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Methodologies for external cost
estimates and internalisation
scenarios
KvK 27251086
Discussion paper for the workshop on
internalisation on March 15, 2007
Discussion paper
Delft, March 8, 2007
Author(s):
H.P. van Essen and B.H. Boon (CE Delft)
M. Maibach and C. Schreyer (INFRAS)
Contents
1
Introduction
1.1 Background of the project
1.2 Aim and scope of the project
1.3 Aim of the workshop
1.4 Reader
1
1
2
2
3
2
External cost estimates
2.1 Introduction
2.2 Overview of the general approach
2.3 Best Practice per cost category
2.3.1 Congestion and scarcity costs
2.3.2 Accident costs
2.3.3 Air pollution cost
2.3.4 Noise costs
2.3.5 Climate change
2.3.6 Other external costs
2.3.7 Summary
2.4 Cost estimates
2.4.1 Level of differentiation
2.4.2 Ranges and levels of accuracy per mode of transport
2.4.3 Putting the values into practice
2.5 Main questions for the workshop
5
5
5
10
10
12
14
17
19
21
23
26
26
27
32
34
3
Scenarios for internalisation
3.1 Introduction
3.2 Aims of internalisation and pricing policies
3.2.1 Potential aims of internalisation
3.2.2 Motives and aims in directive 2006/38/EC
3.2.3 This project
3.3 Theoretical framework
3.3.1 Optimal internalisation methods depend on the context
3.3.2 Marginal social cost pricing
3.3.3 Deviations from marginal social cost pricing
3.3.4 Differentiation of existing taxes or charges
3.3.5 Policy packaging
3.3.6 Use of revenues and earmarking
3.4 Legal background
35
35
36
36
36
37
37
38
38
38
41
42
43
44
3.5
3.6
3.7
3.8
From theory to practice - cross cutting issues in designing scenarios 45
3.5.1 Most important cost categories per mode
46
3.5.2 Options for incentive base
46
3.5.3 How to deal with existing taxes and charges?
49
3.5.4 Revenue use
53
3.5.5 What to do with air pollution?
54
3.5.6 What to do about congestion?
55
3.5.7 How to address the costs of noise?
56
3.5.8 What to do about external accident costs?
57
3.5.9 What to do about climate costs?
58
3.5.10 Special issue: Do we need a toll system for passenger cars? 60
Proposal for scenarios
61
3.6.1 Scenario 1 - Reference scenario
62
3.6.2 Scenario 2 - Differentiation of existing taxes and
charges & regulation
62
3.6.3 Scenario 3 - Full internalisation of external cost
66
3.6.4 Scenario 4 - Full internalisation of intersectoral external
costs only
68
3.6.5 Scenario 5 - Mix of differentiation and new taxes and charges 70
3.6.6 Scenario 6 - Current directive for road freight to a maximum 73
Next steps
75
Main questions for the workshop
75
References
77
1
Introduction
This report is the input paper to the workshop on internalisation of external cost
of transport in Brussels on 15 March 2007. In this chapter a brief explanation of
the background of this project, its aim and its scope are provided. The aim of the
workshop is also discussed.
1.1
Background of the project
The benefits from transport are enormous. It contributes significantly to economic
growth and enables a global market. Without transport, current day society would
have a totally different structure. Unfortunately, most forms of transport do not
only affect society in a positive way but also give rise to side effects. Ships for
example contribute to air pollution, trains and aircraft to noise and road vehicles
to congestion. Such effects of transport are generally not borne by those who
caused them and hence not taken into account when they make a transport
decision. If so, these effects may be labelled external effects. Associated with the
external effects of noise, pollution, accidents, congestion and climate change
impacts are costs.
Internalisation of these effects means making such effects part of the decision
making process. Generally this means that market-based instruments (e.g. taxes,
charges, emission trading) are introduced or altered in order to give incentives to
limit external effects. Existing taxes and charged may be differentiated, e.g. to
Euro standards. In some cases existing instruments may not be able to give
incentives in line with cost drivers. Then there may good reasons to introduce
additional taxes or charges. Because of considerations of fairness, existing taxes
or charges may be lowered or abolished in order to limit the total tax burden of
transport users.
Transport pricing is a sensitive subject. There is a lot of public and political
resistance to the subject particularly when it comes to the increase of overall tax
and charge levels. Transport users already pay a large variety of taxes and
charges. A major aim behind these existing taxes and charges is to cover
infrastructure costs. In most cases, internalisation of external cost has not been a
major aim when current taxes and charges were introduced. They generally
provide few incentives to limit external costs.
Internalisation of external costs can be an efficient way to reduce the negative
side effects of transport. It is an important precondition to:
− Improve transport efficiency (e.g. efficient use of scarce infrastructure, energy
and environmentally efficient rolling stock, efficient use of different transport
modes).
− Guarantee fairness between transport modes, that means fair prices
considering the overall performance and potentials of the different transport
modes.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
March 8, 2007
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−
Improve safety and reduce environmental nuisances in the transport sector.
Over the last decade, issues related to external effects and internalisation have
been extensively studied under a number of European Framework Program
projects (e.g. UNITE, PETS, ExternE, IMPRINT, REVENUE, MC-ICAM,
TRENEN, GRACE). With the amendment of Directive 1999/62/EC on the
charging for infrastructure use of heavy duty vehicles the subject has come to the
forefront of attention. Article 11 of the amended directive 2006/38/EC requires the
Commission to present a general applicable, transparent and comprehensible
model for the assessment of all external costs (including those caused by nonroad modes). This model is to serve as a basis for future calculations of
infrastructure charges. The model must be accompanied by an impact analysis
on the internalisation of external costs for all modes of transport and a strategy
for stepwise implementation.
1.2
Aim and scope of the project
The aim of this study is to provide an overview of market based instruments that
can be applied for internalising all external costs in all transport modes and to
show the impact of various approaches.
Based on the enormous amount of material on these issues, this study will give a
comprehensive overview of applicable options for estimating and internalising
external cost of transport. The result of this study should help the Commission
with the development of policy for internalizing external costs of transport by
showing options for internalizing and their possible impacts.
The study should, in addition, give an overview of the costs of and tolls levied on
road infrastructure in all these countries. This part of the project is not covered in
the workshop, however.
The scope of this study is the extended European Union (EU27) plus Norway and
Switzerland. Besides market-based instruments, also some more direct
regulatory measures are considered, although these may not be labelled
internalisation in the strict sense.
1.3
Aim of the workshop
As a part of this project, a workshop will take place in Brussels on March15,
2007. At this workshop the project team will share their views on the methods for
estimating external cost and internalisation scenarios with a group of policy
makers, scientists and European interest group representatives. The aim of the
workshop is twofold. First, to make use of the broad expertise on these issues
among the invitees. Second, to gain support for the results of the project, which is
deemed crucial for any further step towards policy development on internalisation
of external costs.
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1.4
Reader
The next chapter presents an overview and assessment of various methods for
estimating external cost of transport.
Chapter 3 provides an overview of methods for internalising external costs of
transport and a list of internalisation scenarios. From this list a selection will be
made to come to a set of four to six scenarios which will be subjected to an
impact assessment later on in this project.
In each of these chapters, the last paragraph lists a set of issues to be discussed
at the workshop.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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4
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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2
External cost estimates
2.1
Introduction
‘Fair and efficient pricing’ or ‘getting the prices right’ requires an accepted
(scientifically and politically) measurement of external cost of transport. The
strength of the internalisation approach is the dealing with quantified figures in
the policy debate. At the same time this is also a weakness since there is a long
way from a scientific concept to monetarised values ready for pricing instruments
(or other measures). The production of unit values ready for internalisation needs
a modelling approach with a clear definition of external costs, scientific
consensus on basic methodology and the dealing with critical values and
uncertainties. This chapter describes the major issues of external cost estimation
and approaches per cost category, based on a preliminary evaluation of existing
studies at EU and national level. It forms the basis for the handbook on
estimating external costs which will be developed in this project.
2.2
Overview of the general approach
Several attempts have been made to estimate external costs in the transport
sector. At EU-level, the CAPRI project (1999) and the High Level group on
transport infrastructure charging (1999) have made recommendations for best
practice approaches, within a dialogue between researchers and policy experts.
These have been further developed and used within the two research projects
UNITE and GRACE, in order to provide cost figures. HEATCO has made
recommendations for unit cost figures for externalities which can be used in
transport related Cost Benefit Analysis. Within the sector of air pollution, the
figures are compatible with the approach developed for the CAFE standards, with
unit costs per air pollutant. The most recent recommendations have been
developed in Germany, with the Methodological Convention to estimate
environmental costs (UBA, 2006). At the same time several national and
international studies have estimated costs for different transport modes. Although
the basic approaches and methodologies are similar, the differences between the
estimated figures are big. In order to transform the estimation approach into real
figures, the following questions are of major importance:
− The transformation requires a lot of pragmatic decisions: How accurate is
accurate enough? Scientists tend to underestimate the level of costs, if
uncertain cost categories cannot be quantified. On the other hand, interest
groups tend to under- or overestimate specific cost categories favouring their
transport mode. It has to be considered that estimating of external costs is a
scientific and political approach at the same time.
− The level of differentiation is a tricky issue: The more differentiation (e.g.
based on bottom up procedures), the more accurate are some values, the
more difficult however is it to translate them into policy measures. On the
other hand top down procedures (based on national average figures) tend to
simplify the approach.
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−
There are several important uncertainties, not only with respect to the
economic valuation (such as the value of statistical life or specific shadow
prices for pollutants such as CO2), but also with respect to the availability of
transport, safety and environmental data.
a Definition of external costs and level of externality
External costs are not paid by the transport users. Transport users are thus faced
with incorrect incentives for transport supply and demand, leading to welfare
losses. However: Defining ‘external costs’, within the transport policy discussion,
there are usually two types of discussions.
− The scientific discussion, focussing on welfare optimisation and efficient
pricing. Within this approach, the term ‘external’ is not of major importance.
Much more the term ‘marginal social cost of transport’ is relevant, which are
all costs (infrastructure, congestion, accidents, environment) caused by an
additional vehicle km. These costs are used as a basis for optimal
infrastructure pricing. Within this logic, external costs are the difference
between these costs and the marginal revenues (esp. based on variable
taxes and charges paid such as infrastructure charges and excise fuel
duties).
− The transport accounts discussion, where external costs are the difference
between the total social costs of transport and the costs already paid by the
user. This view focuses mainly on cost recovery and fairness conditions and
is including total infrastructure costs.
As analysed within the UNITE project, these two approaches are leading to
different figures (marginal, average and total costs, internal and external costs)
and two different outcomes of internalisation measures. There is consensus that
for the time being, transport users consider:
− Prices (including all taxes and charges). Existing taxes and charges cover
parts or all infrastructure costs. In some countries, total revenues from
transport taxes and charges exceed the total infrastructure costs. In size the
most important tax is fuel excise duty.
− Their own waiting time or opportunity costs within scarce or congested
infrastructure, but not the costs they impose on other transport users.
− Parts or all of their own risk of accidents based on their insurance, but not the
risks of other transport (or non transport) users.
− No damages or nuisances to society and environment.
In order to produce external costs figures as a basis for practical internalisation
measures, it is useful to concentrate on the three last cost items, which means
external costs of scarce infrastructure, external accident costs and external
environmental costs. Under- or overpayment of infrastructure costs on the other
side is a financial issue. Within the internalisation scenarios however, the link to
existing charges and taxes in the transport sector has to be made. This issues is
further discussed in section 3.5.3.
For the three types of cost to be considered, the level of externality is differing.
6
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Table 1
Level of externality per cost component and mode
Cost component
Social costs
Costs of scarce
infrastructure
All costs for traffic
users and society
based on the
difference between
the current traffic
situation and an
optimal situation
Time costs
Costs of reduced
reliability
All direct and indirect
costs of an accident
Material costs
Medical costs
Production losses
Suffer and grief
Accident costs
Environmental
costs
All damages of
environmental
nuisances
Health costs
Material damages
Biosphere damages
Long term risks
WTP = Willingness to pay.
External part in
general
Part which
additional
demand above a
certain traffic
volume impose
to other users
External part
Road
Difference
between
marginal and
average costs
congestion costs
External part
Rail and Air
Difference
between WTP for
scarce slots and
average
airport/air control
charges
External part
Waterborne
Difference
between
marginal and
average waiting
costs
Part of social
costs which is
not considered in
own risk
anticipation and
not covered by
insurance
All remaining
costs
Add. Costs for
the health sector
and WTP for
fatality risk
reduction
WTP for fatality
risk reduction
(depending on
insurance
systems)
WTP for fatality
risk reductions
Total damage to
society and
nature
Total damage to
society and
nature
Total damage to
society and
nature
Which costs are already internalised? This question is crucial for the definition of
external costs. The following arguments have to be considered.
− Parts of the congestion costs are paid by waiting and delay costs of the
users. Thus these costs can only be estimated if marginal costs are
compared with average costs.
− Parts of the accident costs are paid by insurance. Thus it is very important to
consider the total volume of insurance fees related to the transport sector.
− In most cases environmental costs are not ‘paid’ at all (with some exceptions
for CO2, see remark made above). But the quantification of environmental
costs has to consider the interrelation between the cause and effect of the
externality. Noise is a good example: According to the Coase theorem, it
must not be only the causer (transport) which has to pay for the externality.
In addition some of the taxes and charges already paid by transport users might
be considered as internalisation some of the external cost. This is discussed in
section 3.5.3.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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b Best practice methodologies
Individual preferences are the most important indicator to value externalities. For
some externalities, like long term risks also collective preferences have to be
considered. In order to value individual preferences, the following approaches are
relevant.
− The willingness to pay WTP (for an improvement).
− The willingness to accept (a compensation for non improvement).
Several methods can be used. For resource costs the willingness to pay (WTP) is
reflected by the market price of a certain effect (damage). In order to get the real
WTP, taxes and subsidies have to be extracted using factor costs. If resource
costs are not available, hypothetical market situations have to be constructed.
Several methods can be used; all of them have strengths and weaknesses: The
stated preference method using a contingent valuation approach is directly
measuring the WTP, but depends very much on the survey design and the level
of information. Also indirect methods like revealed preferences (e.g. hedonic
pricing where house price differentials can be used to estimate costs of noise)
are therefore viable. For several environmental costs (relevant for nature), more
differentiated approaches are necessary, since the stated preference approach is
only useful for the valuation of individual key values such as the value of a
human life.
In order to estimate the willingness to pay for a long term environmental problem
(e.g. global warming), it is necessary to consider different risk scenarios: These
are direct and indirect costs to decrease and repair environmental damage and
further costs of damages which cannot be repaired. The major recommended
approach is the impact pathway approach (used by the ExternE model
specifically developed for air pollution) which follows the dose-response function
considering several impact patterns on human health and nature. The German
methodological convention is recommending seven steps to carry out such an
approach. Sometimes it is necessary to combine this approach with a standard
price approach, if the damage level cannot be modelled properly. In this case, as
a second best approach, the avoidance cost approach (cost to avoid a certain
level of pollution) can be used.
The following table is summarising the best practice approaches for different cost
categories pointing out the sensitive issues.
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Table 2
Best practice valuation approaches for most important cost component
Cost component
Costs of scarce
infrastructure
Accident costs
Air pollution costs and
human health
Air pollution and
building/material
damages
Air pollution and
nature
Noise
Climate change
Nature and
Landscape
Best practice approach
WTP for the estimation of the value of time (based on contingent
valuation approaches).
WTP for scarce slots (based on SP with real or artificial contingent
valuation approaches).
Resource costs for health improvement.
WTP for the estimation of Value of Statistical Life based on SP for the
reduction of traffic risks.
Impact pathway approach using resource cost and WTP for human life
(Life years lost) base.
Impact pathway approach using repair costs.
Impact pathway approach using losses (e.g. crop losses at factor
costs).
WTP approach based on hedonic pricing (loss of rents).
Impact pathway approach for human health using WTP for human life.
Avoidance cost approach based on reduction scenarios of GHGemissions.
Repair (compensation) cost approach.
WTP = Willingness to pay; SP = Stated preference approach.
c Bottom up or top down estimation
Bottom up approaches are more precise and accurate, with potential for
differentiation. On the other hand the approaches are costly and difficult to
aggregate. Thus there is a trade off which has to be handled differently
depending on type of cost. The existing literature for efficient pricing recommends
mainly a bottom up approach for the impact pathway approach. In practice
however a mixture of top down (with representative data) and bottom up has to
be combined. Most important is the definition of appropriate clusters where cost
levels are similar (such as air pollution levels, traffic characteristics and
population density).
It is important to state that a bottom up approach is superior to derive marginal
cost values, whereas a top down approach is more appropriate to derive
average(d) costs (see next section).
d Estimation and internalisation approaches: marginal or average costs
According to theory and ongoing research, there is no doubt that marginal social
cost figures are needed for optimal internalisation scenarios. In practice and
related to the new Directive for HGV charging 2006/38, a separation between
infrastructure costs (and recovery) and external costs is however decisive.
This leads to the conclusion, that a first best approach considers the estimation
of marginal external costs for scarce infrastructure (congestion and scarcity),
accident and environmental costs. The link to internalisation can be shown as
follows:
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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Table 3
Relation between marginal and average costs and links to internalisation
Cost component
Difference between marginal and
average costs (costs per veh.km)
Marginal costs above average
costs: Difference is relevant to
define external costs.
Costs of scarce
infrastructure
Accident costs
Marginal costs for infrastructure use
unclear, Average costs as a proxy
possible.
Air pollution costs and
human health
Linear dose response function:
Marginal costs similar to average
costs.
Air pollution and
building/material
damages
Linear dose response function:
Marginal costs similar to average
costs.
Air pollution and
nature
Linear dose response function:
Marginal costs similar to average
costs.
Noise
Decreasing dose response function,
Marginal costs below average costs.
Climate change
Marginal damage costs similar to
average costs (if no major risks
included). For avoidance costs,
marginal costs are higher than
average costs.
Marginal costs are significantly
lower than average costs.
