Keeping fuel prices low causes huge environmental and economic damage while providing no meaningful help for the poor.
A total of 18 European Union countries have reduced transport fuel taxes or introduced price caps on fuel and some have done both in response to the energy crisis.
The Hungarian government fixed the consumer price of petrol and diesel at HUF 480 or about €1.2 from November 2021 while market prices have been much higher and even exceeded HUF 800, for example. The government reduced the excise duty on fuels by HUF 25, or €0.06 even before that.
I have at least 42 arguments for why artificially reducing fuel prices by government intervention is the wrong response. The primary issue is that reducing fuel prices increases fuel consumption.
According to the European Environment Agency, an average fuel price increase of one per cent in the EU reduces fuel consumption by 0.1 per cent in the short term and 0.3 per cent in the longer term. The fuel tax cuts announced so far in the EU are estimated to lead to an additional 3.3 megatonnes of oil consumption.
The effect of the price decrease on fuel consumption is demonstrated by the Hungarian case, too: in the first eight months of 2022, Hungary consumed 14 per cent more transport fuel than in the same period of the previous year, despite the fact that the price of other products, especially food, has increased sharply, limiting the households’ disposable income.
The traffic-boosting effect of price-fixing is also demonstrated by the fact that businesses started to restrict the use of company cars in July 2022 when they were banned from purchasing fixed-price fuel. And in Slovakia, a survey found that 30 per cent of the population drive less since the fuel price hike, and almost six per cent of the respondents said they had switched to public transport either partially or completely because of the sudden price hike.