🚨 Fuel Tax Cut Extended: 20-Year Band-Aid Solution, When Will Real Action Come?

Today Korean Economic News | 2025.06.25

📌 Government Extends Fuel Tax Cut for 2 More Months... "Energy Policy Change Urgently Needed"

💬 The government announced on the 25th that it will extend fuel tax cuts until the end of August for another 2 months. The Ministry of Economy and Finance said, "We decided to extend the cuts to reduce the burden on ordinary people as international oil prices continue to rise due to growing tensions in the Middle East." However, questions are growing about the effectiveness of fuel tax cut policies that have been repeated for over 20 years since first introduced in 2004. Experts point out that "fundamental policy changes like improving energy supply structure and speeding up renewable energy transition are needed rather than temporary measures."

1️⃣ Easy Explanation

The government announced again that it will lower fuel taxes to reduce gas costs for people. But this type of policy has been repeated for over 20 years, so voices are getting louder saying we need real solutions.

First, let me explain what 'fuel tax' is in simple terms. Fuel tax is a tax added to gasoline, diesel, and other fuels. When you fill up gas at a station, the money you pay includes not just the fuel cost but also various taxes. Fuel tax makes up the biggest part of these taxes. About 700 won per liter is added as tax on gasoline, and about 400 won per liter on diesel.

When international oil prices go up, domestic fuel prices also go up. When this happens, the government temporarily lowers fuel taxes to reduce the burden on ordinary people. For example, if gasoline tax is lowered from 700 won to 500 won (a 200 won cut), theoretically gas station prices should drop by about 200 won per liter.

But reality isn't that simple. Even when fuel taxes are lowered, if oil companies or gas stations keep their prices the same, consumers don't feel much benefit. Looking at past fuel tax cuts, prices often didn't drop as much as the tax cuts.

The bigger problem is that this policy remains just a temporary fix. Since first introduced in 2004, similar measures have been repeated for over 20 years. The pattern continues: lower fuel taxes when international oil prices rise, then raise them back when prices stabilize.

Experts say we now need a fundamental approach. They say we need long-term solutions like changing our energy structure away from fossil fuels, increasing electric car adoption, and improving public transportation. Also, when fuel tax income decreases, it creates holes in the government budget, so we need to think about alternative ways to secure tax revenue.

In the end, fuel tax cuts work like painkillers to ease immediate pain, but they're not the fundamental treatment to cure the disease itself.

2️⃣ Economic Terms

📕 Fuel Tax

Fuel tax is the general term for taxes imposed on petroleum products like gasoline and diesel.

• It consists of Transportation·Energy·Environment Tax (former Transportation Tax), Individual Consumption Tax, Driving Tax, and Value Added Tax.
• It's about 700 won per liter for gasoline and 400 won per liter for diesel, making up 40-50% of fuel prices.
• It's one of the government's major revenue sources, worth about 20 trillion won annually.

📕 Energy Security

Energy security means a country's ability to secure needed energy stably and continuously.

• The key is reducing energy import dependence and diversifying supply sources.
• Korea has very weak energy security with 95% dependence on energy imports.
• Expanding renewable energy and improving energy efficiency are key tasks for strengthening energy security.

📕 Carbon Neutrality

Carbon neutrality means making greenhouse gas emissions and absorption equal, resulting in net zero emissions.

• Achieving carbon neutrality by 2050 is a global goal.
• The key is reducing fossil fuel use and transitioning to renewable energy.
• Electric car adoption and hydrogen economy development are major tools for achieving carbon neutrality.

📕 Energy Transition

Energy transition means changing from a fossil fuel-centered energy system to a renewable energy-centered one.

• It includes transitioning to clean energy like solar, wind, and hydrogen.
• It requires comprehensive innovation of social and economic systems beyond simple technology changes.
• While temporary cost increases may occur during energy transition, economic efficiency improves in the long term.

3️⃣ Principles and Economic Outlook

✅ History and Limitations of Fuel Tax Policy

• Let's look at the 20-year history of repeated fuel tax cuts and structural problems.

  • First, fuel tax cuts became a regular policy tool since first introduced in 2004. The fuel tax cut first implemented in 2004 to respond to international oil price spikes was a 'temporary measure' at the time. But it was repeatedly implemented during international crisis situations: the 2008 financial crisis, 2011 Middle East crisis, 2014 oil price spike, 2021 COVID-19 recovery period, and 2022 Russia-Ukraine war. The current fuel tax cut that started in November 2021 has already lasted over 3 years, making it hard to call it a 'temporary measure.' This shows that fuel tax cuts have become embedded as a structural policy tool.

  • Second, the actual effects of fuel tax cuts often fell short of expectations. Theoretically, if fuel tax is lowered by 100 won, gas station prices should also drop by 100 won, but this often wasn't the case in reality. Oil companies raised wholesale prices reflecting international oil price increases, or gas stations adjusted their margins, offsetting the consumer price reduction effects. Even during the 30% fuel tax cut in 2022, actual gas station price drops were only 60-70% of the cut amount. This shows that distribution structure complexity and market power issues limit policy effectiveness.

