road pricing assessment

History of thought and pro

Serge Pahaut a,*, C

vard

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Mi

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Transport Policy x

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111projects on transport pricing, financed by the European Commission under the

4, 5 and 6th Framework Research Programmes.1CORR

ECTE

D P1. Introduction

We discuss here some political perspectives related to the

case studies presented in this special issue of Transport Policy.

These studies were part of a research program1 whose objective

was to define optimal transition paths from a situation with

inefficient, and generally too low, pricing of transportation, to a

situation with socially optimal pricing in which users pay the

marginal social cost of their trips.

The study of (urban transport pricing) UTP has almost

become an academic discipline. It has also inspired a large

number of EU-funded research programs, such as (Mobility

Impacts, Reactions and Opinions) MIRO, (Trans Modal

Integrated Urban Transport Pricing for Optimum Modal Split)

TransPrice, (Acceptability of Fiscal and Financial Measures

and Organisational Requirements for Demand Management)

AFFORD, (PRIcing Measures Acceptance) PRIMA, (Pricing

Acceptability in the Transport Sector) PATS, (Co-ordinating

Urban Pricing Integrated Demonstrations) CUPID, (Modelling

TRansport, ENergy and ENvironment) TRENEN-II, (REal

COst Reduction of Door-to-Door Intermodal Transport)

RECORDIT. This program was designed to incorporate

or cover:

1. all major modes (urban, interurban road, rail, air, water) and

both freight and passenger transport;

2. all relevant levels of decision-making (local/regional,

national, EU); and

3. intramodal implementation issues, intermodal issues (where

conditions in one mode can affect the implementation in

another), and also intersectoral issues relevant to the

implementation.

Our purpose is to present some observations about policy

design and management. The case studies presented in this

issue taught us how much the decision-making process itself

deserves careful consideration. The research program pre-

* We would like to thank Andre de Palma, Stef Proost and Robin Lindsey for

fruitful comments and discussions.* Corresponding author.

E-mail addresses: [email protected] (S. Pahaut), [email protected] Universite Libre de Bruxelles, 50, Bouleb European Commission, Directorate General fo

Abstract

Policy implications of the research program presented in this issue o

and political origins. Problems related to government taxation are analy

began with Pigou [Pigou, A.C., 1920. The Economics of Welfare. Mac

then discuss decision-making processes in transport pricing implement

equity. The article also briefly reviews the general agenda of EU trans

q 2006 Published by Elsevier Ltd.

JEL classification: B130; D620; D630; R480

Keywords: European Union; Negative externalities; Road pricing; Transport poJTRP 7695/1/200609:38SWAPNA194432XML MODEL 5+ pp. 14ROOF

spects for road pricing*

atharina Sikow b

du Triomphe, B-1040 Brussels, Belgium

ergy and Transport, B-1040 Brussels, Belgium

ransport Policy are discussed according to their theoretical, historical

in the light of the early literature on transport externalities pricing that

llan, London. (References are usually made to the 1932, 4th ed.)]. We

n involving redistribution issues, acceptability, users satisfaction and

t policy

; Implementation; Acceptability; Decision-making

x (xxxx) 14

www.elsevier.com/locate/tranpol112

113

114U consideration of practical implementation problems of pricingpolicies.We will not discuss here how to fine tune the derivation of

second-best prices from the point of view of economic theory,

or how to solve technical problems related to modelling. It is

our conviction that policymakers and analysts should take care0967-070X/$ - see front matter q 2006 Published by Elsevier Ltd.

doi:10.1016/j.tranpol.2005.11.012

Union (Commission, DG TREN, 5th Framework Programme). MC-ICAM

program is part of, and builds on, the results of a wider cluster of researchIntegrated Conceptual and Applied Model Analysis), funded by the EuropeanN sented here was indeed the result of a shift in focus from themere technical derivation of optimal pricing rules to thecec.be (C. Sikow).MC-ICAM: Implementation of Marginal Cost Pricing in Transport

