From well to tank: How governments can use gasoline prices to accelerate a green and just transition

Energy commodities need to be affordable so that households can enjoy a high quality of life and industries can compete in a globalised world. At the same time, energy use is responsible for about three-quarters of global greenhouse gas emissions and pollutes the air in our cities. To balance affordability, environmental concerns, and other policy objectives, governments adopt a range of different regulations and approaches.

This commentary analyses countries’ policy approaches to regulating gasoline prices. It considers specific economic and social contexts and suggests policy measures that can accelerate a clean and just transition.

”End-user price is fixed” means prices are set by a government or another authority. “End-user price is not fully fixed or liberalised” means there are mechanisms that can act balance the final price (e.g. price caps) or only a part of the price is fixed (e.g, prices to resellers are fixed). “End-user price is fully liberalised” means that end-user prices are determined by the market. This map is without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.
Source: IEA (2020), Energy Prices.

A wide range of approaches are used to regulate transport fuel prices. Some countries fix the prices that end-users pay at the pump. Others have designed systems that shelter consumers from large price fluctuations caused by crude oil price movements. Some countries have fully liberalised prices, with or without imposing a set of taxes. In each country, the choice depends on historical, geographical and structural reasons. For example, fixed gasoline prices are the most common approach in Africa, and are also found in South America and Oceania.

A significant number of countries fix the price to meet social objectives and lessen the financial burden of meeting energy needs. In most cases, this means subsidising consumption. In other countries, where affordability is less of an issue and energy represents a smaller share of household expenditure, markets are more liberalised, with interventions restricted to taxation. Such countries tend to move towards a liberalised market to benefit from competition and ease the burden on government finances. In a third group of countries, governments adopt an intermediate approach, partially controlling the end-user price (e.g. through a price cap) to limit fluctuations due to variations in crude oil prices.

Gasoline price distribution in different market frameworks, 2019

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Different policy regulations in a globalised market result in a wide distribution of gasoline prices across the world. Prices in a liberalised market are usually higher because taxation represents a high share of the final price, reaching 65% of the end-user price in some European countries. In 38 countries with fixed prices, the average price for gasoline is USD 0.82 per litre, while the average price is USD 1.03 per litre in 44 market-oriented countries.

Taxation on transport fuels, an important source of revenue for governments, is used to raise funds for the general budget or to internalise the external costs of using fuels – for example, to compensate for the social and environmental costs of pollution. An increasing number of countries have started earmarking taxation by linking it to specific objectives. Examples include environmental taxes (linked to sulphur or carbon content); energy security taxes; or social taxation to subsidise access to energy for all. The IEA has started including data on such characteristics of taxation in the Energy Prices database.

This map is without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.
Source: IEA (2020), Energy Prices.

Source: IEA (2020), Energy Prices.

Analysing the distribution of countries’ gasoline prices and economic situations (represented by GDP per capita), we can distinguish four clusters with different approaches to price regulation:

Cluster A – Low-to medium-income countries: Most countries that fix or heavily regulate gasoline prices belong to this cluster, mainly in Africa, Asia, Oceania and to some extent South America.

Cluster B – European countries: Most countries where the market is liberalised, typically European countries and other OECD member countries, are in this group. Affordability is less of an issue in these countries and therefore the price is not influenced by the per capita GDP.

Cluster C – Australia, Canada and the United States: These large countries are mainly oil producers with high GDP per capita and are not densely populated. Taxation is lower than in other liberalised markets resulting in lower prices than in the “European” cluster.

Cluster D – Middle Eastern countries: Qatar, Saudi Arabia and the United Arab Emirates are oil producers with economies highly dependent on hydrocarbon revenues. They have high GDP per capita and state-owned oil companies that play the market.

All those different regulations are the different governments’ answers to the challenges of energy affordability and industrial competitiveness for economic development. Nowadays those needs stand side by side with the environmental concerns and fuel price regulations now need to play their part in the urgent transition towards carbon‑neutral economies. That means policy makers need to adjust price regulations to use them as a tool to drive change.

Governments that subsidise fossil fuels could gradually phase out harmful subsidies to favour more efficient use of fuels and remove the economic burden on their budgets. Some of resulting savings could be spent on mitigating the impact of higher fuel prices on low-income households, ensuring energy access for all.

Although governments are naturally wary about strains on household and company budgets during the Covid-19 crisis, the current low crude oil price provides an opportunity for subsidy reform. Countries that are net importers of fuels find it easier to phase out subsidies when prices are low, as the adjustment to end-user prices (and the impact on inflation) is smaller. Lower oil prices also add urgency to the task of reforming price regulations in major oil and gas producing countries as a way to relieve fiscal strains.

Once explicit consumption subsidies are removed, then fuel prices could be gradually increased through environmental taxation to compensate for the ecological and social costs of fuel use – including air pollution and global warming. Despite growing social awareness about environmental issues, however, environmental taxation is not always welcomed by end-users who are directly affected by the increase in price. To make it more acceptable, such taxation could be bound to clear and tangible environmental objectives and not merged with the general budget.

Also in this case, part of the revenues generated through this taxation could be redistributed to shelter low-income households. The remaining part could be reinvested in the sector to create the alternative. Revenues raised from transport fuels could be devoted to actively reduce the consumption of fossil fuels and to push the economy towards clean fuels, for example by:

  • developing more comprehensive public transport
  • researching and developing low-carbon fuels such as hydrogen and syngas
  • boosting the use of bicycles in cities
  • providing incentives to buy low-carbon or more efficient vehicles, such as hybrid and electric cars.

We could turn the crisis caused by the Covid-19 pandemic into an opportunity to change gear in our green transitions, including by adjusting fuel price regulations. Low crude oil prices along with the need to reboot the economy with sustainable recovery plans can provide the right environment to remove fuel subsidies and reshape energy taxation to accelerate progress towards an inclusive, low‑carbon economy.