,” says the second study leader Dr. Anna Stünzi of the University of St. Gallen.
Of the private companies that earned windfall profits, 95 percent were headquartered in countries that have made commitments to contribute to climate protection 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,” says Florian Egli. Among the private companies, companies in the USA accounted for around half of these profits (143 billion dollars). An additional 37 percent of the profits were taken in by companies in the UK; France and Canada. Nearly all of the companies are located in G20 countries.
“Agreement on minimum tax could be a role model”
“More than half of the worldwide greenhouse gas emissions result from the burning of oil and gas. At the same time, the oil and gas industry has been one of the most profitable sectors for a long time,” says Florian Egli. “It would undoubtedly be hard to reach an international agreement to tax these profits. But the agreement on a global minimum tax rate for companies, reached by more than 130 countries in 2023 under the auspices of the OECD and G20, could be a role model.” The taxes could flow into a fund, for example, so that money would also be available in years without windfall profits. So far, the EU had introduced a temporary windfall profits tax on fossil fuels in 2022; in the UK, such a tax will apply until 2030.
The researchers note that the worldwide profits of the industry are larger than those stated in the study. That is because some of the biggest companies, for example in Russia, Iran, South Africa and Venezuela, do not publish their figures and could therefore not be included in the study.
“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” says study author Michael Grubb, professor at University College London (UCL). “The reorientation of fossil fuel revenues for consistency with climate goals should be next on the global agenda.”
Further information:
Prof. Florian Egli leads the new Transformation Finance Lab of the TUM Think Tank. The TUM Think Tank brings together actors from the realms of science, civil society, politics and business to jointly develop proposals and instruments to address urgent problems.
Journal
Climate Policy
Method of Research
Data/statistical analysis
Subject of Research
Not applicable
Article Title
Harnessing oil and gas superprofits for climate action
Article Publication Date
8-Nov-2024
Climate change poses multiple risks for
banks
By AFP
November 8, 2024
Climate activists held a banner reading 'Banks dirty our future. Let's block them' outside the headquarters of French bank Societe Generale in 2019. Protests are one of the risks bank face over their response to climate change
Benoît PELEGRIN
Climate change poses risks to banks on several levels: it can directly impact their finances, tarnish their image and land them in the courtroom.
Non-governmental organisations regularly criticise banks for the glacial speed at which they are moving to take climate change into account.
The latest was Reclaim Finance, which alongside several other NGOs took aim at European banks just days ahead of the COP 29 UN climate summit that begins on November 11 in Azerbaijan’s capital Baku.
– Financial risk –
By continuing to finance fossil fuel projects, even as part of a transition to a green economy, banks are continuing to link their fates with the industry.
In an October 2022 report, Finance Watch calculated that the world’s 60 largest banks held approximately $1.35 trillion in fossil fuel assets on their books.
There has been no major change since, according to the NGO’s chief economist, Thierry Philipponnat.
The problem is that “there is no scenario where in 50 years fossil fuels will have any value,” he told AFP.
Nations agreed at the COP28 climate summit in Dubai last year to transition away from fossil fuels.
And the International Energy Agency expects demand for oil, gas and coal to peak by 2030.
Economics professor Laurence Scialom at Paris-Nanterre University warned that “overnight entire asset classes will deteriorate.”
Banks that hold shares and bonds of fossil fuel companies in their portfolios will see the value of those diminish, while fossil fuel companies could become credit risks as the sector’s profitability is squeezed, she warned.
The fossil fuel industry represents a “financial time bomb” for banks and they still underestimate the danger, said Scialom.
Home mortgages are also at risk.
US consultancy Bain & Company last year warned that wildfires, drought and other climate risks threatened between 10 and 15 percent of the value of the real estate portfolios held by the world’s top 50 banks.
– Reputation risk –
The research done by NGOs like Finance Watch and Reclaim Finance evaluating bank lending in light of climate change is regularly used by media and has begun to tarnish their public image.
Other groups have opted for more direct action such as disrupting shareholder meetings or demonstrating in front of headquarters buildings to draw attention to the behaviour of lenders.
These “name and shame” campaigns can be a powerful weapon for pressure groups as banks depend heavily on the confidence of clients.
– Legal risks –
NGOs have already challenged fossil fuel firms in court, with the most remarkable success to date being the 2021 victory by the Dutch chapter of Friends of the Earth against Shell.
Judges at The Hague District Court ruled three years ago that Shell must reduce its carbon emissions by 45 percent by 2030, as it was contributing to the “dire” effects of climate change.
That ruling was seen as an historic victory for climate change campaigners as it was the first time a company had been made to align its policy with the 2015 Paris climate change accords. Shell is appealing the ruling.
Activists are now turning to banks.
The Dutch chapter of Friends of the Earth launched in January of this year a case against the Netherlands’ top bank, ING, for financing highly polluting companies.
Then in February Friends of the Earth, Oxfam France and another NGO filed suit against BNP Paribas accusing it of contributing to climate change via its financing of fossil fuel firms.
Valerie Demeure, who heads up research on ESG issues at Ofi Invest Asset Management, said the cases are “certainly the start in a series”.
French law offers environmental activists a means to challenge companies.
Since 2017, large French firms are required to take effective measures throughout their supply chains to respect human rights and minimise environmental harm.
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