Nature and landscape
2.3
Best Practice per cost category
2.3.1
Congestion and scarcity costs
Practical implementation and
proposed differentiation
Estimation of marginal cost
based on standardised curves
for specific traffic clusters
(urban-interurban, peak-off
peak).
Marginal or average costs per
vkm for different type of
infrastructure (urban, interurban,
motorways, non motorways).
Average costs per accident as a
basis for liability differentiation.
Marginal (averaged) costs per
type of vehicle (EURO-class)
and traffic and population
clusters (urban, interurban).
Marginal (averaged) costs per
type of vehicle (EURO-class)
and traffic and population
clusters (urban, interurban).
Marginal (averaged) costs per
type of vehicle (EURO-class)
and traffic clusters (urban,
interurban).
Marginal (averaged)costs) per
traffic and population clusters
(urban, interurban).
Marginal (averaged) costs per
type of vehicle and/or fuel.
Averaged (or marginal) variable
costs per type of infrastructure.
It is important to distinguish between the following terms:
− Congestion in the narrow sense denotes the social loss due to the fact that
users do not care for the additional costs and inconvenience they cause to
other users. This is relevant for non scheduled road transport.
− Delays, additional journey times or increased travel costs are the effects of
traffic congestion experienced by users. In scheduled transport delays can be
measured against arrival and departure times published in time tables, but it
is not clear in how far time tables already consider usual delays.
− Reliability is based on delay information, but the inconvenience for users is
not only expressed by the demand-capacity driven prolongation of travel or
shipment time, but by their fluctuation. The argument behind this concept is
that the traveller or shipper needs to know with a particular level of certainty
10
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−
when the trip needs to start in order to arrive on time. For the purpose of
setting efficient congestion charges information on regular traffic conditions is
more appropriate than information on the effects of irregular events.
Scarcity denotes the economic costs to users and operators occurring when
infrastructures can not be used at the desired time due to overcrowding.
Scarcity thus describes the opportunity costs due to displacement or
exclusion. They can not be measured directly as they describe potentially lost
benefits rather than real measurable costs. Thus, slot auctioning is proposed
as a means to value infrastructure scarcity.
Besides these quantitative concepts congestion can be expressed by qualitative
measures, such as Level-of-Service marks. Such information is, however, not
helpful for price setting and will not be considered in detail in the subsequent
presentation of results. Out of the above concepts the elaborations will
concentrate on marginal social congestion costs and on delay valuations.
a Best practice approach
Most important is the analysis carried out within UNITE, GRACE, INFRAS/IWW
and COMPETE. All these studies have provided methodologies and have
quantified marginal external congestion costs for specific traffic situations,
especially for road transport. GRACE has estimated as well scarcity costs for
public transport; COMPETE has analysed the available data basis and as well
additional congestion costs for indirect economic losses.
Comparing the methodologies, we find consensus on the basic approach valuing
mainly the value of time based on speed flow characteristics (road transport) and
opportunity cost approaches for scarce tracks. Nevertheless the difference
between proposed values is quite huge, depending on differentiation and traffic
characteristics (e.g. corridors, lanes, cordons, etc.). The level of detail depends
very much on the internalisation strategy to be applied (e.g. road or track pricing
schemes). Thus it is very difficult to recommend general values of congestion
costs. Our assessment of existing studies has shown however that the studies
mentioned can be used to provide bandwidths.
For the measurement of unit congestion costs (marginal congestion costs for
specific traffic situations), the following steps are necessary:
1 Differentiation of the traffic network: urban/interurban, single/multiple lanes.
This depends very much on the specific network conditions.
2 Speed flow curves for different traffic network segments. There are some
curves (UK, Germany, TRENEN) available. Most realistic seem to be the
German curves.
3 Transformation to congestion cost curves (mathematical step).
4 Valuation of speed losses with a valuation of time approach. There are
several studies measuring the value of time. Within this context it is very
important to use the willingness to pay to reduce congested situations. The
analysis shows that the basic value of time in congestion might be lower than
in general, but due to the fact of indirect costs, the total value of time can be
higher. UNITE has used a Value of Time for road transport of 21 €
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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11
5
(1998/business) and 4 € (leisure). Other studies (such as INFRAS/IWW) have
used higher values in order to consider as well possible indirect costs of
congestion (especially for business and freight transport). HEATCO 2006
recommends higher time values for delays due to congestions or late arrivals
in public transport. HEATCO 2006 recommends to value the time in
congested situation in road transport 1.5 times higher than standards invehicle-time. For freight transport, the factor is 1.9. For public transport, it is
recommended to value the delays 2.5 times higher than standard in-vehicletime.
Estimation of traffic reactions by charging the external congestion costs. This
step can only be carried out with the help of traffic modelling.
For other modes than road transport, delay and scarcity costs are of major
importance. An appropriate way to estimate scarcity costs is the willingness to
pay for a specific track, which has been used within the GRACE project.
b Critical aspects
All steps are depending strongly on the level of differentiation and the quality of
data available, specifically the speed flow relations (congestion data) and the
value of time. Methodological uncertainties are on the other hand comparably
low. One issue is the treatment of congestion costs due to traffic accidents. It is
useful to allocate these costs within traffic accidents since they are not caused
due to infrastructure scarcity, unless there is a link between the scarcity and the
accident risks.
2.3.2
Accident costs
External accidents costs are those costs which are not covered by risk oriented
insurance premiums. Compared to the other external cost components and
similar to infrastructure costs, part of the costs are paid (internalised) by the user.
Therefore the level of external costs does not only depend on the level of
accidents, but also on the insurance system.
a Best practice approach
There are two different approaches, leading to rather different results:
− The top down approach (UNITE, IWW/INFRAS, OSD) estimates total and
average accident costs considering national accident statistics and insurance
systems. It focuses on material damages and administrative costs (usually
covered by the insurance premiums), medical costs (including other
insurance systems), production losses and societal valuation of risks (usually
external). This approach considers all production losses and valuation of risks
(as well for self accidents) as external. The values are usually rather high.
There are two views to consider: In order to allocate insurance premiums, two
views are to consider: The first view focuses on transport individuals and
does only consider risk dependent premiums. The other view focuses on the
total transport systems considering the total cost recovery. Risk balance
between transport users is considered. Thus the values of the second
approach are quite lower.
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−
The bottom up approach (UNITE, GRACE) aims at estimating marginal costs.
The magnitude of the costs depend on risk elasticity (correlation between
traffic levels and accidents) and on the assumption of risk values. Differently
to the top down approach, it is assumed that transport users are able to
anticipate and consider their own risk. Thus only third party damages are
seen as external. Only the willingness to pay for relatives and friends has to
be considered. Thus the values are considerably lower than those applying
the top down approach.
There is still no consensus on a best practice approach at scientific level.
Moreover it has to be considered that the choice of approaches is very sensitive
in regard to values. Although there are a lot of accurate studies available, there is
no consensus of a best practice approach. We prefer the top down approach as
more appropriate since it is more transparent and considers the insurance
system properly. The bottom up approach seems very narrow and considers a
risk elasticity (accidents by vkm). The wide range of risk elasticities found in
empirical estimates however shows that an internalisation strategy based on
infrastructure pricing is not a very effective strategy.
b Critical aspects
There are several critical aspects to consider:
− Underreporting: the number of fatalities and injuries in official statistics and
databases does not reflect to total number or accidents, fatalities and injuries.
For some countries, figures are available.
− Risk value VSL: In the GRACE project (Lindberg, 2006) the different biases
are discussed. Throughout the world empirical estimates of VSL diametrically
differ between different studies, ranging from a value of less than 200 000 to
30 million US dollars (de Blaeij, 2003). HEATCO made survey of the current
European practice; the result is shown in the figure below. Looking at the
practice in different external cost estimates (UNITE, INFRAS/IWW), an
average value of 1.5 Mio € (bandwith between 1 and 3 Mio.) have been used.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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13
Figure 1
Values of accident fatalities by GDP/capita (EUR 2002 factor prices, PPS = purchasing power
standard). Source: HEATCO
−
−
−
−
2.3.3
Internal and external part of risk value, linked to the two approaches shown
above. This issue is very sensitive.
Inclusion of risk values for relatives and friends: in most studies (UNITE,
INFRAS/IWW, GRACE) a risk value for relatives and friends is not accounted
for due to methodological reasons. Different early studies assume the WTP
and thus the risk value of relatives and friends as a proportion of some one's
own risk value (between 10-50%).
Risk elasticities (different results in different case studies), relevant for the
estimation of marginal costs. The values of studies (e.g. compiled in UNITE)
differ widely.
Cost allocation to different vehicle categories: Linked to the top down
approach, there are several possibilities (causer or victim’s perspective,
simplified approaches).
Air pollution cost
Air pollution costs are caused by the emission of air pollutants such as PM, NOx,
Ozone and consist of health costs, building/material damages, crop losses and
costs for further damages for the ecosystem (biosphere, soil, water). Health costs
(mainly caused by PM, from exhaust emissions or transformation of other
pollutants) are by far the most important cost category. Thus the state of
research on these costs is much more advanced, mainly based on estimations
carried out by the ExternE model funded by several EU-research projects.
a Best practice approach
The calculation of air pollution costs is a core external cost category and
therefore a considerable amount of studies on methodology as well as studies on
total, average and marginal costs is available. Within European research projects
the Impact Pathway Approach established within the ExternE project is a
14
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commonly used tool and already very advanced; ongoing research is conducted
in order to update this methodology, such as NewExt (2005) or Methodex (2007).
This approach can be regarded as the most advanced approach for the
estimation of air pollution costs and thus is recommended as a best practice
methodology. The ExternE approach is a bottom up approach originally aiming at
estimating marginal costs for different traffic situations. The strength of this
approach is its consistency and the consideration of different detailed input
variables. However it is rather costly in order to derive average(d) and
representative figures for a whole country. Thus simplified top down approaches
have been developed as an alternative (especially used in Switzerland, OSD
2006). Although the dose response assumptions are similar, the final values
might differ, due to the use of different air pollution concentration models and
different emission characteristics (e.g. the consideration of exhaust and other
particles due to abrasion and resuspension).
The following picture gives an overview on the most important steps of the
Impact Pathway Approach established within ExternE.
Figure 2
The Impact Pathway Approach for the quantification of marginal external costs caused by air
pollution and noise
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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15
Each step requires inputs:
− Transport flows: data required range from traffic models relevant to specific
route(s), or corridor(s), to data at the aggregated level for the geographic unit
considered (a country, a region, etc.). Disaggregation by vehicle technology
and occupancy rates (load factors for freight) are systematically needed.
− Emissions: emission factors (by technology) for all vehicle, train, plane or
ship technologies are needed including the emission factors for the main upand downstream processes. For modelling the chemical transformation of the
pollutants in the atmosphere, emission data bases covering all emission
sources are needed for the different spatial scales.
− Concentrations and impacts: in addition to transport flows and emissions,
data requirements cover two main areas: i) receptor data (geographical coordinates, population density, other geo-morphological information, such as
built environment pattern for urban situations, building surfaces, etc.), ii)
meteorological data (mainly wind speed and direction). Impacts are derived
from the application of exposure- or dose-response functions, whose
knowledge is therefore a prerequisite.
− Monetary valuation, finally, requires the availability of WTP/WTA, damage
costs and restoration/reparation cost data. Based on most recent research by
NewExt and UBA, figures for a life year lost of 50’000 to 75’000 € are
recommended.
Based on this procedure unit cost per air pollutant can be elaborated. Most
important are the costs for PM and for NOx. CAFE has produced general figures
for all EU countries. The values per tonne for PM2.5 are varying between 8’60025’000 € (low/high value for Greece) and 63’000-180’000 € (low/high value for
the Netherlands. The values per tonne of NOx are for most countries considerably
lower. Several studies have produced figures for the transport sector. UBA
(2006), based on ExternE calculations, shows values between 92’000 €
(interurban) and 450’000 € (big cities) per tonne of PM10 emission for exhaust
particles and 58’000 up to 180’000 € (abrasion and re-suspension). In HEATCO
2006, unit cost values per emitted amount of PM2.5 are given for all European
countries. The values range from 140’000 €2002 to 730’000 €2002 per ton of PM2.5
emitted for urban areas and from 22’000 €2002 to 104’000 €2002 for interurban
areas (Germany: 400’000 €2002 per ton of PM2.5 in urban areas and 78’000 €2002
per ton in interurban areas).
The approach can be used for all modes. For rail transport, the emission factors
due to abrasion are very sensitive.
b Critical aspects and uncertainties
Critical aspects and uncertainties can be grouped according to NewExt (2005)
into 5 categories. Most of these points apply for both major approaches in
external air pollution cost calculation:
− Data uncertainty: slope of dose-response functions, cost of a day of restricted
activity, deposition velocity of a pollutant, emission factors for different vehicle
categories and traffic situations.
− Model uncertainties: assumption about causal links between pollutant and
health impact (e.g. consideration of other emission sources), assumption
16
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March 8, 2007
−
−
2.3.4
about the form of a dose-response function (with/without threshold), choice of
models for atmospheric dispersion and chemistry, underlying model
parameters (e.g. meteorological input parameters).
Policy/ethical choices: discount rates for intergenerational costs, value of
statistical life.
Interpretation of incomplete and ambiguous information.
Noise costs
Noise costs consist of costs for annoyance and health. The annoyance costs are
usually economically based on preferences of individuals (by surveys), whereas
health costs (especially due to increased risk of heart attacks) are based on dose
response figures. Since marginal noise costs decrease with increasing traffic
volumes, the definition and measurement of costs is quite crucial and needs
differentiation.
a Best practice approach
As for other cost components, we can distinguish bottom up and top down
approaches measuring average(d) figures for a country. From the top-down
approach studies ECMT (1998) and INFRAS/IWW (2004) are the most complete
ones.
INFRAS/IWW (2004) and UNITE (2003) provide estimates of marginal noise
costs for all modes by using a bottom-up approach. Some methodological
improvements to UNITE are proposed in GRACE (2005), but these are not yet
fully elaborated. The bottom-up approach was also applied in several other case
studies.
The bottom-up approach is developed in the ExternE-project and is generally
called the ‘Impact Pathway Approach’. The starting point of this approach is the
micro level, i.e. the traffic flow on a particular route. Two scenario’s are
calculated: a reference scenario reflecting the present scenario with traffic
volume, speed distribution, vehicle technologies, etc., and a marginal scenario
which is based on the reference scenario, but includes one additional vehicle.
The difference in damage costs of both scenario’s represents the marginal
external noise costs of that vehicle.
The top down approach is using the willingness to pay for more silence and the
health effects and multiplies this unit values with the national data on noise
exposure for different noise classes. Although the results of the approaches are
in a similar magnitude, there are two important differences. Firstly the bottom up
approach aims at estimating marginal costs which are considerably smaller for
heavily frequented and loud roads. The top down approach on the contrary does
not consider specifically this correlation weighing this effect out. In addition the
top down approach considers exposure rates for a whole country and thus is able
to produce average(d) figures. We consider both approaches as valid.
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17
The unit costs for health costs (value of a life year lost) are the same than used
for air pollution costs. Total costs per person exposed vary between different
traffic modes. The following table is showing the most recent figures
recommended for Germany (UBA 2006a). The values of HEATCO (2006) for
Germany are lower, but in the same range: for a 60 dB noise level, the values
recommended for Germany are 88 €2002 per year and person exposed for road
transport, 44 €2002 for rail transport and 136 €2002 for air transport. For a noise
level of 75 dB, the values are 291 €2002 per year and person for road, 248 €2002 for
rail and 412 €2002 for air transport.
Table 4
Unit costs for noise per person
Noise level
€ per person exposed per year
Lden [dB(A)]
Road
> 45
30
> 50
90
> 55
140
> 60
200
> 65
260
> 70
370
> 75
460
Source UBA (2006a)
Rail
Air
0
30
90
140
200
260
370
30
90
140
200
260
370
460
b Critical aspects and uncertainties
Besides the approach itself, the following issues are sensitive for the valuation of
noise costs:
− The thresholds above which noise is considered a nuisance are somewhat
arbitrary. In some studies 50 dB(A) is adopted to define a reasonable level of
noise, while other studies choose 55 dB or even 60 dB(A). The impact of the
threshold on marginal noise costs are substantial. ECMT (1998) shows that
changing the threshold from 50 dB(A) to 55 dB(A) reduces the average
results for cars by almost 50%.
− Different methods can be applied to value the effects of transport noise. In
some cases market prices can be used (cost of illness). However, for
nuisance effects no market prices do exist, and WTP-values should be used.
Hedonic pricing used to be the preferred method for quantification of amenity
losses due to noise. This method provides the Noise Depreciation Sensitivity
Index (NDSI), which gives the average percentage change in property prices
per decibel. Also the contingent valuation method is applied in some studies
to value noise costs. Other valuation methods, like abatement costs and
avoidance costs, are hardly used to estimate the external costs of noise.
− Valuation of fatalities based on VSL or on years of life lost, similar to the
uncertainties described for health costs due to air pollution.
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2.3.5
Climate change
Climate change costs have a high level of complexity due to the fact, that they
are long term and global and the risk patterns are very difficult to anticipate. Thus
there are difficulties to value the damages and allocate them to national transport
modes. Therefore a differentiated approach (looking both at the damages and the
avoidance strategy) is necessary. In addition long term risks should be included.
a Best Practice approach
The damage cost approach uses detailed modelling to assess the physical
impacts of climate change and combines these with estimations of the economic
impacts resulting from these physical impacts (see e.g. Watkiss, 2005). The costs
of sea level rise could e.g. be expressed as the costs of land loss. Agricultural
impact can be expressed as costs or benefits to producers and consumers, and
changes in water runoff might be expressed in new flood damage estimates.
Using a monetary metric to express non-market impacts, such as effects on
ecosystems or human health, is more difficult and requires dedicated
methodologies. There is a broad and established literature on valuation theory
and its application, including studies on the monetary value of lower mortality
risk, ecosystems, quality of life, etc. However, economic valuation, especially in
the area of climate change, is often controversial. First of all there is a general
lack of knowledge about the physical impacts caused by global warming. Some
impacts are rather certain and proven by detailed modelling, while other possible
impacts, such as extended flooding or hurricanes with higher energy density are
often not taken into account due to lack of information on the relationship
between global warming and these effects. Secondary impacts such as socially
contingent damages (e.g. regional conflicts) are even more difficult to assess.
