1 Introduction

Recent energy price spikes have intensified concerns about cost‑of‑living pressures and the effectiveness of short‑term policy responses in Canada (IEA, 2026; Levell et al., 2025; OECD, 2023). Gasoline price increases affect household welfare not only through higher fuel expenditures but also through indirect price increases in transportation, food, and other energy‑intensive goods transmitted through production and distribution linkages (Hicks, 1939; Deaton, 1989). These impacts vary across households due to differences in income, consumption patterns, transportation needs, and regional energy dependence.

In response, governments have frequently implemented temporary fuel tax relief as a rapid and visible policy intervention (World Bank, 2025; Government of Canada, 2026). Policy evaluations of such measures, however, typically focus on direct fuel expenditures when assessing the welfare impacts of gasoline price shocks or fuel tax changes (IMF, 2021; OECD, 2023). This narrow focus risks overstating the effectiveness of fuel tax relief, as empirical evidence for Canada suggests that non‑energy prices—including food and transportation services—respond meaningfully to fuel cost increases (IISD, 2024). Indirect price effects may therefore account for a substantial share of household welfare losses that fuel tax relief does not address.

This paper provides a welfare‑based assessment of gasoline price shocks and temporary fuel tax relief in Canada using microdata from the Survey of Household Spending. The analysis decomposes household welfare losses into direct and indirect components and assesses the extent to which a temporary fuel tax reduction offsets these losses over a four‑month policy horizon rather annualized shocks. It further distinguishes between first‑order welfare measures, which capture short‑run impacts under fixed consumption, and second‑order measures that allow for substitution and behavioral responses (Deaton, 1989; Baqaee and Burstein, 2022). By documenting heterogeneity across income groups and regions, the paper contributes evidence on the distributional and geographic incidence of fuel price shocks and informs ongoing policy debates about the effectiveness and limits of fuel tax relief as a cost‑of‑living policy instrument in Canada.

2 Welfare Framework, Data, and Empirical Strategy

Household welfare effects of gasoline price shocks are measured using compensating variation (CV), a standard money‑metric welfare measure introduced by Hicks (1939) and widely applied in empirical welfare analysis using household survey data (Deaton, 1989). For household \(h\), compensating variation is defined as \[\begin{equation} CV_h = e(\mathbf{p}^1, u_h^0) - e(\mathbf{p}^0, u_h^0), \tag{1} \end{equation}\] where \(e(\mathbf{p},u)\) denotes the expenditure function, \(\mathbf{p}^0\) and \(\mathbf{p}^1\) are pre‑ and post‑shock price vectors, and \(u_h^0\) is initial utility. CV measures the additional expenditure required to maintain pre‑shock utility after prices change, allowing welfare impacts to be expressed in monetary units and aggregated across households.

In the Survey of Household Spending (SHS), all expenditure aggregates—including gasoline, food, and total consumption—are reported on an annual basis. Welfare impacts computed from equation (1) therefore initially reflect annual compensating variation. To align welfare measurement with the temporary nature of fuel tax relief in Canada, annual CV estimates are scaled to a four‑month horizon by multiplying annual welfare losses by a factor of 4/12. This horizon corresponds to the federal government’s temporary suspension of the fuel excise tax on gasoline and diesel from April 20,2026 through Labour Day (September 7,2026) [FinanceCanada2026]. All reported welfare impacts therefore reflect the duration of the policy intervention under study rather than annualized effects.

Consistent with the paper’s focus on decomposing household welfare losses into direct and indirect channels, we next specify how exogenous gasoline price shocks translate into changes in consumer prices faced by households. This section formalizes the reduced‑form price pass‑through structure that generates the direct welfare effects associated with gasoline expenditures and the indirect effects operating through other consumption categories, as highlighted in the introduction. It also defines how temporary fuel tax relief alters the effective gasoline price shock, thereby clarifying which components of household welfare loss are directly mitigated by the policy.

