Fuel for motor vehicles is currently more expensive in Austria than in most neighboring countries. Apart from taxation (mineral oil tax and VAT), the price net of tax is also comparatively high. As from May 1, 1995, when the mineral oil tax on petrol and diesel will be raised, petrol will be more expensive in Germany only and diesel in Switzerland only, assuming the tax increase will fully translate into prices and the other countries will keep their fuel prices at current levels. Thus, the tax increase also implies that for the first time it will be cheaper to fill up in Italy and that present price advantages for diesel vis-à-vis Germany, Italy and Hungary will be lost. As a result, more drivers will stop for fuel beyond the Austrian borders. High fuel price differentials between neighboring countries are readily exploited not only within the "normal" road traffic of passengers and goods, but also by inducing extra "filling-up travel" movements. Such arbitrage transactions may rise to an important part of total fuel sales in a small country like Austria, where tourism and transit traffic play a major role. In 1973, when petrol prices in Austria were 16 percent below those in Germany, 16 percent of overall petrol sales went to foreigners (net of petrol bought by Austrians abroad). In 1988, when petrol was 28 percent more expensive than in Germany, this share amounted to less than 3 percent. According to demand elasticities estimated for the period from 1972 to 1988, the raise in the price of petrol of over 10 percent as from next May should lower petrol sales in Austria by 4 percent. To one quarter this decline is due to an effective fall in fuel consumption, and to the remaining three quarters to the "diversion" of sales (to Austrians and foreign tourists traveling to Austria) to border regions abroad. Therefore, the raise in the mineral oil tax rate by 25 percent may boost tax revenues by only 17 percent. The mineral oil tax is a specific consumption tax on inputs and final use potentially providing incentives for ecologically responsible behavior. A high tax rate discriminates in favor of public and against individual passenger transport, in favor of railway and against road traffic of goods, and in favor of electric and against combustion type engines; it encourages sustained efforts to lower specific fuel consumption of motor cars. Over the last fifteen years there has been little incentive to reduce fuel consumption: since the second oil price shock in 1981, the price of petrol in Austria has fallen by 36 percent in real terms. In order to bring down consumption significantly, prices would have to be raised massively. However, in the event, countries with low taxes may undermine environmental efforts of their neighbors and, by way of a "beggar my neighbor" policy, may earn, on top of it, additional tax and foreign exchange revenues. In Luxembourg, for example, two-thirds of fuel sales go to foreign motorists as local fuel prices are about 25 percent below those of surrounding countries. For the full environmental policy effect to be obtained from fuel taxation, taxes would have to be harmonized at the international level.