Countries cut tax and give subsidy to minimize soaring energy prices

Soaring oil and energy prices sparked a global reaction to minimize the impact on businesses and consumers. At least 29 countries have launched measures to cushion the impact, according to a survey by the OECD (Organization for Economic Cooperation and Development).

The list of measures is diverse, but most of the initiatives are focused on temporary cuts in taxes and income transfers to families, especially the most vulnerable, to help pay the electricity bill or with free allocation.

Among the countries that have reduced rates or taxes on electricity are Germany, Belgium, Italy and Poland. In Europe, almost half of electricity is generated from gas, coal or oil, and two-thirds of the energy mix as a whole is linked to non-renewable sources.

South Korea, in turn, decided to cut rates on fuels such as gasoline, diesel and cooking gas. A similar measure was announced on Wednesday (23) in the United Kingdom, and the discussion is also gaining strength in the United States.

In Spain, one of the measures adopted was the taxation of profits considered excessive by energy generating companies. The funds collected are used to finance actions that ensure more affordable prices for consumers.

Other countries such as Austria, France, Ireland and the United Kingdom have resorted to transfers to lower-income families. The formats are varied and range from single payments to monthly installments, conditioned or not to use to pay energy or heating bills during the European winter.

Ireland has also decreed a temporary reduction in urban transport fares, from April to December 2022.

The wide variety of measures shows that Brazil is not isolated in the search for solutions to the increase in energy and fuel prices.

Petrobras’ decision to grant a mega-increase of 24.9% on diesel, 18.8% on gasoline and 16.1% on cooking gas, on March 10, helped to further inflame calls for an attitude —in an environment already contaminated by the electoral climate.

The Jair Bolsonaro (PL) government has already adopted part of the prescription, with the approval of the National Congress for a complete exemption from PIS/Cofins on diesel, cooking gas and aviation kerosene. The exemption will be applied until the end of the year and will cost R$ 16.6 billion to the public coffers.

The project also foresees a change in the collection of the state ICMS (Tax on the Circulation of Goods and Services) on diesel. The Economy Ministry’s expectation is that this change will result in additional relief at pumps, but the measure is criticized by governors, who see a loss of revenue close to R$14 billion in 12 months.

Despite the initial diesel tax exemption, different political actors defend the launch of additional actions.

In addition to criticizing the company’s pricing policy, which tracks oil price fluctuations on the international market, Bolsonaro signaled the possibility of also exempting gasoline. The measure would cost R$ 27 billion and was criticized by the special secretary of the Treasury and Budget, Esteves Colnago.

“There’s this pressure [para desonerar gasolina]. We understand that it is not a good policy, as you are serving upper-middle-class people,” Colnago said last Tuesday (22).

The president of the Chamber of Deputies, Arthur Lira (PP-AL), defended the institution of a subsidy aimed at some categories, such as app drivers, taxi drivers and low-income families.

There are also ministers from the political wing of the government who support the creation of a direct subsidy on fuel prices, as was done in the Michel Temer government (MDB) after the truck drivers’ strike. The subsidy was paid directly to distributors and importers who sold the fuel at a reference price informed by the government.

Minister Paulo Guedes (Economy) has already admitted that if Russia’s war against Ukraine continues, the government will have to take additional measures to cushion the effects of rising fuel prices. In the meantime, however, he and his team try to postpone the discussion and buy time, amid the absence of a single direction within the government on the subject.

The economic team’s hope is that the conflict will come to an end, easing the pressure on international oil and dollar quotations.

At the technical level, the assessment is that, if additional action is needed, the best option is a temporary cash transfer aimed at the most affected groups.

A focused policy tends to be cheaper and more effective than a broad exemption on gasoline, which would be expensive and would benefit citizens with greater purchasing power who use individual transport to get around, according to these experts.

“There is no possibility of infinite spending. Spending is regulated, everything has a cost for society”, warned Colnago.

Professor Edmar Almeida, from the Energy Institute at PUC-Rio, states that the mechanisms recommended by the OECD for countries where the energy industry has private participation, as is the case in Brazil, are the creation of a variable tax — higher when the price of energy is low and lower when there is a rise in the market—or income transfers directly to consumers.

“This discussion is poorly channeled in Brazil. Brazil sometimes wants to discuss the problem of fuel prices, but the reflex of public authorities is to think of a subsidy for everyone, as was done with diesel in 2018”, says Almeida.

“The subsidy did not go to the truck driver who went on strike, it went to everyone, including the SUV owner. This path is not appropriate.”

For the specialist, it is unfeasible to finance a subsidy that results in an effective discount on pumps. In Almeida’s calculations, to lower diesel and gasoline prices by BRL 1 would cost BRL 100 billion—with no guarantee that the entire reduction would be passed on to consumers.

“At the end of the day, we would have a discount of 15% or less, costing more than the entire Auxílio Brasil. “, he asks.

The professor says that subsidizing gasoline, either through payments to producers or through tax relief, would not be desirable. In addition to an expensive policy, the measure would make other renewable energy sources, such as ethanol, less competitive. In practice, the country would become even more dependent on oil.

For him, if it is necessary to adopt new measures in Brazil, the most appropriate would be an income transfer.

The Senate even passed a bill providing for a monthly transfer of up to BRL 300 to drivers, taxi drivers, delivery people and vulnerable families, up to a limit of BRL 3 billion. The text is still pending analysis in the Chamber.