Internalisation of external costs

Indicator Assessment
Prod-ID: IND-116-en
Also known as: TERM 026
expired Created 15 Dec 2008 Published 05 Jul 2010 Last modified 19 Apr 2016, 04:57 PM

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There has been some progress in restructuring transport charges towards better internalisation of external costs though this has been slow. Urban (congestion) charging schemes and distance related charging are expanding, and several countries have modified or introduced vehicle charges. There are, however, still a number of countries in Europe with no passenger vehicle related taxes (excluding petrol/diesel tax). The differentiation of user charges has been structured around air pollution in the road freight sector, noise in the aviation sector and CO 2 emissions for passenger cars. Tax breaks for low-sulphur fuel are slowly disappearing as ever more stringent fuel quality standards take over. At the same time reduced excise on biofuel, LPG, CDG and ethanol is being more widely applied in Europe. Many countries have adopted regulations for reduced car sales duties and road tax for electric vehicles, hybrids and hydrogen vehicles.

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Key messages

There has been some progress in restructuring transport charges towards better internalisation of external costs though this has been slow. Urban (congestion) charging schemes and distance related charging are expanding, and several countries have modified or introduced vehicle charges. There are, however, still a number of countries in Europe with no passenger vehicle related taxes (excluding petrol/diesel tax).

The differentiation of user charges has been structured around air pollution in the road freight sector, noise in the aviation sector and CO2 emissions for passenger cars.

Tax breaks for low-sulphur fuel are slowly disappearing as ever more stringent fuel quality standards take over. At the same time reduced excise on biofuel, LPG, CDG and ethanol is being more widely applied in Europe. Many countries have adopted regulations for reduced car sales duties and road tax for electric vehicles, hybrids and hydrogen vehicles.

Is transport charge restructuring moving fast enough towards better internalisation of external costs?

The indicator captures the application and extension of regulations for non-fuel related vehicle (road, rail, air and water transport) taxes and charges as well as for reduced excise on certain vehicles and fuels. Given the importance of differentiation of transport charges and taxes on the basis of environmental impacts, the indicator gives a qualitative overview of the adaptation of price structures in the transport sector towards environmental characteristics. Although there are many examples of good internalisation initiatives, it must be noted that the incentives provided are generally below the level of the externality. The Factsheet on fuel prices and taxes (TERM 22 Progress in charges) outlines the development of user-dependent transport charge levels.

The levels of transport infrastructure taxes and charges follow the Polluter Pays principle and are dependent on local and temporal circumstances; as a result it is hard to reflect externalities in charge levels. In practice existing taxes and charges aim to achieve this by differentiating charges based on environmental characteristics such as:

  • Level of air pollution in the road freight sector,
  • Tax reductions for fuel efficient and hybrid passenger cars, and
  • Noise in the aviation sector.

Very few measures have been implemented to internalise costs of congestion on the road (some aviation and rail charges, and some urban parking fees are exceptions), rail and road noise, or climate change and air pollution costs of aviation. In urban areas, the internalisation of external costs is still far from complete. Some rail, aviation and motorway charges are differentiated according to the time of day and/or week, which can be considered to address congestion. It is, however, difficult to monitor consistently the aim of specific charges. Rail transport also faces the scarcity on dispatched services. Urban parking charges that vary with time of day and/or proximity to central business districts also address congestion. They have not been included in table 1 as they only cover specific local areas.

Vehicle taxation

Several European countries are modifying their vehicle charges though not necessarily with the aim to encourage a more sustainable behaviour. Estonia, for example, is increasing levels of tax for the registration of new vehicles as of 1 January 2009 with the rate dependent on engine power. The UK has also modified the annual car tax system rewarding smaller and 'greener' cars in two stage process in March 2008 and April 2009.

Countries applying environmentally differentiated taxing and charging schemes other than fuel taxation are the United Kingdom, Germany, France, Italy and Poland. Iceland, Liechtenstein, Malta and the Slovak Republic have no such schemes in place. Latvia has a tax related to urban road charging and Romania charges passenger road transport based on air pollution impacts.

