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High fuel prices In Germany: combining short-term relief with a long-term strategy
On the heels of sharply rising fuel prices, policymakers have been discussing far-reaching relief measures for motorists. From a social policy perspective, it is important to help those in greatest need. At the same time, relief measures must avoid setting false incentives: they should not weaken the market signal to conserve fuel amid supply shortages, nor should they slow down the long-term transition to a decarbonised transport system.
A blog post by Marion Vieweg, Senior Associate, National Climate and Transport Policy and Dr. Carl-Friedrich Elmer, Senior Associate, Climate and Transport Economics
Price volatility in combination with a general upward trend is nothing new for petroleum-based fuels. However, the fuel price increases witnessed since the start of the Iran War – with Super E10 and diesel rising by 20 and 30 per cent in Germany, respectively – are placing growing burdens on consumers. While it is uncertain how long the conflict will last, restoring the oil industry and impacted supply chains is expected to take many months after the conflict ends.
The current calls for financial relief are therefore understandable. Proposals range from a further increase in the commuter allowance to energy and vehicle tax reductions. Yet to reduce cost pressures, other measures should be exhausted as well. Above all, this means conserving fuel and refraining from further withdrawals from strategic oil reserves.
Saving fuel is easy on the wallet and strengthens the economy
Given ongoing supply and cost risks – and the need to conserve natural resources – it makes sense for Germany and Europe to harness the current price signal as an opportunity to reduce dependence on oil imports with greater speed and more significantly. Unnecessary consumption of gasoline and diesel would symbolically “pour oil on the fire”, thus worsening the price spiral.
Reducing fuel consumption is the most effective way for individuals to reduce costs. Policymakers should encourage fuel-efficient driving by imposing a general speed limit on the autobahn – at least temporarily. Carpooling and smooth, anticipatory driving can reduce pressure on household budgets while also protecting the environment. Additional eco- and budget-conscious behaviours include switching to alternative modes of transport, working from home, and conducting meetings online. From an individual perspective, such steps may seem small, but collectively they can make a difference that benefits everyone.
Short-term relief measures must be targeted and easy to implement
Independence from petroleum-based products cannot be achieved overnight. Anyone who relies on a combustion-engine vehicle is caught in a cost trap. Accordingly, in addition to encouraging fuel-saving behaviour, it would be sensible for policymakers to consider targeted relief for consumers and to be prepared for the possibility of fuel prices remaining high over an extended period.
Lower-income households in particular face a disproportionate burden. The additional costs of high fuel prices swallow a larger share of their budget. Furthermore, their ability to absorb additional costs is often limited. Relief measures should thus target lower-income households. In addition, they should be implemented quickly and without red tape, while also minimising false incentives.
A repeat of the 2022 reduction in the energy tax would be inappropriate, as it would once again benefit those who are perfectly capable of bearing higher costs. Furthermore, it would reduce incentives to conserve energy. Motorists who drive large, fuel-inefficient vehicles would actually benefit the most. The same applies to the proposed increase in the commuter allowance. This, too, would primarily benefit higher-income earners. Furthermore, it would only take effect with the next tax return.
Boosting purchasing power instead of lowering prices
Instead of lowering fuel prices or raising the commuter allowance, Agora Verkehrswende thus recommends a direct lump-sum payment, if immediate aid appears necessary. This would maintain incentives to conserve fuel while also providing greater relative benefit to lower-income households. Various options are conceivable for the design of this support: it could be linked to the vehicle tax, take the form of targeted aid for commuters, or be paid out as an energy price allowance, as was done in 2022.
In all cases, payment could be issued via the German Federal Ministry of Finance’s newly established direct payment system. While very few people have registered their bank details with this system, an emergency aid programme could motivate large numbers to sign up. This would have the added benefit of opening the door to future direct payments.
Under the current situation, linking relief to vehicle ownership rather than to commuting behaviour would seem preferable for the disbursement of direct payments. This would ensure that aid reaches a larger number of people affected by rising fuel prices (including, for example, retirees). Additionally, it is easier to identify impacted individuals based on the criterion of vehicle ownership rather than on commuting behaviour.
While an energy price allowance for virtually all citizens has already been tried as a relief measure, it would be less targeted at high fuel costs than the direct payment of a fuel allowance. To improve the socioeconomic targeting of this direct payment, regardless of its precise design, it should be subject to taxation, as was true of the energy price allowance in 2022. Greater benefit would thus accrue to lower-income households.
Keeping long-term goals in mind
Policymakers can temporarily cushion economic hardship with short-term relief measures. However, they cannot permanently hedge against the risk of volatile fossil fuel prices using taxpayer money. Accordingly, policymakers should pursue economic and energy policy that will allow Germany to overcome its dependence on oil imports.
Clear signals are needed from the federal government for a transition to sustainable mobility that advances Germany in terms of economic and security policy and in terms of social and climate policy. The currently discussed weakening of European CO2 targets for passenger cars would be counterproductive. The focus on biofuels and e-fuels in the new Climate Action Programme is also a risky gamble.
Alongside the electrification of drivetrains and rapid expansion of renewables generation, there is a need for stable and sufficient funding for alternatives to personal vehicle ownership. Only then will the costs of mobility be predictable in the long term.
