Question:
You are given the full text of a scientific research paper.

    Identify and summarize the **policy problem** that this research addresses. Your response should:
    - Clearly state the societal, environmental, or strategic issue motivating the study
    - Be written in accessible, policy-brief style sentences
    - Focus on the core challenge the research aims to solve
    - Avoid excessive detail or technical jargon unless necessary for clarity

    Write a short paragraph suitable for inclusion under the “Policy Problem” section of a policy brief.

    Scientific Research Paper:
    Nature Energy | Volume 7 | October 2022 | 989–997
989
nature energy
https://doi.org/10.1038/s41560-022-01122-6
Analysis
The effect of European fuel-tax cuts on the oil
income of Russia
Johan Gars
  1, Daniel Spiro
  2 and Henrik Wachtmeister
  3
Following Russia’s invasion of Ukraine, there has been a surge in transport
fuel prices. Consequently, many European Union (EU) countries are cutting
taxes on petrol and diesel to shield consumers. Using standard theory
and empirical estimates, here we assess how such tax cuts influence the
oil income in Russia. We find that an EU-wide tax cut of €0.20 l−1 increases
Russia’s oil profits by around €8 million per day in the short and long term.
This is equivalent to €3,100 million per year, 0.2% of Russia’s gross domestic
product or 5% of its military spending. We show that a cash transfer to EU
citizens—with a fiscal burden equivalent to the tax cut—reduces these side
effects to a fraction.
Following Russia‘s military attack on Ukraine, the European Union
(EU) and United States have imposed a large number of sanctions
on Russia1,2. The attack has also led to a negative supply shock of oil,
partly because Russia’s ability to export has been hampered by the
lack of will to insure Russian ships3, but also due to industry prepa-
ration for the upcoming EU oil import ban4. Together with surging
post-pandemic demand, this has led to very high prices of transport
fuels5,6. In response, a large number of European countries are either
discussing or have already implemented a reduction in fuel taxes to
help consumers cope with high prices. These include Austria, Belgium,
France, Germany, Italy, the Netherlands, Romania and Sweden (see
the Methods section ‘Fuel price and taxes’ and, for example, refs. 7–9
for details). Such tax reductions have problematic consequences
since they increase demand, thus making current supply even more
scarce. Some of the tax reduction will be attenuated by an increase in
the underlying oil price, leading to increased profits for oil produc-
ers. Here, we assess the magnitude of this effect using basic theory
and empirical estimates from the oil sector. We ask: ‘How much does
the oil income in Russia increase following fuel-tax reductions in the
EU?’ Knowing the answer to this question is highly relevant to policy
as Russia’s oil profits may undermine the geopolitical interests of
the EU, reduce the effectiveness of the EU’s sanctions and ultimately
improve the ability of Russia to wage war.
Here, we show that an EU-wide fuel-tax cut equivalent to €0.20 l−1
would increase Russia’s oil profits by €36 million per day in the first
month, €8.4 million per day during the rest of the first year and €8.2 mil-
lion per day beyond the first year. The additional profits are equivalent
to 0.2% of Russia’s gross domestic product (GDP) and 5% of its defence
spending. The fiscal cost to the EU would be €170 million per day dur-
ing the first year. An alternative policy with an equivalent fiscal cost
is studied as well: providing EU citizens with cash transfers. Such a
policy yields a fraction of the tax cut’s profits to Russia and is ulti-
mately more flexible for citizens as they can use the cash on anything
they please.
Theoretical approach
Here, we describe how we derive the effects of a decreased fuel tax in
the EU on Russian oil profits. Our analysis uses a standard model of
supply and demand for oil. Our approach is similar to those of Erickson
and Lazarus10 and Faehn et al.11. To analyse the effects of the EU’s tax,
we distinguish between oil demand for road transport fuels in the EU
and remaining global oil demand. Similarly, to focus on the effects on
Russian revenues, we distinguish between oil supply from Russia and
supply from the rest of the world. We also consider the alternative
policy of income transfers to households.
The first step is to derive how the global oil market responds to
changes in the EU’s road transport fuel tax. More detailed derivations
are provided in the Methods. The global per-unit crude oil price is
denoted p. To make the crude oil usable as fuel for end users, it must
be refined, transported and so on. For the EU, we assume a per-unit cost
c for this (in the Methods, we consider analytically the case where these
costs are instead proportional to the oil price, and assess this case
quantitatively in Supplementary Note 3). Additionally, road fuel users
in the EU pay a fuel excise tax τ per unit of fuel, as well as the value-added
tax (VAT) rate vEU. The market equilibrium is found by equating the
demand for crude oil for road transport in the EU,
Received: 28 April 2022
Accepted: 15 August 2022
Published online: 15 September 2022
 Check for updates
1Beijer Institute, The Royal Swedish Academy of Sciences, Stockholm, Sweden. 2Department of Economics, Uppsala University, Uppsala, Sweden.
3Department of Earth Sciences, Uppsala University, Uppsala, Sweden.
 e-mail: henrik.wachtmeister@geo.uu.se

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Analysis
https://doi.org/10.1038/s41560-022-01122-6
with respect to τ and making a linear approximation gives that Russian
oil profits change by
ΔτπRU ≈(1 +
p−e
p εS,RU) SRU (p) Δτp.
(6)
As an explicit aim of the tax cut is to shield consumers from increas-
ing fuel costs, an alternative way to do so is to give general income
transfers to people that correspond to the reduction in tax revenues
that would result from a decreased fuel tax. From a welfare perspective,
this is preferable since people can then choose how to use the money.
