Fuel taxes are levied on the purchase of fuel in most countries. Levying a tax on fuel consumption not only raises revenues, it is also a relatively unselective means of charging for road use. However, there is some differentiation by fuel type and mode. Fuels that are considered to be the most polluting are often taxed at a higher level. Fuel tax escalators have also been applied to raise fuel tax on an annual basis regardless of need to generate income. This differentiation and annual incrementation are both designed to influence purchasing decisions in favour of more environmentally friendly choices. Some consumers, e.g. bus operators, are offered rebates or tax-free purchase, constituting a subsidy. Fuel tax income is rarely hypothecated.
Demand responses to fuel taxes will not necessarily have a dramatic effect
on vehicle kilometres, especially in the short term. Costs may initially
be absorbed, and it may take time to find alternatives. Consequently,
impacts on policy objectives may follow the same pattern. It should also
be noted that fuel taxes may not make a positive contribution to all policy
objectives, as such there may be a number of looses as a result of taxation.
Consequently, it may be difficult to raise taxes.