Available damage cost estimations of greenhouse gas emissions vary by orders
of magnitude due to special theoretical valuation problems related to equity,
irreversibility and uncertainty. Concerning equity both intergenerational and intragenerational equity must be considered.
A recent detailed assessment of damage costs is carried out by the Social Cost
of Carbon project carried out by AEA Technology and the Stockholm
Environment Institute on behalf of Defra, UK. The term Social Cost of Carbon
(SCC) is used to denote damage cost as opposed to Marginal Avoidance Costs
(MAC). The study reviews a large number of existing studies on damage cost
estimates and compares these to own modelling results.
An alternative approach which avoids the uncertainties associated with assessing
damage costs of climate control is to assess the costs of avoiding CO2
emissions. These are often referred to as avoidance costs or mitigation costs,
and are expressed as so-called shadow values. The method is based on a costeffectiveness analysis that determines the least-cost option to achieve a required
level of greenhouse gas emission reduction, e.g. related to a policy target. Using
a cost curve approach the costs of reaching the specified target are calculated.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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19
The target can be specified at different system levels, e.g. at a national, EU or
worldwide level and may be defined for the transport sector only or for all sectors
together. This approach has been applied and recommended in several studies,
such as UNITE, ExternE. A most recent estimation is summarized in the Stern
report.
In practice the avoidance cost approach is more feasible, since the approach is
more transparent and refers to climate change policy. It has to be considered
however, that several decisions in regard to the transport sector are necessary,
such as the reduction target (short or long term? the scope of reduction (transport
or all sectors? national or international?). This leads to the conclusion that
different shadow factors per tonne of CO2 should be considered. The equilibrium
price of the European trading system is a possible reference value for a short
term view. Most recent recommended values (for Germany and Switzerland) are
compliant with the results of the Stern report: 70 € per tonne of CO2, with a range
of 20 € (short term EU average, based on Kyoto targets 1) to 280 € (long term
strategy and risks). HEATCO (2006) recommends a shadow price for CO2 which
depends on the year of emission: for emissions between 2000 and 2009, a
shadow price of 22 € per ton CO2 is recommended (with a lower value of 14 €
and an upper value of 51 € per ton CO2). For emissions in the following decades,
increasing shadow prices are recommended: 26 € per ton for 2010-2019, 32 €
per ton for 2020-2029, 40 € per ton for 2030-2039, etc. For emissions in 2050 a
shadow price of 83 € per ton CO2 is recommended.
b Critical aspects and uncertainties
Critical aspects determining uncertainties in valuation studies based on damage
costs are:
− Assessment of the physical impacts of climate change and selection of the
impacts included in the analysis; this is especially true for air transport
emissions in high altitudes.
− Assessment of the economic impacts resulting from the estimated physical
impacts and selection of the impacts valued in the analysis.
− The discount rate used.
− The approach to weighting impacts in different regions (called equity
weighting).
− The time horizon used.
Critical aspects determining the accuracy of avoidance cost estimates are:
− Estimation of the greenhouse gas reduction potential of technical and nontechnical options (at the vehicle level as well as at the system level, incl. e.g.
possible rebound effects).
− Assessment of the future costs of technical and non-technical options in
various sectors to reduce greenhouse gas emissions.
− The choice of the target level that is used to assess avoidance costs, with
regard to the:
1
20
The recently by the Commission proposed post-2012 targets are more stringent and are likely to increase
this unit estimate.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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•
−
2.3.6
System to which the target is applied (e.g. all sectors or specifically for the
transport sector or a country or region vs. worldwide).
• The numerical value of the target level.
• Political and public acceptance; formally only legally binding targets laid
down in national law or international agreements can be considered as a
valid indication of the (society’s) willingness to pay.
• Time horizon (short term versus long term).
Assumptions on the energy costs used in the assessment of avoidance costs
for the technical and non-technical options.
Other external costs
Within external cost studies, the following costs are usually considered in addition
to the costs shown above. The estimation procedures are not widely used
compared to the cost categories shown above. At EU-level an ongoing project
(REMEDE, 2007) is aiming at providing methodologies and values for the
damages of nature, soil and water pollution.
a Costs for nature and landscape
Three types of negative impacts are relevant (source: OSD, 2004): Habitat loss,
habitat fragmentation and habitat quality loss. The estimation procedures are
− Repair cost approach for ground sealing and other impacts on ecosystems
(disturbance of animals and their biotopes by noise or barrier effects, visual
disturbance, etc.). (INFRAS/IWW, 2000/4).
− Standard price approach for quantifying the negative effects of airborne
emissions on ecosystems and biodiversity (through acidification and
eutrophication). (ExternE, 1999; NewExt, 2005).
− Two-stage approach for quantifying biodiversity losses: a. repair costs for
reduced species diversity due to land use change and b. repair costs for
negative effects of airborne emissions on ecosystems and biodiversity
(through acidification and eutrophication). (NEEDS, 2005a).
− Two-stage approach for habitat loss and fragmentation: a) compensation
costs for habitat loss due to transport infrastructure (creating compensatory
ecosystem) and b) compensation cost approach for habitat fragmentation.
(OSD, 2003).
The values proposed (in INFRAS/IWW 2004) vary between 10 and 40 € per m2.
The costs for nature and landscape due to airborne pollutants (e.g. through
acidification and eutrophication) do not belong to the cost category ‘nature and
landscape’ but are covered within the cost category ‘air pollution’.
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21
b Costs for soil and water pollution
The most important negative effects of traffic on soil come from the emission of
heavy metals and polycyclic aromatic hydrocarbons (PAH) by different transport
modes. These pollutants can lead to plant damage and decreased soil fertility
along the transport infrastructure and can sometimes even pose a threat to
animals or human beings. The estimation procedures are:
−
−
−
Repair cost approach for polluted areas (soil and water pollution) along
transport infrastructure (dependent on the infrastructure length).
(INFRAS/IWW, 2000/4).
Repair cost approach for the soil and water pollution by heavy metals, organic
pollutants (e.g. polycyclic aromatic hydrocarbons, PAH), de-icing salt,
herbicides and other agents along transport infrastructure (dependent on the
amount of emissions and the critical concentrations). (OSD, 2006).
Damage costs approach: health costs for human beings due to the emission
of toxic heavy metals into soil, water and air. (ExternE, 1999; NewExt, 2005).
c Additional costs in urban areas
In urban areas motorised traffic has different effects on non-motorised traffic
participants (pedestrians, cyclists, etc.). The following two effects are quantified in
certain external cost studies:
− Time losses for pedestrians due to separation effects.
− Scarcity problems (expressed as the loss of space availability for bicycles).
Other possible effects (e.g. urban visual intrusion due to transport volume and
infrastructure) are very difficult to measure and no reliable estimates are known.
The measurement is based on a two-stage approach: a. damage costs due to
separation effects of transport infrastructure in urban areas (waiting time for
pedestrians) and b. compensation cost approach for scarcity problems due to
transport infrastructure (construction of bicycle lanes). (INFRAS/IWW 2000/4,
OSD, 2006)
d Costs of up- and downstream processes
Indirect effects of transport cause additional external effects. It has to be
considered that these costs occur in other than the transport market (e.g. energy
market); hence it has to be considered if these costs are already internalised in
these markets. The most relevant processes considered are the following:
− Energy production (precombustion): The production of all type of energy is
causing additional nuisances due to extraction, transport, transmission. They
depend directly on the amount of energy used.
− Vehicle production, maintenance and disposal: The production, maintenance
and disposal of vehicles and rolling stock causes environmental effects
(emission of air, water, soil pollutants, greenhouse gases, etc.) during a long
period, considering the life cycles of different transport means.
− Infrastructure construction, maintenance and disposal: The construction,
maintenance and disposal of infrastructure elements also lead to negative
environmental effects (emission of pollutants).
The methodology for the calculation of up- and downstream processes is virtually
the same in all studies quantifying these costs: The costs are calculated the
same way as the direct external cost categories of transport operating. However,
22
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March 8, 2007
instead of quantifying the environmental effects of transport operating, the
negative environmental impacts of all other up- and downstream processes are
calculated. The main difference between the studies is the different kind of cost
categories (effects) covered: some studies only cover climate change costs of upand downstream processes whereas others also cover air pollution costs and
costs due to nuclear power risks. (INFRAS/IWW, 2000/4; ExternE, 1999; NewExt,
2004; Friedrich/Bickel, 2001; OSD 2006).
e Critical aspects and uncertainties
Research about external cost calculation often focuses on the most important
cost categories such as noise costs, air pollution costs, accident costs or climate
change costs. Other external cost categories - above all cost for nature and
landscape, soil and water pollution and costs in urban areas - are often
neglected. Methodologies for calculating these cost categories have been
developed only in very few studies. Therefore, the calculation methods are far
from being as sophisticated as for the most important cost categories.
Another critical aspect concerning the costs for nature and landscape as well as
the costs for soil and water pollution is the very complex impact patterns of the
natural ecosystems. Therefore, the knowledge about the detailed impact patterns
and dose-response-relationships is less developed than in other cost categories.
Often, negative impacts of transport activities on the natural environment can be
proved. The detailed relationship between activity and impact can hardly be
quantified. As a consequence, damage costs can often not be quantified and the
calculation has to be done with a repair cost approach.
2.3.7
Summary
The following table is showing the main issues and cost drivers.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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23
Table 5
Overview of main issues per cost category
Cost
component
Congestion
costs (road)
Cost elements
Critical valuation issues
Time costs/opportunity
costs
Add. safety and
environmental costs
Speed flow relations
Valuation of economically
relevant value of time
(reliability)
Scarcity costs
(scheduled
transport)
Delay costs
Opportunity costs
Valuation approach as such
(measurement of opportunity
costs, WTP enlargement
costs, optimisation model)
Increasing marginal cost
Level of traffic, slot capacity
per infrastructure segment
Accident
costs
Medical costs
Production losses
Loss of human life
Valuation of human life
Externality of self accidents
Allocation of accidents
(causer/victim related)
Weak dependency;
difference between marginal
and average costs not
proven
Accident database
Definition of fatalities and
heavy/slight injuries very
important
Air Pollution
Health costs
Years of human life lost
Building damages
Costs for nature and
biosphere
Valuation of life years lost
Valuation of building
damages
Valuation of long term risks in
biosphere
Complex: Increasing
marginal cost curve
Emission and exposure data
(exp. PM, NOx, Ozone)
2
Cost function (costs per
vkm)
Increasing marginal cost
2
Data needs
Main cost drivers
Speed flow data
Level of traffic and capacity
per road segment
Type of infrastructure
Traffic and capacity levels,
mainly depending on:
− Time of the day
− Location
− Accidents and
constructions
Type of infrastructure
Traffic and capacity levels,
mainly depending on:
− Time of the day
− Location
Type of infrastructure
Traffic volume
Vehicle speed
Driver characteristics (e.g.
age, medical conditions,
etc.)
Others
Population and settlement
density
Sensitivity of area
Level of emissions, dep.on:
− Type and condition of
vehicle
− Trip length (cold start
emissions)
− Type of infrastructure
− Location
− Speed characteristics
Not all cost drivers will be applicable as a basis for incentives.
24
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Cost
component
Noise costs
Data needs
Main cost drivers 3
Noise exposure data
(persons)
Long term risks of climate
change
Level of damage in high
altitudes (aviation)
Rather proportional
(marginal cost close to
average cost)
Emission levels
Costs to reduce
separation effects
Compensation costs to
ensure biodiversity
Costs to ensure soil and
water quality
Valuation approach as such
(replacement versus WTP
approach)
Very low marginal cost, but
high fixed costs
GIS information on
infrastructure
Population and settlement
density
Day/Night
Noise emissions level,
depending on:
− Type of infrastructure
− Type and condition of
vehicle
Level of emissions,
depending on:
− Type of vehicle and
add. Equipment (e.g. air
conditioning)
− Speed characteristics
− Driving style
− Fuel type (incl. biofuels)
Type of infrastructure
Sensitivity of area
Valuation approach as such
(avoidance versus damage
cost approach)
Complex: Increasing
marginal cost curve
GIS information
infrastructure, emission
levels
Level of emissions
Type of infrastructure
Separation costs for
pedestrians
Costs of scarcity for non
motorised traffic
Costs of the whole
energy cycle
(environmental and risk
effects of energy supply)
Valuation approach as such
(Avoidance versus WTP
approach)
Increasing marginal cost
curve
Infrastructure data in urban
areas (network data, data on
slow traffic)
Type of infrastructure
Level of traffic
Valuation of long term energy
risks, such as climate change
and nuclear risk
Rather proportional
(marginal cost close to
average costs)
Data on energy processes
and electricity mix
Level of indirect energy
need
Electricity mix (level of non
renewables
Critical valuation issues
Rent losses
Annoyance costs
Health costs
Valuation of annoyances
Climate
change
Prevention costs to
reduce risk of climate
change
Damage costs of
increasing temperature
Costs for
nature and
landscape
Additional
environmental
cost (water,
soil)
Additional
costs in urban
areas
Up- and
downstream
processes
3
Cost function (costs per
vkm)
Decreasing marginal cost
curve
Cost elements
Not all cost drivers will be applicable as a basis for incentives.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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25
2.4
Cost estimates
Within this chapter, the most important values for different traffic situations are
shown, based on a first analysis of existing values and best practice approaches.
The values presented are preliminary values and will be further developed in the
project.
2.4.1
Level of differentiation
The level of disaggregation differs according to cost components and mode. The
following table shows the most important differentiation per cost component and
mode.
Table 6
Overview of differentiation of unit values per cost component
Cost
component
Congestion
costs
(road)
Scarcity
costs
Accident
costs
Noise
costs
Road
Passenger Car
HDV
Bus/Coach
Costs per vehicle
Costs per vkm
Type of infrastructure
(Interurban, urban,
metropolitan)
Peak – off peak
-
Costs per acc.
Costs per vkm
Type of infrastructure
(urban-interurban)
Costs per vkm
Urban-Interurban
Day - Night
Rail
Passenger
Freight
Air
Passenger
Freight
Waterways
Inland Waterways
Seaports
-
-
-
Costs per train
Costs per trainkm
Peak-off peak
Costs per acc.
Costs per trainkm
Costs per plane
Peak-off peak
Cost per ship
Peak-off peak
Costs per acc.
Costs per pkm
(cont.-intercont.)
Costs per acc.
Costs per shipkm
Costs per trainkm
Urban-interurban
Day – Night
Two types of brakes
Costs per airplane
Hub-airportregional/hub airport
Day – Night
Three type of plane
Costs per airplane
(Landing & take-off:
LTO)
regional/hub airport
Type of plane
Costs per airplane
LTO, cruise
Three type of plane
-
Costs per vkm
Costs per vkm
Air
Pollution
Costs per vkm
Urban-interurban
Peak-off peak
Euro standards
Costs per trainkm
Urban-interurban
Electric
Diesel
Climate
change
Costs per vkm
Urban-interurban
Peak-off peak
Engine capacity
Vehicle weight
Costs per km
infrastructure
Costs per vkm
Costs per trainkm
Urban-interurban
Electric
Diesel
Additional
external
costs
26
Costs per vkm
infrastructure
Costs per shipkm
Type of engine
Costs per shipkm
Type of engine
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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2.4.2
Ranges and levels of accuracy per mode of transport
a 1 Total cost values
Mainly two studies have estimated total external costs for Western Europe. The
UIC study (INFRAS/IWW, 2004) has estimated total external costs of transport
(excluding congestion costs, with climate change high scenario) of 650 billion €
for 2000, being 7.3% of the total GDP in EU 17). Climate change is the most
important cost category with 30% of total cost, if high shadow prices are used. Air
pollution and accident costs amount to 27% and 24% respectively. The costs for
noise and up- and downstream processes each account for 7% of total costs.
The costs for nature and landscape and additional urban effects are of minor
importance (5%). The most important mode is road transport, causing 83.7% of
total cost, followed by air transport, causing 14% of total external costs. Railways
(1.9%) and waterways (0.4%) are of minor importance. Two thirds of the costs
are caused by passenger transport and one third by freight transport.
The UNITE project has estimated total external accident and environmental costs
of 120 billion €, being 1.6% of GDP. The differences stem from different
methodologies for accident and air pollution costs and cautious valuation of
external costs. In addition other external environmental costs like up- and
downstream effects are not included. Road transport amounts to 113 billion or
94% of total cost.
a 2 Unit cost values per vkm
The following tables give a first overview of the range of the unit values
recommended for the different cost categories and transport modes.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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27
Table 7
Road transport: unit values per cost component in €ct/vehicle-km
Passenger car
Cost component
Noise
Congestion
Accidents
Air pollution
Climate
change
Nature &
landscape
Total
Urban
Interurban
Urban
Interurban
Urban
Interurban
Urban Petrol
Urban Diesel
Interurban Petrol
Interurban Diesel
Urban
Interurban
Urban
Interurban
Min.
0.8
0.0
2.0
0.0
4.2
0.3
0.1
0.3
0.1
0.3
0.6
0.3
0.0
0.0
Max.
Heavy duty vehicle (HDV)
Min.
3.4
0.0
28
15
4.8
7.2
0.3
1.5
0.4
0.6
2.3
1.0
0.0
0.4
Max.