Tto identify key political, economic and social barriers to the

pricing of transport, and how to confront the technical

constraints related to these barriers.2 As we shall see later,

the promotion of economic efficiency (as part of the broader

goal of sustainable economic growth) is the driving force

behind marginal social cost pricing; but its practical

discussion that is still with us today: should congestion be

of a producer. External economies are mentioned in Marshall

(1890, p. 266).5

In his Economics of Welfare (1920), Pigou argued that the

existence of externalities was sufficient justification for

government intervention. Pigouvian taxes and subsidies

introduce prices to internalise the externalities of a given

activity, both positive (in the case, say, of education) or

S. Pahaut, C. Sikow / Transport Policy xx (xxxx) 142


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regulated through government policy (taxes and regulation),

through transactions among private stakeholders, or not at all?

The underlying idea is that economic efficiency, which

means optimal allocation of scarce resources, cannot be

achieved if there is unconditional access for everybody. In

the case of public roads market pricing of transportation

resources (vehicles, fuel, insurance, etc.) does not result in

efficient use of public roads if users (travellers) create

congestion or other negative externalities. The solution

advocated by Pigou, a specific price introduced by public

authorities through tolls, should be understood in the way we

look at the rationale behind every tax: as a means to increase

the well-being of the population. Pigou built on the inaugural

work by Sidgwick and Marshall and introduced what we now

call externalities: indirect effect of a consumption activity or

a production activity on the consumption set of a consumer,

the utility function of a consumer or the production function

2 For a presentation of this barriers-constraints dynamic approach, see the

contribution of Rouwendal and Verhoef (submitted) in this issue.3 cf. the pragmatic motto of Montaigne: Par divers moyens on arrive a`

pareille fin (1580, I, 1).4 cf. the classical references of this controversy: Pigou (1920) and Knight

(1924). cf. the New Palgrave (quoted below as NP: cf. Eatwell et al. (1987),implementation also involves the effective pursuit of other

goals such as social equity and local growth, in order to ensure

balanced consideration of wider societal goals. A wide

exchange of opinions among all concerned stakeholders is

essential here.

In order to cope with the various situations described in the

case studies, paths of transportation pricing may differ with

respect to the transient prices they adopt before final prices are

settled, the schedule according to which prices are changed,

and how revenues are used.3

This paper should be considered as an exploration of the

global political landscape of transportation pricing. We will

start by discussing some aspects of the inaugural PigouKnight

debate on congestion management as this is at the heart of the

transport pricing debate. We then summarise the present state

of European Union policy in the domain of urban transport, and

draw some general conclusions.

1.1. The PigouKnight debate on congestion management

The fundamental question of transport pricing by govern-

ment was formulated during the debate between Pigou and

Knight.4 This debate is of interest as it not only produced some

definitions and tools, but also opened the path to a fundamentalarticles on Pigou, Knight, Young, Allyn, Coase, Coase theorem,

externalities, rising supply prices, external economies, transaction costs.

JTRP 7695/1/200609:38SWAPNA194432XML MODEL 5+ pp. 14ED PR

OOF

negative (in the case, say, of pollution emission).

In his famous 1924 paper, Some Fallacies in the

Interpretation of Social Cost, Knight argued against Pigou

that no government intervention was needed. He even

dismissed the external economies of the Marshallian tradition,

as he wrote (p. 597) External economies in one business unit

are internal economies in some other, within the industry. He

developed a symmetrical solution (pp. 5867): If the roads are

assumed to be subject to private appropriation and exploitation,

precisely the ideal situation which would be established by the

imaginary tax will be brought about through the operation of

ordinary economic motives. For a brief summary of the

survival of the idea of technological externalities in the Pigou

Knight discussion, cf. NP, article external economies. Some

remarks usually associated to the 1924 paper by Knight were

actually formulated by his teacher, Young, in a 1913 review

(Young, 1913) of Pigous Wealth and Welfare.