To the extent that the tax cut is supposed to appease particular groups,
it is also possible to direct the income transfers to these groups. Such
options include giving money to all car owners (not based on their
driving), giving money to particular regions where the population is
more reliant on cars (for example, rural areas) or reimbursing the tax
collected in a region or municipality to that same region or munici-
pality. Another rationale to uphold fuel taxes is to internalize climate
damages from fossil fuel use (that is, Pigouvian taxes). From the per-
spective of this Analysis, an additional effect of an income transfer is
that a share smaller than one will be spent on fuel; hence, the increase
in Russian oil profits will be smaller. How much smaller will be assessed
quantitatively.
To analyse this alternative policy option, we assume that road fuel
demand in the EU now depends on disposable income I in addition to
the fuel price. Differentiating the market equilibrium condition with
respect to I and treating the equilibrium price as a function of income,
we get that the oil price change due to an income change is
dp
dI = p
I
xεI,EU
yεS,RU + (1 −y) εS,ROW −x
p
p+c+τ ̃εD,EU −(1 −x) εD,ROW
,
(7)
where εI,EU is the income elasticity of road fuel demand in the EU. The
effects of a change in the disposable income ΔI on the oil price, p, and
the fuel price in the EU, f, are
ΔIp ≈
dp
dI ΔI and ΔIf ≈(1 + vEU) ΔIp.
(8)
The effect on Russian oil profits due to the income transfer is
ΔIπRU ≈(1 +
p−e
p εS,RU) SRUΔIp.
(9)
DEU((1 + vEU)(p + c + τ)) (in many EU countries, VAT also applies to the
excise tax; hence, (1 + vEU) multiplies τ), and the remaining global
demand for crude oil, DROW(p), to the supply from Russia, SRU(p), and
from the rest of the world, SROW(p):
DEU ((1 + vEU) (p + c + τ)) + DROW (p) = SRU (p) + SROW (p)
(1)
Since our focus here is on tax cuts on transport fuel, DEU should be
understood as the demand for crude oil to be used as oil-based road
transport fuel in the EU (that is, mainly petrol and diesel). With some
abuse of technical differences, we will often refer to it only as fuel. DROW
should be understood as the global demand for all other oil products
except road fuel in the EU (that is, it also includes non-road oil products
in the EU). We assume that the EU’s crude demand depends on the fuel
price, including costs and taxes, while we assume that rest of the world
demand depends on the oil price.
The effect of a change in the tax on the equilibrium price can then
be found by treating the price as a function of the tax, differentiating
the equilibrium condition fully with respect to the tax, solving for the
derivative of the price with respect to the tax and rewriting. Let x denote
the share of global demand for oil that comes from road fuel demand
in the EU and let y denote Russia’s share of the global oil supply. The
market response to a change in the tax depends on the supply and
demand elasticities in the submarkets. Let ̃εD,EU, εD,ROW, εS,RU and εS,ROW
denote the demand elasticities in the EU and the rest of the world and
the supply elasticities of Russia and the rest of the world, respectively.
The demand elasticity for the EU measures the response in demanded
quantities of oil to changes in the end user prices, including additional
costs and taxes, while the other elasticities measure responses of quan-
tities of oil to changes in the oil price. Using this notation, the effect of
a tax change on the oil price is given by the derivative
dp
dτ =
x
p
p+c+τ ̃εD,EU
yεS,RU+(1−y)εS,ROW−x
p
p+c+τ ̃εD,EU−(1−x)εD,ROW .
(2)
Note the ratio multiplying the EU demand elasticity. This ratio
corrects for the fact that demand depends on the price including the
supply costs and taxes and hence that a change in the global oil price p
will have a smaller percentage effect on consumer prices (see Methods
for further discussion of this).
The effect of a tax change Δτ on the oil price can be approximated
linearly as
Δτp ≈
dp
dτ Δτ.
(3)
Let the fuel price in the EU be denoted f ≡(1 + vEU) (p + c + τ). The
change in the fuel price is
Δτf ≈(1 + vEU) (Δτp + Δτ) .
(4)
The EU’s fuel tax revenues are TEU ≡( vEU(p + c)+ (1 + vEU)τ ) DEU
and the fiscal cost of the tax change (that is, the lost tax revenue) can
be found by differentiating with respect to τ—taking into account that
the oil price depends on the tax—and making a linear approximation.
The fiscal cost is then
ΔτTEU ≈[1 + (vEU +
τ+vEU(p+c+τ)
p+c+τ
εD,EU) (1 +
dp
dτ )] DEUΔτ.
(5)
Finally, we translate an oil price change into a change in Russian
oil profits. The oil profits of Russia are πRU = (p −e)SRU(p), where e
represents the oil extraction costs, which are assumed to be constant
per unit. This assumption is realistic under the production changes
considered here. Again, treating p as a function of τ, differentiating
Barrels of oil
Price of oil
DEU
DROW
DEU+ROW
S
Fig. 1 | Illustration of supply and demand in the long term. Oil demand for
road transport in Europe (DEU) increases by a tax cut (the DEU demand line shifts
to the right from the solid to the dashed line position). Consequently, total world
oil demand (DEU+ROW) increases by an equal amount (the DEU+ROW line shifts to the
right from the solid to the dashed line position). World oil supply (S) is somewhat
elastic and a new, higher, equilibrium price is attained at a higher quantity level
(dashed lines).

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Analysis
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Data and estimates vary over different time
horizons
We quantitatively assess the effects described theoretically in three
different cases: the very short term, the short term and the long term.
Here, we sketch the qualitative effects in the different time horizons.
The size of the effects depends on the numerical values, which are pre-
sented at the end of this section. We start by describing the long-term
effects. Note that we use long term to describe the effects beyond 1 year,
to be thought of as in 1–3 years but not more. Other studies deriving
price elasticity estimates often use long term to describe effects on
longer time horizons. In the Methods, we discuss our selection and
range of elasticity estimates in more detail and how they relate to the
time horizon.