A few countries already provide incentives for purchasing hybrid and low CO2 emission passenger cars, with more elaborate schemes becoming increasingly popular. Furthermore, the British vehicle tax regulations are linked with the CO2 emissions of the vehicle concerned. Germany has a fixed car tax structure, which is differentiated according to engine Euro classes (i.e. the emissions of air pollutants).

Austria successfully introduced a kilometre charge on its motorways in 2004, varying from EUR 0.13 to EUR 0.27 depending on the number of axles of a vehicle, but without any environmental differentiation. The German kilometre charging for HDV on motorways was launched in 2005, linking charges per vehicle-kilometre to the number of axles as well as the Euro emission class. The Czech government introduced electronically calculated tolls on main roads from 2006, charging vehicles over 12 tonnes (plans to extend the scheme for LDV charging exist). Slovakia also has similar intentions. Toll rings have existed in Norway since 1987, within which charges vary depending on the day of the week (e.g. in Trondheim, Stavanger and Oslo). Stockholm has also introduced a time sensitive congestion charging scheme, which came into operation in August 2007.

In many other European countries public private partnerships have been an important means to fund infrastructure. In France, Spain, Portugal, Italy and Greece on large parts of the motorway network distance related toll charges apply. On the A1 motorway near Paris an additional congestion tariff is levied. During peak hours (Sundays between 16:30 and 20:30), traffic volume decreased by between 4 to 10 percent.

In February 2003 London introduced a congestion-charging scheme to improve the accessibility of the city centre, air quality and liveability. Vehicles fuelled by alternative sources of energy are exempted from any charge. Since its introduction, congestion within the zone in London has decreased by 30 % and emissions of NOx and PM10 from road traffic by approximately 12 %. Research suggests that the charge has had a broadly neutral impact on overall business performance in the charging zone. In February 2007 the charging area was extended to the west of the UK's capital. There are now plans to introduce congestion charging or a low emission zone in Manchester. In Italy, Rome and Genoa both have city charging schemes.

In Poland an environmental fee system has been in use since 1990 which applies to companies in all industries as well as the transport sector. A fee is charged related to emissions of HC, CO2, NOx, Pb (lead), SO2 and particles. In practice, the fee is estimated on the basis of fuel consumption and a pre/post Euro 2 classification with low charges. The 'Eurovignette' Directive (Directive 2006/38/EC) was adopted in May 2006 with the aim of improving the structure of road freight distance based charges and also to shift freight from roads onto other less-polluting modes of transport such as rail and waterways. Under the Directive, the Eurovignette allows EU Member States to levy charges on heavy goods transportation vehicles of more than 3.5 tonnes. The Eurovignette also gives Member States extra flexibility on how to levy tolls or charges. In particular, these can now be raised on the entire road network, not just motorways.

Aviation taxation

With respect to air transport, the majority of countries have noise surcharges and schemes in place to curb night time noise linked to airports. Apart from the recently introduced emission surcharges at London Heathrow and Gatwick, only Sweden has a scheme providing incentives to reduce emissions. Sweden introduced an environmental tax on airline tickets which came into affect in July 2006. The Netherlands introduced a surcharge on airline tickets as of 1 July 2008 differentiated on the basis of the distance of the flight to reflect environmental effects. France, the UK, Norway, Cyprus, Luxembourg and several over countries outside the EEA-32 have proposed to raise funds for development aid by introducing a tax on airline tickets. The French air ticket tax to reduce emissions of greenhouse gases and other pollutants entered into force on 1 July 2006.

Shipping taxation

Shipping taxation linked to environmental performance is very limited. Only two countries (Sweden and Finland) differentiate ship emissions. There is a Green Award for seaborne ships being administered by the Green Award Foundation, which has been established in 1994 on the initiative of the Rotterdam Municipal Port Management and the Dutch Ministry of Transport (independent since January 2000). A Green Award specifies that a ship meets high, but manageable technical and managerial requirements. An increasing number of ports and nautical providers recognize the value of Green Award. The scheme has over seven countries participating in Europe (

Indicator specification and metadata

Indicator definition

No definition has been specified


In national currency or EUR (if information is available).