7.0
0.1
6.0
0.0
3.2
0.3
4.7
31
0.2
84
7.0
11
2.8
18
2.1
7.5
2.0
1.2
0.0
0.0
7.0
4.3
0.0
1.2
Peak, urban
7.7
39
23
150
Peak, interurban
3.1
38
10
103
Off-Peak, urban
5.7
26
17
73
Off-Peak, interurban
1.1
25
4.5
26
Explanations by cost category:
Noise costs:
Source Car/HDV: INFRAS/IWW, 2004
Min: dense traffic situations during day time
Max: thin traffic situations during night time
Congestion:
Source: Urban Min: UNITE Case Study, Urban Max: GRACE case studies
Interurban Min+ Max: UNITE case Studies
Min: Off-Peak
Max: Peak
Accident costs: Source: UNITE case studies
Min+Max: Marginal cost values from UNITE case studies
Max: Marginal cost values from INFRAS/IWW, 2004
Air pollution:
Source: UNITE Case Studies (D11) for different cities, Values based on EURO 2
Cars and HDVS
Min: lower values from case studies (based on lower population densitiy)
Max: higher values form case studies (higher pop. density)
Climate change: Source: INFRAS/IWW, 2004
Min: Shadow value of 20€/t CO2
Max: Shadow value of 70€/t CO2
Nature&Landscape:
Source: INFRAS/IWW, 2004
No external costs in urban and built-up areas
Min: short run marginal costs
Max: long run marginal costs
28
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Table 8
Rail transport: unit values per cost component in €ct/train-km
Cost component
Noise costs
Scarcity costs
(see comment
below)
Accident costs
Air Pollution
Urban
Interurban
Peak
Rail passenger
Min.
Max.
27
82
1.7
5.2
Rail freight
Min.
32
1.8
Max.
96
5.5
0
0
15
15
12
0
13
13
32
32
83
0
Off-Peak
Urban
Interurban
Urban
Interurban
0
0
2.5
16
11
0
13
13
5.0
42
41
0
Climate change
Additional
Urban
external costs
(nature &
Interurban
landscape)
0
23
0
8
Total external
Urban
41
140
59
224
costs
Interurban
29
123
28
140
Explanations by cost category:
Noise costs:
Source Rail Passenger/Rail Freight: INFRAS/IWW, 2004
Min: dense traffic situations during day time
Max: thin traffic situations during night time
Scarcity costs: GRACE analyses specific inter-modal corridor situation. The value of an off-peak
slot is expressed as percentage of a peak slot. This value is estimated to be
around 10% of the peak-slot. In an off-peak situation there are no scarcity costs.
In the peak hour scarcity costs are equal to slot opportunity costs of an existing
operator of a specific slot. Source: GRACE Project
Accident costs: Sources: UNITE Case studies, INFRAS/IWW, CE, 2003
Min: UNITE Case studies
Max: INFRAS/IWW, 2004 (in general), rail freight: ECMT, 1998, CE, 2003
Air pollution costs:
Source: UNITE Case Studies (D11)
Min-Max: ranges of values of different case studies, no differentiation for
urban/inter-urban for rail freight transport
Climate change: Source: INFRAS/IWW, 2004
Min: Shadow value of 20€/t CO2 ,electric train
Max: Shadow value of 70€/t CO2 ,diesel traction
No differentiation urban/interurban
Nature&Landscape: Source: INFRAS/IWW, 2004
No external costs in urban and built-up areas
Min: short run marginal costs
Max: long run marginal costs
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29
Table 9
Air transport: unit values per cost component in €/aircraft-km or €/LTO
Cost component
Noise costs
Congestion
costs
Peak
Air passenger
Min.
Max.
Air freight
Min.
Unit
150
1200
150
1200
8.9
11.9
8.9
11.9
119
631
119
631
0.8
6.1
0.8
6.1
Max.
€ 1999 per
LTO
€ 2000 per
aircraft-km
Off-Peak
Scarcity costs
Accident costs
Air Pollution
Climate change
Additional external costs
0.0
0.079
0.0
0.083
(nature & landscape)
Total external costs
Explanations by cost category:
Noise costs:
Source: CE, 2002, costs expressed in € 1999 per LTO
Min: 100 seater, state of the art technology
Max: 400 seater fleet average 1999
Congestion costs: Source UNITE D7, costs expressed in € 2000 / aircraft-km
Min: lower bound of results of selected months 1997-2000
Max: upper bound of results of selected months 1997-2000
Accident costs: No data available.
Air pollution:
Source: CE, 2002, costs expressed in € 1999 per LTO
Min: 100 seater, fleet average 1999
Max: 400 seater fleet average 1999
Climate change: Source: CE, 2002, costs expressed in € 1999 per aircraft-km
Min: 100 seater, fleet average 1999, shadow value of 20€/t CO2
Max: 400 seater fleet average 1999, shadow value of 70€/t CO2
Nature&Landscape: Source: INFRAS/IWW, 2004, costs expressed in € 2000 / aircraft km
No external costs in urban and built-up areas
Min: short run marginal costs
Max: long run marginal costs
Total costs:
no total cost calculation possible due to different cost indicators
30
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€ 1999 per
LTO
€ 1999 per
aircraft-km
€ 2000 per
aircraft-km
Table 10
Inland waterways: unit values per cost component in €ct/vessel-km
Cost component
waterways freight
Min.
Unit
Max.
Noise costs
Scarcity costs
215
625
240
360
Accident costs
Air Pollution
Climate change
€ per vessel and
cm of water level
€ct 1998 per
vessel-km
€ct 2000 per
vessel-km
€ct 2000 per
vessel-km
40
141
Additional external costs
(nature & landscape)
0
92
Total external costs
Explanations by cost category:
Noise costs:
no sources available
Scarcity costs: Source: GRACE D4, costs are expressed in € per cm of water level in the river
Rhein for a vessel carrying 500 TEU
Min: value for high water levels
Max: value for low water levels
Accident costs: no data available
Air pollution:
Sources: UNITE D11, €ct per vessel-km
Min: marginal costs per vessel-km downstream
Max: marginal costs per vessel-km upstream
Climate change: Source: INFRAS/IWW, 2004, €ct/vessel-km
Min: Shadow value of 20€/t CO2
Max: Shadow value of 70€/t CO2
Nature&Landscape: Source: INFRAS/IWW, 2004, in €ct 2002/vessel-km
No external costs in urban and built-up areas
Min: short run marginal costs
Max: long run marginal costs
Total costs:
no total cost calculation possible due to different cost indicators
a 3 Comparison Road-Rail (in €/pkm and €/tkm)
Using the average load factors for road and rail transport, average costs per
passenger-km and tonne-kilometer have been calculated.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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31
Table 11
Comparison Road-Rail: using average load factors 4
Noise
Urban
Interurban
Accidents
Urban
Interurban
Air pollution
Urban Petrol
Urban Diesel
Interurban Petrol
Interurban Diesel
Climate change
Urban
Interurban
Nature & landscape Urban
Interurban
Total
Passenger transport (€/pkm)
Passenger Car (€/pkm)
Train Pass. (€/pkm)
Min.
Max.
Min.
Max.
0.5
2.2
0.21
0.63
0.0
0.0
0.01
0.04
2.8
3.2
0.00
0.10
0.2
4.8
0.00
0.10
0.1
0.2
0.02
0.04
0.2
1.0
0.00
0.00
0.1
0.2
0.12
0.32
0.2
0.4
0.00
0.00
0.4
1.5
0.08
0.31
0.2
0.7
0.08
0.31
0.0
0.0
0.00
0.00
0.0
0.3
0.00
0.18
Peak, urban
Peak, interurban
Off-Peak, urban
Off-Peak, interurban
3.8
0.7
3.8
0.7
7.1
6.8
7.1
6.8
0.31
0.22
0.31
0.22
1.08
0.95
1.08
0.95
Freight transport (€/tkm)
HDV (€/tkm
Train Freight (€/tkm)
Min.
Max.
Min.
Max.
0.5
2.1
0.11
0.34
0.0
0.0
0.01
0.02
0.2
0.7
0.00
0.04
0.0
0.2
0.00
0.04
0.3
1.2
0.05
0.11
0.0
0.0
0.00
0.00
0.1
0.5
0.05
0.11
0.0
0.0
0.00
0.00
0.1
0.5
0.04
0.29
0.1
0.3
0.04
0.29
0.0
0.0
0.00
0.00
0.0
0.1
0.00
0.03
1.1
0.3
1.1
0.3
4.4
1.2
4.4
1.2
0.21
0.10
0.21
0.10
Explanations: Average load factors:
Passenger car: 1.5 persons/car
Passenger train: 130 passengers/train
HDV:
15 tons/vehicle
Freight train:
285 tons/train
2.4.3
Putting the values into practice
a Value transfer mechanisms
The unit values are the basis for calculating the values for the various traffic
situations, modes, types of vehicle and countries. To calculate the values for
member states, a value transfer is proposed. Value transfer is useful and
appropriate to save expenditures for detailed estimation of external costs in
specific traffic situations, vehicle types, modes of transport and countries. The
following transfer mechanisms are relevant:
− Transfer of dose-response functions: A transfer is possible. For some cost
components a transfer needs additional information:
• Congestion: Local Speed-Flow curves are useful, since traffic situations
might differ between countries.
• Accidents: The national insurance systems have to be considered and
might lead to different levels of externalities.
• Nature and landscape: The general settlement situation should be
considered.
− Transfer of data: If possible local data (traffic, emissions, concentrations, etc.)
should be used. Value transfers are only possible if specific clusters (e.g.
specific traffic situations and exposure situation) can be defined.
− Transfer of unit values (VSL, VOT, etc.): The literature (UNITE,
INFRAS/IWW) is proposing a value transfer based on GDP per capita (PPP
adjusted). This implies the assumption that the unit values are linked with
income with an elasticity of 1.
4
Congestion and scarcity costs are not included here, because of lack of data of scarcity costs on rail.
32
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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0.79
0.49
0.79
0.49
b Base year, update and dynamisation mechanisms
It is useful to present figures for a most actual base year. The more
disaggregated the figures are presented, the less important is a common base
year, since structures can be shown in detail (e.g. Euro classes).
Forecasts and changes in the future, e.g. the variation of external cost over time,
depend on:
− Change in dose response functions. Usually this is only the case for long term
risks such as climate change.
− Change in traffic patterns (volumes, structure, loading factors). This can
influence averaged figures, depending on disaggregation of results.
− Change in technical performance (emission category, etc.). This can also
influence averaged figures, depending on disaggregation of results.
− Change in income: According to the assumptions above, an increase of GDP
per capita is also changing unit values. Similar to the value transfer
approaches, an income elasticity of 1 can be assumed. Recent research
(INFRAS/IWW, 2004) shows that a lower elasticity (e.g. 0.5) can be used as
well. It has to be considered that the very sensitive unit values (such as VSL)
are also depending on other factors like the change of risk aversion for
individuals.
c Link to internalisation scenarios
How to use the values presented into practice, e.g. into concrete pricing
scenarios? In order to build a bridge between external cost values and transport
pricing strategies, the following leverage points are most important and will be
further analysed in chapter 3.
− The internalisation of congestion costs requests a road pricing scheme which
differentiates at least between urban areas and interurban bottlenecks on
motorways. Since the implementation of such schemes is very much
depending on local network characteristics, available alternatives and political
acceptability, the values presented can only provide a rough magnitude for
concrete congestion based road charges (usually not per vkm, but per
passage).
− The pricing strategy for the internalisation of accident costs is only a small
part of the policy instrument to internalise accident costs. Thus the figures
presented will serve mainly as a basis for the differentiation according to type
of infrastructure and for cost benefit analysis of appropriate safety measures.
− The internalisation of environmental costs can be linked to km or fuel
charging, differentiated according to environmental criteria. The values
presented can directly provide a basis.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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33
2.5
Main questions for the workshop
The following questions are of major importance for the discussion in the
workshop:
a
How accurate is accurate enough?
− Value transfer: Is it possible to use proposed values from scientific studies
or is an own detailed study necessary?
− Level of detail: Which disaggregation level of values is useful?
b
Which values are useful?
− Which values do reflect external cost properly?
− Which level of differentiation is useful?
c
Main approaches
− Is there consensus that a pragmatic marginal cost oriented approach with
averaged figures for typical traffic situations forms the basis for the
estimation of concrete values?
− Is there consensus that a bottom up approach is most appropriate for the
estimation of congestion and environmental costs and a top down
approach is useful for the valuation of accident costs?
− What is the opinion on best practice approaches per cost category?
d
Dealing with critical aspects and risks
− What has to be considered for the definition of critical unit costs such as
VSL and shadow rates for CO2?
− How should values be presented: Recommended values, bandwidths,
sensitivity analysis?
34
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3
Scenarios for internalisation
3.1
Introduction
Transport gives rise to various types of external effects which pose costs to
society. External effects are by definition not taken into account explicitly in
decision making. There is no economic market for these effects, and therefore
the market-clearing process does not lead to the most optimal outcome, from a
societal point of view. The external effects of pollution, noise and climate change
may be labelled intersectoral externalities when transport users inflict these to a
large extent on others outside of the transport sector. In contrast, the externalities
of congestion and accidents are intrasectoral externalities, imposed by transport
users upon one-another 5.
Pigou formulated an optimal solution to the problem of external effects, in the
context of congestion: introduce a regulatory charge equal to the marginal
external costs. Transport users will thus take account of the external effects on
one-another and on others, and may or may not adapt their decision, depending
on whether their marginal benefit is lower or higher than the marginal external
costs to others. This is the basic idea behind internalisation of external costs.
The step from theory to practice is not a simple one, however. External
congestion cost levels may vary from minute to minute 6, transport users may not
be able to take fully rationale account of such varying taxes and charges and
even then, technological solutions to charge such rapidly varying taxes and
charges are not straightforward either.
In this chapter we discuss the ways external costs can be internalised. First, we
provide an overview of the main aims of internalisation (section 3.2). This
includes a discussion of the formulated aims by the European Union in Directive
2006/38. Next, we give an a theoretical framework of the methods for
internalisation external costs of transport (section 3.3). In section 3.4 we discuss
the legal background.
The main cross cutting issues for designing the scenarios are discussed in
section 3.5. Section 3.6 gives an overview of the scenarios themselves.
The next steps in the project are briefly described in section 3.7. Finally section
3.8 lists the main questions for discussion at the workshop.
5
6
We will refer to this distinction in the next section.
There are examples in the US, where certain lanes are tolled and others not, with charges levels being
adapted according to traffic levels every six minutes. Clearly, drivers can only take account of such varying
charges when they have the option of using the tolled lane or the non-tolled lane (US FHA, 2006).
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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35
3.2
Aims of internalisation and pricing policies
The design of internalisation measures starts with a clear picture of the aims they
might serve. We first discuss the various aims and motives that can be
distinguished and then focus on the aims of internalisation as described in
Directive 2006/38.
3.2.1
Potential aims of internalisation
The motives for internalisation and/or the introduction of pricing policies can be
various. Related to these motives may be specific policy aims. As background to
the discussions, we distinguish in this section different motifs and aims of pricing
policies for the transport sector (based on Verhoef et al. (2004)).
Three motives for pricing policies that can be distinguished are (each with various
possible policy aims):
− Influencing behaviour, to:
• Reduce environmental impacts.
• Allow a freer flow of traffic.
− Generating revenues, to:
• Finance new, extension or modernisation of infrastructure (which may in
turn be related to the aim of improving freer flow of traffic).
• Cover (fixed) costs of infrastructure management, operation and
maintenance.
• Finance the general budget.
− Increasing fairness, to:
• Make the polluter / user pay.
• Have identical taxes and charges for everyone.
• Level out the income distribution.
• Prevent changes in income distribution.
• To level the playing field between modes.
Clearly, when implementing pricing policies, a multitude of effects will occur,
contributing to more than one potential aim.
3.2.2
Motives and aims in directive 2006/38/EC
Although in theory, the various motifs and aims can be distinguished neatly, in
practice things are more complicated. As mentioned above, implementation of
pricing policies will generally contribute to more than one potential aim. The
motifs and aims underlying directive 2006/38/EC also appear to be multiple.
Reading directive 2006/38/EC carefully, the motif of the Commission for the
amendment appears to be related with encouragement of sustainable transport,
that is to influence behaviour. A fairer charging scheme is a means for that motif
and not a motif in itself.
36
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March 8, 2007
The aims of internalisation appear to be more diverse. A reduction of
environmental impacts, a freer flow of traffic (or even wider: a more efficient
transport system), making the user and polluter pay and level the playing field
between modes are all aims that have been mentioned at one time or another. At
the same time, the directive also involves the recovery of infrastructure
investments and the generation of funds to provide new infrastructure.
3.2.3
This project
According to welfare theory, the primary motif for internalisation is a more
efficient economy. This is particularly related to influencing behaviour by
providing optimal incentives. In this project this is taken as the primary aim of
internalisation. The other motives may be politically relevant and will be taken
into account, but less central.
3.3
Theoretical framework
Internalisation of external costs can be done by a wide variety of methods and
instruments. In general, internalisation relates to market-based instruments, and
pricing instruments in specific. Consumers receive a direct financial incentive to
adapt behaviour and at the same time keep the freedom for making their own
choices. There are however many different ways of implementing pricing policies,
for example with regard to price structures and price levels.
More generally, potential government instruments (not all internalisation
methods) can be classified as follows.
− Market-based instruments (pricing, emission trading).
− Regulation.
− Infrastructure provision.
− Environmental planning.
− Communication & information.
These instruments differ to the extent that they allow consumers to make their
own decisions and to the extent that the results can be predicted beforehand.
They also differ to the extent that they may be related to particular government
motives and aims. For example, communication & information may influence
consumer behaviour, but cannot be related to generating revenues.
The focus in the scenarios will be on market-based instruments, but other
instruments will be included where appropriate, in particular regulation.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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37
3.3.1
Optimal internalisation methods depend on the context
The optimal internalisation strategy depends on the underlying aims and motifs. If
internalisation takes place out of equity considerations, intersectoral externalities
are especially relevant, because these make up the ‘unpaid bill’ that transport
imposes upon society. Charging for external congestion costs may be of less
interest then. In contrast, if the improvement of economic efficiency is the goal,
both intra- and intersectoral externalities should be internalised 7.
If the aim of internalisation is solely generating revenues then the main
considerations are minimizing transaction costs and gaining public support. The
most efficient way of revenue raising is to increase existing taxes or charges, but
this often faces strong public resistance. Combining aims of generating revenues
with increasing fairness may help to increase public support.
As stated before (section 3.2.1) the central aim of the internalisation scenarios to
be developed in the current study is influencing behaviour to improve economic
efficiency and reduce external effects. This implies that designing the scenarios,
we need to have a close look at the impacts on welfare. These impacts are
discussed in the next sections.