In the long term, supply is somewhat elastic and demand is rather
elastic too. This is because producers have time to adjust their produc-
tion and make some capacity investments. Likewise, consumers can
acquire new habits or find solutions based on a new fuel price, and
those in the process of buying a new vehicle will take the fuel price into
account (see, for example, ref. 12). This is the case illustrated in Fig. 1.
The grey lines show the demand from the EU and the rest of the world,
respectively. The black lines represent global demand and supply. A
tax reduction in the EU shifts the EU’s demand outwards (dashed grey
line). This in turn increases global demand by an equivalent amount
(dashed black line). There are two effects of this: an increase in the oil
price (a shift along the vertical axis) and an increase in the quantity of
oil produced (a shift along the horizontal axis).
In the short term, to be thought of as 1–12 months, the supply
elasticity in terms of quantity is lower than in the long term. This can
be seen in Fig. 2a, where supply is illustrated as fixed. Demand elastic-
ity is lower than in the long term since most of the consumer choice
regards how much to drive rather than what vehicle to buy or how
to change long-term habits. Since, as in the figure, supply is fixed, a
reduced tax results in increased oil price but no increase in production
or consumption. In practice, some of the increased demand from the
EU is attenuated by decreased consumption in the rest of the world.
In the very short term, to be thought of as up to 1 month, there
are limitations on how much oil, which was originally meant for other
markets, can be redirected quickly to the EU. The reason for this is that
bilateral contracts of supply can be viewed as partly fixed; oil tankers
on their way to one country cannot in the very short term easily be
sent elsewhere. To capture this, we model this as though the EU is an
isolated oil market. The supply is fixed, both in terms of quantity and
who supplies the oil. Implicitly, this also means that the oil price in the
EU may differ from the oil price elsewhere. This case is illustrated in
Fig. 2b. Importantly, here Russia is relatively a much larger supplier
than on the global market. Demand is also less elastic than in the short
term. We view our modelling here as a thought experiment. Reality in
the very short term probably lies somewhere in between our modelling
here and the short-term scenario described above. One simplification
and limitation of our model is that we do not consider oil invento-
ries. We discuss the potential effects of an EU import embargo in the
next section.
The parameters, quantities and shares in equations (1)–(9) are
based on previous research and current data. They are reported in Table
1. Where relevant, we distinguish between very-short-term, short-term
and long-term elasticities and shares. Motivations for the values are
provided in the table, with further information available in Methods.
In a sensitivity analysis in Supplementary Note 2, we perturb the
key parameters to show how this affects our results.
Effects of fuel-tax cuts on Russian oil income
Here, we analyse the effects of a fuel-tax cut in the very short term, the
short term and the long term. The tax cut considered is equivalent to
€0.20 l−1 including VAT (that is, it amounts to €0.2/(1 + VAT)). This is
based on a weighted average of currently announced tax cuts in EU
countries (equivalent to roughly 10% of the price) and on the possibil-
ity that all countries cut the taxes to the EU’s minimum level (see the
Methods section ‘Fuel price and taxes’ for details).
The results in the very short term are presented in the top row of
Table 2. Of the 20 cents of tax reduction, 7 cents are passed through to
oil suppliers. Russia, being an important supplier, attains a large share
of the fiscal cost of the policy, making an additional €36 million per
day. Apart from financing Russia, the policy is also quite ineffective
in lowering consumer prices in the very short term; consumers only
experience 12 cents of reduction per litre despite the tax reduction
being 20 cents. The results here take into account Russia’s current
reduced supply to the EU (see the Methods section ‘Size of markets
and Russian export declines’).
In the short-term case, to be thought of as the remaining part of
the first year, the consumer price in the EU is reduced by almost the
full tax reduction and the now global oil price is increased by much
less than in the very short term. Nevertheless Russia—a large supplier
Barrels of oil
Barrels of oil
Price of oil
Price of oil
b
a
DEU
DROW
DEU
SEU
DEU+ROW
S
Fig. 2 | Illustration of supply and demand in the short term and in the very
short term. a, In the short term, oil demand for road transport in the EU (DEU)
increases by a tax cut (the DEU demand curve shifts to the right from the solid
to the dashed line position). Consequently, total world oil demand (DEU+ROW)
increases by an equal amount (the DEU+ROW demand curve shifts to the right from
the solid to the dashed position). World oil supply (S) is fixed (inelastic) and a
new, higher, equilibrium price is attained (dashed line) at the same quantity level.
b, In the very short term, oil demand for road transport in Europe (DEU) increases
by a tax cut as in the short term, but due to transport rigidities, the EU is modelled
as an isolated market. Hence, the total demand equals EU demand (DEU). Supply
to the EU (SEU) is fixed (inelastic) and a new, higher, equilibrium price is attained
(dashed line) at the same quantity level.

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Analysis
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also globally—is still receiving sizable additional profits (€8.4 million
per day or €3.1 billion in year equivalents).
In the long-term case, to be thought of as beyond 1 year and up to
3 years, supply becomes somewhat elastic and so does demand. The
price effects are again smaller and the fiscal cost to the EU is smaller
than in the very short and short term. This is because, instead of an oil
price increase, there is an increase in the supply. Russia’s additional oil
profits are still sizeable at €8.2 million per day or €3.0 billion per year.
In Supplementary Note 2, we carry out a sensitivity analysis of
these results with respect to other parameter values. The results are
generally not very sensitive in the very short term. The long-term and
short-term results are more sensitive. The sensitivity analysis sug-
gests that Russia’s short-term profit gains can be one-third compared
with those using our preferred parameter values (reported here in
the main text). However, they may also be around 70% higher. We also
investigate whether the discount on Russian oil (through the Urals
price) is likely to change our results (Supplementary Note 4) and let the
costs c be proportional to the oil price (Supplementary Note 3). With
regard to the Urals price, while the time window is too short to infer
the long-term effects, our analysis suggests that an increased global oil
price (for example, due to a tax cut, as considered here) will lead to an
equivalent increase in the Urals price. Hence, our results are probably
not affected by this discount. We refer the reader to Supplementary
Note 4 for more details.
