After oil prices rose following U.S. and Israeli airstrikes on Iran, the government is reviewing the possibility of expanding the fuel tax cut rate and preparing to roll out fuel price subsidies. But past cases show the fuel tax cut lowered pump prices less than expected, leaving consumers with only a modest sense of relief. By contrast, many analyses find that paying out fuel price subsidies has positive effects.
Of course, when global oil prices rise, it is better to deploy policy tools such as fuel tax cuts and fuel price subsidies to ease the burden on the economy than to do nothing. But some note that a higher priority should be policies to reduce oil consumption and a low-consumption, high-efficiency energy economy that is less affected by spikes in global oil prices.
On the 12th, a review by ChosunBiz of multiple reports analyzing the effects of fuel tax cuts and fuel price subsidies, published since the first domestic fuel tax cut was implemented in 2000, found that fuel price subsidies were generally more effective than fuel tax cuts.
The government has implemented fuel tax cuts a total of four times so far. In Mar. 2000, it cut gasoline and diesel fuel taxes by 5% and 12%, respectively, for two months. In Mar. 2008, when global oil prices surged to $140 per barrel, it cut fuel taxes on gasoline, diesel, LPG, and butane by 10% each for 10 months.
Starting in Nov. 2018, it cut fuel taxes by 15% for six months, then reduced the cut to 7% and extended the period through the end of Aug. 2019. Currently, fuel taxes are cut by 7% on gasoline and 10% on diesel, a measure first implemented in Nov. 2021 that has been extended or modified 20 times.
◇ "The full amount of the fuel tax cut was not reflected in gasoline and diesel retail prices… at times prices rose more than the cut"
Fuel tax cuts were repeatedly implemented during periods of high oil prices, but many analyses are negative on whether they delivered the effects the government wanted. First, the effect of fuel tax cuts actually shrinks when global oil prices rise, because the share of fuel taxes in the retail price declines.
Fuel taxes consist of the transportation-energy-environment tax, the driving tax (26% of the transportation-energy-environment tax), and the education tax (15% of the transportation-energy-environment tax), and are fixed per liter. Gasoline is subject to a fuel tax of 694 won per liter (L), and diesel 476 won. The retail price is the sum of the pre-tax price (refiners' supply price to gas stations) and the fuel tax, plus 10% value-added taxes. Therefore, when global oil prices rise, the supply price goes up and, as retail prices increase accordingly, the share of fuel taxes gets smaller.
Even when fuel taxes are cut, the retail price does not fall by the full amount of the cut. According to the report "Effects and implications of fuel tax cut policy," released in Jan. 2023 in Energy Economics, an academic journal of the Korea Energy Economics Institute (KEEI), by Assistant Professor Jang Hee-seon of the Department of Economics at Jeonbuk National University and Associate Professor Choi Bong-seok of the School of International Trade at Kookmin University, only 26%–49% of the gasoline fuel tax cut and 12%–27% of the diesel cut were reflected in retail prices.
There were also periods when the cut was not reflected at all. From May 1, 2022, to Jun. 30, 2022, when the cut rate rose by 10 percentage points from Nov. 12, 2021, the start of the fourth fuel tax cut policy, to 30%, retail prices increased beyond the amount of the tax cut. As pump prices failed to come down, the government raised the cut rate to 37% on Jul. 1, 2022.
The authors of the report said, "In a prolonged high oil price environment with high market uncertainty, government fuel tax cuts are unlikely to be effectively reflected in the retail prices paid by consumers," and "Even if fuel taxes are cut, the retail price does not properly reflect it, so consumers find it hard to feel the effect."
A report released by the Korea Energy Economics Institute (KEEI) in Jul. 2024 contains similar analysis. In a report titled "A study on the economic effects and policy improvements following the temporary cut of transportation fuel taxes" (Researchers Kim Tae-hwan and Jung Joon-hwan of KEEI), it said, "An analysis of extensive empirical data suggests that gas station retail prices did not fully reflect the fuel tax cut," adding, "Even if some stations lowered prices by the full amount of the tax cut, various statistical analyses confirm that the market average did not fall by that much."