2.1 Price Shocks and Pass‑Through

We consider an exogenous proportional increase in the gasoline price, \[\begin{equation} \Delta \ln p_f \in \{\underline{\Delta}, \ldots, \overline{\Delta}\}, \tag{2} \end{equation}\] and model its transmission to other consumer prices through reduced‑form pass‑through relationships. Transportation and food prices adjust according to \[\begin{align} \Delta \ln p_T &= \theta_T \, \Delta \ln p_f, \tag{3} \\ \Delta \ln p_F &= \theta_F \, \Delta \ln p_T, \tag{4} \end{align}\] where \(\theta_T\) captures the pass‑through from fuel prices to transportation services and \(\theta_F\) captures subsequent pass‑through from transportation to food prices. These relationships generate direct welfare effects through gasoline expenditures and indirect welfare effects through other consumption categories.

Temporary fuel tax relief is modeled as a reduction in the gasoline price by a fixed proportional amount \(\tau\), such that \[\begin{equation} \Delta \ln p_f^{\,p} = \Delta \ln p_f - \tau. \tag{5} \end{equation}\] All downstream prices adjust consistently using the same pass‑through parameters.

2.2 First‑Order and Second‑Order Welfare Effects

Building on the price pass‑through framework, we measure household welfare losses using both first‑ and second‑order approaches. The first‑order measure captures the immediate impact of gasoline and downstream price changes under fixed consumption and provides a transparent decomposition into direct and indirect welfare losses. To account for household adjustment behavior, we also report second‑order welfare measures that allow for substitution across goods. Together, these measures clarify how behavioral responses affect both the magnitude and composition of welfare losses and the effectiveness of temporary fuel tax relief.

2.2.1 First‑Order Welfare Effects

Let \(x_h\) denote total household consumption and \(s_{hg}\) the budget share of good \(g \in \{f, T, F\}\) for household \(h\). A first‑order Taylor expansion of the expenditure function yields the short‑run welfare loss \[\begin{equation} CV_h^{(1)} = x_h \sum_{g} s_{hg} \, \Delta \ln p_g. \tag{6} \end{equation}\]

This expression decomposes naturally into a direct component \[\begin{equation} CV_{h,\text{direct}}^{(1)} = x_h \, s_{hf} \, \Delta \ln p_f, \tag{7} \end{equation}\] and an indirect component \[\begin{equation} CV_{h,\text{indirect}}^{(1)} = x_h \big( s_{hT} \, \Delta \ln p_T + s_{hF} \, \Delta \ln p_F \big). \tag{8} \end{equation}\]

Total first‑order welfare loss is therefore \[\begin{equation} CV_{h,\text{total}}^{(1)} = CV_{h,\text{direct}}^{(1)} + CV_{h,\text{indirect}}^{(1)}. \tag{9} \end{equation}\] First‑order welfare captures the immediate impact of price changes under fixed consumption quantities and provides an upper bound on short‑run welfare losses.

2.2.2 Second‑Order Welfare Effects

To account for substitution across goods, we compute second‑order welfare losses using a quadratic approximation to the expenditure function. Let \(\varepsilon_{gj}^c\) denote compensated (Hicksian) demand elasticities. Second‑order welfare is given by \[\begin{equation} CV_h^{(2)} = x_h \left[ \sum_g s_{hg} \, \Delta \ln p_g - \frac{1}{2} \sum_{g}\sum_{j} s_{hg}\,\varepsilon_{gj}^c \, \Delta \ln p_g \, \Delta \ln p_j \right]. \tag{10 } \end{equation}\]

The second term captures substitution gains, which reduce welfare losses as households reallocate consumption in response to relative price changes. Second‑order welfare thus provides a more realistic measure of welfare impacts once behavioral adjustment is allowed. Importantly, first‑ and second‑order welfare measures are alternative approximations to the same underlying welfare change and should not be summed.