A final issue of robustness is whether the results change due to
an import embargo. On 3 June 2022, the EU announced an extensive
but incomplete import embargo on Russian oil4 to be imposed with
a delay of several months. Had the embargo been imposed before
the tax cuts, the particular effects relying on the rigidity of transport
would disappear. It would make the mechanisms and results in the very
short term identical to those in the short term, which are independent
of whether an oil import embargo exists or not. However, since the
import embargo will take force with a long delay and since most of the
tax cuts have already been implemented, we view the very short-term
results presented here as an assessment of what has possibly already
Table 1 | Parameters for equations (1)–(9) describing Russia’s oil income
Parameter
Variable
Very short term
Short term
Long term
Reference
Demand elasticity of road fuel in the EU with
respect to price
̃εD,EU
−0.25
−0.25
−0.9
See Methods
Demand elasticity of oil globally (excluding
EU road fuel) with respect to price
εD,ROW
−0.125
−0.125
−0.45
See Methods
Supply elasticity of Russian oil with respect
to price
εS,RU
0
0
0.13
See Methods
Supply elasticity of global oil (excluding
Russia) with respect to price
εS,ROW
0
0
0.13
See Methods
Demand elasticity of road fuel in EU with
respect to income
εI,EU
1
1
1
Ref. 15
Base fuel excise tax in the EU (€ l−1)
τ
0.55
0.55
0.55
Weighted average of all countries’
taxes; see Methods
Base oil price per litre of fuel (€ l−1)
p
0.58
0.58
0.58
Oil price = $110 per barrel; foreign
exchange rate = €0.9 per $; 170 l fuel
per barrel
Other costs, such as refining (€ l−1)
c
0.45
0.45
0.45
Follows from p + τ + c; see Methods
VAT rate
vEU
0.2
0.2
0.2
Base consumer price excluding VAT (€ l−1)
p + τ + c
1.58
1.58
1.58
Sum of oil price, fuel tax and other
costs; see Methods
Oil extraction cost in Russia (€ per barrel)
e
17
17l
17
Rystad UCube database14
EU road fuel demand share of global oil
consumption (%)
x
48
5.7
5.7
Refs. 31,32
Russian oil exports per day (million litres of
fuel; million barrels of oil)
SRU
540; 3.2
1,200; 7
1,400; 8
IEA38 and case assumptions; see
Methods
Global oil supply, excluding Russian exports,
per day (million litres of fuel; million barrels
of oil)
SROW
13,000; 7.6
16,000; 92
16,000; 92
Follows from SRU,S
Road fuel demand in the EU per day (million
litres of fuel; million barrels of oil)
DEU
870; 5.1
960; 5.6
970; 5.7
Follows from x, D
Global oil demand, excluding EU road fuel
demand, per day (million litres of fuel;
million barrels of oil)
DROW
950; 5.6
16,000; 93.4
16,000; 94.3
Follows from x, D
Russia’s exports as a share of the global
supply (%)
y
29
7
8
Follows from SRU,S
Table 2 | Effect of an EU fuel-tax cut of €0.20 l−1
Oil price
change
(cents per
litre)
EU fuel
price
change
(cents per
litre)
Fiscal cost
to the EU
(million
Euros per
day)
Profit gain
for Russia
(million
Euros per
day)
Profit gain
for Russia
(million
Euros per
year)
Very short
term
6.7
−12
150
36
–
Short term
0.7
−19
170
8.4
3,100
Long term
0.55
−19
115
8.2
3,000

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materialized. It should be noted that the results for the short and long
term are driven by an increase in the global oil price due to higher EU
demand. Furthermore, in such time frames, transport routes can be
adjusted. Hence, the results in the short and long term are independ-
ent of whether or not the EU imposes an import embargo on Russia. As
long as there are sufficiently many or large buyers of Russian oil, the
market will adjust the trade flows.
Are the additional profits for Russia large? We now discuss this
from a few different perspectives. First note that in the very short term,
a large share of the EU’s fiscal cost (24%) is sent to Russia. In the short
term and long term, much less is sent, but still around 5–7% of what is
meant to help European consumers is instead going to Russia.
The additional Russian profits are sizeable compared with Rus-
sia’s pre-invasion GDP, which was about €3.7 billion per day. The EU’s
tax cut increases Russia’s GDP by ~1% in the very short term versus
0.2% in the short term and the long term. We can also compare them
with Russia’s military spending, which was about €160 million per day
pre-invasion (based on ref. 13, the average yearly military spending in
2015–2020 was US$65 billion; a $ to € exchange rate of 0.9 makes this
€160 million per day). The daily profit increase then corresponds to
23, 5 and 5% of military spending in the very short term, short term and
long term, respectively.
Almost all of these revenues stay in the Russian economy as 93% of
Russian production is owned by Russian companies14 (both state owned
and privately owned). Rosneft and Gazprom—the two main majority
state-owned companies—produce ~46% of Russia’s oil. The average
government take for oil (that is, combined state taxes, tariffs and so
on) in Russia is 50% of total revenues14. Hence, almost all oil revenues
stay in the Russian economy while 50% goes directly to the Russian
state as taxes and fees and an additional 23% goes to state-controlled
companies.
Finally, it should be noted that the effects are linear in the size of the
tax cut. This implies that, should the tax cut be twice as large, the Russian
additional profits will be twice as large too, and vice versa in case the tax
cut is half of what we study. This follows from our linear approximation
(see the section ‘Theoretical approach’). This is a reasonable assump-
tion as long as the effects on aggregate global demand and supply are
small, which indeed is the case in both the short- and long-term cases.
