Abolish fossil fuel tax breaks

Transport fuel tax cuts and fuel price caps are extremely damaging from a social, economic and environmental point of view. 

Lowering fuel prices increases fuel consumption, thus it indirectly supports the Russian war machine, contributes to the climate crisis and increases air pollution. 

These measures result also in a very unfair redistribution, as the rich drive much more than the poor. And there is an important political difficulty: it is usually very difficult to withdraw a concession.

Emit

I discussed many of this issues in my previous article for The Ecologist. Here I want to propose a real solution to the fuel inflation and cost of living crisis, based on international examples.

A tax on carbon emissions was introduced in Canada during 2020, which raised the price of fuel. 

The federal government either distributes the proceeds directly to provincial governments (where the scheme has been voluntarily adopted), or directly to individuals and families (tax-free), as well as to targeted sectors including small and medium-sized enterprises, schools, hospitals, non-profit organisations, and indigenous communities. 

Most households receive more support through these payments than the additional expenditure the new tax generates for them. 

The Austrian government taxes carbon emissions from October 2022, and this includes transport fuels. Companies have to pay €30 for every tonne of carbon dioxide they emit, which will obviously be passed on to consumers. 

Compensations

To compensate, all adults who spend at least six months in the country in 2022 received a one-off payment of €500, while those under 18 receive €250 (regardless of nationality) and the family allowance was increased to €2,000 per child under 18 and €650 per dependent child over 18. There is also a €100 back-to-school bonus. 

The tax credit for parents is increased from €450 to €550, to be paid in the tax assessment season starting in early 2023. Low-income earners and those on benefits receive an additional bonus of €300. In areas of the country where public transport is scarce, an additional subsidy of up to €200 is provided.

The government in Ghana has been subsidising fuel consumption with huge sums of money for years, which has put a considerable strain on the state budget. 

The government tried to abolish this subsidy several times but in the face of massive protests it was withdrawn each time – until 2005, when it succeeded to abolish the subsidy without protests from the population, despite a 50 percent increase in fuel prices. 

The secret of success was thorough preparation, extensive information, and the introduction of various financial compensations.

Rebel

The measures included an increase in social subsidies, the abolition of tuition fees in state-run primary and secondary schools, an increase in the number of public transport buses, the introduction of a price ceiling for public transport fares, better funding of health care in poor areas, an increase in the minimum wage and investment in electrification in rural areas.

Indonesia also subsidised the use of fuel to the tune of 2.2 per cent to 2.8 per cent of GDP. The government tried to eliminate these subsidies since 1997 but failed each time because of wide protests. It finally succeeded in 2005-2008. 

The key to success was an increase in social subsidies (the poorest were given cash), improvements in health care and education, and preferential loans for small businesses. 

These measures minimised the number of opponents and boosted the president’s popularity. The fact that the public was thoroughly informed about the reasons for and the aims of the measures greatly facilitated their understanding and acceptance by society.

In Iran, fuel prices were kept extremely low before 2010, with huge state subsidies. In 2010, however, the government abolished the subsidy, which led to an overnight four-fold increase in fuel prices. Not only did the public not rebel, but they were almost unanimous in their support. 

Petrol

The secret of success lay in thorough preparation, extensive information, and adequate compensation. Thirty per cent of the proceeds were given to companies to support energy-saving measures and energy efficiency investments. 

A further 20 per cent was allocated to the public sector (schools, hospitals, etc.) to offset increased energy costs and improve their energy efficiency. And 50 per cent of the proceeds went to each resident for $40 per month – except for the richest 20 percent of households.

Compensation for higher fuel prices has benefited most families and the reform has increased social equality. The poorest people had got almost no benefit from low fuel prices (they usually did not have cars), while the compensation paid by the government significantly improved their living conditions. 

The reform has greatly reduced poverty in Iran, which has resulted in significant moral support for the government. The reform has also boosted domestic demand, contributing to growth in non-energy sectors and reducing unemployment. 

In 2008, Switzerland introduced a carbon tax on a significant proportion of fossil energy (although petrol and diesel were not subject to the tax), which gradually increased from an initial 12 to 120 Swiss francs per tonne. 

Distributed

The tax is also payable on household fuels, for which all Swiss residents receive equal monthly cash compensation from the state. This means that the less household fuel you use, the better off you are.

In Hungary, in the first half of the 1970s, there was a significant subsidy on meat products, with all the negative consequences that entailed. In 1976, the government abolished the subsidy, which led to a surge in meat prices. 

At the same time, all Hungarian residents received a monthly compensation of HUF 60 (a significant amount of money at that time), which benefited the vast majority of the population. Poor people were the happiest, as they consumed much less meat than the average and bought the cheapest meat.

The Hungarian environmental NGO Clean Air Action Group has recently developed proposals, supported by calculations, for mileage-based taxation of cars and trucks and simultaneous compensation of the population. By implementing the proposal, 80 per cent of the population would benefit (only the richest 20 per cent would suffer some losses).

So, instead of the misguided fuel tax cuts and fuel price caps, the amount saved by abolishing these measures should be distributed evenly to the population, except for a certain percentage of the highest-income households. 

This Author

András Lukács is the president of Clean Air Action Group, a Hungarian environmental NGO.