2.3 Welfare Under Tax Relief and Policy Offsets

Welfare losses are computed both without policy and with fuel tax relief by substituting \(\Delta \ln p_f\) and \(\Delta \ln p_f^{\,p}\) into the welfare expressions above. The welfare offset attributable to tax relief is defined as \[\begin{equation} \Delta CV_h = CV_h^{\text{no policy}} - CV_h^{\text{policy}}. \tag{11} \end{equation}\]

To evaluate policy effectiveness, we consider both the absolute dollar value of welfare losses offset by policy and the share of total welfare losses mitigated, defined as \[\begin{equation} \text{Efficiency} = \frac{CV^{\text{no policy}} - CV^{\text{policy}}} {CV^{\text{no policy}}}. \tag{12} \end{equation}\]

2.4 Data, Time Horizon, and Aggregation

The empirical analysis uses microdata from Statistics Canada’s Survey of Household Spending, which provides detailed information on household expenditures, income, and region of residence. Household‑level welfare losses are aggregated using survey weights to produce nationally representative estimates and are also reported by income quintile and by region in order to capture distributional and geographic heterogeneity.

Because fuel tax relief is temporary, welfare impacts are reported over a four‑month horizon corresponding to the duration of the policy intervention. Annual compensating variation is therefore scaled proportionally by a factor of \(4/12\), \[\begin{equation} CV_{h}^{4\text{ months}} = \frac{4}{12} \times CV_{h}^{\text{annual}}. \tag{13} \end{equation}\]

This structure allows a transparent comparison of welfare losses with and without tax relief across alternative gasoline price shock scenarios, income groups, and regions.

2.5 Results: Household Welfare of Gas Price Shocks in Canada

2.5.1 Direct and Indirect Welfare Effects

We first present the Canada‑wide welfare impacts by decomposing first‑order welfare losses into their direct and indirect components across a range of gasoline price shock scenarios. Showing results for multiple shock magnitudes allows us to assess how each component of the first‑order welfare effect evolves as gasoline prices rise and to compare how a common policy response—temporary fuel tax relief—performs across different scenarios. This approach highlights whether the effectiveness of tax relief scales with the severity of the shock and provides a clear visual basis for the discussion that follows. Figure 1 summarizes these results by illustrating the direct and indirect components of first‑order welfare losses under each shock, with and without fuel tax relief.

The Canada‑wide results highlight the importance of accounting for both direct and indirect welfare channels, consistent with the paper’s first contribution. Under a central 50 percent gasoline price shock with no tax relief, the four‑month first‑order welfare loss is approximately $504.5, composed of a direct component of $346.0 (68.6 percent) arising from higher gasoline expenditures and an indirect component of $158.5 (31.4 percent) reflecting price increases in transportation and food. This decomposition makes clear that indirect effects are an integral part of first‑order welfare losses and account for nearly one‑third of the total burden, underscoring that analyses focused solely on fuel spending substantially understate the full cost‑of‑living impact of energy price spikes. The results also clarify the limits of temporary fuel tax relief as a short‑run policy tool, reinforcing another key contribution of the paper. Across gasoline price shocks ranging from 40 to 60 percent, tax relief reduces total first‑order welfare losses by a constant $100.9 over the four‑month period. While this offsets about 25 percent of welfare losses under the smallest shock, the share mitigated falls to roughly 20 percent under the central shock and 17 percent under the largest shock. In dollar terms, even after tax relief, first‑order welfare losses under the 50 percent shock remain above $400. These findings show that fuel tax relief provides meaningful but limited protection: it reduces first‑order welfare losses in absolute terms, but a substantial portion of both the direct and indirect components of cost‑of‑living pressures remains, particularly when gasoline price shocks are large.

2.5.2 First-order and Second-order Welfare Effects

While Figure 1 decomposes first‑order welfare losses into direct and indirect components, Figure 2 compares first‑ and second‑order welfare impacts across all three gasoline price shocks, illustrating how behavioral adjustment alters total welfare losses and the share mitigated by temporary fuel tax relief.

Across all shock scenarios—40, 50, and 60 percent—Figure 2 shows that allowing for behavioral substitution reduces estimated welfare losses relative to the first‑order benchmark, confirming that first‑order measures provide an upper bound on short‑run welfare impacts. The reduction from first‑ to second‑order welfare is economically meaningful at each shock size, on the order of $35–50 over the four‑month period, but modest relative to the overall magnitude of losses. This pattern reflects households’ ability to adjust consumption in response to higher prices, partially dampening but not eliminating the welfare burden of gasoline price shocks.

