China hikes fuel tax to urge alt-fuel vehicles

China's latest fuel-tax reform involves a major jump in taxation on fuel. It is intended to help spur demand for more fuel-efficient vehicles. The fuel tax on gasoline will climb from the equivalent of 13 cents a gallon to 64 cents, while the tax on diesel will rise from 6.5 cents a gallon to 51 cents.

With crude oil prices plunging on international markets, this is considered the best time to unveil the long-awaited pricing reforms in China, first proposed in 1994, in an attempt to offset higher costs.

"Vehicle sales won't be damaged as the higher fuel tax will fail to lead to higher pump prices immediately," commented Jia Xinguang, former chief analyst with the China Association of Automobile Manufacturers.

"Consumers tend to buy vehicles that have better fuel economy as future retail prices are widely anticipated to go up with their link to international crude oil prices," Jia added.

Along with the scrapping of road maintenance fees and five other fixed charges, the fuel tax increase is mainly aimed at encouraging motorists to drive less. It will have the effect of making fuel expenditures a larger percentage of the cost of car ownership.

Market demand for small, fuel-efficient vehicles has grown in China amid rising fuel prices, and analysts are saying the fuel tax will prompt automakers to be even more attentive to eco-friendly and energy-saving technologies.

"New-energy vehicles, including hybrids and electric cars, will be developed and commercialized much more quickly," said Zhong Shi, an independent vehicle analyst.

BYD Automobile is one of the Chinese companies due to launch green products soon. BYD's F3 dual-mode hybrid sedan, the company's first, comes out next week, nearly two years ahead of the Chevrolet Volt electric car that is designed to be mass-produced in the United States in late 2010.

China is well out in front of the United States in terms of government action to encourage consumers to buy smaller cars.