The year 2022 was meant to be the end of the energy crisis. Governments around the world hoped that as the pandemic waned and supply problems abated, prices would fall. The war in Ukraine may have put an end to this hope: European natural gas prices have risen markedly and crude oil is now hovering around $100 a barrel.

Sky-high prices may prolong the bonanza for oil and gas companies, which has led in turn to plans for record-breaking share buyback programmes. Yet the crisis may not bring only upsides for oil majors. BP’s announcement that it would divest its stake in Rosneft, the Russian state-controlled oil producer, could result in a huge writedown for the company.

This shows how hard it is to predict the corporate winners and losers of geopolitical turmoil. Many, though, will clearly profit. For such companies, fending off calls for a windfall tax on their gains — already a shrill appeal as a result of the cost of living squeeze — will become even more difficult. It was one thing for energy companies to dismiss the idea when supernormal profits could be put down to vague “supply issues”. Doing so when they will be benefiting indirectly from the biggest military offensive on European soil since the second world war is quite another.

Yet, however appealing it might seem to force oil companies to fund a form of compensation, windfall taxes are a bad idea. They compound uncertainty and distract from the need to pursue well thought-out reform to deal with the challenges ahead.

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A good tax system should clearly set out, in advance, how an individual or entity will be taxed. Stability is key to promoting both investment and spending — both of which drive economic growth. Predictable and constant regulations are identifiers of a society governed by the rule of law.

This does not mean that taxes should never change: epoch-shifting geopolitics may very well require more revenue to be raised for a multitude of reasons. But any changes should be made according to due process, and deliver on an explicit rationale. The targeted, retrospective confiscation of profits deemed to be “too high” is anathema to these principles and carries significant risk. High profits are not guaranteed, and if they are taxed away investors may be reluctant to take on risk — especially in an already unstable, unpredictable environment.

Debate can be had as to whether economic rents should be taxed more — especially those associated with natural resources. This is really a matter of degree. Britain already treats profits from natural resources differently.

If energy companies do escape the threat of windfall taxes, they are not absolved of the moral responsibility to reflect on how future profits are deployed. They, too, have a stake in the rules-based order that is now directly under threat and should acknowledge the important role they can play in fortifying it. BP’s announcement that it would divest its holdings in Rosneft was undoubtedly the right decision. It would also be wise to accelerate plans to transition towards the renewables that will give European countries true energy independence.

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The coming months and years will raise hard questions about how governments should fund responses to issues arising from the Ukraine crisis, the climate crisis, and others yet to be determined. It will always be tempting to reach for the closest pot of money. Far wiser would be to initiate meaningful discussion on how best to reform the tax system to raise the revenue needed. Natural resource taxation will be a part of this conversation. Arbitrary windfall taxes should not be.

By info