No Massive Rise in the Excise Duties for Euro-4 and Euro-5 Can Be Justified

The RF Government has vetoed the RF Ministry of Finance's proposal that the excise duties for Euro-4 and Euro-5 standard gasoline should be massively increased in the next few years. If the proposal had been approved, three years from now the price of one liter of Euro-4 and Euro-5 gasoline would have been around 5 rubles higher than it is at present. The Government wants gasoline prices to increase at a much more moderate pace.

Last week, the RF Government decided to refrain from rapidly and massively increasing the excise duties for Euro-4 (E4) and Euro-5 (E5) high-quality gasoline. Earlier, in April, the RF Ministry of Finance had proposed that the growth rate of motor fuel excises should be considerably increased. RF Minister of Finance Anton Siluanov noted in this respect that the excise duties for high-quality gasoline were approximately two times lower than those for second- and third-class gasoline (see the Table below). According to Siluanov, because of the low excise duties for high-quality motor fuel, in the next three years the transition to Euro-4 and Euro-5 high-quality gasoline would cost Russia' road funds Rb 100bn in lost revenue.

It should be reminded that, from 2011 onwards, Russia has been using a new system of excise duties levied on petroleum products. Before 2011, the rates of excise duties were based on the RON, while the new system oriented to the ecological class of gasoline is designed to stimulate production of cleaner fuel by introducing lower rates of excise duties for gasoline that meets ecological Classes 4 and 5.

On 1 January 2011, excise duties for all ecological classes of motor gasoline rose at least by 40- 50%. In 2012, they grew by one-third. Further hikes in excise duties are planned to take place within the next few years.


The sharp rises in the rates of excise duties in 2011 and 2012, carried out without decreasing the volume of production of gasoline and diesel fuels, pushed up the excise duties yield by 67% in 2011 in comparison with 2010. In 2012, the excise duties yield rose by about 27% on 2011. Thus, in principle, the pace of excise duty rate indexation determined a similar growth rate of revenues from the excise duties on petroleum products. 

At the same time, the fiscal importance of the excise duties on petroleum products is very low - for example, in 2012 they accounted for no more than 0.6% of GDP. It is unlikely that they may ever surpass this level, because their further indexation, especially if carried out amidst changes in the structure of production, will reduce the volume of receipts in the medium-term perspective - a prospect that causes alarm for the RF Ministry of Finance. Therefore, judging by our estimates, the gasoline market need not worry that any cardinal changes can actually take place in the structure of production until the year 2015 (when Euro-3 is planned to be banned - we are definitely not prepared to take this step any time sooner than that) through the introduction of cutting-edge technologies, with the resulting drop in the volume of revenues from excise duties on gasoline. There is more clarity with regard to the prospects of diesel fuel production - as the structure of diesel fuel production is being modernized at an extremely slow pace, the most probable scenario for that industry's adjustment to the transition to diesel fuel that meets higher ecological classes will be an increase in the share of diesel fuel exports.


Therefore, the massive and rapid rise in the rates of excise duties for Euro-4 and Euro-5 gasoline proposed by the RF Ministry of Finance can hardly be justified because, if implemented, it will cause a further increase in the share of taxes in the structure of the price of gasoline, and so result in that price's further growth. According to the LUKOIL oil company, as of the beginning of 2012, the share of taxes (including the excise duty) in the price of one liter of Regulator-92 gasoline amounted to more than 50%. According to experts, the share of the excise duty in the retail price of gasoline hovers around 25 to 30%. 

We believe that the general logic of rate setting for motor fuel excises can actually be oriented to setting a wider margin between any two adjacent classes (in this case, between Class 3 and Class 4) than the current margin of 12-15% - because, given the share of the excise duty in the price of gasoline, it may save only 3 to 4% of the retail price. At the same time, the difference between Class 4 and Class 5 should evidently be made less pronounced (in other words, the incentive for a switchover to Euro-5 will not be simply the excise rate, but also the ban on production of Class 4 - which is to be introduced from 2016 onwards).


I. A. Sokolov - Candidate of Economic Sciences, Head of the Budget Policy Department