Policy brief: taxing fossil‑fuel profits to accelerate Europe’s transition

A recent policy study from environmental groups argues for a permanent, profit‑targeted levy on fossil fuel companies as a durable revenue source for decarbonisation and consumer protection. The paper situates its proposal against the backdrop of large corporate earnings and high fossil‑import bills, noting that these profit pools create a clear fiscal opportunity for governments. It recommends a framework that combines a differentiated corporate tax design, legal bans on passing new levies onto end users, and an EU‑wide monitoring methodology to detect and sanction pass‑through. The authors propose lowering public reporting thresholds and forcing country‑by‑country tax transparency to close avenues for profit shifting and aggressive tax planning.

Social safeguards are emphasised: revenue recycling should back targeted household relief, workforce support, and investment in renewables and storage. The brief criticises the narrative that low corporate taxes are essential for energy investment, pointing to continued fossil‑focused capital allocation despite generous tax regimes. Technical design options include profit‑based charges, carve‑outs for green investments, and mandatory reporting rules to make revenues predictable rather than one‑off. Enforcement logistics are central: the study calls for common metrics and penalties to prevent companies from shifting costs to consumers or moving profits across jurisdictions. If translated into EU regulation, the measure would reduce tax competition between member states and tighten the perimeter for tax avoidance within the bloc.

Alongside this proposal, a recent confidential European Commission recommendation reframes a separate but complementary problem hampering electrification: retail electricity is often taxed and levied more heavily than fossil fuels, creating a persistent 'spark gap'—the retail price ratio between electricity and gas—that can render heat pumps and other electrification projects economically marginal. The Commission’s draft advises Member States to use existing legal routes to lower VAT and excise on electricity, shift non‑energy levies to general budgets, and therefore make electrification more competitive. A simple VAT reduction (for example, from 21% to 10%) produces modest bill relief—roughly a 9% reduction in VAT‑inclusive price—useful but sometimes insufficient where electricity still costs two to three times as much as gas.

These two policy threads can be mutually reinforcing: profit‑based levies on fossil firms could create a revenue stream to replace the household and industrial revenues foregone if Member States lower electricity levies or VAT—solving a central political barrier to retail tax reform. However, both approaches face practical hurdles. The brief’s assumption that pass‑through can be legally blocked depends on high‑frequency, cross‑border price and margin surveillance that many member states lack. The Commission’s recommendation is cautious and non‑binding, reflecting political sensitivity over replacing levy revenues and the absence of a clear EU‑level offset in its draft. Together, the documents point to a policy package that would need three alignments to succeed: legally tight pass‑through bans, interoperable monitoring and reporting systems, and explicit revenue‑recycling rules linking fossil‑firm levies to lower retail electricity taxation and direct investments in electrification and storage.

In sum, the coalition study and the Commission draft suggest complementary levers—supply‑side fiscal discipline on fossil rents and demand‑side retail tax reform—that, if designed and enforced in tandem, could both fund and accelerate Europe’s shift away from fossil imports while protecting consumers and supporting a just transition.