With oil prices once again trading above $110 per barrel and geopolitical tensions in the Middle East sustaining uncertainty, consumers are being forced to adjust their daily lives to a steadily rising cost environment. Continued disruptions at the Strait of Hormuz are affecting supply, while analysts estimate that even a full reopening would take months to restore market stability. For households, this translates into more expensive transport, higher utility bills and increased pressure on already strained purchasing power.
The easy solution
Against this backdrop, a familiar question resurfaces: which measures can meaningfully support citizens? In Cyprus, the most common policy response has been horizontal tax reductions on fuel and electricity. This is the approach implemented last Saturday, with an excise‑duty cut of 8.33 cents per litre on petrol and 6 cents on diesel.
These interventions immediately reduce the price consumers see at the pump and offer swift relief. However, an analysis by The Cyprus Institute, coordinated by Dr Theodoros Zachariadis, notes that “any measure that directly subsidises energy prices does not help reduce fuel consumption”. In other words, such measures focus on lowering prices without addressing the core issue of consumption levels and reliance on imported fuels.
The 'hidden' inequality
The research also highlights a less visible dimension: how energy costs are distributed across society. According to the data, in 2023 an average Cypriot household spent about €3,651 per year on energy, equivalent to 7.5 per cent of its income.
The average, however, masks significant disparities. The poorest 10 per cent of households spent approximately €1,609 annually, amounting to 12.8 per cent of their income. By contrast, the wealthiest 10 per cent spent around €6,074, but this represented only 4.3 per cent of their income.
As the report puts it, “total spending on energy goods is regressive”. Simply put, the lower the income, the larger the share required to meet basic energy needs.
Electricity
This imbalance is even more pronounced in electricity consumption. Lower‑income households spend a far higher proportion of their income on electricity than higher‑income households. As a result, price increases do not affect everyone equally but disproportionately burden the most vulnerable – despite the continued dominance of horizontal measures in policy responses. Their appeal lies in practicality: they are easy to implement, require no complex targeting mechanisms and have an immediate effect, even if their real impact is unequal.
According to the research, reducing fuel excise duty saves around €40- €45 per year for the poorest 20 per cent of households, while the benefit for the wealthiest 20 per cent reaches €140- €175. Similarly, a VAT reduction on electricity yields about €35-€40 for lower incomes and up to €95 for higher ones.
At the same time, such measures weaken incentives to save energy. In an economy almost entirely dependent on imported fuels, this has direct implications for both costs and the sustainability of the energy model.
A fairer system
By contrast, the study suggests that more targeted interventions would be more effective than horizontal tax cuts, which bring quick but uneven relief. Structural measures such as expanding renewables, energy storage or electric mobility remain crucial, but they cannot provide immediate support to most households.
In this context, direct income support emerges as the fairer option. As the analysis notes, “direct income support would be preferable”, tailored to income level, dependants and other social criteria, to offset part of rising energy costs.
The key difference is that such a measure supports income rather than consumption. Households could then decide how best to allocate the support: some might maintain their current energy use, while others might cut consumption and channel funds to other essential expenses.
Implementation, however, is complex. It requires the state to have complete and reliable data on household incomes and composition – including those without taxable income – and to link information across services such as taxation and social insurance. That takes time and preparation.
For this reason, some countries have adopted alternative solutions. In Germany, for example, a price cap system was applied to electricity: 80 per cent of household consumption is billed at a lower price, while any additional use is charged at the market rate. This ensures a basic level of protection while preserving incentives to save energy.
Such a model is considered more balanced, combining support with limits on waste. As the study notes, it could be applied in Cyprus for electricity, although extending it to transport and heating fuels remains more challenging in practice.