In the very short term (where the EU is a submarket), changes in the tax
cut may not scale linearly. This is because, if the tax cut is sufficiently
large, the EU demand change is sizeable. Hence, a doubling of the tax cut
cannot be assumed to imply doubling of Russian profits; it can be more
and it can be less than doubling. One issue that plays a role is whether the
elasticities are constant over the demand and supply curves. To date,
this is a largely unresolved question in the literature.
Effects of an alternative direct cash transfer policy
As seen, a fuel-tax cut in the EU provides Russia with a large additional
income. Furthermore, part of the help meant for EU fuel consumers in
the form of a tax cut is instead passed through to increased oil prices,
especially in the very short term. The question is then whether it is pos-
sible to help EU consumers in a way that does not benefit Russia. Here,
we look at one such alternative, namely in the form of a cash transfer
to consumers with an equivalent fiscal burden to the tax cut. That is,
we tie the transfer to €150 million, €170 million and €115 million in the
very short, short and long term, respectively.
The results are presented in Table 3. The increased income leads
to an increased demand for fuel. However, since the cash can be spent
on anything, most of it is used for other things. Hence, the fuel price
increases only marginally (1.1 cents in the very short term and much
less in the long term). One perspective on this, which highlights the
main benefit of cash transfers compared with fuel-tax cuts, is that
consumers, through these policies, receive the equivalent of 20 cents
per litre of fuel consumed on average. To receive the benefits of a tax
cut, consumers have to buy fuel. If they receive it in the form of cash
instead, they can choose to spend it all on fuel, to spend none of it on
fuel or somewhere in between; cash is a more flexible currency than a
tax cut. Even a person who spends the whole transfer on fuel will gain
from a cash transfer since the fuel price increases only by 1.1 cents.
Therefore, this allows for varying preferences in the population (it is
also possible to direct the cash to particular groups that are hit harder
by the price increase; see ‘Theoretical approach’). Another benefit of a
cash transfer is that it avoids decreasing the fuel tax (that is, a Pigouvian
tax), thus abating climate concerns.
Perhaps most importantly for the subject matter here, Russia’s
profit gains are substantially lower with the cash transfer (in the short
term ~15% of the profits received from a tax cut and in the long term
much less). It can be noted that Russia’s profits under a cash transfer are
also substantially lower when compared with the lowest profits of a tax
cut considered in the sensitivity analysis (see Supplementary Note 2).
The conclusion that an income transfer yields much lower Russian
profits is not likely to change even if we consider other expenditures
of households in the EU. The reason for this is that an income elastic-
ity of 1, as we use here15, implies that fuel’s share of income is constant
when income increases. Put differently, since private road-transport
fuels correspond to 7% of consumer spending in the EU (figure for
2008 from ref. 16), only 7% of the cash transfer would go to road fuel.
Transport accounts for 13.2% of households’ expenditures17, not all of
which goes to oil products. Elasticity for other transport is not very
different from that for road fuels (for aviation income, elasticity is
around 1 (ref. 18)). Hence, the amount of cash transfer that may go to oil
products is effectively capped by oil’s cost share in the EU. Elasticities
for other categories of consumer spending vary. For food, elasticity is
around 0.5 in the EU19 and it accounts for 14.8% of expenditures, while
housing-related expenditures correspond to 25.7% (a small share of
which is gas for heating). Various smaller categories correspond to
the remaining 48% (ref. 20).
Conclusion
We have analysed how much a fuel-tax cut in the EU will increase Rus-
sian income from oil. The effects are substantial. A tax cut of €0.20
increases Russia’s daily oil profits by €8.4 million during the first year
and €8.2 million if it remains longer (in the very short term, the daily
profit increase can be substantially higher).
We show that a fiscally equivalent cash transfer can achieve similar
alleviation to consumers to a tax cut but with a fraction of the increased
profits for Russia.
Methods
Derivation of model
Here, we provide derivations of the model used in the analysis. We
distinguish between the demand for crude oil for vehicle fuel in the EU,
DEU, and the remaining oil demand DROW. Note that the rest of the world
demand includes oil demand in the EU for uses other than vehicle fuel.
Since we want to study the effects of taxes on vehicle fuel in the EU, we
explicitly consider these and assume that the demand for oil for fuel in
the EU depends on the price, including refinement, transportation and
Table 3 | Effect of a fiscal equivalent cash transfer
Oil price
change
(cents per
litre)
EU fuel
price
change
(cents per
litre)
Fiscal cost
to the EU
(million
Euros per
day)
Profit gain
for Russia
(million
Euros per
day)
Profit gain
for Russia
(million
Euros per
year)
Very short
term
0.91
1.1
150
4.9
–
Short term
0.11
0.13
170
1.3
470
Long term
0.016
0.019
115
0.24
88

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Analysis
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taxes. Let p denote the crude oil price, v the VAT rate and τ the per-unit
tax on vehicle fuel in the EU. The costs for refinement and transpor-
tation could have one per-unit component, c, and one component
proportional to the price, z. We thus have the fuel price
f = (1 + v) ((1 + z) p + c + τ)
(10)
and crude demand in the EU depends on this price and on income I,
DEU(f, I). The rest of the world demand depends directly on the crude
oil price DROW(p). In the baseline model, we focus on per-unit costs,
corresponding to z = 0. In the Supplementary Information, we instead
consider completely proportional costs, corresponding to c = 0.
The supply is a function of the crude oil price and we distinguish
between oil supply from Russia, SRU(p), and supply from the rest of the
world, SROW(p).
The world market price of crude oil is determined by the equilib-
rium in the global oil market:
DEU (f, I) + DROW (p) = SRU (p) + SROW (p) .
