DIW economist calls for targeted household payments as Germany tackles fuel costs

Germany could direct energy-cost support more effectively towards lower-income households by using cash payments rather than relying primarily on cheaper fuel, according to Stefan Bach, tax economist at the German Institute for Economic Research (DIW Berlin).

Bach has proposed a €200 payment that would initially be available broadly, with the final level of support subsequently adjusted according to recipients’ income through the tax system. His proposal comes as Germany considers further measures to cushion households and businesses from elevated fuel costs. DIW has separately estimated that the planned temporary reduction in fuel taxation from October through December would cost the federal government and states around €2.5bn.

Under Bach’s example, households within the lowest 40% of the income distribution would retain the entire €200 without an additional tax charge. The benefit would gradually decline further up the income scale, while recipients within the highest 40% would ultimately return the payment through their subsequent income tax assessment.

Making the payment available universally at the outset would require more than €16bn, according to Bach. He estimates that subsequently adjusting the benefit according to income could cut the eventual cost to the public finances by approximately half.

The approach is designed to separate household assistance from the amount of petrol or diesel consumed. DIW’s recent analysis argues that fuel-tax reductions tend to provide larger cash benefits to motorists consuming more fuel, while households without cars receive no direct assistance despite potentially experiencing higher costs elsewhere through transport charges, food prices and inflation. DIW estimates that more than €200m of the relief from Germany’s earlier 2026 fuel-tax reduction was not ultimately passed through to consumers.

Bach has also suggested additional assistance for people commuting to work, potentially calculated at 3 cents for each kilometre between home and the workplace. He estimates this could add around €0.8bn to the cost if the benefit were subsequently recovered through the tax system from people in the upper half of the income distribution.

Delivering such support would depend on Germany’s mechanism for making direct payments to individuals. Bach argues that offering a meaningful payment could encourage significantly more people to register the bank details required to receive money electronically. For those who remained outside the system, he suggests that a lower-value voucher could provide an alternative route for assistance.

Bach’s proposal would maintain higher fuel prices as an incentive to reduce consumption while concentrating government assistance more heavily on households considered less able to absorb higher energy costs. DIW’s broader analysis similarly concludes that direct financial assistance can be better targeted than measures that reduce fuel prices for motorists generally.