Importantly, Figure 2 also shows that behavioral adjustment does not materially change the effectiveness of temporary fuel tax relief. The absolute value of relief remains close to $100 across all shock scenarios under both first‑ and second‑order welfare measures, implying that tax relief offsets a similar dollar amount regardless of whether households adjust consumption. As a result, even under second‑order welfare, tax relief mitigates only about 20 percent of welfare losses at moderate shocks and a smaller share as shocks become larger, leaving the majority of cost‑of‑living pressures unaddressed. This comparison reinforces the central policy message of the paper: while household adjustment dampens welfare losses, temporary fuel tax relief does not scale with shock severity and provides only partial protection against large gasoline price shocks.

2.6 Welfare Impact by Income Quintile

Figure 3 decomposes first‑order welfare losses from a 50 percent gasoline price shock across income quintiles into direct and indirect components. The 50 percent shock is used as the central case because it represents a large but plausible short‑run price increase observed during recent energy price spikes and provides a clear benchmark for examining distributional patterns without focusing on extreme scenarios. Moving from aggregate results to income‑specific outcomes allows us to assess how the welfare burden identified earlier is distributed across households with different income levels.

The figure shows a clear income gradient in total four‑month first‑order welfare losses, which increase from about $286 in the lowest income quintile to roughly $758 in the highest. This pattern is driven primarily by the direct fuel component, which rises sharply with income—from $189 in the bottom quintile to $515 in the top—reflecting higher gasoline consumption among higher‑income households. At the same time, indirect effects transmitted through transportation and food prices are sizable across all quintiles and account for a relatively stable share of total losses, approximately 32–34 percent in each income group. This consistency underscores that indirect price effects are an integral component of first‑order welfare losses throughout the income distribution. Even though higher‑income households experience larger absolute losses, indirect cost‑of‑living pressures remain quantitatively important for lower‑income households, reinforcing the need to consider the full consumption basket when assessing the distributional impacts of gasoline price shocks.

2.6.1 Provincial Impact

Figure 4 extends the distributional analysis by examining how first‑order welfare losses from a 50 percent gasoline price shock vary across provinces, building on the national and income‑based results shown earlier. While Figures 1 and 2 demonstrate that gasoline price shocks generate substantial aggregate welfare losses and that fuel tax relief offsets only a limited share of those losses, and Figure 3 shows how those losses are distributed across income groups, Figure 4 highlights an additional layer of heterogeneity driven by regional differences in transportation needs, fuel dependence, and consumption patterns.

The figure reveals considerable provincial variation in total four‑month welfare losses, even under the same gasoline price shock. Total losses range from about $465 per household in Quebec to over $670 in Newfoundland and Labrador, with Prince Edward Island, Nova Scotia, and Saskatchewan also experiencing losses well above the national average. These differences are driven mainly by the direct fuel component, which is largest in provinces where households rely more heavily on private vehicle travel and face longer travel distances. However, indirect welfare losses associated with transportation and food prices remain substantial across all provinces, typically accounting for around 25–35 percent of total losses. This pattern mirrors the income‑quintile results and reinforces a key message of the paper: while absolute welfare losses vary across regions due to differences in fuel use, indirect price effects transmitted through the broader consumption basket are an integral component of first‑order welfare losses everywhere. From a policy perspective, the provincial results underscore that uniform fuel tax relief operates against a backdrop of highly uneven regional exposure, suggesting that a single national policy instrument will inevitably deliver uneven relief across provinces and leave substantial welfare losses unaddressed in regions most dependent on gasoline.

3 Conclusions and Policy Implications

This paper provides a comprehensive welfare‑based assessment of gasoline price shocks in Canada and evaluates the effectiveness of temporary fuel tax relief as a short‑term policy response. Across national, income‑based, and regional analyses (Figures 1–4), gasoline price shocks generate substantial short‑run welfare losses, with roughly two‑thirds of losses arising from direct fuel expenditures and about one‑third transmitted through indirect price effects in transportation and food. These indirect channels are quantitatively important across all settings, demonstrating that analyses focused solely on gasoline spending materially understate the full cost‑of‑living impact of energy price spikes.

