Tag: Transport and Environment

Revisiting the Impact of Rising Gasoline Prices on Swedish Households

Posted on February 10, 2025 | Policy Brief

Scenic night view of Stockholm traffic with light trails, symbolizing the gasoline prices impact on Sweden’s transport sector.

Sweden has a long-standing tradition of fuel taxation, but recent shifts in transport policy have significantly altered the cost of driving. This policy brief examines the impact of gasoline tax cuts and reductions in biofuel mandates introduced between May 2022 and January 2024. These measures, alongside a drop in global crude oil prices, have led to a 34 percent decline in pump prices, bringing the cost of driving to one of its lowest levels in the past 25 years. Using a comparative analysis with Denmark, the brief quantifies the impact of the tax cuts and biofuel policy changes, showing how they kept fuel prices lower. However, these short-term financial benefits have broader implications. Lower gasoline taxes have increased household exposure to crude oil price volatility and slowed electric vehicle adoption, reversing progress toward Sweden’s long-term climate targets. Given these trade-offs, the brief argues for a reassessment of transport policies to balance affordability with long-term environmental sustainability.

The Cost of Driving in Sweden

Sweden has a long history of fuel taxation, having introduced an excise tax on gasoline in 1924. For over seventy years (1951–2021), the nominal tax rate steadily increased without significant reductions. This trend stopped in 2022, when the first of a series of tax cuts was implemented on May 1. This shift in transport policy came in response to a 60 percent surge in gasoline prices between early 2021 and mid-2022. This price spike was driven by pandemic-related supply-chain issues and Russia’s invasion of Ukraine in February 2022. Moreover, the 2022 elections in Sweden, which brought a conservative coalition to power, further transformed transport policy, as the new government had campaigned on reducing pump prices.

In 2022, Celina Tippmann and I published two policy briefs on the impact of surging gasoline prices in Sweden. The first, titled The Impact of Rising Gasoline Prices on Swedish Households – Is This Time Different?, found that despite record-high real gasoline prices, driving was historically affordable due to improved fuel efficiency and rising real wages over the past three decades. The second brief, Who Benefitted from the Gasoline Tax Cut in Sweden?, examined Sweden’s first major gasoline tax cut in decades, implemented on May 1, 2022 in response to the surging price. We found that the tax cut was fully passed through to consumers but likely caused spill-over effects that raised gasoline prices in neighboring countries, shifting part of the burden onto their households.

In this brief, I analyze the developments since the May 2022 gasoline tax cut. This tax cut marked the beginning of significant changes to Sweden’s transport policies. While a part of the May tax cut was reversed by design (the majority of the 1.81 SEK (€0.17) per liter tax cut expired by October 2022), it was followed by the removal of subsidies for electric vehicles in November 2022 and additional tax cuts; one tax cut on January 1st, 2023, and a further reduction in gasoline tax rates on January 1st, 2024, alongside a lower biofuel mandate. Meanwhile, global crude oil prices dropped by more than a third since their June 2022 peak. Together, these changes have likely reduced the cost of driving using gasoline and diesel and created a relative cost advantage for vehicles with internal combustion engines.

Figure 1. Gasoline pump price: 2000-2024

A historical chart of Sweden’s gasoline prices impact, showing fuel price trends from 2000 to 2025 in real SEK per liter.

Source: Monthly data on gasoline prices are provided by Drivkraft Sverige (2025).

Figure 1 illustrates the dramatic price movements over the last couple of years. After the sharp increase in gasoline prices from early 2021 to mid-2022, the subsequent drop has been equally dramatic. Since June 2022, pump prices have fallen by 34 percent, bringing real gasoline prices just below the 25-year average of 15 SEK per liter.

Figure 2. Gasoline expenditure per 100 km

Source: Trafikverket (2022) and Drivkraft Sverige (2025).

Furthermore, the recent drop in driving costs is even more dramatic if we factor in improvements in average fuel efficiency over time. New vehicles sold in Sweden today can drive 50 percent further on a liter of gasoline compared to the year 2000. Accounting for this, Figure 2 shows that the cost of driving is now 20 percent below the average cost over the last 25 years.

Lastly, real wage growth has further enhanced the affordability of driving. Since 1991, average real wages in Sweden have risen by nearly 60 percent. As a result, the cost of driving, measured as a share of income, has steadily declined. Figure 3 shows a temporary increase in driving costs in 2022, but today, households spend less than 40 percent of their hourly wage to drive 100 kilometers – a near-historic low.