3.3.2
Marginal social cost pricing
In theory, assuming a first-best world, Pigouvian taxes would be optimal for
optimizing economic efficiency (welfare). This is often related with the principle of
marginal social cost pricing. Under the REVENUE research program, ‘pure
marginal social cost pricing’ has been defined as a situation where prices in
transport are set equal to the short-run price relevant cost, consisting of:
− The marginal producer costs (e.g. reconstruction, wear & tear, maintenance
costs).
− The price-relevant user cost (congestion, scarcity costs). plus
− The marginal external costs (environmental costs, external accident costs).
Marginal social cost pricing would, under some conditions, lead to allocative
efficiency in a static perspective.
3.3.3
Deviations from marginal social cost pricing
In the dynamic real world, deviations from marginal social cost pricing may be
more appropriate or practical.
In marginal social cost pricing, no consideration is given to the financial
implications of the pricing scheme in terms of surpluses of deficits for each mode.
This implies that there is no guarantee that the total revenues from marginal
social cost pricing are sufficient to cover all infrastructure costs. Rothengatter
(2003) remarks that marginal social cost pricing is typically orientated to optimize
the use of an existing facility of which the fixed costs are bygones. Infrastructure
7
38
See Lakshmanan et al. (2001).
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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providers may not be able to recover the investments in new infrastructure and
thus have no incentive for such investments.
More generally speaking, the theoretical ‘first best’ solution in the form of
regulatory Pigouvian charges based on marginal external cost levels may not be
appropriate or feasible altogether in practice. Pigouvian charge levels may not be
appropriate, because they are only optimal under certain theoretical assumptions
that are not satisfied in practice. For example, it is based on the assumption that
marginal social cost pricing is applied throughout the whole network considered,
the whole transport sector and even throughout the economy. In addition, it is
based on the assumption that governments use lump sum taxes to pursue any
redistribution targets they may wish to meet. See also MC-ICAM (2001) and
Lindsey and Verhoef (2001).
Furthermore, marginal social cost pricing may not be practical because a tax or
charge varying by all cost drivers, including time, place and all relevant vehicle
characteristics may be impossible, or at least, very expensive to implement. The
derivation of the optimality of marginal social cost pricing abstracted from
implementation and transaction costs.
Thus, when first-best conditions are not achievable or not known, or when a
multitude of motifs and aims are at stake, and prices are set optimally conditional
to constraints of imperfections, deviations from marginal social cost pricing may
be needed.
Summarizing, there may be three reasons for deviating from marginal social cost
pricing:
1 Limited scope of a pricing scheme - First-best pricing is not applied
throughout the whole network considered, the whole transport sector and / or
throughout the economy.
2 High system requirements & costs - Pure marginal social cost pricing requires
a technological system which may be too complex or expensive to implement.
3 Insufficient revenues - Revenues from pure marginal social cost pricing may
be insufficient to cover total infrastructure costs.
Below we sketch the main impacts of these deviations on the design and price
setting.
Limited scope of a pricing scheme
Internalisation measures have a limited scope, unless they cover the whole
economy. Regulation, like the National Emission Ceilings (NEC), or emission
trading systems, like the ETS, are measures which approach a coverage of the
whole economy, at least within the EU. Pricing measures generally cover a much
smaller part, such as a single mode of transport or even only a part of a network.
This may give rise to boundary-effects, in particular a shift from the priced modes
or parts of the network to the other parts or modes. From a welfare point of view
this could lead to much less positive welfare effects.
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The shift away from priced modes or parts of infrastructure will only be significant
in cases where there is true competition. An example is the German kilometer
charge for heavy duty vehicles on motorways only. After the introduction there
was an increased use by heavy duty vehicles of regional roads. However, after a
few months after the introduction this temporarily shift did not hold. Apparently, in
this case the underlying network is not a valid alternative for the motorways.
To avoid undesired side-effects because of the limited scope of a system in order
to limit the negative impacts in the welfare gains, the scope needs to be chosen
in such a way that there is only limited competition between the priced and the
non-priced parts. For this reason this project focuses on scenarios with
internalisation measures in all transport modes.
High system requirements & costs
Pure marginal social cost pricing requires a system that can differentiate price
levels according to all cost drivers for the various external costs, e.g. the actual
congestion level, the actual vehicle emissions factors for pollutants and noise, the
actual fuel consumption and maybe even the actual blood alcohol level of the
driver. Such a system would be too complicated from a technological point of
view and the price incentives would be far too complicated for users to respond
to.
Therefore, any feasible pricing system will use a limited number of easy
measurable parameters as a proxy for the actual cost drivers. Examples of such
proxies are the Euro standard as a proxy for the actual emission factor or the
distinction between peak and off-peak hours as a proxy for the actual congestion
level. As long as the proxies are well-chosen and close-enough related to the
cost drivers, these types of deviations from a pure marginal social cost pricing will
not give rise to large negative impacts on the potential welfare gains. The same
holds for implementation and transaction costs. As long as these costs are
relatively small compared to the price incentives, their impacts on welfare will be
limited.
We conclude that welfare gains require internalisation measures that are:
− Built on good proxies for cost drivers.
− Not too complex so as to limit implementation and transaction cost.
Insufficient revenues
If the principle of pure marginal social cost pricing is applied to both infrastructure
costs and external costs, the revenues of such a scheme may not be sufficient to
cover the total infrastructure costs. Whether or not marginal cost based pricing
suffices, may be mode dependent. In that case, one might want to use the
revenues of external cost pricing of one mode to cover the fixed infrastructure
costs of other modes. This could be done by introducing inter-modal funds. The
issue of use of revenues and how to take account of existing taxes and charges
will be discussed later in section 3.3.6.
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3.3.4
Differentiation of existing taxes or charges
If the aim of internalisation is influencing behaviour in order to reduce external
costs, there is an alternative for the introduction of mark-ups or new taxes or
charges based on external cost levels. This alternative is differentiation of
existing taxes or charges, giving incentives on a revenue neutral basis.
In the air transport sector such differentiation have been introduced at several
airports. Existing infrastructure charges are differentiated with respect to the
noise emissions of aircraft. The idea is that aircraft operators are thus
incentivised to operate less noisy aircraft. This can either reduce the noise
exposure of the population or free up capacity for other aircraft. Because the
overall charge levels are not increased, the demand for transport may not go
down.
Such a revenue-neutral differentiation cannot generally be seen as internalizing
external costs. Although, given the correct level of differentiation, the externalities
will be taken into account, other costs will no longer be fully taken into account.
Consider the example of tolls that account for the variable costs of road
infrastructure. If these tolls are differentiated by increasing them at peak times
and reducing them during off peak hours, during off peak hours users no longer
pay the variable infrastructure costs. Other previously internal costs may become
external under revenue-neutral differentiations 8.
In the specific situation where the existing tax or charge was introduced to cover
fixed costs, differentiation may be an improvement from the perspective of
economic efficiency. The total costs will still be financed, and users of
infrastructure receive incentives to adapt their behavior to account for e.g.
congestion or emissions of pollutants.
A practical advantage of differentiating existing taxes or charges which were
introduced to cover fixed infrastructure costs is that there will be no need to
discuss the use of revenues (see section 3.3.6). There are however some
practical aspects that need to be taken account of. First of all, because
differentiation incentives changes in behavior, periodic adjustment may be
required to ensure the financing requirements. This is similar to any charge and
should not be a problem.
Second, there is the question to what extent public bodies can make private
concessionaries differentiate their tariffs. Some current concessions allow for
differentiations but do not require them. In particular when different
concessionaries compete with each other, such as some port and airports may
do, there may be resistance to differentiating existing taxes or charges.
8
Nonetheless, allowing for such differentiations is likely to increase welfare (abstracting from implementation
/ transaction costs), because it relaxes one restriction on the charge levels.
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3.3.5
Policy packaging
It may be more effective to combine different policies in a policy package than to
introduce pricing instruments in isolation. As formulated in MC-ICAM (deliverable
2, p48-49): ‘It was found in the AFFORD project that packages designed to
match policy instruments to externalities sometimes performed much better than
analysis of the effects of the isolated instruments suggested, and even approach
first-best efficiency gains 9. (…) Optimal policy packages are likely to combine or
supplement marginal cost based usage charges such as vehicle taxes,
standards, or other regulations. For example, if a CO2 fuel charge provides
insufficient incentive to develop and buy fuel-efficient vehicles, then a
differentiated vehicle tax related to CO2 emissions might be adopted too 10. While
countries currently rely heavily on fuel taxes, several factors limit how much they
should, and indeed can, be used either to raise revenue or as Pigouvian tax
instruments. For this reason, fuel taxes need to be used in combination with other
instruments, including (of course) road pricing as well as differentiated vehicle
taxes.’
In the final report it was formulated as follows (MC-ICAM, final report, p20).
‘Second best policies 11 almost by definition require policy packaging. The failure
to achieve the ideal result with one policy instrument forces us to look at ways of
improving the situation by the use of other policy instruments’. This includes the
use of other pricing and non-pricing measures.
The choice between transport instruments, or packages of instruments, depends
not only on their relative efficiency but also on their equity impacts, since in
general the overall objective of society concerns not only a maximization of total
efficiency, but also to achieve an equitable distribution of welfare. Moreover, any
major transport policy reform will be acceptable only if it is welfare increasing or
welfare neutral for a sufficiently large majority of the voters. A necessary
condition for voters to accept the reform is that their utility is not reduced
SPECTRUM (2003).
Verhoef (2002, p13) also notes that ‘the possible weaknesses that can arise from
second-best taxes when applied in isolation can often be reduced when
constructing a policy package of second-best measures, that is designed to cover
the most important externalities and dimensions of behaviour relevant for the
particular case considered. What is of importance here, of course, would be that
the various charge levels employed for the individual instruments in the package
be carefully chosen, simultaneously, so as to maximize the package’s eventual
efficiency.’
9
10
11
42
These are the gains of marginal social cost pricing assuming that all conditions are met.
Indeed there is evidence that fuel charges do not provide sufficient incentives. In general, when purchasing
a car, consumers only take account of the first three years of potential fuel savings of a fuel efficient vehicle
(NRC, 2002; Annema, J.A. et al., 2001). Hence, there is reason not to internalise only by marginal cost
pricing, but to design more complete policy packages.
Second best means here optimal pricing from a welfare point of view, under real world conditions.
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Some non-pricing measures have proven to be very effective in the past.
However, also when applying these non-pricing measures it makes sense to
internalise the remaining external costs.
3.3.6
Use of revenues and earmarking
The introduction of mark-ups or new taxes or charges to internalise external
costs, leads to revenues. The use of the revenues is an integral part of the
internalisation policy. Mayeres and Proost (2001) have shown for example, that it
is possible to increase society’s welfare by using the revenues of a congestion
charge for financing new road infrastructure or reducing income taxes, but that by
applying the revenues for public transport subsidies, welfare may go down 12.
If the aim of internalisation would mainly relate to infrastructure costs and the
‘user pays principle’, the revenue from congestion charges could be used to
finance new infrastructure. In CE Delft (2002) a road pricing system is developed
in which investments in new road infrastructure aimed at relieving congestion are
governed by the willingness to pay of users. The investment rule developed
prescribes that the time to expand road capacity at a particular location is when
the revenues from an optimised congestion charge levied on the new, additional
capacity are precisely sufficient to fund the capital costs of that capacity.
More generally, the REVENUE project has extensively researched the issue of
how to use the revenues from transport pricing. REVENUE (p 38) concludes that
‘the arguments in favor or against earmarking are more or less balanced’. This
conclusion was reached after studying the relation of earmarking with efficiency,
equity and acceptability objectives (Revenue, Deliverable 6, 2006, p37-38).
Below the considerations are repeated.
Efficiency
As there is no guarantee that transport projects will be the most efficient
proposals, standard theory informs us that hypothecation of funds to transport
budgets may result in a loss of efficiency, in that it may require that a set of
projects be undertaken which does not maximize social welfare. However, this
simple theory takes no account of institutional arrangements and social
acceptance. Governments at the lower levels may take no account of the effects
of their decisions on the rest of the system outside their area. For instance,
governments may select projects that favor local rather than transit traffic. To the
extent that detailed investment decisions are sensibly left to national or regional
government earmarking funds to be invested in the Trans European Network
may offset this inefficiency.
Equity
Equity considerations giving individuals with lower incomes higher weights when
balancing utilities will lead to deviations from marginal social cost pricing which
12
The impact of the use of revenues on economic welfare is case specific, so this example may not be
generalised. The availability of public transport generally offers mobility alternatives and helps giving a
greater elasticity to the demand curve, thus making pricing policies more effective.
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reduce efficiency but improve equity. There is no reason to suppose in general
that earmarking will improve equity in this sense, although there may be specific
cases where it would. Equity arguments for earmarking more often take the form
of saying that those who pay should get corresponding benefits for their money.
This would only be fair in general if the existing distribution of income were fair.
Even so, it would not be the most efficient way of using the revenue, which would
be to undertake the most beneficial set of projects across all sectors subject to
the requirement that the existing distribution of income was not changed.
Acceptability
The prospect of a pricing reform being implemented will be enhanced if it enjoys
public acceptability. It may be thought that this is most likely if a majority of the
population benefits from it. If surplus revenue is used to minimize the number of
individuals that will experience a reduction in utility from the transport pricing
reform, the acceptability of that reform will increase. Earmarking of surplus
revenues to the transport budget is one method for ameliorating the harmful
impacts of pricing reform that raises prices for certain users.
As remarked above, in the end arguments for or against earmarking were judged
to be more or less balanced. In section 0 we discuss the use of earmarking we
choose in the internalization scenarios in this project.
3.4
Legal background
In this section, a brief overview is provided of the legal background for
internalisation in the various modes. It focuses on prevailing EU directives, but
attention is also given to current proposals from the European Commission, and
to other current international arrangements that may either enable or restrict
internalisation of external effects. Specific national laws are not addressed.
The purpose of this overview is to provide a general background on the legal
possibilities for internalisation. This current state of affairs serves as a point of
departure for the internalisation scenarios to be developed in this project.
However, it is not the intention that all internalisation scenarios put forward
adhere to current legislation. Some adaptations may be proposed.
Directive 2003/96/EC requires minimum tax levels for energy products, including
motor fuels. However, there are a few important exemptions. Regarding aviation,
jet fuel is to be exempted from the minimum tax levels as set in the Directive.
Energy products for private pleasure-flying may be taxed. Similarly, fuel for
navigation in Community waters is to be exempted. Member States may limit
these exemptions to international and intra-Community transport. In addition, in
case of bilateral agreements, exemptions may also be waved. In such cases, a
level of taxation below the minimum level set out in the Directive may be applied.
Energy products and electricity used for the carriage of goods and passengers by
rail, metro, tram and trolley bus may also be exempted. Also, energy products
used as fuel for inland navigation may be exempted.
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The rail directive 2001/14/EC allows for rail infrastructure charges to be
differentiated with respect to environmental characteristics. Mark ups that lead to
additional revenues are however not allowed in the absence of comparable
charges for competing modes. If this is the case, it is up to Member States to
decide on how to use the revenues.
Directive 2006/38/EC allows for tolls and user charges for road vehicles over 3.5
tonnes to recover infrastructure costs. These costs may include expenditures
related to the infrastructure designed to reduce noise nuisance, accidents or to
relate to particular environmental elements. Mark ups up to 25% (15%) above
infrastructure costs are allowed for regions with acute congestion or
environmental problems, under the condition that these are invested in crossborder (domestic) priority TEN projects. Member States are free to determine the
use to be made of the revenue of the general charge, though are recommended
to be used benefiting the transport sector. Differentiations of charge levels are
allowed (in fact required as of 2010 on the basis of Euro class) but the variation
in charge levels is restricted. The Directive explicitly does not restrict Member
States to introduce regulatory charges to combat time and place related traffic
congestion or to combat environmental impacts, including poor air quality.
In addition, there are Directives that provide standards for emissions of pollutants
are applicable to road vehicles, vessels, aircraft and locomotives.
Next to these Directives, there are several proposals for Directives that are of
relevance. First of all, there is a proposal relating to passenger car related taxes
(COM(2005) 261). According to the proposal, by 2008 at least 25% of the total
revenue from annual circulation taxes and registration taxes shall come from a
carbon-dioxide based element in the tax structure. This share should be 50% for
2012. By 2016, it is proposed, all registration taxes should be abolished.
Second, there is a proposal for the inclusion of aviation in the EU emissions
trading scheme. Starting from 2011 airlines would have to purchase allowances
for all emissions of aircraft above the historic emission levels of 2004-2006.
The Commission is about to propose special tax arrangements for commercial
gas oil, aiming at narrowing excessive differences in tax levels between Member
States, in order to reduce distortions of competition and environmental damage in
the transport haulage by reducing ‘fuel tourism’.
In addition, the taxation of fuel used for aviation in generally prohibited through
bilateral air service agreements.
3.5
From theory to practice - cross cutting issues in designing scenarios
The previous sections have provided an overview of the theoretical and legal
background of internalisation scenarios. Before proposing particular scenarios,
we discuss several cross-cutting issues:
− Most important cost categories per mode (section 3.5.1).
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−
−
−
−
−
Options for incentive base and non-pricing measures (section 3.5.2).
How to deal with existing taxes and charges (section 3.5.3).
Use of revenues (section 3.5.4).
Approaches for different external costs (section 3.5.5 to 3.5.9).
some mode-particular issues (section 3.5.10).
The considerations provided in these discussions, enable us to be more brief in
the discussion about the proposal for the scenarios to be studied.
3.5.1
Most important cost categories per mode
Based on 2.4.2, the table below gives a rough indication of the most important
cost categories per mode of transport. This may serve as the basis for selecting
the external effects that are most important to address in the different scenarios.
Table 12
A rough indication of the most important categories per mode of transport
Congestion
Scarcity
Accidents
Climate
Air pollution
Noise
Additional ext. costs
(nature & landscape)
RoadHDV
X
Roadcars
X
X
X
X
X
X
X
X
X
X
X
RoadLDV
X
X
X
X
X
X
Rail
Shipping
Aviation
X
?
