Taxation of road transport has traditionally been used as a means of raising revenue to finance public road infrastructure. However, over the last 20 years there has been a gradual shift towards using taxation as an incentive on road users to modify their behaviour and redress the externalities of road traffic. In Australia as in many developed countries, the increasing traffic volume is generating externalities in the form of environmental costs and social costs borne by society. Studies conducted overseas and in Australia indicate that these costs are significant and are likely to grow in the near future. This paper analyses the various externalities associated with road transport and discusses the role of various forms of taxation in addressing these externalities. The paper finds that the current Australian road transport tax policies will not help to challenge the problems posed by an increasing road transport demand. Recommendations and proposed reforms for the Australian road transport tax regime are examined in the context of two examples of reform implementation in the UK and Singapore. The paper concludes by discussing the challenges that need to be overcome before a successful implementation of environmental tax reform involving road transport.