  • Third, repeated fuel tax cuts place continuous burden on government finances. Fuel tax revenue is about 20 trillion won annually, an important part of government revenue. The revenue loss from fuel tax cuts over the past 3 years is estimated to exceed 15 trillion won total. This constrains the government's fiscal capacity and acts as a limiting factor for pursuing other policies. Also, as fuel tax cuts become prolonged, the predictability of government budget planning is declining. Ultimately, the fiscal burden from fuel tax cuts could lead to other forms of tax increases or government spending cuts, requiring comprehensive evaluation of policy effects.

• The repeated use of fuel tax policy clearly shows the limitations of temporary responses, and the urgent need to transition to more fundamental and sustainable energy policies.

✅ Structural Factors in International Oil Price Changes and Response Strategies

• Let's analyze the root causes of oil price changes and strategic responses Korea can take.

  • First, geopolitical risks and supply chain instability are major causes of oil price changes. Recent heightened tensions in the Middle East pose direct threats to global oil supply. Since the Middle East accounts for about 30% of global oil production, political instability in this region immediately leads to oil price increases. Also, energy supply chain reorganization due to the Russia-Ukraine war and demand increases from China's economic recovery add to oil price volatility. These structural factors are difficult to resolve quickly, so oil price volatility will likely continue.

  • Second, Korea's high energy import dependence increases vulnerability to oil price shocks. Korea depends on imports for 99.7% of crude oil and 98.6% of natural gas, making it very sensitive to international energy price changes. Especially high dependence on the Middle East exposes Korea to geopolitical risks. In this structure, short-term measures like fuel tax cuts can't provide fundamental solutions. Policy should shift toward improving supply stability through energy import source diversification, expanding reserves, and improving energy efficiency.

  • Third, accelerating renewable energy transition is key to long-term solutions. Reducing fossil fuel dependence and increasing the share of renewable energy like solar, wind, and hydrogen is the fundamental way to escape oil price volatility. Currently, Korea's renewable energy share in power generation is about 9%, far below the OECD average of 30%. To achieve the goal of increasing renewable energy share to 30% by 2030, large-scale investment and policy support are needed. Expanding electric car adoption, building a hydrogen economy, and developing energy storage technology must also be pursued in parallel.

• Fundamental response to oil price volatility is only possible through strengthening energy security and clean energy transition, requiring urgent establishment of long-term and systematic strategies.

✅ Energy Transition and New Policy Paradigm

• Let's explore new energy policy directions and implementation plans suitable for the carbon neutral era.

  • First, tax system transition through carbon tax introduction and fuel tax reform is needed. The current fuel tax system was created in the 1990s and doesn't fit the era of climate change response and energy transition. The tax system should transition toward introducing carbon taxes based on carbon emissions and gradually reforming existing fuel taxes. This can create an incentive system to reduce fossil fuel use and increase clean energy use. However, when introducing carbon taxes, support measures considering the burden on ordinary people and small businesses must also be prepared.

  • Second, transportation demand management through electric car adoption and charging infrastructure expansion is important. Since about 50% of total oil consumption is used in the transportation sector, electric car adoption is an effective way to reduce fuel demand. While current cumulative electric car adoption is about 500,000 vehicles, achieving the goal of increasing to 3 million by 2030 requires charging infrastructure expansion and purchase support. Also, reducing overall transportation energy demand through public transportation improvement, bicycle road expansion, and smart transportation system construction is important.

  • Third, improving energy efficiency and building smart energy systems is essential. Reducing energy demand is as important as expanding supply. Energy usage can be reduced through strengthening building energy efficiency standards, improving industrial sector energy efficiency, and building smart grids. Especially, introducing energy management systems using AI and IoT technology can greatly improve energy use efficiency. While these investments require initial costs, they help with long-term energy cost savings and securing economic efficiency.

• Energy transition requires comprehensive innovation of social and economic systems beyond simple technology changes. An integrated approach with government, businesses, and citizens participating together is needed.

4️⃣ Conclusion

The government's fuel tax cut extension helps ease immediate burdens on ordinary people, but it again shows the limitations of temporary approaches that have been repeated for over 20 years. Now is the time when a paradigm shift to more fundamental and sustainable energy policies is needed.

The biggest problem with fuel tax cut policy is focusing only on short-term symptom relief without structural solutions. International oil prices are expected to continue being highly volatile due to various factors like geopolitical risks, climate change, and energy transition. In this situation, fundamental solutions are difficult with the approach of lowering fuel taxes whenever oil prices rise.

More important is the era's task of carbon neutrality and energy transition. To achieve carbon neutrality by 2050, fossil fuel dependence must be greatly reduced and transition to renewable energy must happen. From this perspective, fuel tax cuts might actually have reverse effects of slowing energy transition.

Going forward, focus should be on long-term energy policy transition rather than short-term fuel tax adjustments. Fundamental solutions involve reducing fossil fuel dependence through expanding renewable energy investment, accelerating electric car adoption, improving energy efficiency, and enhancing public transportation.

Of course, policy consideration for the burden on ordinary people and small businesses is needed during this transition process. When introducing carbon taxes or reforming fuel taxes, protective measures for socially vulnerable groups must be prepared. But this shouldn't become a reason to delay structural reforms.

Ultimately, true energy security means building a self-reliant and sustainable energy system that doesn't shake under external shocks. It's time to move away from the band-aid solution of fuel tax cuts and focus on the future task of energy transition.