Regan Brown
Fuel duties are a significant source of revenue for governments. In the US, the federal government and all 50 states impose fuel taxes, with the average state gas tax at 32.26 cents per gallon as of July 2023. The federal tax rate is 18.4 cents per gallon and has been unchanged since 1993. However, state tax rates vary, ranging from 8.95 cents in Alaska to 62.9 cents in California. These fuel taxes are used to fund infrastructure projects, such as roads and bridges, and other initiatives like law enforcement and education. In the UK, fuel duty is levied per unit of fuel purchased, with a rate of 52.95 pence per litre for petrol and diesel. While fuel duties are expected to bring in substantial revenue, they have faced challenges due to factors like electric vehicles and fuel efficiency, impacting the amount of tax revenue generated relative to vehicle miles travelled.
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What You'll Learn
Fuel duties and taxes
Fuel duties are levied on purchases of petrol, diesel, and other fuels. They represent a significant source of revenue for governments. For instance, in the UK, fuel duties are expected to raise £24.4 billion in 2025-26, which would represent 2.0% of all receipts and is equivalent to £850 per household and 0.8% of national income. The rate depends on the type of fuel, with the headline rate on standard petrol and diesel being 52.95 pence per litre, including a temporary 5 pence cut introduced in 2022-23 and extended until 2025-26.
In Australia, the fuel excise is adjusted biannually in February and August in line with inflation, and it contributes to general revenue. While a significant portion of the fuel excise revenue is reinvested in roads and transport projects, it also funds other public services like healthcare and education.
Additionally, it's worth noting that governments around the world provide subsidies for both fossil fuel and renewable energy production, which can significantly impact energy prices and consumption patterns. These subsidies can take various forms, such as investments in research and development or tax credits for clean energy utilities and consumers. While subsidies can help make energy more affordable, especially for low-income households, they can also have negative consequences, such as encouraging excess energy use and contributing to climate pollution. There are ongoing debates and efforts to phase out fossil fuel subsidies and transition towards low-carbon energy sources.
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Revenue sources
Fuel Duties
Fuel duties are levied on purchases of petrol, diesel, and other fuels, and they represent a significant source of revenue for governments. In the UK, for example, fuel duties are expected to raise £24.4 billion in 2025-26, representing 2.0% of all receipts. The rate of duty depends on the type of fuel, with the headline rate on standard petrol and diesel being 52.95 pence per litre in the UK. The duty is included in the price paid for fuel and is levied per unit of fuel purchased.
Excise Taxes
Excise taxes are another source of revenue for governments, with federal excise taxes in the US being 18.3 cents per gallon on gasoline and 24.3 cents per gallon on diesel fuel. In Australia, the fuel excise is adjusted biannually in February and August in line with inflation, and it contributes to general revenue. While a portion of the excise tax revenue is invested in road and transport projects, it also funds other public services such as healthcare and education.
Subsidies
While some governments provide subsidies to encourage the use of renewable energy sources, many governments also subsidize the production and consumption of fossil fuels. These subsidies reduce the cost of energy for consumers and can take the form of price caps, tax credits, or direct payments to producers or consumers. According to the International Energy Agency, phasing out fossil fuel subsidies would benefit energy markets, climate change mitigation, and government budgets. However, removing subsidies may negatively impact low-income consumers and cause indirect price increases in other areas, such as food.
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Forecasting and modelling
Economic Factors
The health of the economy is a critical factor in forecasting fuel duty revenue. Domestic consumption and real GDP are used as proxies for demand for road travel and, consequently, fuel. Inflation also plays a role in determining future duty rates, as the government sets out policy assumptions for the uprating of fuel duty, which may include adjustments for inflation.
Consumption and Demand
Forecasting fuel duty revenue requires making assumptions about trends in fuel efficiency and the total amount of fuel consumed. This includes considering the increasing adoption of electric vehicles, which will reduce petrol and diesel consumption. In-year estimates for fuel duty receipts are influenced by the performance of receipts to date, changes in the tax base, and indications from HMRC's receipts monitoring.
Policy and Regulatory Changes
Policy changes related to fuel duty rates can significantly impact revenue forecasts. For example, the government may choose to uprate fuel duty by RPI inflation, as stated in the March 2025 EFO, or keep duty rates constant, which could result in lower receipts. Additionally, changes in eligibility for using cheaper fuels or marked gas oil can affect revenue.
Excise Taxes and Levies
Excise taxes and levies on fuel purchases represent a significant source of government revenue. These duties are levied per unit of fuel purchased and included in the price paid for petrol, diesel, and other fuels. The rates vary depending on the type of fuel, with standard petrol and diesel subject to a headline rate, while other fuels like marked gas oil for off-road diesel or non-commercial heating may have lower rates.