X
X
X
X
?
X
X
X
X
X
?
?
Note that especially the costs of congestion, air pollution and noise and their size
differ to a large extent to the specific location and time of the day and/or vehicle
characteristics. For local / urban transport, those cost categories are much more
important.
3.5.2
Options for incentive base
Pricing measures that aim at influencing behaviour give incentives to users
change behaviour leading to reduction of external costs. To be effective and
efficient, these incentives need to be based on good proxies for the true cost
drivers (see section 3.3.3). Table 13 gives an overview of options for the
incentive bases for the various cost categories. In addition, in the third column an
indication is given of the correlation between the proxy provided by the incentive
base with the marginal cost level. The fourth column lists the most relevant nonpricing options.
As indicated in the table, fuel use and kilometres driven alone have a low
correlation to most external costs. The main reason behind this is that the
external costs induced by a kilometre driven or a litre of fuel used depend very
much on other parameters that have a large impact on the marginal external cost
level, in particular the vehicle characteristics (e.g. Euro-standard), location and
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time of the day. As an example, the difference in external air pollution cost of a
Euro-5 car on rural road and Euro-0 diesel car in a dense urban area is
enormous; the same is true for the difference between the noise cost of a noisy
train or aircraft at night in an urban area and a relatively silent one in an area with
a low population density.
For any specific pricing instrument, the incentive base needs to be kept as simple
as possible to avoid unnecessary complexity of the pricing scheme. Systems that
are too complex may stay closer to marginal social cost pricing, but generally
also face the problem of high implementation and transaction costs.
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Table 13
Options for incentive base and their correlation with marginal cost levels
Cost component
Options for the incentive base of pricing
measures
Accident costs
a
b
c
d
e
Noise costs
Air pollution
f
a
b
c
d
e
f
g
a
b
c
d
Climate change
e
f
a
b
c
d
e
Additional
environmental
cost (water, soil)
Additional costs
in urban areas
Congestion
costs (separate
cost category)
a
b
c
d
a
b
c
a
b
c
d
Scarcity
13
48
a
b
c
d
Fuel use
Kilometers driven (road/rail)
13
Number of LTO’s (aviation) or
port visits (shipping)
a/b + time of the day
d + location (accident risk) +
vehicle type
e + driver/carrier characteristics
Fuel use
Kilometers driven
Number of LTO’s (aviation)
b/c+ time of the day (day or night)
b/c + location (number of people
exposed, population density,
urban/non-urban)
b/c + vehicle noise emission class
combination of c,d and e
Fuel use
Kilometers driven/sailed
Number of LTO’s (aviation) or port
visits (shipping)
b/c + location (number of people
exposed, population density,
urban/non-urban)
b/c+ Euro-standard & fuel type
combination of d and e
Fuel use + CO2 content of the fuel
Kilometers driven (road)
Kilometers flown/sailed
Vehicle: average vehicle fuel
efficiency (class)
c+d
Kilometers driven
Number of LTO’s (aviation) or port
visits (shipping)
Quality Management Certification
Location
Kilometers driven
Time of the day
Location
Fuel use
Kilometers driven
b + Time of the day and location
(peak/off-peak, based on average
congestion level in peak hours)
Times or days of entering a certain
congestion zone
Kilometers driven
Number of port visits (shipping)
Number of paths/slots (rail/aviation)
b/c + Location + Time of the day
Correlation with
marginal cost level
(current situation)
Low
Low
Low
Low
Medium
High
Low
Low
Low
Medium
Medium
Most relevant other
instruments
−
−
−
−
−
−
−
−
Low/Medium
High
Low
Low
Low/Medium
−
Medium
−
Medium
High
High
Medium
Medium
Low
Medium
Low
Low
Low
Low
?
Low
Low
High
−
−
−
−
−
Liability regulation
Insurances
Regulation for vehicles,
drivers, etc.
Speed limits
Noise emission
standards for vehicles
Non building zones
Regulation of operations
(aviation)
Limits to noise levels or
annoyed people
Speed limits
Emission standards
Environmental zoning
Limited access for
certain vehicles
Speed limits
−
Emission trading
CO2 emission standards
for (new) vehicles
Fuel regulation (e.g.
biofuels)
Speed limits
−
Regulation
−
Various types of urban
transport policy (esp.
infrastructure policy for
non-motorized transport)
New or extension of
existing infrastructure
−
−
Medium
Low
Medium
Medium
High
−
Auctioning of slots/paths
LTO = Landing and Take-Off.
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For most cost categories a good proxy for the cost driver is a combination of
distance with one or more other parameters (some vehicle characteristics,
location or time of the day). The main vehicle characteristics that can be used are
the Euro standard and for some modes (i.e. rail and aviation) the noise emission
class. To differentiate to location, a feasible way is to use a few categories, e.g.
for road, the type of infrastructure (urban, rural motorways), in combination with
the distinction between ‘normal’ and ‘sensitive’ areas.
Differentiation to time of the day can be done by defining time windows, e.g.
day/night, peak/off-peak. For congestion more than two rates (like high peak,
peak, busy hours, off-peak) or even rates that change continuously with the time
of the day, stay closer to the actual cost driver and therefore are preferable from
a theoretical point of view. However, for practical reasons, all congestion
schemes introduced so far in Europe use only very few rates. For congestion, an
alternative for a combination of distance and time of the day as a proxy, is the
number of days or times a congestion zone is entered (like used in the London
Congestion Charge).
For aviation and waterborne modes, for some cost categories the number of
visits to a port or airport may be more relevant than the distance because of the
relative large share of costs that are related to these parts of the trips.
For the costs of climate change, the actual fuel use (in combination with the
carbon content of fuel) is the optimal incentive base, because it is an excellent
proxy for the greenhouse gas emissions. Pricing fuel with a CO2 based fuel tax
gives incentives to reduce greenhouse gas emissions in all possible ways.
Distance related charges are also a good proxy, but they do not give incentives
for buying fuel efficient vehicles or applying a fuel efficient driving style and make
it harder to distinguish between the various types of fuel in particular biofuels.
For other cost than climate, fuel consumption is poorly correlated with the actual
marginal cost.
3.5.3
How to deal with existing taxes and charges?
In the current situation, transport users pay various taxes and charges. This
raises the question to what extent external costs may be regarded as being
internalised by the already existing taxes and charges.
In this section we discuss how internalisation policies should take account of
existing taxes and charges. We first briefly discuss what type of charges and
taxes are currently levied on the transport sector. Next, how account should be
taken of these charges is discussed from a theoretical point of view. Finally, the
implications for this study are addressed.
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Existing taxes and charges in the transport sector
The main types of existing taxes and charges are listed in Table 14.
Table 14
Overview of existing taxes and charges and main option for entirely new ones
Mode
Road-HDV
Road-cars
Rail
Water
Aviation
Existing taxes and charges
Infrastructure charges:
− User charges (fixed)
− Tolls on motorways
− Tolls on all roads
Fuel excise duty
Circulation tax
Congestion charge
VAT
Fuel excise duty
Circulation tax
Vehicle purchase tax
Toll
Parking fees
Congestion charge
VAT
Infrastructure charges
Diesel excise duty
Electricity tax
VAT
Harbour dues
Dues for locks and bridges
Fuel excise duties (in a few specific cases)
LTO charge
En-route charge
Noise surcharges
Emission charges
Fuel excise duties (in a few specific cases)
For the purpose of this study we categorize the existing taxes and charges that
are imposed on the transport sector in five classes. Taxes and charges may:
1 Be levied to regulate / limit environmental effects.
2 Be levied to finance mitigation measures.
3 Be levied to cover marginal production costs.
4 Be levied for the general budget or to finance infrastructure measures and be
differentiated on a revenue neutral basis to provide incentives for cleaner,
safer or more efficient transport.
5 Be levied for the general budget or to finance infrastructure measures
without any relation to the environmental performance of transport.
Congestion charges are a clear example of the first type of charges. An example
of the second type are noise surcharges levied at airports to finance insulation of
houses. Tolls on concession roads generally cover the costs of providing
infrastructure, and are an example of the third kind. Differentiated excise duties
with respect to low sulphur fuels provide an example of the fourth type. VAT on
fuels can be taken as an example of the fifth type.
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Obviously, internalisation should, in some form, take account of existing taxes
and charges levied to regulate external effects (first type mentioned above). It
appears plausible that also existing charges and taxes of the second and fourth
type should be accounted for. What to do with taxes that are fully unrelated to the
environmental performance of transport, is not directly clear.
When can an existing tax or charge be regarded as internalising external
cost?
Whether account should be taken of existing charges and taxes when
internalising external effects depends on the aims and motives for internalisation.
Aim: A more efficient economy
If the aim of internalisation is a more efficient economy, internalisation in
transport translates to ensuring that the marginal costs of a trip are charged. This
will lead to the optimal level of transport, where only trips for which the marginal
benefits exceed the marginal costs are taken.
The marginal costs of a trip relate both to the marginal external effects, but also
to the marginal producer costs. In this context the most relevant marginal
producer cost are the marginal infrastructure cost. To the extent that existing
marginal taxes and charges, such as excise duties, exceed the marginal
producer costs, they should be taken into account when setting the marginal
charge level for internalisation.
This approach is theoretically first best, but may be hard to implement because it
requires full knowledge of the marginal infrastructure cost. Moreover, the cost
drivers for marginal infrastructure cost differ from those for the various types of
external cost.
It should be noted that setting taxes and charges at marginal social cost level is
not about average charge or tax levels, but about the marginal tax and charge
level in each specific traffic situation. Consequently, charge structures, are of
particular interest in order to give the right incentives to change behaviour.
Current taxes and charges that are levied for other purposes than internalisation
of external effects are generally not aligned with the main cost drivers behind the
external costs, and will not provide incentives for cleaner or safer transport. Fuel
excise duties for example do not correlate well with marginal external costs
(except for climate, see section 3.5.2). Therefore they cannot be regarded as
internalising these cost. As we can see from the overview of section 3.5.2 also
most other existing taxes and charges are not well aligned with the cost drivers of
the various types of external cost.
Existing marginal taxes and charges, fuel excise duties in particular, are not well
correlated with the marginal infrastructure cost either. Therefore to come to
marginal social cost pricing, taxes and charges need to be reformed in order to
reflect better the cost drivers of both marginal infrastructure and marginal
external cost. However, designing infrastructure taxes and charges that are
better aligned with the marginal infrastructure cost is clearly beyond the scope of
this study.
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Therefore, in this study we will assume that marginal infrastructure cost are
related to fuel excise duties. To the extent that fuel excise duties exceed the
marginal infrastructure costs, they could be lowered if additional taxes and
charges are introduced for internalising external cost. In cases where also tolls
are present, fuel excise duties could be reduced further when internalisation
measures are taken.
Aim: Fairness
If fairness is the motive, polluters should pay for the costs they impose on the
economy.
If the aim of internalisation is fairness or the making the polluter pays,
internalisation does not necessarily relate to introducing marginal charges at the
marginal cost level. Instead, one may argue that the total external costs should
be paid for by the polluters.
How to deal with existing taxes and charges in this study?
For this study and in the context of Directive 2006/38, we assume as primary
motive for internalisation the aim of a more efficient economy (see section 3.2).
Marginal cost pricing has been at the heart of the European policy debate since
many years. Therefore, marginal taxes and charges that are not related to the
marginal infrastructure costs 14 will be taken account of to the extent possible in
setting optimal charge levels to internalise external effects.
The foremost example of a variable existing tax or charge that should be
accounted for is fuel excise duty. Fuel excise duty is an important fiscal
instrument with high revenues which are usually not earmarked. In many
countries fuel excise duties are to some extent implicitly related to producer
costs, i.e. to cover (part of the) infrastructure costs.
In this study we deal with fuel excise duties in the following way. If the revenues
of fuel excise duties of a mode exceed the variable infrastructure costs of that
mode we will assume that the external climate costs are (partly) internalised by
the fuel excise duties. To make this more transparent, we label this part of fuel
excise duties in the scenarios as CO2 taxes. The revenues from both the
remaining fuel excise duties and the CO2 taxes are fiscal revenues for the state
budget.
The minimum levels for fuel excise duties according to Directive 2003/96/EC are
30.2 cents per liter of diesel and 35.9 per liter of petrol. For comparison, a CO2
shadow price of 70 Euro/tonne corresponds to 16 and 18 cents per liter,
respectively. Table 15 gives an overview of various external cost estimates for
CO2 expressed and how this relates to a rate per liter fuel.
14
52
The marginal infrastructure costs are the additional infrastructure cost induced by an extra vehicle
kilometre. Hence they relate to variable operation and maintenance costs.
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Table 15
Various shadow prices of CO2 expressed in Euro per liter fuel
CO2 shadow price
Euro/tonne
10
20
50
70
150
280
Petrol
Euro-ct/l
Diesel
Euro-ct/l
2.28
4.56
11.40
15.96
34.20
63.84
2.63
5.26
13.15
18.40
39.44
73.62
Another example relates to infrastructure charges for rail. In general, these are
based on marginal cost pricing and we may assume that charges are in line with
marginal infrastructure costs. However, in some countries mark ups are applied
to raise sufficient revenue for financing the infrastructure. These mark ups will be
accounted for in setting marginal charge levels to internalize external effects of
rail transport.
How to deal with fixed taxes and charges is less straightforward. Welfare
economics and theory on marginal cost pricing does not provide guidance.
However, we may return to secondary motives for internalisation such as
fairness. One may argue that based on this motive, account should be taken of
fixed environmental taxes and charges. For this project we propose the following.
Fixed taxes and charges of the third and fifth type, such as undifferentiated
vignets or circulation taxes, will not be taken into account when designing
internalisation scenarios. This means that these charges that are unrelated to
external effects will not changed when internalising new taxes or charges to
internalise external costs. Fixed taxes and charges of the other three types will
be considered on a case by case basis.
Note that setting a general rule for this subject in practice will be difficult. The EU
decision making process requires unanimity between Member States with regard
to fiscal reforms while it requires the qualified majority when it comes to transport
charges. A complicating factor for the modeling exercise is that current charging
and taxing structures vary widely between Member States.
3.5.4
Revenue use
Some of the internalisation measures proposed in the scenarios will lead to
revenues. These revenues can be used in many ways, as was discussed in
section 3.3.6. In this section we explain the choices we make in this project.
In order to model the impacts of the various scenarios, we need to make
assumptions on how the revenues are spent. Whether this is done by earmarking
or not, is more a political issue, related to aacceptability, than that it is relevant for
modelling the scenarios. The assumptions made are described within the various
scenarios. Some more general considerations are discussed below.
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First of all, as was described in the previous section, the revenues from CO2
taxes are used to lower existing fuel excise duties to the extent they exceed
marginal infrastructure cost.
For other cost categories the revenues will be spent differently. Revenues from
congestion charges are assumed to be applied for investment within the modes
or for intermodal funds. Taxes and charges related to other external effects are
used for investments to reduce the external effects (e.g. noise screens and
insulation, research into new technologies) and rewarding the best in class 15.
Other options for using revenues are redistribution per capita or allocation to the
general budget. Redistribution of revenues per capita, e.g. via a lowering of
labour taxes, comes out as most efficient according to many studies and
modeling work. Allocation to the general budget, in contrast, is sometimes worst
in respect of welfare gains.
3.5.5
What to do with air pollution?
The Euro-standards for road vehicles have proven very effective in reducing the
emission of air pollutants. In other modes, such standards have been introduced
more recently. We propose to further tighten the Euro-standards, for road
vehicles and locomotives, and also Euro or other international standards for
vessels and aircraft.
In addition to the standards, financial incentives are now used in some countries
to:
− Speed up the introduction of new/cleaner vehicles in the fleet.
− Use of most recent technology in critical areas (urban areas, sensitive areas
such as alpine transit).
In theory, the differentiation of circulation taxes, road user charges and tolls could
be used for this purpose. Registration taxes are not suitable, since (almost) all
newly sold cars adhere to the latest Euro-standards.
At the moment, in the road sector, there are good arguments for such financial
incentives. However, by 2020, the differences in emissions and external costs
between cars from different Euro-standards are likely to be small. Differences in
costs may be more attributable to the location where is driven (e.g. driving in a
densely populated area versus a rural environment) than the vehicle that is
driven (e.g. between a Euro-5 and a Euro-7 car).
For this reason, the need for incentives in fixed charges (such as user charges
and circulation taxes) for cleaner cars may be small. However, if a system is in
place that levies charges dependent on location (either for congestion or
infrastructure or a combination), incentives to limit the use of cars in certain areas
15
54
There is some recent scientific literature on greening taxes and use of revenues that addresses this issue.
Some model results indicate that from an economic efficiency perspective, rewarding the best companies
may be superior to lowering labor taxes.
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may be provided. The charges may then also be differentiated according to Eurostandards.
In other modes than road, the (Euro-)standards currently in place are not so
severe yet. It appears significant technical improvements are still feasible. Based
on the progress made for road vehicles, we propose to continue the approach of
standards for these sectors. In addition, there may be reason to differentiate
existing taxes and charges with respect to the emission of pollutants (e.g.
differentiated harbour dues, differentiated LTO charges), or even to introduce
regulatory charges, potentially differentiated to location. Potential revenues could
be earmarked for research into cleaner technologies, or to subsidise retrofit
applications. This may be especially relevant for the non-road modes, because
the lifetime of locomotives, vessels and aircraft is generally much longer than for
road vehicles.
There is no real argument for direct earmarking. Bonus-Malus is sufficient. Only
in a wider sense (e.g. to promote public transport or rail alternative in sensitive
regions (the Swiss and the London idea). This may be especially relevant for the
non-road modes, because the lifetime of locomotives, vessels and aircraft is
generally much longer than for road vehicles.
3.5.6
What to do about congestion?
Congestion problems on the road can basically be split into two categories:
1 Congestion in urban areas.
2 Congestion at major corridors.
These two categories may require different solutions. Congestion around urban
areas may best be addressed by city toll (aera licencing/cordon charge, e.g.