Policy context and targets

Context description

For more than 10 years, internalisation of external costs has been on the agenda of European transport and environment policy, and is increasingly accepted as a target for transport policy. The European Commission stressed this in three policy papers; the Green Paper on fair and efficient pricing (European Commission, 1995), the White Paper on fair payment for infrastructure use (European Commission, 1998), and the White Paper on European transport policy for 2010 (European Commission, 2001).

Toll Related Charging

The EU has recently amended a Directive on the principles of road infrastructure charging, the so called 'Eurovignette Directive' (first version of 1999/62/EC) on the basis of a 2003 proposal by the Commission (European Commission, 2003). Directive 2006/38/EC defines the conditions under which Member States are allowed to levy tolls on the Trans-European Transport Networks (TEN-T) and on roads in direct competition.

Tolls will initially only reflect infrastructure costs and will apply by 2012 at the latest to all freight traffic over 3.5 Gross Vehicle Weight. As of 2010, they must be differentiated with respect to emission Euro class including levels of PM10 and NOx emissions. They may also be differentiated with respect to time of day and type of day / season. Mark ups of up to 25 % are allowed for particularly sensitive regions and congested roads, the revenues of which must be used for cross-financing investment costs of other more environmentally friendly transport infrastructures. The user may thus be faced with incentives to reduce their financial and environmental burden by choosing the less polluting vehicles, itineraries which are less ecologically sensitive, less congested periods or safer vehicles.

Within two years after entry into force, the Commission will put forward uniform calculation principles for all transport modes and all external costs, and a proposal to revise the Directive to include these costs. In case a revision of the Directive regarding internalisation is not adopted within three years of presentation of the calculation principles, Member States may include a mark up of up to 60 % of the infrastructure costs to reflect a minimum of external costs. It is recommended that revenues of the tolls are assigned to the transport sector.

Environmental Taxes

In 2005 the Commission published a proposal for the adaptation of passenger car related taxes (European Commission, 2005a). Apart from the voluntary commitment by the car industry (pillar I) and consumer information (pillar II), fiscal measures are the third pillar of the Community's strategy to reduce CO2 emissions from passenger cars to 130 g CO2 per km by 2010 at the latest. It is proposed that, by 2008, at least 25 % of the total revenue from annual circulation taxes and registration taxes shall come from a CO2 based element in the tax structure. By 2012 this should account for 50% of the total revenue raised, thus providing a strong financial incentive for drivers to purchase more fuel efficient vehicles. Furthermore, registration taxes are to be abolished from the beginning of 2016 to eliminate double taxation.

In September 2005 the Commission published a communication on aviation and climate change (European Commission, 2005b). It identifies emissions trading as the most promising economic instrument to limit emissions growth in aviation. In 2008 the decision was made to include intra-EU aviation in the European Union Emission Trading Scheme (EU-ETS) from 2012, making it necessary for the aviation sector to either decrease greenhouse gas emissions or to buy greenhouse gas allowances on the market up to a certain cap. For 2012 that cap is set to 95% of the average emissions during the years 2004 to 2006.

A study for the Directorate-General for Energy and Transport (DG TREN) on the mid-term review of the EC Common Transport Policy White Paper (Transport and Mobility Leuven, 2005) concluded that 'the biggest failure in implementation of the White Paper proposals is the failure to implement Social Marginal Cost Pricing for all transport modes'. Advancement of effective charging for transport at the level of the European Commission and EU-15 was judged as poor, whereas advancement for the EU-10 was judged as non-existent (assessment of situation in 2005).

The transport user currently does not pay for the external costs (air pollution, climate change, safety problems and infrastructure damage) that a trip causes. By moving towards a differentiated charging scheme that is closer to the Polluter Pays principle, the environment will benefit, since environmental aspects will be better taken into account in transport related decisions by users. Variable transport pricing can provide an incentive to reduce environmental pressure and might have a positive impact on load factors, logistics, overall transport safety, accessibility, air pollution and climate change. It could eventually lead to either a modal shift, or to a net reduction of transport volume, and hence to less negative impacts of transport.

