The environmental impact of
transport subsidies
Chris Nash (University of Leeds)
Peter Bickel and Rainer Friedrich
(University of Stuttgart),
Heike Link and Louise Stewart (DIW, Berlin)
Paper prepared for the OECD workshop on the
environmentally harmful subsidies, Paris, November 2002
1
Outline of the paper
1.
2.
3.
4.
5.
Introduction
Alternative approaches to subsidies
What is the nature of transport subsidies
Evidence on overall subsidy levels
Methodology for quantifying
environmental costs
6. Measurement of marginal external cost
7. Effects of marginal social cost pricing
8. Conclusions
2
Alternative approaches
1. Comparison of total cost with revenue
Relevant to political and equity issues
2. Comparison of marginal social cost
with price
Relevant for economic efficiency
3
What is the nature of transport
subsidies?
Explicit subsidies:
• service obligations
• fares obligations
• investment grants
Implicit subsidies:
• failure to charge fully for infrastructure
• favourable tax treatment
• failure to charge for externalities
4
Justifications for subsidy
1. Economies of scale
2. Second best
3. Equity
4. Economic development
5
Relevant costs and charges in the
transport sector?
Summary of Relevant Cost and Revenue Categories
Categories
Costs
Capital charges
Infrastructure
Maintenance and renewal costs
Vehicle operating costs
Marginal cost approach
Average cost analysis
marginal only


Public transport only
Public transport only
External costs of
Congestion
Scarcity
Mohring effect
Accidents

Public transport only


Air pollution
Noise
Global warming

Marginal only




Public transport only
Public transport only
Public transport only


commercial vehicle only
Public transport only



VAT not paid
Revenues
Fares and freight tariffs
Fuel duty
VAT on fuel duty
Vehicle excise duty
Key:  - included
6
How significant are transport
subsidies?
Road
Charges always cover total infrastructure costs; often
also total external cost
Rail
Charges on average cover 37% of infrastructure and
operating cost; on average 36% of total social cost
Other local public transport
Heavily subsidised
Air
Landing fees often do not cover cost of airports, let
alone external cost
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Environmental Cost Categories
• Air pollution (e.g. CO, SO2, Nox, etc.)
• Climate change: the emission of greenhouse gases
(CO2, CH4, N2O, etc.)
• Noise
• Impacts on nature and landscape
• Soil and water deterioration
• Effects associated with electricity production
• Other effects: e.g. visual intrusion in cities
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Processes generating
Environmental costs
Each of the processes:
• Vehicle manufacture
• Vehicle use
• Vehicle maintenance and support
• Vehicle disposal
• Fuel/electricity production
• Infrastructure construction, maintenance and
disposal causes environmental damage
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The Impact Pathway Approach for the
quantification of external costs caused
by air pollution
Impact Assessment
Valuation
Activity
Emissions
Transport and chemical
conversion
Concentration/
Deposition
Response of receptors
(humans, flora,
materials, ecosystems)
Physical impact
Change in utility
Welfare losses
Monetization
Costs
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Marginal cost and revenue analysis by
type of vehicle and time of day
Revenue:HGV Artic, off-peak
Costs:HGV Artic, off-peak
7.6
19.8
Revenue:HGV Artic, peak
Costs:HGV Artic, peak
7.6
33.5
Infrastructure, operating cost & depreciation
Revenue:Car, off-peak
Congestion
Costs:Car, off-peak 0.1
External accident costs
7.0
Air pollution
Noise
Revenue:Car, peak
Climate change
Costs:Car, peak 0.1
0
Revenue
13.2
5
10
15
20
25
30
Pence per mile
35
40
45
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50
Effects of inter urban
MSC pricing
• much more variable results (toll roads,
existing rail charges)
• often lower rail fares, but car may be
overcharged too
• air charges higher (unless heavily taxed)
• road freight undercharged (but rail subsidised
as well)
• limited mode split shifts
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Effects of MSC pricing
in urban areas
• Much higher charges for use of roads,
e.g. peak
• Reduction in peak road traffic (5-20%)
• Changes in time and route of travel
• Park and ride
• Higher public transport fares (esp. bus)
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Conclusions
Eliminating subsidies to cover total cost would
lead to:
• growth in road traffic
• big reduction in public transport
• environmental damage
Equating price to marginal social cost would
lead to :
• modest reductions in road and air
• growth in rail
• modest environmental improvement
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