Figure 3. Cost of driving as share of income

Source: Data on average hourly real wages are provided by Statistics Sweden (2025).

The Cost in the Counterfactual Scenario

While Figures 1–3 show the evolution of driving costs, they do not isolate the impact of recent transport policies. The causal effect of the tax cuts and changes to the biofuel mandate hinges on the pass-through rate to consumers and how much of the benefit of the policy changes has been captured by producers. In addition, we need to separate the price change that is due to policy changes from the part that is due to the falling crude oil price.

Two strategies are available to estimate the pass-through rate to households. The first involves using price elasticities of demand and supply for gasoline, where the relatively inelastic side captures most of the benefit from a tax reduction (Andersson and Tippmann, 2022). However, the unusual conditions in the gasoline market over the past few years – characterized by supply restrictions from underinvestment during the pandemic, sanctions on Russia following its invasion of Ukraine, and shifts in consumer travel behavior – have made elasticity estimates from historical data less reliable for assessing tax incidence today.

The second approach involves a comparative analysis, examining the evolution of gasoline pump prices in Sweden against those in a ”twin“ country – one similar to Sweden but unaffected by recent transport fuel policy changes. This is the method I adopt in this brief. A benefit of using a comparative analysis is that the crude oil price is not a confounder as it affects the gasoline price in the comparison country equally. I selected Denmark as the comparison unit due to its geographical proximity, socio-economic similarity, and minimal changes to gasoline tax rates over the past two and a half years (Drivkraft Danmark, 2025).

Figure 4. Gasoline pump price 2022-2024

Graph comparing the gasoline prices impact in Sweden and Denmark from 2022 to 2024, showing effects of tax changes on fuel costs.

Note: Gasoline prices in Sweden and Denmark are provided by CirkleK (2025). Daily exchange rates are provided by Riksbanken (2025). The horizontal lines indicate the four tax changes over the sample period.

Figure 4 shows that nominal gasoline prices in Sweden and Denmark closely tracked each other until the first tax cut on May 1, 2022. Following the tax cut, Sweden’s prices fell by an amount roughly equivalent to the tax cut. When part of this initial tax reduction was reversed on October 1, 2022, the price gap narrowed before widening again due to a new tax cut on January 1, 2023. The gap widened further at the start of 2024 with another tax cut and a reduction in the biofuel mandate (biofuel is typically much more expensive than crude oil). In total, the pump price in Sweden fell by more than 3 SEK relative to the counterfactual scenario. With a full pass-through of the tax cuts to consumers, approximately half of this reduction is attributed to the tax cuts, with the other half resulting from the reduced biofuel mandate (Andersson and Tippman, 2022).

It may seem surprising that a reduction of the biofuel mandate from 7.8 percent to 6 percent has such a significant impact on the pump price in Sweden. However, one needs to account for the indirect effect on the price of biofuel itself from a reduction in its demand. Sweden also reduced its biofuel mandate for diesel, from 30.5 percent to 6 percent, a far more drastic cut. Together, these reductions significantly lowered biofuel demand, likely driving down biofuel prices in the market and amplifying their impact on pump prices.

Conclusion

The cost of driving in Sweden is at a historic low. Over the past two and a half years, tax cuts and reductions in the biofuel mandate have significantly lowered pump prices, with the benefits passed directly to consumers. Compared to a scenario with no policy changes, Swedish households now enjoy drastically reduced costs at the pump. However, these short-term benefits come with a long-term risk that warrant careful consideration.

In our first policy brief in 2022, Celina Tippmann and I cautioned that reducing gasoline tax rates could encourage households to purchase less fuel-efficient vehicles, leaving them more vulnerable to future crude oil price spikes. Previously, excise taxes – comprising more than half of Sweden’s pump price – acted as a buffer against global oil price volatility. Lower fuel taxes now mean crude oil prices make up a larger share of the pump price, increasing price volatility and household exposure to market fluctuations.

Emerging evidence suggests that households are responding to the latest policy changes as anticipated. In 2024, the share of electric vehicles in new car sales dropped for the first time in years, from 38.7 percent to 35 percent, while average carbon emissions from new vehicles increased by 5 percent (Mobility Sweden, 2025), breaking a long-run downwards trend. This reversal of progress in emissions reductions makes achieving Sweden’s 2030 climate target – a 70 percent reduction in transport sector carbon emissions relative to 2010 – significantly more challenging.