London or Stockholm). The examples so far show that urban congestion can be
decreased significantly, if alternatives (e.g. public transport) are available. Tolls
may be differentiated according to time of day (e.g. peak and off peak).
The experience so far show however that there is no real acceptance of road
users, due to the following reasons. Firstly the alternatives (e.g. public transport)
in peak hours are usually worse than during the day. Road users tend to pay for
a bad quality instead of a good alternative (double payment of congestion costs).
Secondly the system is getting more complication with regard to transparency
and enforcement. To improve accessibility and provide alternatives, revenues
may be earmarked for investments in the transport sector, including the financing
of public transport alternatives.
The second type of congestion is related to congestion at major corridors
outside of city centres. This can be bottleneck congestion related to the passing
of a certain point or construction work (i.e. a bridge or tunnel). Alternatively,
congestion on a link between large cities may arise. If such bottlenecks or
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55
arteries become congested, there is by definition a capacity problem that cannot
be solved by alternative links 16.
Real life examples show that there are two possibilities. The one is optimal
capacity management by differentiating a congestion toll according to time of
day, in order to guarantee optimal traffic flows with low congestion risk. This
value pricing can be used for specific lanes combined with incentives to increase
load factors. The examples in the US show that high occupancy lanes function if
there are transparent pricing systems, enough lanes and a willingness to pay of
the users. The second possibility is increasing capacity. The congestion toll is a
pre- or postfinancing instrument of the capacity increase. This increase can be a
new lane (also priced with value pricing) or a new bypass.
We therefore propose to levy tolls at such links, with a recommendation to
earmark revenues for road infrastructure investment. Especially in mountainous
areas, it may be relevance to invest in alternatives that have minimal impact on
the environment. In general, the investments of the funds should be based on
cost benefit analysis, including options within the road sector as well as
investment in other modes.
In addition to the instruments discussed so far, a transit bourse has been
proposed to solve congestion problems in alpine regions. Such a system is a cap
and trade system for limiting the number alpine transits. The impact of such a
system can be similar to a bottleneck congestion toll mentioned above. The
implementation cost of a transit bourse will probably be much higher than of a
congestion toll. For these reasons we do not elaborate a transit bourse system in
the scenarios.
3.5.7
How to address the costs of noise?
Especially in the road, rail and aviation sector, noise costs may be substantial.
The costs of noise relate both to the vehicle used and the location / time of day
where it is used.
For the road sector, the marginal costs of noise may be very limited in situations
where the total costs are high, i.e. in urban areas. The reason is that there is
already a lot of noise in urban areas. For this reason, including the marginal costs
of noise in marginal pricing schemes may not be very effective in reducing the
exposure to noise in areas where total noise problems are largest.
Alternatively, noise may be better addressed by regulation and standards.
Different to air pollution there is a direct link to the use of revenues, since
infrastructure or home based noise measures (noise walls, windows) are
appropriate and effective. This link should be considered for all modes. For road
transport, a noise charge and sensitive corridors is useful. A differentiation
according to noise levels however is not feasible since the differences are small
and driving styles play an important role.
16
56
An exception might be Alpine corridors, where railways alternatives might be viable.
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For railways, a differentiation of track pricing (considering esp. brake systems)
are useful. Several countries are using such a noise bonus for silent brake
systems.
In the aviation sector, landing charges differentiated to noise emissions and / or
time of day are widely applied. In some situations, surcharges are levied to
finance insulation or property acquisition.
3.5.8
What to do about external accident costs?
Accident costs are odd external effects of transport. In principle, accident costs
are covered by insurances. However, a large part of the costs associated with
accidents are non financial, and are often not covered by insurances, see also
Chapter 2. Depending on the liability laws, even parts of values of human life’s
are paid by compensation for bereaved. This is especially the case within the US
law.
Vehicle kilometres are not the best cost driver to base internalisation on. For the
government to develop a pricing scheme that adheres closely to the true cost
drivers is not straightforward. An alternative would be to charge the insurance
company involved a lump sum at the level of the estimated external costs for
each accident. In all countries, insurance is obligatory. Insurance companies
have detailed information on cost drivers and differences in the risk rates
between drivers.
Insurance companies are expected to pass on the costs to their clients through
higher insurance rates. The insurance companies are better able to differentiate
these costs according to the accident risk involved with different drivers, driving
times, routes etc. Drivers thus receive further incentives to reduce their risks.
Insurance companies may then judge whether it is worthwhile to switch to payas-you-drive schemes 17, providing optimal incentives at the margin, or that the
costs of introducing such schemes do not weigh up against averaging.
A disadvantage of this proposal is that insurance companies are faced with
increased uncertainties. On top of their current expenditures on the internal
accident cost there will be additional payments to the governments for each
accident to cover the external costs. It is however the core business of insurance
companies to deal with such uncertainties.
Clearly, such a scheme involves revenues for the government. The earlier
discussed options for revenue use once more apply. More specifically, part of the
revenues could be invested to augment a fund for compensation and safety of
infrastructure use. Parts could be redistributed to the insurance holders per
capita.
17
Which may be connected to potentially existing kilometer charging schemes for infrastructure costs to limit
transaction and implementation costs.
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The main alternative to this scheme would be to apply an average charge,
potentially differentiated with respect to location (type of road) and time of day, on
top of an existing toll scheme for road. For the other modes, alternatives are not
straightforward. For railways there could be an additional charge to the
infrastructure charge. For aviation, the enlargement of the liability system seems
to be most appropriate. For maritime transport and inland waterways, the costs of
fatal accidents are small.
Accidents in the maritime transport sector may involve oil spills into the sea and
substantial damage to the environment. Whether additional instrumentation to
reduce these externalities is required will be discussed at a later stage in the
project.
3.5.9
What to do about climate costs?
With the use of fossil fuels, carbon dioxide is emitted into the atmosphere. This
contributes to climate change. From a fairness perspective, it can be argued that
all modes should be treated the same and receive the same incentive (per ton of
CO2) to reduce the emission of carbon dioxide.
Two notes however. The climate impacts of aviation and shipping differ
substantially for the impact of CO2 emissions alone. Related to aviation are the
emissions of NOx at altitude and contrail formation. Both have a net warming
effect on climate. On the other hand, related to shipping are the emissions of
sulphates. Even though these remain in the atmosphere for only a limited amount
of time, they have a substantial cooling effect.
How to deal with this? Neglecting for the moment the non-CO2 climate effects, we
propose on the basis of the fairness argument to provide the same incentives
across all transport modes to reduce emissions of CO2. There are two options for
this.
1 A CO2 tax could be levied upon fuel, based on the carbon content of fuel. The
charge would thus be lower for diesel than for gasoline. The charge per ton of
CO2 would be the same across all transport modes, and could be based on
external cost estimates. A disadvantage of this approach is that there may be
some possibilities to fuel up outside of Europe, thus avoiding the charge. This
holds especially for maritime transport. Another potential problem is that the
levying of such a charge may not be allowed for all modes. For aviation,
many bilateral air service agreements exist that preclude such charges. For
inland waterways, the Mannheim convention can pose a problem. It should
however be taken into account, that before 2020 such legal arrangements
may be adapted.
2 A connection could be made with the EU ETS. In line with the proposal for the
aviation sector, and in line with the current practice for the electricity used for
electric trains, all transport modes could be included in the EU ETS. The
advantage of this approach is that the incentive to reduce CO2 emissions in
the transport sector will be in line with incentives in the other sectors. A
disadvantage is that level of the incentive may be below or above the external
58
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costs of CO2 emissions, dependent on the shortage on the EU ETS market
and the emission reduction opportunities available to all parties. In addition,
inclusion of all transport modes in the EU ETS is not straightforward. It is
important to make a good choice for the actors to be included, so to limit
transaction costs. For example, transaction costs may become unacceptably
large if all passenger car owners would be made to trade on the EU ETS
market 18. It must further be noted that inclusion of all modes in the EU ETS
may not end the discussion of level playing field across modes. A similar
allocation method for all modes, such as auctioning may provide, would be
further required.
Because of the difficulties with fuel taxes for aviation and maritime transport,
(both legislative and with respect to economic distortions), we propose to include
these sectors in the EU ETS. For some scenarios, the other sectors will also be
included in the EU ETS, for others a CO2 tax or charge on fuel will be proposed.
As discussed in section 3.5.3, especially in the road mode, excise duties already
impose marginal costs on transport users that are partly in line with the external
climate effects. The excise duties may therefore be revised when internalisation
measures are imposed. For a CO2 tax or charge, we refer to section 3.5.3. With
regard to emissions trading, the excise duties may be lowered so that the total
revenue from fuel excises is reduced by the revenue from any auctioned
allowances under emissions trading. Total revenues for the government will so
remain unchanged, and the charging scheme is closer to marginal cost based
pricing.
When a CO2 tax or charge or emission trading is implemented, we propose
account is taken of the potential of biofuels to limit the net CO2 emissions of fuel.
With regard to the non-CO2 climate impacts of aviation 19, we propose that
additional flanking instruments are introduced. Closer regulation of flight paths
can reduce the formation of contrails. In additional, standards for new aircraft
may reduce the emissions of NOx at altitude.
In addition to the proposed cross-cutting measures, one could imagine specific
incentives to influence the vehicle purchasing decision and the supply of fuel
efficient passenger cars. A CO2 tax on fuel or inclusion in the ETS may provide
the correct incentive at the margin, but there is evidence that at least car owners
may not make fully rational decisions with regard to fuel efficiency of vehicles on
purchase. Generally, only the first three years of fuel use are taken into account.
If longer periods are taken into account, people are more likely to opt for more
fuel efficient cars. A differentiation of registration taxes, or if these are abolished,
circulation taxes may be a good instrument, in line with the Commissions
proposal.
18
19
There are several potential alternatives, each with its merits. Fuel suppliers are for example an option.
For maritime transport, it is more complicated. The science behind these non-CO2 climate effects of
shipping is not at a stage in which concrete policy recommendations can be made.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
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59
Next, it is also important the fuel efficient cars are introduced and being put on
the market. The current agreements between car makers and the Commission
have this aim. Regulation of CO2 emissions of new cars may be a useful
instrument. In addition, special incentives may be given to lease cars, such as
currently employed in the UK 20. The argument for such special treatment is that it
has been shown that the person that picks a new lease car has very little concern
on the fuel costs of the car.
For other modes instruments to incentivice the production and use of more fuel
efficient vehicles are more difficult to introduce, because there is more variety in
the potential performance of vehicles, albeit aircraft, vessels or trucks. In
additional, there may be less need for such a scheme, since generally the lifetime
costs of vehicles are more rationally taken into account in the commercial sector
than in passenger car market.
3.5.10
Special issue: Do we need a toll system for passenger cars?
In theory, setting a charge at the marginal social cost level would be optimal. This
would require investments in charging systems. To be able to account of situation
differences in external costs (related to e.g. time of day and location) a fairly
sophisticated charging scheme would be required. The question we want to pose
is whether a kilometre charging scheme that applies on all roads and that can be
differentiated to time and location would be worth setting up, based on
considerations of external costs only.
Without going into details here, to decide whether such a system may be called
for, we discuss briefly for which external effects such a system may be required.
For air pollution, congestion, accidents and noise the external effects may differ
by time and location. However, above we have argued that the costs of air
pollution may be relatively small by 2020.
Similarly, for congestion in urban areas, toll rings or cordons may be more
appropriate. These may of course be differentiated to time, and are by definition
differentiated by location. Similarly, bottleneck congestion and congestion on
major arteries may best be regulated by specific tolls.
For accidents we propose to use a very different charging scheme, introduced via
insurance companies.
The impacts of noise vary substantially according to time of day and location.
However, the marginal costs of noise are very low for passenger cars in urban
areas, given the number of cars that already drive there.
20
60
In the UK, income tax is levied on a share of the sales price of a lease car. This share has been made
dependent on the fuel efficiency of the car.
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Based on these considerations, it may not be worthwhile to introduce
sophisticated (and relatively expensive) systems for kilometre charging that apply
to the whole network for the purpose of reducing external effects. From other
perspectives, such as a fairer charging system for the use of infrastructure, there
may be good arguments to introduce such a system. If such a system is indeed
introduced for such reasons, it may also be used for differentiated charges with
regard to internalisation of external costs.
3.6
Proposal for scenarios
In this section we present the scenarios as a starting point for the workshop.
They are not meant as a final list, but as a starting point for discussion. The final
definition of the scenarios that will subjected to the impact assessment will be
chosen after the workshop, in order to make fully use of the ideas and
suggestions made at the workshop.
The scenarios describe the changes in price levels and price structures and other
internalisation measures that are implemented by Member States. To some
extent they are hypothetical, because they assume that all Member States
implement a similar set of internalisation measures.
Following the contract with the Commission, four to six scenarios will be worked
out in detail and be subjected to an impact analysis. The project team is
responsible for a precise definition of the different scenarios. Under guidance by
the Commission, the scenarios will then be inserted into a variety of models
(TRANSTOOLS, TREMOVE and ASTRA) to assess the impact the different
scenarios may have on the economy (transport cost, government income,
employment, welfare and competitiveness), transport sector (modal split,
transport cost, safety and congestion) and environmental impacts and cost.
We now turn to a discussion of the different scenarios we propose. Some
scenarios are based on complex pricing mechanisms that are closely aligned
with external cost drivers. Related to this are differences in the extent to which
new measures are introduced, or existing charges and taxes are differentiated.
Scenarios also differ in the way they take account of fairness considerations,
there is one scenario in which intrasectoral external effects are not internalised.
Some scenarios are more directed toward setting correct charge levels, other are
primarily aimed at charge structures.
The playing field between effectiveness, equity, marginal cost pricing, secondbest circumstances and use of revenues is complex. With the set of proposed
scenarios, we aim to cover a reasonable spread in possibilities.
In the proposal for the scenarios we have been considering to what extent
existing models can take account of the differentiations and instruments
proposed. In the back of our mind we have also considered the current legal
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61
background and restrictions this might pose to the introduction of instruments 21.
Nonetheless, not for all of the proposed instruments, impacts can be modelled
with the existing models. Similarly, not all of the proposed instruments may be
feasible within the current legislative context. We have chosen not to restrict us
too much by these criteria, because legal contexts may be changed and the
inability to model a certain instrument does not mean it cannot be an cost
effective instrument.
Comments with regard to the appropriateness of the proposed scenarios are very
welcome, as are suggestions for adaptations and alternatives.
The scenarios we propose are:
− Scenario 1 - Reference scenario.
− Scenario 2 - Differentiation of existing taxes and charges & regulation.
− Scenario 3 - Full internalisation of external cost.
− Scenario 4 - Full internalisation of intersectoral external costs.
− Scenario 5 - Mix of differentiation and new taxes and charges.
− Scenario 6 - Current directive for road freight to a maximum.
Note that all scenarios 2 - 6 describe the changes with respect to the business as
usual scenario, Scenario 1.
3.6.1
Scenario 1 - Reference scenario
To be able to model the impacts of internalisation, a reference scenario is
required. We propose as a reference scenario to assume that all existing taxes
and charges remain unchanged within all modes. No additional internalisation
measures are introduced.
3.6.2
Scenario 2 - Differentiation of existing taxes and charges & regulation
The second scenario we propose is based on existing taxation and charging
schemes and regulation. We propose to adapt existing instruments to make them
more in line with the cost drivers of external effects. It thus addresses the
structure of existing charges and taxes, and not so much the levels. The scenario
does not propose new mark ups or charges. The additional burden on the
transport sector only depends on the costs that are associated with adhering to
strengthened regulations. Moreover, by using existing instruments, transaction
and implementation costs may be kept to a minimum.
Because this scenario is based on existing charges that may be levied for other
reasons than internalisation, e.g. infrastructure cost recovery, the proposed
transformation of the existing instruments will be revenue neutral for each
instrument. It can thus be ensured that the aims of the existing instruments are
not harmed. Clearly, strict revenue neutrality cannot be guaranteed because of
21
62
In additional, especially for the aviation and maritime transport sector, we are aware that some of the
proposed instruments may distort competition.
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the unpredictability of infrastructure users’ reactions. Periodic adaptation of the
charges may therefore be required.
There are two related practical aspects that warrant attention:
1 Should the level of differentiation be based on marginal external cost
estimates or should more pragmatic differentiations be applied?
2 In case of the first option, what to do if current charge levels are too low to
base differentiation upon?
We propose a pragmatic solution to these issues. In general, the level of
differentiation should have a basis in the external cost estimates, but may be
required not to exceed the limits of e.g. 25% and 250% of the average charge
level.
Instruments per mode
Passenger cars and LDV
For CO2, we assume a regulatory scheme that reduces the average CO2
emissions of new passenger cars. Registration taxes or circulation taxes 22 will be
differentiated with respect to CO2 emissions of new cars, in line with the current
EC proposal. In addition, CO2 taxes or charges on fuel are introduced based on
the external climate costs. The charges reflect the differences in climate impact
of diesel, gasoline and biofuels. Existing fuel excise duties are lowered by the
same rates, but not below the level of marginal infrastructure cost 23.
Emissions of noise and air pollution are addressed through vehicle standards.
Circulation taxes are differentiated to Euro standard to speed up fleet renewal.
Existing toll schemes are transformed so to provide incentives to spread traffic
over the day.
A differentiation of existing instruments with respect to accident risk is not
feasible.
HGV
Emissions of noise and air pollution are addressed through vehicle standards.
Existing tolls, fixed infrastructure user charges and circulation taxes are
transformed so to differentiate between Euro standards and to provide incentives
to spread traffic over the day.
CO2 taxes or charges on fuel are introduced based on the external climate costs.
The charges reflect the differences in climate impact of diesel and biofuels.
Existing fuel excise duties are lowered by the same rates, but not below the level
of marginal infrastructure cost.
22
23
In addition to differentiating registration and circulation taxes with respect to fuel efficiency, the EC
proposal also proposes to abolish purchase taxes for internal market reasons.
his might also be implemented by labelling part existing fuel duties as being related to the external cost of
climate impact.
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A differentiation of existing instruments with respect to accident risk is not
feasible. The same holds for climate costs 24.
Rail
A distinction will be made between electric and diesel trains. External effects
related to electricity production should be addressed within the energy sector.