Research and future infrastructure charging schemes development

Differentiated vehicle ownership and circulation taxes can be used to guide consumers to purchase vehicles that make use of technology advances to improve fuel efficiency rather than power, weight or comfort (OECD/ITF, 2008). Over the last few decades conventional (gasoline) vehicle technology has shown a natural rate of efficiency improvement of around 1 % a year. This improvement alone will not enable a reduction of greenhouse gases to the targets set in Europe.

In Europe vehicle ownership and circulation taxes are increasingly being differentiated according to CO2 emissions. National labelling systems for vehicle fuel efficiency are frequently based on an entirely different segmentation of the market (by size, price and function). There is a clear role for international coordination to harmonize the way the market is structured. Again, for tax differentiation, a formula to link tax rates to CO2 emissions rates rather than by steps or ranges of engine volume avoids the problem (OECD/ITF, 2008).

The impact of transport pricing on transport volumes was a subject of study under the sixth Framework Programme of the European Commission called GRACE - 'Generalisation of Research on Accounts and Cost Estimation' ( Important findings have been developed through the project, some of which are:

  • Optimal charges for the use of rail and road transport infrastructure will be below average maintenance and renewal costs for road, and a long way below for rail, wherever there is spare capacity and little environmental impact;
  • Most of the evidence suggests that charges should be higher for low quality, less heavily used road and rail infrastructure, as the low quality nature of the infrastructure makes it more susceptible to damage;
  • Airports produce substantial environmental costs which are not usually internalised in charges;
  • There are major differences in the marginal social cost of time, space and vehicle type that have not been internalised in existing charges;
  • Data shortages exist in some Member States, but perhaps the most important implementation barriers result from policy maker's unfamiliarity with the accounts methodology, a lack of resources and problem perception, organisational opposition against change, fear of undesirable results, and lack of an organisation responsible for national transport accounts. Overcoming these barriers requires institutional reform and more dissemination of best practice;
  • The costs of implementing the most complex charging regimes for roads appear likely to outweigh the benefits, whereas a simpler scheme is likely to yield higher net benefits;
  • All member countries with important transit transport flows have an interest to misreport their marginal external costs if their tax and toll cap is a function of their report. In practice, there will be incentives to over-charge and under-charge in different parts of Europe.

Findings of this research can help to improve infrastructure charging across Europe. They can also help to link fuel taxation, external costs of transport charging and infrastructure maintenance cost recovery schemes, thereby supporting climate change prevention.


No targets have been specified.

Related policy documents

No related policy documents have been specified


Methodology for indicator calculation

The indictor is based on qualitative information collected through the annual questionnaire (EEA) and other sources (studies and publications retrieved from the Internet).

Methodology for gap filling

Verification with the EEA member countries via annual questionnaires.

Methodology references

No methodology references available.


Methodology uncertainty

Information about the structure of tax incentives is available, but it is more difficult to find or verify data about the levels of transport taxes and charges.

No time series are available. Comparison between countries requires detailed insight information on all aspects of price structures and also levels for transport in the Member States, which is currently lacking.

Only data about tax structures and not tax levels is available - information on both transport price levels and structures should become available in order to fully answer the question of whether we are moving towards the internalisation of external costs in transport.

Data sets uncertainty

Data completeness cannot be guaranteed because some sources are based on voluntarily submitted information. The information used in the fact sheet is the most recent information available to the EEA - it could be that more internalisation measures are implemented, which are not known to the EEA and therefore not reported.

Rationale uncertainty

No uncertainty has been specified

Data sources

  • No datasets have been specified.

Generic metadata


Transport Transport (Primary topic)

Typology: N/A
Indicator codes
  • TERM 026

Contacts and ownership

EEA Contact Info

Peder Gabrielsen


EEA Management Plan

2010 (note: EEA internal system)


Filed under:


European Environment Agency (EEA)
Kongens Nytorv 6
1050 Copenhagen K
Phone: +45 3336 7100