Russia’s invasion of Ukraine has pushed fuel prices to their highest level in recent years. To reduce the impact for drivers at the pump, many EU countries have reacted by cutting fuel duties and several countries are still considering such measures.
While this policy approach has a simplistic appeal, it completely fails to reduce oil demand from Russia. Quite the opposite, by making fuel cheaper, cuts to fuel taxes invariably increase oil demand. We estimate that over the announced duration of the policies, they will result in an additional 3.3 million tonnes of oil equivalent (Mtoe) being consumed and 12.9 Mtoe if the cuts are extended for a full year.
Cuts to fuel taxes also generate inequitable social outcomes as the rich use eight times more fuel than the poor. Based on evidence from past cuts, we also know that oil companies will adjust their prices to claim a share of the tax cut.
It is also an extremely expensive policy approach, already totalling nearly €14 billion in announced Member State commitments – an amount that may continue to rise if more member states announce tax cuts or if the temporary reductions are prolonged (€52 billion for a full year).
A better way to help citizens while also reducing oil demand from Russia
Given the backwards incentive to burn more oil, and the skewed distribution of benefits towards the rich, T&E proposes that EU countries reverse the cuts to fuel duties and at the very least declare that the cuts will not be renewed.
As an alternative, EU countries should take actions that actually lower the use of Russian oil – rather than subsidise it – by cutting public transport fares, making homeworking a right, and reviewing speed limits (e.g. limiting truck speed to 80km/h).
Governments should also design income support measures (e.g. consumption cheques, reduced labour taxes) focused on low and middle income families that do not incentivise oil use and car driving.