(11)
Model of fuel-tax cut
Treating the equilibrium price p as a function of τ, and differentiating
both sides fully with respect to τ, taking equation (10) into account,
gives
(1 + v)
∂DEU(f,I)
∂f
((1 + z)
dp
dτ + 1) + D′
ROW (p)
dp
dτ = (S′
RU (p) + S′
ROW (p))
dp
dτ
(12)
Let D and S denote total demand and supply and let x and y denote
shares of demand and supply as given by
DEU = xD, DROW = (1 −x) D, SRU = yS and SROW = (1 −y) S.
(13)
Multiplying the left- and right-hand sides of equation (12) by p/D
and p/S, respectively (with S = D in equilibrium), yields
dp
dτ =
(1 + v)
p
D
∂DEU(f,I)
∂f
p
S S′
RU (p) +
p
S S′
ROW (p) −(1 + v) (1 + z)
p
D
∂DEU(f,I)
∂f
−
p
D D′
ROW (p)
.
Using equation (13) and multiplying the terms containing the
derivative of DEU by f/f, we get
dp
dτ =
(1+v)p
f
xf
DEU
∂DEU(f,I)
∂f
yp
SRU S′
RU (p) +
(1−y)p
SROW S′
ROW (p) −
(1+v)(1+z)p
f
xf
DEU
∂DEU(f,I)
∂f
−
(1−x)p
DROW D′
ROW (p)
.
Using equation (10), we arrive at
dp
dτ =
x
p
(1+z)p+c+τ ̃εD,EU
yεS,RU + (1 −y) εS,ROW −x
(1+z)p
(1+z)p+c+τ ̃εD,EU −(1 −x) εD,ROW
,
(14)
where we have the price elasticities of supply
εS,RU ≡
p
SRU S′
RU (p) and εS,ROW ≡
p
SROW S′
ROW (p)
(15)
and demand
̃εD,EU ≡
f
DEU
∂DEU(f,I)
∂f
and εD,ROW ≡
p
DROW D′
ROW (p) .
(16)
We can differentiate the fuel price from equation (10) with respect
to τ to get
df
dτ = (1 + v) ((1 + z) dp
dτ + 1) .
The changes in the oil price p and the EU fuel price f induced by a
change Δτ in the tax can be linearly approximated as
Δτp ≈
dp
dτ Δτ and Δτf ≈(1 + v) ((1 + z) Δτp + Δτ) .
(17)
The EU tax revenues associated with fuel contain both the direct
VAT revenue and the excise duty with VAT applied to it:
TEU = (v ((1 + z)p + c) + (1 + v) τ) DEU (f, I) .
Differentiating this fully with respect to τ gives
dTEU
dτ
= [τ + v ((1 + z)p + c + τ)]
∂DEU(f,I)
∂f
[(1 + v) ((1 + z)
dp
dτ + 1)]
+ [v ((1 + z)
dp
dτ + 1) + 1] DEU
= (1 + v)
τ+v((1+z)p+c+τ)
f
f
DEU
∂DEU(f,I)
∂f
[((1 + z)
dp
dτ + 1)] DEU
+ [v ((1 + z)
dp
dτ + 1) + 1] DEU
= [1 + (
τ+v((1+z)p+c+τ)
(1+z)p+c+τ
̃εD,EU + v) ((1 + z)
dp
dτ + 1)] DEU.
Multiplying by Δτ and using Δτ f from equation (17) delivers a linear
approximation of the change in tax revenues from the tax change Δτ:
ΔτTEU ≈[Δτ + ( τ + v ((1 + z)p + c + τ)
(1 + z)p + c + τ
̃εD,EU + v) ((1 + z)Δτp + Δτ)] DEU.
The Russian oil profits are
πRU = (p −e) SRU (p) ,
where e represents Russian extraction costs that are assumed to be
constant.
Treating p as a function of τ and differentiating fully with respect
to τ gives
dπRU
dτ
= dp
dτ SRU + (p −e) S′
RU (p) dp
dτ = (1 + p −e
p
εS,RU) SRU
dp
dτ
and, using Δτp from equation (17), a linear approximation of the change
in Russian oil profits is
ΔτπRU ≈(1 + p −e
p
εS,RU) SRUΔτp.
Model of income transfer
Here, we consider the effects of transferring income to households
instead of lowering the fuel tax. Treating the equilibrium oil price as
a function of I, differentiating equation (11) fully with respect to I and
using equation (10) gives
∂DEU(f,I)
∂I
+
∂DEU(f,I)
∂f
(1 + v) (1 + z)
dp
dI + D′
ROW (p)
dp
dI = (S′
RU (p) + S′
ROW (p))
dp
dI .
(18)
Multiplying the left- and right-hand sides of equation (18) by p/D
and p/S, respectively (with S = D in equilibrium), we get
dp
dI =
p
D
∂DEU(f,I)
∂I
p
S S′
RU (p) +
p
S S′
ROW (p) −(1 + v) (1 + z)
p
D
∂DEU(f,I)
∂f
−
p
D D′
ROW (p)
.

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Analysis
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Using equation (13) yields
dp
dI =
p
I
xI
DEU
∂DEU(f,I)
∂I
yp
SRU S′
RU (p) +
(1−y)p
SROW S′
ROW (p) −
(1+v)(1+z)p
f
xf
DEU
∂DEU(f,I)
∂f
−
(1−x)p
DROW D′
ROW (p)
.
Using equations (10), (15) and (16), we arrive at
dp
dI = p
I
xεI,EU
yεS,RU + (1 −y) εS,ROW −x
(1+z)p
(1+z)p+c+τ ̃εD,EU −(1 −x) εD,ROW
,
where the income elasticity of demand in the EU is
εI,EU ≡
I
DEU
∂DEU (f, I)
∂I
.
