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 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 cleaner, quieter, more fuel-efficient and safer vehicles and modes running on cleaner fuels in off-peak periods than to drive in more polluting, noisy and unsafe vehicles in peak periods. '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 'Transport prices').

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.'.

Scientific references

• No rationale references available

Indicator definition

No definition has been specified

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).

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 NO_x 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' (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

No related policy documents have been specified

Methodology

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.

Data specifications

EEA data references

• No datasets have been specified here.

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.

Rationale uncertainty

No uncertainty has been specified