Greening fuel taxes

Vehicle fuel taxes on gasoline and diesel have been introduced in many countries and are generally considered to be a road user fee intended to fund roadway projects and services (Jones and Nix 1995 and Brown 2001, cited in Litman 2003). However, given the fact that fuel consumption is causing environmental degradation, it can be justified to use fuel taxation in a way that contributes to environmental protection. This strategic policy option defines the "greening of fuel tax" as: (1) using fuel tax as a disincentive for vehicle ownership and use, or an incentive to switch to cleaner vehicles, implying the rise of tax rates on more polluting fuels or more polluting vehicles, and/or (2) mobilising revenue from fuel tax for more sustainable modes of transport.
Throughout the world, especially in European counties, attempts have been made to green fuel taxes. Revenues from fuel taxes are used for the purpose of developing sustainable transport in countries such as Germany, the United States, Colombia, and the United Kingdom. For fuel shifting, many countries have used tax differentiation to discourage the use of leaded gasoline and some European countries are introducing differentiated gasoline based on the level of environmental burden. In order to "green" fuel taxes, it is critical to consider the following instruments: step-by-step approach, allocation of tax revenue for development of sustainable transport, setting tax rates favouring cleaner fuels, and awareness raising campaigns.

Objectives:
The general objective of vehicle fuel taxes is to fund roadway projects and services.
For greening fuel taxes, potential objectives include the following:
- to provide disincentives for excessive use of automobiles and consumption of fuels
- to induce switching to cleaner fuels
- to secure funding for more environmentally sustainable measures of transport
- to induce structural impact on the choice of vehicles and location of residences
- to internalise the external costs of petroleum production and consumption (including environmental damages, tax subsidies, micro-economic, and security costs of petroleum imports) (Jones and Nix 1995 and Brown 2001, cited in Litman 2003)

Expected impacts:
In the short term, greening fuel tax is expected to induce: changes in the use of fuel that are due to changes in price, shifts to lower emitting fuels such as unleaded gasoline, lower sulphur gasoline and diesel, etc., if differential taxes are introduced, and an increase in funding for environmental policies. In the long run, effects on the choice of vehicles and the location of residences are expected (World Bank 1996).

Remarks:

APEIS/RISPO Strategic Policy Options (SPOs) Database:
http://www.iges.or.jp/cgi-bin/rispo/index_spo.cgi