KENAT: service is definitely an issue here too. Our plant is right next to a major commuter train station but is in the suburbs. Folks like me doing the reverse commute from the city have trouble taking the train because it's so poorly served- only two trains in the morning, and often the early one doesn't run. Trains in the other direction are both frequent AND full, and that's good- but it's a chicken-and-egg thing: people won't ditch their cars until the transit alternatives are in place, and they won't be built until the demand can be demonstrated.
Fortunately, living in a city with a good public transit system, I'm the only person in the family who needs a car. It's used more or less only for the commute. Living near work you'd need a car to go to the corner store!
Tax the fuel and there'll be revenue to pay for more frequent transit service, new routes and better parking at the major transit hubs. And there'll be an incentive to build renewable electrical generation capacity and electric commuter vehicles too.
It'll take generations for us to change North American cities which have been planned around the car. The car will be with us for a long time, I'm not denying that. But we need to make it worthwhile for people to minimize their consumption by buying smaller, more efficient vehicles, carpooling etc. Even at $1.25 CDN/litre, most folks don't even bother to consider it.