The costs of regulation are expected to be passed on in the price of electricity.
Euro-standards and noise standards will be further tightened. To provide
incentives for retrofit applications, infrastructure charges will be differentiate to
Euro-standard and noise standard. Account will be taken of location (noise & air
pollution) and time of day (noise), according to the possibilities that the rail
directive provides.
Scarcity costs will be addressed in accordance to the possibilities the rail
directive provides (i.e. by mark-ups). We assume that revenues generated will be
used for rail infrastructure investments.
Inland shipping
There are few existing taxes and charges that can be differentiated. Harbour
dues will be differentiated to air pollution. Euro-standards will be further
tightened.
Sea shipping
Similar to inland shipping. Standards will be further tightened, harbour dues are
differentiated.
Aviation
Aviation will be included in the ETS, in line with the current proposal.
Infrastructure charges are further differentiated according to the noise emissions
of aircraft, time of day and the NOx emission level during LTO. NOx and noise
standards for new aircraft will be further tightened.
24
64
With respect to the climate effects of HDVs, it is difficult to design a levy point on the basis of which
existing charges might be differentiated.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
March 8, 2007
Table 16
Overview of internalisation measures in scenario 2
Scenario 2
Road
passenger cars
and LDV
Road HDV
Climate
Differentiation of vehicle purchase
tax & circulation tax
Regulation of CO2 emissions of
new cars
Fuel excise duty partly replaced by
CO2 tax
Fuel excise duty partly replaced by
CO2 tax
Rail
-
Inland shipping
-
Maritime
shipping
-
Aviation
ETS
Air Pollution
Differentiation of circulation tax to
Euro standard
Stricter vehicle emission
standards
Noise
Stricter vehicle noise emission
standards
Other
-
Accidents
-
Congestion and scarcity
Differentiation of existing tolls to
spread traffic over day
Differentiation of circulation tax,
toll and fixed user charges to Euro
standard
Stricter vehicle emission
standards
For diesel: differentiated
infrastructure charges to Euro
standard and location
Stricter vehicle emission
standards for diesel
Stricter vehicle noise emission
standards
-
-
Differentiation of existing tolls to
spread traffic over day
Differentiated infrastructure
charges to noise standard, time
of the day (day/night) and
location (urban/non-urban)
Stricter vehicle noise emission
standards
-
-
-
Mark-ups to existing infrastructure
charges to spread traffic over day
-
-
-
-
-
-
-
Differentiation of LTO charge to
noise emission category
Stricter aircraft noise emission
standards
-
-
-
Differentiated harbour dues to
vessel size, Euro standard and
location (urban/non-urban)
Stricter vehicle emission
standards
Differentiation of harbour dues to
ship size, emission class and
location (urban/non-urban)
Stricter vehicle emission
standards
Differentiation of LTO charge to
emission class and airport location
Stricter aircraft emission standards
4.288.1/Methodologies for external cost estimates and internalisation scenarios
March 8, 2007
65
3.6.3
Scenario 3 - Full internalisation of external cost
In contrast to scenario 2, under this scenario new charges are introduced, to
adhere as much as possible to marginal cost pricing. The disadvantage is that
transaction and implementation costs are likely to be higher, because the
charging structure is more sophisticated. The advantage is that by the
introduction of new instruments, we can adhere closer to the cost drivers that
cause the external effects. We assume implementation of a variable kilometre
charging scheme for road infrastructure 25 that can also be used for charging for
external effects, and enables charge levels to be differentiated to time of day,
location and vehicle characteristics.
Accident costs
For all modes, insurance companies will be charged a lump sum per accident
(depending on severity) to cover external accident costs. We assume that
insurance companies will raise their insurance rates by the same amount,
differentiated to the main cost drivers. We also assume that half of the revenues
of these lump sum charges will be invested in mitigation measures, and the other
half will go to the general budget. For aviation and maritime transport, we
assume all proceeds will be invested into mitigation. Because of the international
nature of these sectors, flows to general budgets may be very difficult to achieve.
Revenue use
We propose two variants. In scenario 3A, revenues from congestion charges will
be fed into intermodel funds. Based on cost benefit analysis, the most cost
effective infrastructure investments will be selected. Revenues from road may
thus be reinvested in the road sector. Revenues from charges for environmental
effects will in the first place be used to reduce existing variable taxes and
charges that are unrelated to marginal costs (in particular fuel excise duties but
not below marginal infrastructure cost levels). Remaining revenues will be
invested in research, mitigation and subsidies for retrofit technology.
Under the second variant, scenario 3B, all revenues will in the first place be
used to reduce existing variable charges that are unrelated to marginal costs
(e.g. excises and circulation taxes). Remaining revenues will be directed at the
taxes on labour. Such taxes are known to disturb the economy significantly.
Charging externalities and lowering disturbing taxes should increase economic
efficiency substantially.
Below, the instruments per mode for both scenarios are further presented.
25
66
We further assume that simultaneously with the introduction of this infrastructure charging scheme,
existing charges such as registration and circulation taxes and fuel excise duties are reduced so the net
governmental revenue remains unchanged.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
March 8, 2007
Instruments per mode
Passenger cars, LDV and HDV
The kilometre charging scheme takes full account of the external costs of
congestion, air pollution, noise and ‘other’ external costs. In addition air pollution
and noise emission standards for new vehicles are tightened.
Just like in scenario 2, we assume a regulatory scheme that reduces the average
CO2 emissions of new passenger cars. Registration taxes or circulation taxes will
be differentiated with respect to CO2 emissions of new cars, in line with the
current EC proposal. In addition, climate costs are internalised through a CO2 tax
on fuel, based on carbon content and shadow cost level. Existing fuel excise
duties are lowered by the same rates, but not below the level of marginal
infrastructure cost.
Rail
The rail infrastructure charge will take full account of the external costs of
congestion / scarcity, air pollution, noise and other external costs, in line with rail
Directive. In addition air pollution and noise emission standards for new vehicles
are tightened.
External costs of electricity production will be dealt with upstream. On diesel, a
CO2 tax will be imposed.
Just like in scenario 2, scarcity costs will be addressed in accordance to the
possibilities the rail directive provides (i.e. by mark-ups). We assume that
revenues generated will be used for rail infrastructure investments.
Inland waterways
A CO2 tax on fuel will be introduced. In addition, an air pollution charge is levied.
This is based on the amount of fuel taken on board and the engine standard of
the vessel 26. Euro-standards for air pollutants will be tightened.
Sea shipping
Maritime transport is included in the EU ETS. Harbour dues will be increased
based on fuel intake and engine characteristics, this relates especially to
potential sulphur emissions. NOx standards for engines will be tightened.
Aviation
Aviation is included in the EU ETS. A LTO charge based on NOx and noise
emissions is introduced. The LTO NOx charge will be increased to take account
of the climate impact of NOx emissions at altitude. NOx and noise standards for
aircraft / engines will be tightened. Air traffic control measures are taken to
reduce contrail formation. Congestion/scarcity will be dealt with by a
governmental levy.
26
If this unfeasible because of evasion, the alternative is to add a surcharge on the harbour dues to account
for air pollution, based on the emission class of the engine.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
March 8, 2007
67
3.6.4
Scenario 4 - Full internalisation of intersectoral external costs only
This scenario is very similar to scenario 3, with the difference that it does not
address intrasectoral external costs that users of the same mode impose onto
each other. This means that congestion and accident costs are not internalised.
Revenues from charges are used as in scenario 3B.
68
4.288.1/Methodologies for external cost estimates and internalisation scenarios
March 8, 2007
Table 17
Overview of internalisation measures in scenario 3 (for scenario 4 the same table applies, with the last two columns left blank)
Scenario 3
Climate
Air Pollution
Noise
Other
Accidents
Road passenger
cars
Differentiation of vehicle
purchase tax & circulation tax
Regulation of CO2 emissions
of new cars
Fuel excise duty partly
replaced by CO2 tax
Fuel excise duty partly
replaced by CO2 tax
For diesel: CO2 emission
factor based charge (partly
replacing fuel excise duty, if
present)
Charge per km, differentiated to
Euro standard and type of infra
(motorway, urban, other) and
mark-ups for mountainous areas
Stricter vehicle emission
standards
Same as cars
Charge per km, differentiated to
noise standard and type of infra
(motorway, urban, other) and
mark-ups for mountainous areas
Stricter vehicle noise emission
standards
Same as cars
Charge per km,
differentiated to type
of infra (motorway,
urban, other) and
mark-ups for
mountainous areas
Same as cars
Charge per
accident for
insurance
companies
Same as cars
Same as cars
For diesel: charge per km,
differentiated to Euro standard
and location
Stricter vehicle emission
standards
Mark-up per km, differentiated to
noise standard and location
(urban/non-urban)
Stricter vehicle noise emission
standards
-
Charge per
accident for
insurance
companies
Inland shipping
CO2 emission factor based
charge
-
Rate per km or
harbour visit,
differentiated to
vessel size
Charge per
accident for
insurance
companies
Maritime
shipping
ETS
-
Rate per harbour
visit, differentiated to
ship size
Charge per
accident for
insurance
companies
-
Aviation
ETS
Rate per km or harbour visit,
differentiated to vessel size, Euro
standard and location
Stricter vehicle emission
standards
Rate per harbour visit,
differentiated to ship size,
emission class and port location
Stricter vehicle emission
standards
Rate per LTO, differentiated to
emission class and airport
location
Stricter aircraft NOx emission
standards
Mark-ups to
existing
infrastructure
charges to
spread traffic
over day
-
Rate per LTO, differentiated to
noise emission category
Stricter aircraft noise emission
standards
-
Charge per
accident for
insurance
companies
Governmental
levy
Road HDV
Rail
4.288.1/Methodologies for external cost estimates and internalisation scenarios
March 8, 2007
Congestion and
scarcity
Congestion
charge or Cordon
charge
69
3.6.5
Scenario 5 - Mix of differentiation and new taxes and charges
This scenario is somewhere in the middle between scenario 2 and 3. It
introduces less new instruments than scenario 3, but more than scenario 2. In
contrast to scenarios 3 and 4, this scenario does not presuppose a kilometre
charging scheme for road infrastructure costs.
For climate costs, we assume that the whole transport sector is included in the
ETS 27. Excise duties are adjusted so that the total revenue from the revised
excise duties and any auctioned allowances under the EU ETS is equal to the old
revenue from excises. External accident costs are addressed by a lump sum for
insurance companies per accident. The revenues will be used first to invest in
safety measures related to infrastructure. Additional revenues will be used to
lower labour taxes.
Congestion on the road is addressed by cordon charges in major urban areas
with congestion problems. Corridor congestion charging on bottlenecks 28 (and
potentially in mountainous areas). Revenues into TENS and additional
infrastructure, intermodal funds (to finance infrastructure with best cost-benefit
analysis).
Accident costs are internalised the same way as in scenario 3 (via insurance
companies).
In addition to these measures, we assume that (Euro-)standards for air pollution
and noise are further tightened for all modes.
Instruments per mode
Passenger cars, LDV and HDV
ETS for climate costs. Congestion on the road is addressed by cordon charges in
major urban areas with congestion problems. Corridor congestion charging on
bottlenecks (and potentially in mountainous areas). Revenues into TENS and
additional infrastructure, intermodal funds (to finance infrastructure with best
cost-benefit analysis).
Euro-standards for air pollution and noise emission standards are further
tightened.
Rail
ETS for climate costs and lowering of excise duties (where present). Revenues
invested in infrastructure. (Euro-)standards for air pollution and noise are further
tightened.
27
28
70
In practice, it may well be that for some modes this may lead to such high transaction costs (e.g. if all
passenger car owners are required to trade) that a CO2 tax or charge on fuel is introduced for these
modes at the level of the expected price level in the EU ETS.
These can take the very simple form of toll boots, or electronic tags.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
March 8, 2007
To provide incentives for retrofit applications, infrastructure charges will be
differentiated to Euro-standard and noise standard. Account will be taken of
location (noise & air pollution) and time of day (noise), according to the
possibilities that the rail directive provides.
Scarcity costs will be addressed in accordance to the possibilities the rail
directive provides (i.e. by mark-ups). We assume that revenues generated will be
used for rail infrastructure investments.
External costs of electricity production will be dealt with upstream.
Inland waterways
ETS for climate costs. In addition, an annual air pollution charge is levied based
on the engine characteristics and size class of the vessel. Revenues will be used
to subsidise retrofit technologies. Euro-standards for air pollutants will be
tightened.
Sea shipping
ETS for climate costs. Emission standards for engines will be tightened.
Aviation
ETS for climate costs. An LTO charge based on NOx and noise emissions is
introduced, to finance mitigation and research. NOx and noise standards for
aircraft / engines will be tightened.
4.288.1/Methodologies for external cost estimates and internalisation scenarios
March 8, 2007
71
Table 18
Overview of internalisation measures in scenario 5
Scenario 5
Climate
Air Pollution
Noise
Other
Accidents
Road
passenger cars
Differentiation of vehicle
purchase tax & circulation tax
Regulation of CO2 emissions of
new cars
Fuel excise duty partly replaced
by ETS
Fuel excise duty partly replaced
by ETS
For diesel: ETS (diesel excise
duty lowered, if present)
Stricter vehicle emission standards
Stricter vehicle noise emission
standards
-
Charge per accident
for insurance
companies
Congestion and
scarcity
Congestion
charge or
Cordon charge
Stricter vehicle emission standards
-
Same as cars
Same as cars
-
Charge per accident
for insurance
companies
Inland shipping
ETS
-
ETS
-
-
Aviation
ETS
Differentiation of LTO charge to
noise emission category
Stricter aircraft noise emission
standards
-
Charge per accident
for insurance
companies
Charge per accident
for insurance
companies
Charge per accident
for insurance
companies
Mark-ups to
existing
infrastructure
charges to
spread traffic
over day
-
Maritime
shipping
Annual air pollution tax differentiated
to vessel size and Euro standard
Stricter vehicle emission standards
Stricter vehicle emission standards
Stricter vehicle noise emission
standards
Differentiated infrastructure
charges to noise standard, time
of the day (day/night) and
location (urban/non-urban)
Stricter vehicle noise emission
standards
-
Road HDV
Rail
72
For diesel: differentiated
infrastructure charges to Euro
standard and location
Stricter vehicle emission standards
for diesel
Rate per LTO, differentiated to
emission class and airport location
Stricter aircraft emission standards
4.288.1/Methodologies for external cost estimates and internalisation scenarios
March 8, 2007
-
Governmental
levy
3.6.6
Scenario 6 - Current directive for road freight to a maximum
Under this scenario, we assume that certain optional measures under the current
directive 2006/38 will be made compulsory and therefore be applied to a
maximum. That means that we assume that all countries introduce tolls for freight
road infrastructure costs, which are differentiated with respect to Euro standard.
Toll levels are based on the infrastructure costs as indicated in the Directive,
including the infrastructure related expenditures on noise mitigation 29. Mark ups
are applied for mountainous areas with acute congestion or significant
environmental damage by vehicles. Revenues are used to finance new
infrastructure. We do not assume the introduction of regulatory charges to
combat air pollution and congestion, as not ruled out by the directive (art. 9). For
other modes, we assume no change in the current taxes and charges, as under
the reference scenario.
This scenario enables one to answer the following question: Is adaptation of the
current directive (or is a new directive) required to achieve the aims of
internalisation?
29
Note that the Directive allows charges above the marginal producer costs. The additional charge may be
taken as partly internalising external environmental costs.
4.288.1/Internalisation scenarios
February 23, 2007
73
Table 19
Overview of internalisation measures in scenario 6
Scenario 6
Climate
Air Pollution
Noise
Other
Accidents
Road passenger cars
and LDV
Road HDV
-
-
-
-
-
Congestion and
scarcity
-
-
-
-
-
Differentiation of tolls
within limits of 2006/38
and mark-ups for
mountainous areas
-
-
Rail
Inland shipping
Maritime shipping
Aviation
Differentiation of tolls
within limits of 2006/38
and mark-ups for
mountainous areas
-
-
-
-
74
4.288.1/Internalisation scenarios
DRAFT
February 23, 2007
3.7
Next steps
After the workshop, scenarios will be elaborated further, to a set of four to six
scenarios which will be subjected to the impact assessment. This elaboration will
include:
− Exact changes in price levels and structures per mode.
− Technical en organisational requirements per mode (e.g. system to charge
per km differentiated to emission class).
After the selection and elaboration of the scenarios, an impact assessment will
be carried out for the set of four to six scenarios. This will be based on modeling
work by TREMOVE and TRANS-TOOLS.
Based on the outcome of the impact assessment, the project will come forward
with policy and legal strategies.
3.8
Main questions for the workshop
a
Internalisation strategy per cost category (congestion, accidents, air
pollution, climate, noise, other)
− Accidents – is internalisation via insurance companies the most
appropriate approach?
− Climate: Should internalisation by CO2 taxes/charges for some modes
and ETS for others be aligned. If so how?
− Scarcity – is internalisation by government levies for infrastructure
providers the most appropriate approach?
− Air pollution: to what extent and for which modes are market based
instruments in addition to regulation an appropriate approach?
− Noise: what is most effective - regulation or taxes/charges? Should
charge levels be based on marginal or average cost levels?
− To what extent are market based instruments appropriate for internalising
other external cost like nature and landscape costs?
− To what extent should intra-sectoral costs (external congestion and
external accident costs) be charged for?
b
Taking account of existing taxes and charges
− Is there agreement on the approach proposed - treatment of existing
taxes and charges, in particular fuel excise duties?
c
Use of revenues
− Should the revenues from congestion charges be earmarked to intermodal funds or within the mode?
− How should revenues from environmental surcharges be earmarked: for
mitigation or decreasing labour taxes?
d
Which of the scenarios should be subjected to the impact assessment?
− What are the pros and cons of the various scenarios?
4.288.1/Input paper for a workshop on internalisation of external cost of transport
February 23, 2007
75
76
4.288.1/Input paper for a workshop on internalisation of external cost of transport
DRAFT
February 23, 2007
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Anwendung
der
Methodenkonvention:
Möglichkeiten
der
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