Korean Energy Economic Review ISSN:1599-7057(Print) 에너지경제연구

This paper analyzes the effects of fuel tax cut on retail prices of gasoline and diesel, which has been in effect since November 12, 2021. Since Korea has imposed a higher fuel tax on gasoline than on diesel, a higher amount of fuel tax was cut for gasoline than for diesel, although the fuel tax was cut at the same rate. This paper makes use of this fact and estimates a difference in difference model for differential effects of fuel tax cut on retail prices of gasoline and diesel. The results show that 26%-49% of the fuel tax cut was reflected in the retail price of gasoline, while 12%-27% of the fuel tax cut was reflected in the retail price of diesel. Moreover, the retail price of diesel rose more than the magnitude of the fuel tax cut during the period of 30% fuel tax cut. The uncertainty of the international oil market and the inelasticity of demand for diesel may undermine the effect of fuel tax cut policy. Our results suggest that the government's fuel tax cut policy is not appropriately reflected in the retail price paid by consumers, especially under the higher uncertainty of the international oil market and higher oil prices. Our results suggest that it would be better to properly collect the fuel tax and use the tax revenue to subsidize those in need.