While the election campaign promise from the conservative coalition of reducing gasoline prices may have been politically and electorally effective, its consequences on the transport market are becoming clearer. Swedish households have become more vulnerable to crude oil price volatility as they are buying less fuel-efficient vehicles, and progress toward emission reduction goals has stalled. As such, it is time for a more ambitious climate policy in the transport sector. Sweden should consider reintroducing higher gasoline tax rates and strengthening financial support for electric vehicle adoption. These measures would help balance the affordability of driving with the urgent need to meet climate objectives.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Road Congestion Pricing with A Public Transport Cashback Mechanism

Posted on February 3, 2025 | Policy Brief

Traffic congestion during rush hour – a challenge congestion pricing aims to solve.

Traffic jams are a major problem in cities leading to wasted time, air pollution, reduced accessibility, and, in turn, lower economic activity. Transport economists widely agree that charging drivers fees for using busy roads during rush hours (congestion pricing) is the best answer to road congestion problems. However, such a policy is rarely used, mostly because people see it as unfair in how it affects different income groups. We propose an innovative personalized public transport cashback mechanism to make congestion pricing more acceptable. Recent surveys in Riga and Vienna show that people are more willing to support the introduction of congestion pricing when it includes a cashback component.

Road Congestion Pricing and Its Discontent

Road Congestion Pricing

Traffic jams happen when too many cars at the same place and at the same time use a road of a limited capacity. Building new roads or lanes is expensive, especially in cities, and it only provides short- and medium-term traffic improvements, with little impact on congestion in the long term (Ossokina et al., 2023; Hymel, 2019). Duranton and Turner (2011) show that when major roads are expanded, more people start using them and, over time, congestion returns to the same level as before. Meanwhile, a travel mode shift from cars to public transport and bicycles also requires investments and is difficult to implement in practice.

Dynamic congestion pricing, when road tolls vary based on the time of day, is designed to spread out traffic flow over time without the need to expand road infrastructure (Small and Verhoef, 2007). Notably, this approach does not aim to reduce the total number of cars on the road. Instead, it encourages them to spread their travel times more evenly, ensuring that the road capacity can handle the traffic without congestion.

Dynamic congestion pricing typically works as follows: there is no charge at night, the toll is small in the early morning, then it gradually increases during the morning until it reaches its peak. The toll then decreases in the afternoon before rising again during the evening. This system works in a congestion zone, which is usually the busiest areas of a city. When a car enters the zone, video cameras automatically identify it without stopping the car. There are no toll booths on the streets – an electronic system calculates the toll based on the time of day and charges the driver automatically through a linked account. Cities can tailor the system to fit their specific geography and infrastructure, offering exemptions for certain vehicles and pass-through traffic (for practical examples, visit the Swedish Transport Agency’s website to learn more about congestion pricing in Stockholm and Gothenburg).

By reducing the number of cars during congested hours, such dynamic pricing benefits both the city and its residents:

  • (i) Drivers enjoy faster travel times as road toll allows them to gain time in exchange for money. For example, in the morning, drivers can leave for work later as they no longer need to account for time spent in traffic jams.
  • (ii) Non-drivers enjoy congestion-free neighborhoods with improved air quality and overall higher quality of life.
  • (iii) The city can tackle congestion without making large investments in new roads. The funds collected from drivers not only cover the toll system maintenance, but also contribute to the cost of the infrastructure they use. The funds may also be used to improve public transportation.

Low Public Acceptability

In light of the benefits of congestion pricing, it seems surprising that very few cities actually use it. Notable examples include London, Singapore, Stockholm and Gothenburg. New York City introduced its congestion charge on the 5th of January 2025, the first in the US. This stands in stark contrast to paid on-street parking, another transport policy measure that has been successfully implemented in almost every large city across Europe. The disparity arises because the general public often sees congestion pricing as an additional tax, believing it unfairly affects lower-income individuals. Presumably, low-income individuals have less flexible work schedules and fewer travel choices, making it harder for them to avoid traveling during high-toll periods (Selmoune et al., 2020). Moreover, they would spend a larger share of their income on road tolls compared to wealthier drivers, which makes congestion pricing a regressive policy.

Even though congestion pricing is not a tax and is not meant to redistribute funds, it may still appear as such to the public. This perception leads to vocal public resistance to road pricing which, in turn, discourages politicians from implementing the policy. Another reason for public skepticism is a lack of trust in politicians and municipal officials to manage the collected funds effectively, with concerns that the money may not be spent in ways that benefit the city.