The divergence between Pigou and Knight is not a mere

question of political preference concerning the means of

congestion regulation. Pigou himself was not advocating a

moralistic approach to economics. He firmly maintained that

economic science should not itself be an art, or directly

enunciate precepts of government.6 He explained that

economics is a positive science of what is and tends to be,

not a normative science of what ought to be. But he also knew

very well, as he dared to say with Alfred North Whitehead, that

in our most theoretical moods we may be nearest to our most

practical applications.7

This use of taxes and subsidies was for Pigou8 a

principle.susceptible of general application. He added in aprophetic way that the application of the principle is

incomplete, because the revenue from these taxes.must bedevoted.exclusively to the execution of new and specific roadimprovements, to the effect that in the main, the motorist

does not pay for the damage he does to the ordinary roads, but

obtains in return for his payment an additional service useful to

him rather than to the general public. Pigou implicitly

advocated here the use of earmarking.

The general implications of this discussion still confront us.

The distinction between public and private management

5 The irrelevance of pecuniary externalities was demonstrated by Young and

Knight, and only technological externalities have survived. See NP, article

externalities, by J.-J. Laffont.6 We refer the interested reader to the first pages of his Economics of Welfare

(1920, Part I, ch. I).7 We refer the interested reader to the first pages of his Economics of Welfare

(1920, Part I, ch. I). For a discussion about this very remarkable reciprocity of

theory and praxis, we refer the reader to the Magnum Opus of Isabelle Stengers,Penser avec Whitehead (2002).8 cf. Pigou, 1920, Part II, ch. IX.

227

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Tof transport is perhaps less important than the very

fundamental question that we have to face now: which

institutions are required, if any, to regulate the multiple

interactions and transactions generated by transport? This

question was not settled during the PigouKnight debate. Forty

years later Coase (1960) presented his now famous Theorem: if

transaction costs among private persons are nil and there are

traffic from road to rail, development of liberalised railway

management, etc. will have important and still unclear impacts

instrument to strengthen the Single Market and the integration

of national economies. More recently, transport pricing is

increasingly seen as an important source of revenues for the

development of the trans-European transport networks, and

particularly for the 30 transnational projects declared of

European interest.13

S. Pahaut, C. Sikow / Transport Policy xx (xxxx) 14 3


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340UNCO

RRECon urban life and urban transport policy. It should be kept inmind that transport policy is related to the overarching concernof sustainable development. An overall strategic objective of

EU transport policy is to achieve a decoupling of economic

growth and transport growth. This decoupling is part of a large

policy scheme, involving integration of social and environ-

mental costs of transport and the publication of annual reports

on sustainable development (the Gothenburg agenda).

Transport pricing is also seen as a key to establish a level

playing field and fair competition system between, and within,

the different transport modes. It is therefore an important

9 cf. NP, article transaction costs.10 For a description of the development of this policy, see Pahaut and Quinet

(2005).11 A different interpretation of the subsidiarity principle is often taken in the

context of environmental policy. In the CAFE (Clean Air For Europe) program,

policy measures (including transport) will be proposed to ensure adequate air

quality in all cities in the EU.no income effects, contracts among the parties involved may

solve the externality problems without any government

intervention. In most circumstances, however, multilateral

transactions are very costly, and regulations may be more

efficient.9

As we can seen from this brief summary of a long, complex

discussion, the mix of public intervention and private

transactions was an open question from the very outset of the

discussion in the 1920s. The suitable composition of this mix

remains an open problem for European transport policythe

subject of the following section.

2. Current orientations of EU policy

2.1. Transport pricing policy

Space constraints preclude a comprehensive summary and

history of transport pricing policy in the European Union.

Suffice it to say that the approach of the White Paper adopted

by the European Commission (EU, 2001) on transport policy is

far more ambitious than it looks.10 Urban transport policy per

se is not targeted in the White Paper because, in the ECs view,

the subsidiarity principle dictates that urban transport matters

should be dealt with by local politicians and decision-makers.11

However, the implementation of reforms on heavy goods

vehicle pricing and other European transport policy initiatives

such as sea motorways12, rail/water integration, shifts of freight12 Sea links providing a way around bottlenecks, such as in the Alps or in the

Pyrenees.


