With Europe in the midst of another energy crisis, many are asking how to stop the cost of war making its way onto household bills.
The long term solution, which is already cutting bills in Spain, is investing in homegrown renewables, leading to less reliance on imported fossil fuels - inflated prices meant these cost the EU an extra €2.5bn in the first 10 days of the Iran war.
The short term solution, which governments could implement overnight, is to cut tax.
Last year, 28 per cent of the average European consumer’s electricity bill went on taxes and levies, according to the IEA.
Many see this as particularly unfair because taxes on electricity are much higher than on fossil fuels - despite these being the leading cause of the climate and biodiversity crisis. In Spain, taxes on electricity were 4.2 times higher than those on fossil gas in 2025 while Germany’s were 3.2 times higher.
With the five oil majors earning more than €88 billion in 2024, higher taxation would still leave them in the green.
European governments are finding clever ways to cut tax on electricity
Your electricity bill is made up of three parts: energy costs, network or grid fees and taxes. As Climate Action Network (CAN) Europe points out, every component of your bill “depends on policy choices made by governments”.
Energy costs are what you pay for the electricity you actually use and are determined by many variable factors, such as wholesale electricity costs, time of day and weather conditions. Network or grid fees go towards maintaining the poles, wires and infrastructure that bring electricity into your home or business. While the taxes added to your bill are decided by governments.
If the average home or business owner is paying less tax, governments are likely to need to make up the shortfall. The solution, argues CAN Europe, is “rebalancing taxation away from electricity and toward fossil fuels”.
Some governments have already successfully reduced electricity prices through tax changes. Germany, which has the highest electricity bills in Europe, managed to reduce annual bills by 16 per cent by taking a levy for renewables off electricity bills and onto general tax bills.
Denmark came up with the clever solution of making electricity for heating cheaper, thereby rewarding home and business owners who installed heat pumps.
“The Danish government considers that the tax exemption was in part responsible for the large increase in heat pump installations from 2019-2021 and in 2023,” according to a report from the NGO Regulatory Assistance Project.
'Start taxing companies that fuel the climate crisis'
In response to the current energy crisis, caused by the closure of the Hormuz Strait and reduced Middle East energy exports, dozens of countries - including most of Europe - agreed to release a record amount of oil from their emergency reserves.
Fanny Petitbon of environmental organisation 350.org argues that this is like putting a “band-aid on a gaping wound”.
“If G7 countries are serious about stabilising the market, they need to stop protecting profits and start taxing companies that fuel the climate crisis,” she says.
“Working people shouldn’t be paying the price while oil majors treat the war in the Middle East like a winning lottery ticket.”
Do fossil fuel giants pass taxes onto consumers?
It’s logical to worry that if fossil fuel giants, like Aramco and Gazprom, had reduced profits due to higher tax they would charge their customers more to make up for the shortfall - resulting in higher bills for consumers.
But analysis from CAN Europe found this is unlikely to happen: “Economic evidence shows that profit taxes, unlike consumption taxes, are generally not passed on to consumers or other companies, as prices are driven primarily by fuel costs, market design and infrastructure constraints rather than corporate taxation. And there is no significant correlation between higher corporate taxes and higher electricity prices across EU countries.”
Permanent windfall taxes are the answer
During Europe’s last big energy shock, after the outbreak of the Ukraine war in 2022, the bloc introduced a ‘solidarity contribution’ - a temporary windfall tax on fossil fuel profits to help shield households and companies from inflationary energy prices. It raised €28bn, mostly used by EU member states to financially support energy consumers, particularly vulnerable households.
Many climate-aligned organisations have called for this windfall tax to be brought back and made permanent, creating funds to drive the clean energy transition.
“In the short term, cutting electricity taxes and introducing targeted support measures funded by taxing the excess profits being made by the fossil fuel industry can give people breathing space for now. But in the long run, fossil fuel profits should be taxed permanently which can be used for future proofing Europe’s energy system through investing in renewables, efficiency, grids and electrification,” says Seda Orhan, Head of Energy at CAN Europe.
