Rajan Wilcox
Fuel duties are a significant source of revenue for governments worldwide. In the United States, fossil fuels generated approximately $138 billion annually for local, state, tribal, and federal governments between 2015 and 2020. Similarly, in the United Kingdom, fuel duty tax receipts amounted to around £24.83 billion in 2023-24, with expectations to raise £24.4 billion in 2025-26. These revenues are primarily derived from taxes levied on purchases of petrol, diesel, and other fuels, with rates depending on the type of fuel. While the income generated from fossil fuels is substantial, the shift towards clean energy and the implementation of climate policies are expected to impact these revenue streams.
| Characteristics | Values |
|---|---|
| Fuel duty tax receipts in the UK in 2023/24 | £24.83 billion |
| Fuel duty tax receipts in the UK in 2024/25 | £24.4 billion |
| Fuel duty tax receipts in the US from 2015-2020 | $138 billion |
| Fuel duty tax rate in the UK | 52.95 pence per litre |
| Fuel duty tax rate in the US | Not mentioned |
| Fuel duty tax rate changes in the UK | Reduced by 5 pence per litre in 2022-23, extended to 2023-24, 2024-25 and 2025-26 |
| Fuel duty tax rate changes in the US | Expected to decline |
| Fossil fuel subsidies globally in 2017 | $5.2 trillion |
| Fossil fuel subsidies globally in 2022 | $7 trillion |
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What You'll Learn
Fuel duty tax receipts in the UK
Fuel duties are levied on purchases of petrol, diesel, and other fuels, and they represent a significant source of revenue for the UK government. The main rate of fuel duty has been frozen since 2011 at 57.95 pence per litre, and it was temporarily reduced by 5 pence per litre in 2022-23. This temporary cut was further extended until 2025-26.
The UK government receives tax revenue from drivers of petrol and diesel cars through two main methods: fuel duty and Vehicle Excise Duty (road tax). Combined, these sources contributed £35 billion annually, constituting 1.5% of the UK's GDP and around 4% of all tax revenue. Of this, fuel duty brings in £28 billion a year, while Vehicle Excise Duty nets roughly £7 billion.
However, the rise in electric vehicles (EVs) is reducing the government's tax income from cars. Electric vehicles are exempt from fuel duty and road tax, and as the sale of new petrol and diesel cars ends between 2030 and 2035, the associated revenue will also decline. This will represent a significant loss for the UK government, and potential solutions are being discussed.
One suggestion is to introduce some form of road pricing, where drivers are charged based on how much, when, and where they drive. This could be implemented through telematics-based taxes, with electronics wired into cars to track their usage. However, this approach raises concerns about privacy, security, and potential higher charges for driving in certain areas or during peak times.
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Fuel duty tax receipts in the US
Fuel tax is a significant source of revenue for the US government, with federal and state taxes imposed on gasoline and diesel fuel. The federal government levies excise taxes on gasoline and diesel fuel, currently set at 18.3 cents per gallon for gasoline and 24.3 cents per gallon for diesel. Additionally, a Leaking Underground Storage Tank fee of 0.1 cents per gallon is applied to both fuels. These federal excise taxes contribute to the government's revenue from fuel duties.
Beyond federal taxes, state governments also impose their own taxes and fees on motor fuels. These state-level taxes may include excise taxes, environmental taxes, special taxes, and inspection fees. However, state taxes exclude those based on gross or net receipts and do not encompass county or local taxes. The specific rates and types of state taxes vary across the country.
The US government also provides various tax credits and subsidies related to fuel consumption. The Fuel Tax Credit (FTC) is a refundable credit for businesses using fuel for specific off-highway and non-taxable purposes, such as agriculture, aviation, and certain types of equipment. This credit is designed to offset the cost of fuel taxes for businesses in specific industries.
Additionally, the fossil fuel industry in the US receives substantial government funding and subsidies. According to the International Monetary Fund (IMF), the US spent $649 billion on fossil fuel subsidies in 2015, making it one of the largest subsidizers globally. This funding is often administered through initiatives like the Department of Energy's programs, project loans, grants, and guarantees from institutions like the Overseas Private Investment Corporation (OPIC).
While there is a push to reduce the impact of climate change and transition to cleaner energy sources, the US government continues to provide significant financial support to the fossil fuel industry, including coal, oil, and natural gas sectors. The complex interplay between fuel duties, taxes, credits, and subsidies shapes the government's revenue and expenditure in the energy sector.
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Fuel duty policy changes
Fuel duties are levied on purchases of petrol, diesel, and other fuels and represent a significant source of revenue for the government. In 2023-24, fuel duty tax receipts in the United Kingdom amounted to approximately £24.83 billion. The main rate of fuel duty has been frozen since 2011 and was temporarily reduced by 5 pence per litre in 2022-23. This reduction was extended to the following years until 2025-26. The fuel duty policy has undergone changes at most Budgets and Autumn Statements since 2010, with previously planned rises repeatedly postponed or cancelled.
