Redistributive policy

Energy costs in Europe: Economists discuss policy options

In his September 2022 State of the Union Address, European Commission President Ursula von der Leyen has called for windfall taxes on the profits of energy companies. She also flagged the possibility of price caps to reduce household and business bills for gas and electricity, which have soared in recent months. Romesh Vaitilingam summarizes the results of a survey conducted by the Initiative on Global Markets, which invited American and European economists to express themselves on the political responses to be given to the energy crisis.

The survey of European economists took place in June 2022. We asked the experts whether they agreed or disagreed with the following statements and, if so, to what extent and with what degree of confidence:

  1. A windfall tax on the excess profits of big oil and gas companies – the revenue from which would be returned to households – would be an effective way to temporarily relieve the average household in European countries of rising energy costs.
  2. Fiscal measures capping consumer energy prices would be a more appropriate immediate response to rising inflation in the eurozone than an interest rate hike.

Exceptional taxes

Of our 48 European experts, 33 participated in this survey. On the first statement, there is a diversity of opinions. Weighted by each expert’s confidence in their answer, 4% of the panel strongly agree, 46% agree, 33% unsure, 17% disagree and 0% strongly disagree.

Experts can include short comments in their responses, many of which add considerable nuance to their simple survey responses. For example, among those who agree, there are some notable caveats.

Ricardo Reis of the London School of Economics (LSE) says: “Yes in principle, but very uncertain effect on expectations of future taxes for lucky industries, subsidies when energy prices fall, etc.” Charles Wyplosz, of the University Institute of Geneva, says: “It is a poor substitute for a fully reimbursed carbon tax, but a better approach to raising revenue than a general tax or a deficit. And Franklin Allen of Imperial College London comments: “This redistribution may have a long-term effect on investment, but seems appropriate given the current situation in many countries.

Among those who say they are uncertain, several panelists note the challenges of implementing windfall taxes. Patrick Honohan of Trinity College Dublin remarks: “Geopolitical circumstances could justify an excess profits tax, but it is difficult to operationalize it successfully in a multi-country world. And Stanford’s Nicholas Bloom talks about his personal experience of working in government: “Having been responsible for a windfall tax on oil companies in the UK in 2001, it’s a lot more complex than it appears.”

Other concerns mentioned by experts who say they are uncertain include those expressed by Jan Eeckhout of the Universitat Pompeu Fabra in Barcelona: “Taxing inelastic supply (resources), by all means. Levying ad hoc taxes on ex post results, not so sure. Example from Norway: 78% tax on profits, always.’ Yale’s Costas Meghir adds: “Excess profits are very difficult to measure and profitability should be measured by the longer-term return on capital. And Chicago Booth’s Christian Leuz observes: “The impact of this tax is unclear but matters. In addition, there are many constitutionality and implementation issues with this tax.

Among those who disagree with the statement, there are strong opinions. Kjetil Storesletten of the University of Oslo protests: “People invest because they think they can reap the benefits. Ex post taxation undermines property rights and kills investment incentives. And Jan Pieter Krahnen from Goethe University Frankfurt concludes: “windfall profits in the energy sector and helping the poorest households are two different things that should not be directly linked.

American Perspectives

Equally strong opinions were expressed by some members of our US panel when, in March 2022, we actually asked for the same question on energy cost policy in the United States:

A windfall tax on the profits of big oil companies – the revenue from which would be returned to households – would be an effective way to protect the average American household from rising energy costs.

Of our 43 American experts, 36 took part in this survey; and while there was a similar diversity of opinion, they were more likely to disagree with the statement than the European panel: nearly half of American respondents compared to only a sixth of Europeans. Weighted by each expert’s confidence in their answer, 4% of the panel strongly agree, 34% agree, 16% unsure, 35% disagree and 12% strongly disagree (totals do not always add up to 100 due to rounding).

Among those who disagree, some note the potential effects on business and consumer incentives. Robert Shimer of Chicago replies, “It would reduce energy costs now, but the anticipation of future taxes reduces the incentive to invest in a stable supply. And David Autor of MIT objects: “I want energy companies to invest now. I also want consumers to reduce their energy consumption. This idea discourages both.

Others echo the view that taxing windfall profits and helping households should be considered separately. Yale’s Oliver Hart says, “Arbitrary taxes are bad, and a windfall tax is arbitrary. Better to help poor households directly. And Larry Samuelson of Yale suggests: ‘The rebate would help households, but it’s a piecemeal policy. Comprehensive tax reform and a coherent energy policy would be more effective.

Of the US panelists who agree with the statement, two refer to environmental issues. Maurice Obstfeld of the Peterson Institute notes: “Especially in view of climate goals.” And MIT’s Daron Acemoglu concludes: “But this should be motivated not as a windfall but as a punitive tax for all their misbehavior on climate and the clawback of fossil fuel subsidies.”

Cap on consumer energy prices

Regarding the second statement, whether capping consumer energy prices would be a more appropriate immediate response to rising inflation than raising interest rates, the majority of panelists said that they disagree. Weighted by each expert’s confidence in their answer, 4% of the panels strongly agree, 11% agree, 7% unsure, 36% disagree and 43% strongly disagree.

Among those who agree, Oliver Blanchard of the Peterson Institute says, “This is a case where a larger budget deficit can make the job of monetary policy easier. But Jan Eeckhout, who says he is uncertain, objects: “To play with the price system leads to an imbalance, which someone has to pay anyway. Better monetary and fiscal policy plus redistribution.

Among the panelists who disagree, some focus on alternative ways to help poorer households. Jan Pieter Krahnen says: “You will not manipulate market prices, because of the negative allocative consequences. The poorest households can be compensated directly. Ernst Fehr of the University of Zurich suggests: “Instead of an energy price cap, poor households should receive a cash transfer to ease the burden of high energy prices. Jean-Pierre Danthine of the Ecole Polytechnique Fédérale de Lausanne adds: “I am not in favor of such a measure for ecological reasons. Direct subsidies to the poorest households are preferable.

Others also worry about the impact on incentives to reduce energy consumption. Franklin Allen replies: “Such a cap would blunt the incentives to reduce energy consumption and would therefore be counterproductive. And Charles Wyplosz observes: “Energy prices should rise because supply is tight (and that’s also good for the long term). Inflation is another matter.

Still others focus directly on inflation and potential policy responses. Chicago’s Lubos Pastor says, “Inflation has a broader base, going well beyond rising energy prices. Patrick Honohan said: “The change in energy prices is – and should be – unlikely to be temporary; strongly negative nominal key interest rate difficult to justify today. Harvard’s Pol Antras comments: “Inflation is widespread. Price controls would reduce energy costs, but would likely encourage spending, increasing inflation. Need tightening. And Ricardo Reis explains: “Monetary policy is the right tool to deal with inflation”, in connection with one of his papers on the subject.

Finally, two experts go back in history. Kjetil Storesletten observes: “In the 1970s we tried price caps as an instrument to curb inflation. It didn’t work then and it won’t work now. And Nicholas Bloom agrees: “Price controls don’t work – there’s a long history of evidence on this. Indeed, I don’t know why this is even a question.



  • This blog post summarizes an investigation by the University of Chicago Booth School of Business Global Markets Initiative. Jhe full survey results for the European and WE the panels include all comments made by the experts.
  • The post office represents the point of view of its author(s), and not the position of LSE Business Review or the London School of Economics.
  • Highlighted image by KWON JUNHO on Unsplash
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