Road transport imposes negative externalities on society. These externalities include environmental and road damage, accidents, congestion, and oil dependence. The cost of these externalities to society is in general not reflected in the current market prices in the road transport sector.
An efficient mobility model for the future must take into account the true costs of transport and its regulatory framework will need to create incentives for people to make sustainable transport choices. This paper discusses the use of economic instruments to correct road transport externalities, but gives relatively more weight to the problem of carbon emissions from road transport, as this is particularly challenging, given its global and long-term nature.
Economics offers two types of instruments for addressing the problem of transport externalities: command-and-control and incentive-based policies.
Command-and-control policies are government regulations which force consumers and producers to change their behaviour. They are the most widely used policy instruments. Examples include vehicle emission and fuel standards in the US as well as driving or parking restrictions in Singapore. The implementation cost of these instruments to the government is small. Although from an economic perspective these policies often fail to achieve an efficient market outcome, the presence of political constraints often make them the preferred option, in terms of feasibility and effectiveness.
Economic theory shows how policies, which affect consumption and production incentives, can be used to achieve the optimal outcome in the presence of externalities. Incentive-based policies function within a new or an altered market. We first examine incentive-based policies, which cap the aggregate amount of the externality, such as carbon emissions, by allocating permits or rights to the emitters. The emitters are then free to trade their permits amongst them. The permit allocation mechanism is important–although market efficiency would be satisfied by an auction, political influences usually favour a proportional allocation based on historic emissions. We discuss EU ETS as an example of a cap-and-trade system, however, no such policy for CO2 emissions in road transport has been implemented anywhere in the world to date.
Fiscal instruments are, like command-and-control, widely used in road transport, because they are relatively cheap and simple to implement. They include the use of taxes and charges in order to bridge the gap between private and the social costs and, in principle, can lead to an efficient market solution. Registration, ownership, fuel, emissions, usage taxes, and parking and congestion charges have been implemented in many countries around the world. On the other side of the spectrum, subsidies can be given to those scrapping old cars and buying fuel-efficient vehicles. Some cities, such as London, have implemented congestion charges and many states in the United States have introduced high occupancy lanes. Other interesting possibilities include pay-as-you-drive insurance and other usage charges. However, the size and scope of taxes and subsidies are determined by governments, and because of their imperfect knowledge of the market the outcome is still likely to be inefficient.
Governments have many effective economic instruments to create a sustainable road transport model. These instruments can be used separately or together, but their implementation will be necessary in the nearest future.