The responses of the oil price p and the EU fuel price f to an income
change ΔI can be linearly approximated as
ΔIp ≈
dp
dI ΔI and ΔIf ≈(1 + v) (1 + z) ΔIp.
(19)
Treating p as a function of I, differentiating oil profits
πRU = (p −e) SRU (p) fully with respect to I and using the Russian supply
elasticity in equation (15) gives
dπRU
dI
= dp
dI SRU + (p −e) S′
RU (p) dp
dI = (1 + p −e
p
εS,RU) SRU
dp
dI
and, using equation (19), a linear approximation of the change in Rus-
sian oil profits is
ΔIπRU ≈(1 + p −e
p
εS,RU) SRUΔIp.
Parameter values of elasticity of demand
The price elasticity of demand for road transport fuels (gasoline and
diesel) and crude oil is low in the short term but increases with time. In
the short term, many fuel consumers can only drive less to reduce con-
sumption, while in the longer term many can shift to more efficient vehi-
cles or change their commuting distance or mode of transportation.
Several studies compile existing estimates of the demand elas-
ticity of gasoline, diesel and crude oil (see, for example, refs. 21–24).
These estimates are derived using different methods over different
time periods and locations. Short-term gasoline elasticity estimates
range from −0.04 to −0.5 (refs. 23,24) with several review studies deriv-
ing averages around −0.25 (ref. 24). Aklilu24 also provides additional
original estimates for EU countries using recent data, finding an EU
average short-term gasoline elasticity of −0.255. We use −0.25 in our
calculations, in line with these recent EU estimates as well as the wider
literature samples.
Long-term gasoline demand elasticity estimates range from −0.2
to −1 (ref. 23). Aklilu24 compiles review studies with even higher ranges
but with averages around −0.7. Aklilu’s own empirical study finds a
long-term EU average of −0.88. We use −0.9 in our calculations based
on these results.
Crude oil demand elasticity is usually found to be lower than that
of gasoline. This is to be expected since crude oil is only a part of the
gasoline price. If we assume that crude oil represents half the cost of
retail gasoline, a 10% increase in the price of crude oil would translate
to a 5% increase in the price of gasoline, and the demand elasticities for
oil would be about half those for gasoline21. Caldara et al.22 compile 31
studies for short-term world oil demand in the range of −0.04 to −0.9
with a mean of −0.22 and a median of −0.13. We follow Hamilton21 and
use half of the gasoline estimates for wider oil demand (that is, −0.125
for our short-term oil demand elasticity and −0.45 for our long-term
oil demand elasticity), which is also in line with the estimates of
Caldara et al.22.
In the sensitivity analysis in Supplementary Note 2, we also explore
lower and higher values in the range found in the literature.
Parameter values of elasticity of supply
The price elasticity of global oil supply is low (close to zero) in the short
term and grows only slowly in the longer term. New conventional oil
fields take several years to bring into production and additional supply
in the short term (within 1 year) can only come from either inventory,
politically withheld supply (including, for example, Saudi Arabian spare
capacity), shale oil production and infill drilling in conventional fields.
Compared with demand elasticity studies, supply elasticity studies
are rare. Caldara et al.22 compile six studies applying different methods
and data and find short-term (within 1 year) supply elasticities in the
range of 0–0.27. These estimates are based on historical data and do
not necessarily reflect current or future oil supply. As a complement,
we also rely on modelled forward-looking estimates of supply elasticity
derived by Wachtmeister25 using a bottom-up modelling framework
and Rystad UCube field-by-field data, as well as our own judgement of
the current oil market outlook.
For our very-short-term and short-term scenarios, we use a supply
elasticity of 0 for both Russia and the rest of the world. This corre-
sponds to a hypothetical scenario with no inventory draw, no addi-
tional production by the Organization of the Petroleum Exporting
Countries and a timeframe below 6 months where the shale response is
still low. In the sensitivity analysis (Supplementary Note 2), we present
a short-term case using 0.1, which can be seen as reflecting a 12-month
shale response and/or a stronger response from the Organization of
the Petroleum Exporting Countries.
For our long-term scenario, we use 0.13, which is in line with a
modelled 3-year horizon estimate of global supply by Wachtmeister25. A
value of 0.13 is also used as a central estimate by Erickson and Lazarus10,
even though their studied time horizon is longer than ours. In the sen-
sitivity analysis (see Supplementary Note 2), we explore 0.2 as a higher
estimate, reflecting a stronger supply response.
Note again that our long-term scenario reflects a supply response
in 1–3 years. Other studies reporting long-term supply elasticity esti-
mates might use long term to describe longer time horizons. For exam-
ple, Gately26, Brook et al.27 and Erickson and Lazarus10 use long term to
describe responses up to 15 years ahead.
Other costs and refinery margins
We translate oil production (crude oil, condensate and natural gas liq-
uids) in barrels per day to a corresponding volume of refined products.
We make the simplifying assumption that one barrel of oil yields 170 l
of products and fuels that can be sold to consumers. In the base case,
the variable production cost of these fuels is assumed to correspond
directly to the crude oil price (that is, the variable fuel production cost
is the global oil price per barrel (Brent; in US$ per barrel) measured in
Euros per litre of fuel product (p)). The retail fuel price (consumer price)
is then the variable fuel production cost (oil price, p) plus the other, fixed,
production costs, c (refining, transport, margins and so on), plus the fuel
tax, τ, then VAT is applied to all of these. In the sensitivity analysis (see
Supplementary Note 3), we explore other variable production costs (z)
and discuss which case is more likely. Our base case c of €0.45 l−1 is derived
backwards from a consumer price of €1.9 l−1. c thus includes the current
refinery margins (the value difference between crude oil and refined
products), which vary in time and are currently at historically high levels.
