A tax on fuel combined with tax exemptions or subsidies for fuel-efficient vehicles is implemented in many countries to reduce greenhouse gas emissions and other negative externalities from road traffic. This study, however, shows that a tax on fuel should be combined with heavier taxation of fuel-efficient vehicles to curb externalities from road traffic. The tax on fuel is implemented in order to curb externalities linked to both consumption of fuel and road use. A heavier tax on fuel-efficient vehicles prevent motorists from avoiding the road user charge on fuel by purchasing fuel-efficient vehicles.
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