OOF

If we are to understand the somewhat partial approach of the

EU transport pricing policy, we have to keep in mind the

current political state of affairs and the decision-making

procedures of the EU, which make collective decisions difficult

to reach, to say the least. As the White Paper of 2001 flatly

states14: Several Member States contest the very principle of a

general Community-wide ban to keep heavy goods vehicles off

the roads on weekends. Member States have also taken

diverging paths on taxation in response to the recent surges in

oil prices. These comments reflect the equivocal nature of the

subsidiarity principle.

It is in this context that the Commission announced a series

of measures ranging from pricing to revitalising alternative

modes of transport to road and targeted investment in the trans-

European network, while bearing in mind the historical

imbalance in favour of road for the last 50 years. The

ambitious objective of the Commission paper is to rebalance

modal demand and prevent the modal share of road transport

from growing further. Transport pricing is seen as one of the

most powerful measures in achieving this goal.

A careful selection of complementary policy instruments

will be necessary to achieve this goal. Cross-financing and

revenue hypothecation, for example, will require political

decisions consistent with the subsidiarity principle. The

proposal to develop corridors of European interest15

(transport corridors relevant to European integration) will

benefit from a transfer of resources from the road sector to

alternative modes. A first step in this direction was reached in

the recent transport Council, which agreed on the possibility to

add, under certain conditions, a 12% mark-up on top of

allocated infrastructure costs for heavy goods vehicles to be

earmarked to non-road modes in the same corridor.

Intercity truck tolls were recently introduced in the form of a

heavy goods vehicle (HGV) kilometre-charging scheme on

German and Austrian motorways. And in several countries

passenger vehicle tolls are common on intercity motorways.

But few urban roads are tolled despite the considerably higher

external costs or urban driving.16 Bold and innovative policies

will also be required to introduce tolls on urban roads. It can be

hoped that the toll rings in the major Norwegian cities and

Londons congestion charging scheme have paved the way

13 Decision 884/2004/EC14 EU (2001), see the introduction on Policy Guidelines.15 Decision 884/2004/EC declared 30 priority projects to be of European

interest (listed in its Annex III). These projects, and particularly their cross-

border components, will be prioritized when allocating EU subsidies.16 See the RECORDIT program, which calculated the marginal external costs

of a 40-ton lorry on three long distance transport corridors. The differencebetween external costs in urban and interurban varies typically from 5 to

60 Euro cents/km.

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Tfor a more widespread use of pricing to allocate urban road

capacity as a complement to access restrictions and clean

S. Pahaut, C. Sikow / Transp4


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zones.

Road pricing has still not reached the policy agenda at the

worldwide level. The European Commission is taking strong

positions on this point since the publication of the 1995 Green

Paper on fair and efficient pricing: .while transport may beheavily taxed, it is above all badly and unequally taxed. Users

are all treated alike, irrespective of the infrastructure damage,

bottleneck and pollution they cause. This failure to spread the

burden fairly between infrastructure operators, taxpayers and

users causes considerable distortion of competition both

between transport operators and between modes of transport.

(CEC, 1995).

The White Paper of 2001 considered more precise

objectives (CEC, 2001): The thrust of Community action

should be to replace gradually existing transport system taxes

with more effective instruments for integrating infrastructure

costs and external costs [in the price of transport]. These

instruments are, firstly, charging for infrastructure use, which is

a particularly effective mean of managing congestion and

reducing other environmental impacts, and, secondly, fuel tax,

which lends itself well to controlling carbon dioxide

emissions.17 For two reasons the distinction between charging

and taxation as political instruments is of particular interest and

importance. First, because of the need to use different

instruments to tackle different problems. And second because

the Community decision-making rules differ for the two cases:

taxation falls under the unanimity rule whereby any EU

member State can block a proposal, whereas decisions on

charging can be taken by qualified majority.

2.2. Acceptability

Transport policy reform is bound to relate social, economic,

fiscal and political agenda that are notoriously difficult to

manage. Indeed, this is the central political question. The

discussion of equity in matters such as transport policy cannot

be an isolated subject.18 In the context of the European Union,

in addition to distribution of income between citizens or

households, equity has also another dimension, which is often

called regional cohesion in the EU jargon. The implications of

a policy upon certain regionsconsidering oppositions among

poor/rich; peripheral/central; big/small country; old/new

member statesare of interest for the policymaking process.

