Transport, tax and the environment

Finally we're getting somewhere in tackling Melbourne's congestion. Though there are still some infrastructure fetishists who are pushing for longer and wider freeways, more thoughtful minds are realising the power of pricing to change motorist's habits.

Here's how The Age covered the release of a draft report by the Victorian Competition and Efficiency Commission (I'd never heard of them either):

Motorists could pay higher peak-hour tolls
By Stephen Moynihan
April 6, 2006

MOTORISTS could pay more to use the city's toll roads during peak periods under options being considered to ease Melbourne's congestion woes.

Under the proposal, CityLink and the operator of EastLink would charge drivers more during the morning and evening peaks but less in off-peak times.
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An increase in peak period pricing is an option discussed in the Victorian Competition and Efficiency Commission's draft report for managing transport congestion.

With an e-Tag on just about every car, it's not a big stretch to see charges on all of Melbourne's freeways and a CBD congestion charge as a means of allocating access to a scarce resource. Of course, this can all be revenue-neutral if it's coupled with a reduction in annual registration fees on vehicles.

Last year I wrote a paper on this very subject for my Economics of the Environment class. I think my findings are particularly prescient, so I've published my synopsis below:

Transport, tax and the environment

INTRODUCTION

Why is motor vehicle use a problem?

Two reasons:

1. Environmental impact:
 Vehicles emit large quantities of local and global pollutants, such as ozone, carbon monoxide and nitrogen dioxide
 These chemicals can be harmful to both environment and human health
 Problem is a product of petrol emitted by vehicles

2. Social impact:
 Congestion becoming more frequent in large population centres
 Occurs when number of vehicles overwhelms the infrastructure to support those vehicles
 Decreases quality of life

Taxation regimes can be used to address problem through altering commuters’ behaviour by closing gap between Marginal Social Cost and Marginal Private Cost

Three methods to be tested:

1. Registration fees on vehicles
2. Excise tax on petrol
3. Space tax, such as parking charges and toll roads


METHOD 1: REGISTRATION FEES

 A fixed cost charge levied each year on each vehicle
 Fee may vary according to vehicle type, but is same regardless of frequency of use
 Fee acts as a sunk cost to the motorist, and so does not effect each marginal decision to use vehicle
 May even act as an incentive for marginal use of vehicle, since this decreases average cost
 Theoretical possibility of decreasing total number of vehicles on road, but this requires registration fee to be high

Conclusion: Not likely to have significant effect on number of vehicle trips per year, and only acts as revenue raising for government.

METHOD 2: EXCISE TAX

 A tax on petrol, levied per unit consumed
 Has effect of adding to private marginal cost, thereby discouraging each marginal use of vehicle
 Also has added benefit of encouraging development of non-petrol powered vehicles, whose fuel would not attract excise
 Limitation of excise tax is inability to apply discriminately in time and place
 Tax is effective at discouraging use, so long as petrol is a necessary input

Conclusion: Excise tax works effectively at internalizing negative externality, but may be ineffective in long term if reliance on petrol declines

METHOD 3: SPACE TAX

 Space Tax is a catch-all term to cover congestion charges, toll roads and parking charges, all of which tax the ‘space’ occupied by the vehicle
 Is reliant on technology for compliance, such as e-tag
 Has an effect on each marginal decision to use vehicle
 Can be adjusted according to needs at different times and places, eg peak hour toll charge or cheaper rural parking
 Effective regardless of fuel type used for vehicle

Conclusion: Space tax is effective at discouraging vehicle use and smoothing peaks and troughs in use of vehicle space.

CONCLUSION

 Ideal tax arrangement combines petrol tax with space tax
 Petrol tax encourages use of alternative fuels, hence addressing environmental problems
 Space tax discourages use generally, and also directly addresses congestion problems
 Registration fees an ineffective way of altering behaviour.