Taxation on vehicle fuels: its impacts on switching to cleaner fuels

Vehicular consumption of fossil fuel contributes over 90% of air pollution in Hong Kong. A key strategy to improve Hong Kong's air quality is to discourage dirty fuels (e.g., leaded petrol and high-sulphur diesel) and to promote the use of clean fuels (e.g., low-sulphur diesel and liquefied petroleum gas (LPG)). This paper presents the empirical evidence on the effectiveness of the Government's clean fuel programs that offer tax subsidy to lower the consumption cost of such fuels. For the cases of unleaded petrol and ultra-low-sulphur diesel, lower fuel duties were offered so that the prices of these fuels were below those of leaded petrol and conventional diesel. Conventional petrol and diesel were phased out. In order to decide on the level of fuel duty concessions required to introduce LPG for taxis and bio-diesel for other vehicles, various Government-run trial programs were introduced to obtain cost estimates of using these alternative cleaner fuels. LPG using vehicles were subsequently exempted from the fuel duty in order to attract taxi and light bus operators to switch to LPG. It is apparent that the higher the subsidy, the faster is the rate at which switching to cleaner fuels takes place.