Size of markets and Russian export declines
We assume that Russia has already lost 1 million barrels per day of
oil exports based on recent export data28 and analysis29. In January,
before the war, the global supply and demand of oil was estimated
to be 100 million barrels per day (ref. 30). Consequently, we assume

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Analysis
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the current oil market to be 99 million barrels per day. Road trans-
port fuel’s share of total EU oil consumption is 47.5% (ref. 31). The
EU’s share of global oil consumption is 12% (ref. 32), which yields our
x = 0.475 × 0.12 = 5.7%. The EU imports, in normal times, ~35% of its oil
from Russia33. For the very short term, we assume that the reduction in
Russia’s export (1 million barrels per day) fully accrues to the EU. This
implies y = 29% in the very short term.
Fuel price and taxes
For our analysis, we need to construct an EU-level fuel price and fuel
tax. However, fuel prices and taxes differ between the EU countries.
We construct EU-level values using weighted averages based on each
country’s share of total EU fuel consumption using data from Eurostat34.
The data underlying the quantification in this section are summarized
in Supplementary Table 1.
For the country-level fuel price, we use data from the European
Commission (from the fuel-prices.eu database35). We use the average
prices for the month of May 2022 (see columns 3 and 4 of Supplemen-
tary Table 1) and obtain weighted averages of €1.89 l−1 for petrol and
€1.87 for diesel. Hence, we choose €1.9 as transport fuel price.
In assessing the EU’s tax reduction, we want to emphasize that
announced and implemented tax reductions come in several forms
(for example, excise duty reduction and directed VAT reductions), new
ones are being suggested and their time spans are varied. Hence, there
is scarcely any way to assess the final aggregate outcome until pos-
sibly several years from the time of writing. Instead, to obtain a rough
estimate of what the final outcome may be, we look at two scenarios.
The first scenario is based on the possibility that all EU countries
reduce their excise tax to the EU minimum level (€0.359 l−1 for unleaded
petrol and €0.33 l−1 for diesel). In this scenario, we use the countries’
tax levels from July 2021 (ref. 36) and reduce them to the minimum level
(we use the numbers for unleaded petrol and gas oil for propellant use
(diesel); in some instances, different tax levels apply to different sub-
categories, in which case we take an average). The data are summarized
in columns 5–8 of Supplementary Table 1. We then obtain a weighted
average tax reduction of €0.24 for petrol and €0.15 for diesel (these
do not include the indirect effects on VAT that apply to excise duties).
The second scenario (columns 9 and 10 in Supplementary Table 1)
takes the post-invasion announcements to date (mid-June 2022). For
this, we take the compilation of Transport & Environment37, cross-check
their entries with news articles and add directed VAT reductions for
fuels (for Estonia and Romania). For most countries, we verify the
numbers from Transport & Environment37 (see the footnote of Sup-
plementary Table 1). We interpret (but ultimately cannot verify) the
numbers to exclude the indirect effects on VAT payments in those cases
(such as Germany) where VAT applies to the excise duty (the number
for Sweden in Supplementary Table 1 includes this indirect VAT effect).
The most consequential decision is probably our choice to set Poland’s
pre-invasion VAT reduction to zero. In calculating VAT reductions in
Euros, we use the average price in January and February 2022 (this
is conservative since prices were lower than post-invasion). We then
obtain a weighted average tax reduction of €0.165 l−1 for petrol and
€0.132 l−1 for diesel. We also calculate the percentage reduction in fuel
taxes. We obtain percentage reductions for petrol and diesel of 9.7 and
8.2%, respectively, compared with the price in January and February,
8.8 and 7.4%, respectively, compared with the 3-month pre-reduction
average price and 5 and 4.3%, respectively, compared with the price in
May. These numbers are not shown in Supplementary Table 1.
Based on these scenarios, each with its own caveats, we use a tax
reduction of €0.20 (including indirect VAT effects) for the analysis.
Data availability
All of the data generated or analysed during this study are included
in this published article (and its Supplementary Information files) or
are publicly available.
Code availability
Model implementation code written in MATLAB is available as Sup-
plementary Code.
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Acknowledgements
We thank S. O’Brien for excellent research assistance; N. Rossbach,
P. Olsson and J. Norberg at the Swedish Defence Research Agency
for valuable input on Russian military spending; M. Höök for valuable
support; and P. Bansal for important comments. This work has been
supported by Formas under grant number 2020-00371 (to J.G.
and D.S.).
Author contributions
All of the authors contributed equally to the project. J.G., D.S. and H.W.
together designed the study, developed the methodology, interpreted
the results and wrote and edited the manuscript. H.W. led the data and
input parameter work, J.G. led the model implementation. D.S. led the
coordination of the project.
Funding
Open access funding provided by Uppsala University.
Competing interests
The authors declare no competing interests.
Additional information
Supplementary information The online version
contains supplementary material available at
https://doi.org/10.1038/s41560-022-01122-6.
Correspondence and requests for materials should be addressed to
Henrik Wachtmeister.
Peer review information Nature Energy thanks Michael Ross, Michael
Plante and the other, anonymous, reviewer(s) for their contribution to
the peer review of this work.
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    Policy Problem:

Answer: The war in Ukraine has led to significant increases in the oil price, which is passed on to households in the form of increased fuel prices. These fuel‑price increases have significant negative financial effects on households, some of which are hit harder than others. One policy response in the EU has been to lower fuel taxes to soften the blow. However, such a policy stimulates oil demand in a situation where supply is the limiting factor and hence increases the oil price further. The increased oil price implies a de facto income transfer from the EU to the oil suppliers. Importantly, this includes suppliers in Russia, who the EU is trying to isolate economically due to the invasion of Ukraine. The question for policy makers that we address in our study is whether this effect is sizable and what alternative policies exist.