The fuel duty policy significantly impacts transport costs for both businesses and individuals. Changes in the duty rate can affect inflation, consumer spending, and business costs. The duty rate is currently set at 52.95 pence per litre, which includes a temporary 5 pence cut introduced in 2022-23 and extended until March 2025. The rate depends on the type of fuel, with a lower rate applied to alternative fuels such as agricultural diesel and a duty-free exemption for kerosene.
The government sets out policy assumptions for the uprating of fuel duty each year. Based on announced policies, petrol and diesel duty rates are expected to rise by 5p in March 2026, followed by RPI inflation in April 2026 and subsequent years. The fuel duty forecast is based on several factors, including domestic consumption, real GDP, and inflation. The forecast for fuel duty receipts in the current year is determined by performance in the year-to-date, developments in the tax base, and indications from HMRC’s receipts monitoring.
Parliament has noted the risk of deviations from the government's stated fuel duty policies. The government has stated that fuel duty will be uprated by RPI inflation in the future, but this has not occurred in the past decade. Additionally, the Labour government has discussed reversing the reduced fuel duty policy, which could result in prices rising by a minimum of 5p or even up to 10p per litre.
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Fossil fuel subsidies
The total value of fossil fuel subsidies varies depending on the definition used and the scope of the analysis. In 2022, estimates range from $1.5 trillion to $7 trillion globally, with a significant increase since 2020 due to surging energy prices. The largest contributors to global fossil fuel subsidies are underpricing for local air pollution costs and climate damages, each accounting for about 30% of the total. Other factors include explicit subsidies (18%), road transport externalities (17%), and forgone consumption tax revenue (5%).
While fossil fuel subsidies may be intended to protect consumers by keeping prices low, they often disproportionately benefit higher-income households. Removing these subsidies could lead to more equitable outcomes and reduce energy security concerns related to volatile fossil fuel supplies. However, it is important to consider the potential indirect impact on vulnerable groups, as removing subsidies may result in price increases for essential goods and services.
There have been recent efforts to address fossil fuel subsidies, such as the proposals by the Biden-Harris Administration in the FY 2024 budget, the Inflation Reduction Act (IRA), and the Infrastructure Investment and Jobs Act (IIJA). These initiatives aim to eliminate tax preferences and credits for fossil fuel companies and incentivize carbon capture and sequestration projects. Despite these efforts, fossil fuel subsidies persist due to voter demand and energy security concerns.
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Fuel efficiency and total consumption
Fuel duties are levied on purchases of petrol, diesel, and other fuels, providing a significant source of revenue for governments. In the UK, for instance, fuel duty tax receipts amounted to approximately £24.83 billion in 2023-24, with similar figures expected for 2024-25. The following year, this figure is expected to rise to £24.4 billion. In the US, fossil fuels have generated roughly $138 billion annually for federal and state governments between 2015 and 2020.
The effectiveness of fuel taxes in reducing fuel consumption and improving fuel efficiency has been a subject of debate. Economists have generally favoured fuel taxes over fuel economy standards, arguing that taxes provide maximum flexibility to vehicle manufacturers and purchasers. Taxes influence fuel consumption by making travel more expensive, thereby reducing vehicle miles travelled, and creating an economic incentive for the development and purchase of more efficient vehicles. This view is supported by evidence suggesting that fuel efficiency per mile increases substantially as fuel taxes are increased. As a result, taxes need not be excessively high to combat pollution.
However, the assumption of an efficient market, particularly for fuel economy, has been questioned. There is substantial disagreement about the magnitude of the effect of changes in fuel taxes on fleet fuel economy and travel volumes due to the volatility of fuel prices and the influence of multiple variables. Additionally, fuel economy taxation has been criticised for inducing a "rebound effect" by lowering the cost of driving, which erodes gasoline savings and increases congestion and accidents.
To address these concerns, policymakers have introduced fuel economy tax policies that tax or subsidize new vehicle purchases based on fuel economy performance. While these policies have improved vehicle fuel economy, it has been argued that direct taxation of gasoline could achieve the same goals at a lower cost to society. For instance, a tax on vehicle size has been found to be significantly more regressive than a gasoline tax. Furthermore, the revenue from a gasoline tax can be rebated back to consumers to offset regressivity.
In summary, while fuel efficiency and total consumption are important considerations in fuel taxation, the complex interplay between fuel prices, fuel economy, and fuel consumption makes it challenging to predict the precise impact of fuel taxes on these factors. Nevertheless, fuel duties continue to be a significant source of revenue for governments, and the design of taxation policies plays a crucial role in balancing economic, environmental, and social objectives.
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Frequently asked questions
Fossil fuels generated approximately $138 billion per year for US localities, states, tribes, and the federal government between 2015 and 2020. However, government revenues are expected to decline as the world transitions to clean energy.
In 2023/24, fuel duty tax receipts in the UK amounted to approximately £24.83 billion, compared to £25.1 billion in the previous financial year. In 2025/26, fuel duties are expected to raise £24.4 billion.
The fuel duty rate is currently 52.95 pence per litre for petrol and diesel, with VAT at 20%. The duty rate has been frozen since 2011/12 and was temporarily reduced by 5 pence per litre in 2022/23, extended to 2025/26.