Global Energy Market Dynamics
Global energy market dynamics, such as spikes in energy prices due to geopolitical events, can influence government decisions on fuel duties and subsidies. For instance, the recent energy crunch and the invasion of Ukraine led to increased consumption subsidies to support consumers facing higher energy costs.
Subsidies and Alternatives
Government subsidies for fossil fuels and renewable energy can significantly impact fuel duty revenue. Subsidies can reduce the cost of energy production or make it cheaper for consumers, affecting the demand for fuel and associated tax receipts. Additionally, the increasing competitiveness of low-carbon energy sources and electric vehicles may gradually reduce the demand for fossil fuels over time.
Accurate forecasting and modelling of fuel duties require careful consideration of these factors and ongoing monitoring of economic, policy, and energy market trends.
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Subsidies and costs
Fuel duties are a significant source of revenue for governments. In the UK, fuel duty tax receipts amounted to approximately £24.83 billion in 2023/24. The Office for Budget Responsibility expects fuel duties to raise £24.4 billion in 2025-26, which would represent 2.0% of all receipts. However, it is important to note that the transition to electric vehicles may impact the revenue generated from fuel duties in the future.
On the other hand, governments also provide subsidies for fossil fuels, which can be defined as explicit or implicit. Explicit subsidies are direct payments made by governments to reduce the costs of producing or consuming fossil fuels. In 2023, government support for fossil fuels reached at least USD 1.5 trillion globally, with Germany, Russia, and Iran among the top subsidizers. This money is intended to make energy more affordable for households and businesses, especially low-income consumers. However, it contributes to the artificial deflation of fossil fuel prices and delays the transition to clean energy sources.
Implicit subsidies refer to the environmental costs that are often not reflected in the prices of fossil fuels. Consumers did not pay for over $5 trillion of environmental costs associated with fossil fuel consumption in 2023. These costs include local air pollution and damage from global warming, which contribute to lung and heart diseases. If governments were to put a price on these externalities, it would incentivize a transition to cleaner energy sources and reduce the social costs of motoring.
Estimates of the total subsidies for fossil fuels, including both explicit and implicit subsidies, range from £1 trillion to a record-high of $7 trillion in 2023. Removing these subsidies could generate additional revenue for governments, improve public health, and contribute to global efforts to combat climate change. However, eliminating fuel subsidies can be challenging, and governments must carefully design and communicate policy reforms to ensure a smooth transition.
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Electric vehicles
While the transition to electric vehicles offers significant environmental benefits, it also has implications for government fuel revenues. Fuel duties are a significant source of income for governments, with fuel taxes and duties providing an expected £24.4 billion in the UK in 2025-26. However, as more people adopt EVs, the demand for traditional fuel slows, and governments may experience a decline in fuel duty revenues. This shift could impact funding for road infrastructure, as fuel taxes have traditionally been a primary source of financing for highways and roads.
To address the potential loss in revenue, governments are considering various strategies. For instance, some states in the US are exploring the idea of imposing road user charges or distance-based fees, where travelers are charged based on the distance they drive. Additionally, EV registration fees and electricity sales taxes have been proposed as possible solutions. Norway, a leader in EV adoption, has implemented several measures, including removing the exemption from the annual road tax for EVs and limiting their access to bus lanes.
It's important to note that the impact of EVs on government fuel revenues will vary across states and countries due to differences in EV adoption rates and fuel tax structures. While EVs currently make up only a small percentage of vehicles in operation, their increasing market share will likely lead to a significant shift in revenue streams for governments.
As the world transitions towards cleaner energy sources, governments must adapt their revenue models to support this change. By reallocating funds from fossil fuel subsidies and exploring new taxation principles, governments can promote the adoption of electric vehicles while maintaining the necessary funds to support road infrastructure and other public services.
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Frequently asked questions
In the UK, fuel duty tax receipts amounted to approximately £24.83 billion in 2023/24. In the US, state and local governments collected a combined $53 billion in revenue from motor fuel taxes in 2021.
In the US, most states levy per-unit taxes based on how many gallons of gasoline a consumer purchases. The per-gallon gas tax rates range from 8.95 cents in Alaska to 62.9 cents in California. In the UK, the main rate of fuel duty was 57.95 pence per litre in 2022-23, but it was temporarily reduced by 5 pence per litre.
Fuel duties are levied on purchases of petrol, diesel, and a variety of other fuels such as gasohol (a mixture of ethanol and unleaded gasoline) and biodiesel.
In Australia, on average, 53.7% of fuel excise revenue is put towards road and transport projects, with the remaining amount going towards other public services such as healthcare and education. In the US, motor fuel tax revenue accounted for 26% of highway and road spending in 2021.
In Australia, the fuel excise rate is adjusted biannually in February and August in line with inflation. In the US, the gas tax rate is adjusted as consumer prices go up, and some states also take into account variables such as inflation, population growth, and fuel-efficiency standards.
