As oil profits are expected to triple amid the ongoing war in Iran, some groups are reviving calls for a windfall tax in Canada.
A windfall tax, also known as an excess profits tax, is applied when a certain industry gains higher-than-average profits from a crisis, to such an extent that those extra earnings appear “unreasonable or unfair or immoral,” says Hadrian Mertins-Kirkwood, senior researcher at the Canadian Centre for Policy Alternatives.
Prior to the outbreak of the war, Canada’s oil and gas industry was expected to make $30 billion this year in profit, according to Mertins-Kirkwood. Now profits are expected to go as high as $100 billion, resulting in about $70 billion in excess earnings. “Their profits tripled basically overnight through no act of their own,” he says.
As Canada grapples with an ongoing affordability crisis, as many struggle to afford housing, groceries and now gas, Mertins-Kirkwood and left-leaning organizations and politicians like the Alberta Federation of Labour and NDP Leader Avi Lewis argue that excess profits in the oil and gas sector could benefit more Canadians if redirected toward public priorities.
Who gains?
“These companies are making money off of an illegal war against Ukraine and now the Iran war,” Catherine McKenna, former Canadian minister of environment and climate change, told Corporate Knights at the Montreal Climate Summit on April 16. “I feel if you’re going to make those profits, they can be reinvested in a way that supports Canadians, not given back to your largely U.S.-based shareholders.”
Mertins-Kirkwood projects that Canadians as a whole are spending an additional billion dollars each month because of higher oil prices. However, Canadians themselves aren’t padding the oil industry’s pockets on a one-to-one basis, he says. Most of the oil that the Canadian oil industry produces is sold to international markets, such as refineries in the United States.
Canada wouldn’t be the first to establish a windfall tax. The United Kingdom currently has one in place, and ministers in Germany, Italy and Spain have recently called on the European Commission to implement one because of rising gas prices. That approach is not widespread, however, Mertins-Kirkwood says, because in many countries the oil industry is state-owned, so a large share of the windfall would already go to the government.
Not likely
While the Alberta Federation of Labour has urged the Alberta government to implement a windfall tax, most arguments push for the tax to be imposed at the federal level.
However, natural resources fall primarily under provincial jurisdiction, which complicates any federal attempt to impose a windfall tax, says Kent Fellows, a professor in the School of Public Policy at the University of Calgary. Further, Alberta, the largest oil-producing province in Canada, already takes royalties from the oil and gas sector, he says. “When prices increase and these firms are more profitable, the public purse gets a larger chunk of their revenues.”
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According to the Business Council of Alberta, resource royalties in recent years have generated an estimated $20 billion annually, or approximately one-quarter of total provincial government revenues in a roughly $75-billion budget. “The idea of a windfall profit tax doesn’t really make a lot of sense here because really they’d just be stealing from themselves,” Fellows says.
Mertins-Kirkwood, however, argues that a windfall tax would be applied after royalties have already been taken, so it would have no bearing on how much provinces already collect.
Another major pushback against the initiative is the idea that a windfall tax could stifle investment in the oil and gas sector. Investors take on the risk that in a low-price environment they might lose money, Fellows says. But if prices go up, they also expect to benefit. “They’re making calculated bets on that capital investment, and right now those bets are paying out.”
Leah Golob is a freelance business journalist based in Toronto.
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