Public Transport Cashback

Cashback Mechanism

To address the perceived unfairness of congestion pricing and fears about the misuse of collected funds, we propose a personalized public transport cashback mechanism – a novel approach that has not yet been implemented anywhere. Instead of collecting the tolls, we suggest immediately transferring the money back to drivers in the form of public transport vouchers or cashback. That is, when a driver pays road toll, almost the entire amount is credited directly to their personal public transport account/card as cashback, while a small portion of the toll is retained to cover maintenance costs of the road pricing system. The cashback can only be used to pay for public transport. Since the road toll is returned to drivers in the form of public transport cashback, there is no need for money redistribution by public authorities.

Our pricing mechanism retains the core feature of conventional dynamic road pricing: the road toll motivates drivers to adjust their travel times, helping to prevent traffic jams. The toll values are likely to be different though, as the toll now has additional value to drivers who might use the cashback for public transport. While this feature reduces the efficiency of the toll compared to conventional congestion pricing, the cashback mechanism also introduces a new beneficial property. By motivating some drivers to occasionally switch to public transport, it further reduces car use and helps ease congestion. The interplay between these two factors ultimately determines the required congestion toll values.

The cashback can be accumulated over several years and is non-transferable to prevent drivers from using their cars more often. The cashback mechanism would likely work for private cars only, though exceptions and specific features can be adjusted to local circumstances. Public transport companies are likely to benefit from additional revenue through increased ticket sales and unused, expired cashback. However, since public transport ticket prices do not always cover the full cost of providing the service, it is important to balance the additional costs of implementing the cashback mechanism with the expected revenue gains. This could potentially be done by reducing the cashback portion relative to the toll share retained for system maintenance.

However, congestion pricing with a cashback mechanism is not a standalone solution or a silver bullet. It works best when combined with improvements of the public transport network, as this encourages drivers to make regular use of their cashback.

Transport Survey Data

The key idea behind the cashback mechanism is that it gives drivers direct and transparent control of their money, which is expected to make road pricing policy more acceptable. Whether this holds true or not is an empirical matter. This was tested by considering the means of a representative survey conducted in Riga (Latvia) and Vienna (Austria) in the summer of 2024. The survey includes 1,000 residents in both capitals and their respective surrounding municipalities. It features questions about respondents’ socio-demographic characteristics, current travel options, commute patterns (including accompanying trips with children), and their political and social attitudes. It also includes two stated-choice experiments exploring the acceptability of congestion pricing and potential changes in travel behaviour if such pricing is introduced. While detailed data analysis is still ongoing, this policy brief highlights some intriguing preliminary insights.

In the survey, we ask the respondents whether they would vote in a referendum in favor of congestion pricing under four different scenarios for using the collected toll funds: (i) transferring them as a public transport cashback, (ii) sharing them equally among all city inhabitants, (iii) leaving the allocation decisions to local politicians, or (iv) using them to support eco-friendly transport. Respondents were familiarized with the topic before answering the question by participating in a stated-choice experiment about congestion pricing acceptability. The experiment included a detailed explanation of how congestion pricing works, along with a potential congestion zone map. Figure 1 shows responses from Riga, and Figure 2 from Vienna.

Figure 1. Responses from Riga. “Would you support congestion pricing in a referendum if the collected toll funds were used this way?”

Source: Representative survey in Riga in summer 2024.

Figure 2. Responses from Vienna. “Would you support congestion pricing in a referendum if the collected toll funds were used this way?”

Source: Representative survey in Vienna in summer 2024.

In Riga, the cashback option is the most popular, with more participants supporting than opposing it. The overall positive attitude towards congestion pricing with the cashback option suggests that Riga might already be ready to implement it. In Vienna, the cashback ranks a close second after the green transport option. This result shows that cashback might be a viable option also in Vienna.

Conclusion

To overcome public skepticism towards road congestion pricing, we propose a cashback mechanism. It involves returning toll money back to drivers as public transport cashback. The cashback mechanism has several benefits: drivers retain some control of their money, there is no need to redistribute collected toll funds, and it helps reduce congestion without major investments in road infrastructure. Surveys in Riga and Vienna in 2024 show support for the cashback option. While the specifics of such a solution should be tailored to each city’s needs, many cities struggling with congestion could benefit from implementing road congestion pricing with a public transport cashback mechanism.

Acknowledgment

This policy brief is based on a collaborative research effort by economists Sergejs Gubins from Riga (BICEPS) and Stefanie Peer and Martina Reggerova from Vienna (WU) as part of the “Tolls That Work” project, supported by the ERA-NET research grant. Agreement No ES RTD/2023/11. See project updates on the webpage:

https://www.wu.ac.at/en/spatialeconomics/projects/city-tolls-that-work

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.