European fuel tax cuts will lead to significant income transfers to Russia, thus undermining the Union’s sanction efforts against the country. EU politicians should instead consider alternative policies, such as direct income transfers to households, if they want to shield citizens from increased fuel prices without benefiting Russia.
Messages for policy
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Tax cuts designed to shield households from higher fuel prices following Russia’s invasion of Ukraine can be expected to raise the underlying oil price and increase Russian oil profits.
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This unintended income transfer from the EU to Russia is independent of whether the EU implements an oil-import embargo. Fuel tax cuts can thus undermine EU efforts to sanction Russia.
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An alternative policy of direct income transfers to households would lead to much smaller profit increases for Russia while still meeting the EU’s objectives of shielding citizens from high fuel prices.
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Income transfers are more flexible from a household’s perspective. Instead of aiding people only at the pump, the same amount of money is put in their wallets.
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References
Further Reading
Sanctions adopted following Russia’s military aggression against Ukraine. European Commission https://ec.europa.eu/info/business-economy-euro/banking-and-finance/international-relations/restrictive-measures-sanctions/sanctions-adopted-following-russias-military-aggression-against-ukraine_en (2022). This website outlines the sanctions adopted by the EU against Russia.
Oil Market Report (IEA, 2022); https://www.iea.org/reports/oil-market-report-may-2022. The International Energy Agency tracks and projects Russian oil supply in its monthly reports.
A Dereliction of Fuel Duty: Europeʼs €9 Billion Gift to Putin and the Rich (Transport & Environment, 2022); https://www.transportenvironment.org/wp-content/uploads/2022/03/2022_03_study_fuel_excise_duty_measures.pdf. This report outlines the plans for fuel-tax reductions early after the invasion and discusses other effects such as on the climate and distributional issues.
Montag, F., Sagimuldina, A. and Schnitzer, M. Are temporary value-added tax reductions passed on to consumers? Evidence from Germany’s stimulus. Preprint at https://arxiv.org/abs/2008.08511 (2020). This research analyses the extent to which tax cuts are attenuated by an increase in the underlying fuel price.
Wachtmeister H. World Oil Supply in the 21st Century: A Bottom-up Perspective. PhD thesis, Uppsala Univ. (2020). A background on the global oil market and some of the key quantitative values used in our study.
Acknowledgements
The work has been supported by Formas under grant number 2020-00371 (J.G. and D.S.).
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Gars, J., Spiro, D. & Wachtmeister, H. European fuel tax cuts increase Russian oil profits. Nat Energy 7, 912–913 (2022). https://doi.org/10.1038/s41560-022-01125-3
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DOI: https://doi.org/10.1038/s41560-022-01125-3
