Excess Profits Tax in Times of Crisis Falls Short of Expectations
Research
20.04.2026
ZEW Study Shows Limited Revenue Effect and Distortions in EU Electricity Market During 2022 Energy Crisis
The usefulness of an excess profits tax as a policy measure in times of crisis is limited. This is the conclusion of a current study by ZEW Mannheim, which for the first time provides a comprehensive empirical evaluation of the EU-wide inframarginal revenue cap. Although the taxation of excess profits in the electricity sector generated considerable revenue during the 2022 energy crisis, fiscal outcomes fell short of expectations, and the tax slightly distorted market behaviour.
“At first sight, excess profits taxes seem to be an efficient instrument, helping to finance the costs of crisis without distorting economic decision-making. Our analysis, however, shows that these taxes deliver on their promises only under certain conditions,” explains Julia Spix, researcher in the ZEW Research Unit “Corporate Taxation and Public Finance”. Dr. Daniela Steinbrenner, researcher in the same unit, adds: “Especially the design of the taxes and the timing of their implementation are crucial to the success of the policy. Even with a generous definition of excess profits, these taxes can have a distortionary effect on market behaviour.”
Limited tax revenues and uneven distribution
The analysis reveals that while the inframarginal revenue cap applied in the EU electricity market had the capacity to generate tax revenues, such revenues varied considerably across EU Member States. Overall, the cap covered around 24 per cent of the crisis-related government support. In many countries, tax revenues fell short of expectations, especially since electricity prices dropped rapidly after the peak of the crisis. This means that the exact timing of the policy – ideally when prices peak – is decisive for its fiscal outcome.
Incentives for strategic behaviour in electricity markets
In addition to the fiscal effects, the study also analyses potential market distortions. It shows that long-term investment incentives remain largely unaffected by the temporary tax. On a short-term horizon, however, electricity producers seem to slightly adjust their production decisions to optimise their own profitability under the tax regime. This demonstrates that even in transparent markets the definition of excess profit can have substantial influence on firms’ behaviour.
About the methodology
The study is based on a comprehensive dataset with hourly data on electricity generation and day-ahead prices in 23 EU Member States. In their analysis, the authors examine both the fiscal effects and the behavioural responses of electricity producers. The high frequency and granularity of the data enable a precise evaluation of the excess profits tax in the European electricity market.