Allowing for behavioral adjustment reduces estimated welfare losses by a modest but meaningful amount—on the order of $35–50 under a central 50 percent shock—confirming that first‑order welfare measures provide an upper bound on short‑run impacts. However, incorporating substitution does not materially alter policy conclusions. Temporary fuel tax relief delivers a nearly fixed amount of relief in dollar terms, offsetting only about 20 percent of total welfare losses under moderate shocks and a smaller share as shocks become larger. As a result, the majority of welfare losses—often 80 percent or more—remain unmitigated even when households adjust consumption behavior.

The distributional results further underscore these conclusions. In absolute terms, welfare losses rise sharply with income and vary substantially across provinces, reflecting differences in fuel dependence, transportation needs, and consumption patterns. At the same time, indirect price effects consistently account for a similar share of welfare losses—approximately one‑third—across income quintiles and regions. This indicates that cost‑of‑living pressures transmitted through non‑fuel goods are pervasive and affect households throughout the income distribution and across Canada, not only those with high gasoline consumption.

From a policy perspective, the findings suggest important limitations of relying on broad, uniform fuel tax relief as a primary response to gasoline price shocks. While such measures provide meaningful short‑term relief, they do not scale with shock severity, do little to address indirect price pressures, and deliver uneven protection across income groups and regions. Policies that complement or replace fuel tax relief—such as targeted income transfers or measures aimed at mitigating downstream price increases in essential goods—may therefore be better suited to protecting household welfare during periods of elevated and volatile energy prices.

References

Akcura, E. (2025). Global stock‑take of fuel subsidies and pricing policies. World Bank Policy Research Working Paper No. 11154.

Baqaee, D., & Burstein, A. (2022). Welfare and input–output propagation. Journal of Political Economy, 130(10), 2736–2810.

Deaton, A. (1989). Household survey data and pricing policies in developing countries. World Bank Economic Review, 3(2), 183–210.

Deaton, A. (2016). Measuring and understanding behavior, welfare, and poverty. American Economic Review, 106(6), 1221–1243.

Department of Finance Canada (2026), Temporarily suspending the federal fuel excise tax, Government of Canada. Effective April 20, 2026 through September 7, 2026. https://www.canada.ca/en/department-finance/news/2026/04/temporarily-suspending-the-federal-fuel-excise-tax.html

Fetzer, T., Gazze, L., & Bishop, M. (2024). Distributional and climate implications of policy responses to energy price shocks. Economic Policy, 39(120), 711–756.

Government of Canada. (2026). Temporarily suspending the federal fuel excise tax. Department of Finance Canada.

Hicks, J. R. (1939). Value and Capital. Oxford University Press.

International Energy Agency (IEA). (2026). How governments can best support consumers during this energy crisis. Paris: IEA.

International Institute for Sustainable Development (IISD). (2024). Volatile costs of fossil fuel energy were a key driver of recent record inflation and continue to impact affordability.

International Monetary Fund (IMF). (2021). The distributional implications of fuel price increases on inflation. IMF Working Papers, No. 21/271.

Levell, P., O’Connell, M., & Smith, K. (2025). The welfare effects of price shocks and household relief packages: Evidence from an energy crisis. Institute for Fiscal Studies Working Paper.

Mghenyi, E., Jayne, T. S., & Myers, R. J. (2011). Welfare effects of food price shocks. World Development, 39(8), 1246–1259.

Organisation for Economic Co‑operation and Development (OECD). (2023). A cost‑of‑living squeeze? Distributional implications of rising inflation. Paris: OECD.

St. Louis Fed (FRED Blog). (2026). The relationship among oil prices, food costs, and consumer inflation.

World Bank. (2025). Global stock‑take of fuel subsidies and pricing policies. Washington, DC: World Bank.