Internalisation of external costs

Assessment versions

Published (reviewed and quality assured)

• No published assessments

Rationale

Justification for indicator selection

The aim of internalisation of external transport costs is to maximise the contribution of transport to society’s welfare. Internalisation can be achieved with various policy measures, including market-based instruments (charges, taxes and tradable permits), regulatory instruments (vehicle emission and safety standards, traffic restrictions) and voluntary instruments (such as the past agreement with the car industry to reduce CO2 emissions from new passenger cars). All of these instruments have associated advantages and disadvantages. Charges, taxes and tradable permits can be efficient instruments — provided they are effectively designed and implemented at modest cost — because they leave choices to individual transport users. Differentiated kilometre charges (for the internalisation of infrastructure, congestion, accident, noise and environmental costs) and fuel taxes (for the internalisation of climate change effects of CO2 emissions) are promising instruments for internalisation.

Internalisation by pricing measures provides an incentive to reduce externalities. The aim is then to bridge the gap that exists between the private costs of different trips (users’ costs) and the social cost of these trips. Fair and efficient pricing will make it economically more attractive to use modes with fewer environmental and social effects. Modern eco-friendly modes and fuels tend to be cleaner, quieter, more fuel-efficient and safer vehicles. Further, pricing schemes can determine the time of day people travel, easing congestion which can reduce pollution, noise and accidents. ‘Though a global increase in transport prices may be on the cards, the biggest change will nonetheless be in price structure’ (EC, 2001).

Changing the modal split and reducing transport volumes are not explicit aims of the internalisation strategy, but such changes could be induced (see TERM 20 ‘Real changes in transport prices by mode’).

There is much discussion over the size and possible use of revenues that accrue from the internalisation of external costs. There are indications that marginal cost pricing will result in a surplus of revenues over public expenditures (Roy, 2000). Although there is an economic case for not allocating the revenues for specific purposes, earmarking can sometimes improve the political feasibility of new charging regimes. The White Paper on the common transport policy proposes earmarking revenues from road transport charges in specific cases, for example to finance new infrastructure for alpine crossings (European Commission, 2001). The White Paper states that ‘to produce maximum benefit for the transport sector, it is essential that available revenue be channelled into specific national or regional funds in order to finance measures to lessen or offset external costs. In the revision of the Eurovignette Directive the European Commission and Parliament seem to support this ideology. Their position is that revenue generated from the additional charges imposed on heavy lorries (covering the costs of environmental impacts) should be used to finance investments into making transport more sustainable, such as research and development into clean vehicle technologies, construction of alternative transport infrastructure, and efforts to reduce pollution at source. However, in this scenario Member States would lose power over the revenue they generate. This has proven unpopular and has led to the latest draft proposal encouraging, rather than mandating, the recycling of funds.

Scientific references

• No rationale references available

Indicator definition

Overview of all non-fuel related charges and internalisation policies for EEA countries

Units

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). More recently, the EC published a Communication on a strategy for the internalisation of external costs (EC, 2008a). This strategy stresses “the need for a transport pricing system that is more efficient and more accurately reflects the true costs involved”. In order to achieve this, a range of economic instruments are suggested, including taxation, tolls and CO2 emissions trading. The general principle for internalisation of external costs is ‘social marginal cost charging’, whereby transport prices should correspond to the additional short-term cost generated by one extra person/vehicle using the infrastructure, ensuring fair treatment of both transport users and non-users and would create a direct link between the use if shared resources and payment on the basis of the ‘polluter-pays’ and ‘user’ pays’ principles. This same principle is expected to be used across the various modes of transport, but with varying instruments: 

In 2006, the EU  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 initially only reflected infrastructure costs, and applied to all freight traffic over 3.5 tonnes. Tolls can be differentiated with respect to Euro emission standards (including PM10 and NOX), and with respect to time of day and type of day/season. Mark-ups are allowed for particularly sensitive regions and congested roads, the revenues of which must be used for cross financing investment costs of more environmentally friendly transport infrastructure. Therefore, users may thus be faced with incentives to reduce their financial and environmental burden by choosing the less polluting vehicles, itineraries that are less ecologicallu sensitive, less congested periods or safer vehicles. 

A further proposal for the revision of the Directive was implemented on 15th October 2010, which paved the way to the ‘polluter pays’ principle for road transport. Members States will be allowed to charge tolls on heavy-duty vehicles (12 tonnes and over) to cover the external costs associated with the road transport of goods, including air pollution and noise. These ‘external costs tolls’ will be in addition to the existing transport infrastructure charges that are allowed under the current Eurovignette Directive. The scope of the tolls has also been expanded to included the entire European network (30,000km), twice the extent of the current Eurovignette Directive, which is limited to the TEN-T network (15,000km). The proposal states that the revenue generated from the road charges should be allocated to the transport sector to contribute to its sustainability. 

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 were 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 (now superseded by mandatory regulation of new passenger car CO2). It was 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” (http://www.grace-eu.org/). 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.

Targets

No targets have been specified.

Related policy documents

• COM(2003) 488
  Proposal for a Directive of the European Parliament and of the Council amending Directive 1999/62/EC on the charging of heavy goods vehicles for the use of certain infrastructures, COM(2003) 488
• COM(2005) 261 final
  COUNCIL DIRECTIVE on passenger car related taxes
• COM(2005) 459 final
  COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS, Reducing the Climate Change Impact of Aviation
• COM(2008) 433
  Communication from the Commission to the European Parliament and the Council on Greening Transport, COM(2008) 433 final, Brussels, 8 July 2008.
• COM(2008) 435
  Strategy for the internalization of external costs. Communication from the Commission. COM(2008)435
• COM(2008) 436
  Proposal for a Directive of the European Parliament and of the Council amending Directive 1999/62/EC on the charging of heavy goods vehicles for the use of certain infrastructures COM(2008) 436
• European transport Policy for 2010: Time to decide.
• Fair payment for infrastructure use
  A phased approach to a common transport infrastructure charging framework in the EU, White Paper
• Towards fair and efficient pricing in transport
  Policy options for internalising the external costs of transport in the European Union

Methodology

Methodology for indicator calculation

The indictor is based on qualitative information collected through the annual questionnaire (EEA) and other sources (studies, research projects and publications).

Methodology for gap filling

Verification with the EEA member countries via annual questionnaires.

Methodology references

No methodology references available.

Data specifications

EEA data references

• Questionnaire results for TERM026 indicator "Internalization measures for transport environmental costs" provided by European Environment Agency (EEA)

Data sources in latest figures

Uncertainties

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.

Where a policy is included in the previous TERM 26 questionnaire response, but is not included nor explicitly removed from the latest TERM 26 questionnaire response, it has been left in with affixed comment: “Status Uncertain”. Where a country did not respond in 2010, it has also been labelled “Status Uncertain”.

Rationale uncertainty

No uncertainty has been specified