There is also analysis that policies like across-the-board price discounts from fuel tax cuts deliver more benefits to heavy fuel consumers. Assistant Professor Jang and Associate Professor Choi said, "In the case of fuel tax cuts, those who consume more gasoline and diesel receive greater benefits, and in general, as income levels rise, gasoline and diesel consumption tends to increase," adding, "Higher-income households spend more on fuel and receive more benefits from fuel tax cuts." They proposed, "If policies must respond to high oil prices, it is more desirable to provide fuel price subsidies or refund fuel taxes to targeted recipients than to cut fuel taxes."
◇ "Fuel price subsidies also help ease income inequality among truck owners"
In fact, many analyses find that paying fuel price subsidies is effective. In Korea, since 2001, under the "first energy tax reform," a fuel price subsidies program has been in place to support truck owners expected to face managerial difficulties.
At the time, the government decided to gradually raise diesel and LPG prices, which were relatively much lower than gasoline prices, through fuel tax adjustments until Jul. 2006. To ease the burden on the transport sector, it provided part of the fuel tax increase as subsidies—these are the fuel price subsidies. Vehicles eligible for fuel price subsidies include commercial cargo vehicles, buses, and taxis that use diesel and LPG.
In a Dec. 2021 report titled "Legislative impact analysis of the cargo truck fuel price subsidies system" (Legislative Researcher Gu Se-ju, Land and Marine Affairs Team), the National Assembly Research Service positively evaluated the system, saying, "An analysis using the 2015–2020 cargo truck transport survey data shows that fuel price subsidies account for about 20% of net income, indicating that the system positively affects the income of truck owners and reduces income inequality among them, thereby achieving its legislative purpose."
The Korea Institute of Public Finance(KIPF) likewise analyzed in its 2018 report, "A study on reform plans for the cargo truck fuel price subsidies system" (Researchers Lee Dong-gyu, Sung Myeong-jae, and Kim Seung-rae), that "Because the main beneficiaries of fuel price subsidies are middle- and low-income groups, the resulting increase in disposable income has a strong effect of boosting consumption expenditure."
Earlier, the government revised the fuel price subsidies payment guidelines and on the 11th said it would extend by two months, through the end of Apr., the diesel fuel price subsidies that expired at the end of Feb. Previously, it supported only 50% of the amount exceeding the reference price of 1,700 won per liter, but it plans to raise the payout ratio to 70%.
◇ "Expand and promote public transit use instead of intervening in market price functions"
However, both fuel tax cuts and fuel price subsidies assume the current pattern of fuel consumption remains unchanged and aim only for cyclical management and price stabilization. With the Middle East crisis effectively blocking the Strait of Hormuz and cutting supply, if fuel consumption holds steady, pump prices will inevitably rise, yet the goal of fuel tax cuts and fuel price subsidies is merely to artificially suppress prices.
In this regard, the Organization for Economic Cooperation and Development (OECD) has pointed out that fuel tax cuts run counter to climate crisis responses such as reducing greenhouse gases. Fuel price subsidies can be criticized on the same grounds, given that a large share of trucks run on diesel.
According to the International Energy Agency (IEA), Korea's oil consumption ranks eighth in the world in 2025, with daily consumption reaching about 2.75 million barrels. The problem is that it relies entirely on imports for crude oil. As a result, spikes in global oil prices push up inflation and drag down economic growth, and each time prices are high, fuel tax cuts and fuel price subsidies are discussed. An energy industry official said, "Recent discussions lack calls to actually reduce fuel consumption and focus only on lowering pump prices."
In their report, KEEI researchers Kim Tae-hwan and Jung Joon-hwan said, "During periods of high oil prices, policies to expand and promote public transit use should be implemented ahead of temporary fuel tax cut measures," adding, "Policies to expand and promote public transit use share the same policy goal of easing the national economy's burden during high oil prices and, because the government does not directly intervene in the market's price function, they do not distort oil consumption."
They added, "Households that choose private cars as a means of travel during periods of high oil prices can improve disposable income by opting for public transit as an alternative," and "It better serves efficient resource allocation and social welfare for the government to greatly increase the expected benefits of choosing public transit during periods of high oil prices and invest the necessary funds accordingly."