There is some concern that those who will be negatively

impacted by pricing will not benefit from the increased

revenues; e.g. some existing legislation may not let urban

authorities decide how revenues from congestion charging can

be used. This would need to be addressed for urban pricing

to be more widely present on the policy agenda in the EU.

Acceptability of pricing will depend not only on relevant

17 cf. CEC, 2001.18 A discussion of equity and social choice is beyond the scope of this article.Readers are referred to the seminal formulation by Gevers (1986), and Trannoy

and Fleurbaey (2003).


OOF

macroeconomic relations, but also on investments that confer

benefits to users of transportation systems.

3. Concluding remarks

In conclusion it is our view that the orientation of European

transport policy is relatively well defined and theoretically

grounded. However, the policy will only come into practice if

national and local authorities cooperate. It is impossible to tell

now if, and how, this integration will develop. We have shown

that the present transformation of transport calls not only for

technical management, but also for political decisions. The

multiplicity and diversity of interest groups, users, taxpayers,

local authorities, etc. requires political arbitration. It will be up

to decision-makers at all levels of government to fulfil these

expectations.

4. Disclaimer

The views expressed here are not to be considered as the

views of the Commission.

5. Uncited reference

de Palma and Quinet (2005).

References

CEC, 1995. Green Paper: Towards Fair and Efficient Pricing in Transport

Policy-Options for Internalizing the External Cost of Transport in the

European Union.

CEC, 2001. White Paper: European Transport Policy for 2010: Time to Decide.

Coase, R., 1960. The problem of social cost. Journal of Law and Economics

3, 1.

de Palma, A, Quinet, E., 2005. La tarification des transports, Enjeux et defis.

Economica, Paris.

Eatwell, J., Milgate, M., Newman, P., 1987. The New Palgrave: A Dictionary

of Economics. Macmillan, London.

EU, 2001. White Paper on European Transport Policy for 2010: Time to

Decide. European Commission, DG TREN, Brussels.

Gevers, L., 1986. Walrasian social choice: some simple axiomatic approaches.

In: Heller, W.P. (Ed.), Social Choice and Public Decision Making Essays in

Honor of K.J. Arrow, vol. 1. Cambridge University Press, Cambridge,

pp. 91114.

Knight, F., 1924. Some fallacies in the interpretation of social cost, Quarterly

Journal of Economics, 38. Reprinted in The Ethics of Competition and

Other Essays. Allen and Unwin, London.

Marshall, A., 1890. Principles of Economics. Macmillan, London (References

are to the 3rd edition of 1920).

Montaigne, M., 1580. Essais, Bordeaux.

Pahaut, S., Quinet, E., 2005. Doctrines dans lUnion europeenne. In: de

Palma, A., Quinet, E. (Eds.), La Tarification des Transport. Pourquoi? Pour

Qui? Les Defis daujourdhui et de Demain. Economica, Paris, pp. 6989.

Pigou, A.C., 1920. The Economics of Welfare. MacMillan, London

(References are usually made to the 1932, 4th ed.).

Rouwendal, J., Verhoef, E., Submitted for publication. Basic economics of

roads pricing: From theory to applications.

Stengers, I., 2002. Penser Avec Whitehead. Gallimard, Paris.

Trannoy, A., Fleurbaey, M., 2003. The impossibility of a paretian dominant.

In: Social Choice and Welfare, 21, 2 (issue in honour of Louis Gevers).

ort Policy xx (xxxx) 14Young, A.A., 1913. Pigous wealth and welfare. Quarterly Journal of

Economics 27, 672686.455

456

History of thought and prospects for road pricingIntroductionThe Pigou-Knight debate on congestion management

Current orientations of EU policyTransport pricing policyAcceptability

Concluding remarksDisclaimerUncited referenceReferences

road pricing assessment

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