Abstract The use of fossil fuels in transportation is an important topic as a result of growing concerns over global warming. Automobile petrol demand has been of particular interest to researchers and policy-makers, given that the automobile is a major contributor to the enhanced greenhouse effect. This paper forecasts Australia's automobile petrol demand up to the year 2020 based on the best performing forecasting model selected out of eight models. In order to establish ways to reduce the demand for petrol, and the consequent by-product of reducing the amount of greenhouse gas emissions, we have estimated the impact on CO2 for several potential policy instruments, using Transportation and Environment Strategy Impact Simulator (an integrated transport, land use and environmental strategy impact simulation programme). We find that a carbon tax of AU$0.50/kg can reduce automobile kilometres by 5.9%, resulting in reduced demand for petrol and a reduction in CO2 of 1.5%.