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Sound and independent information
on the environment

Internalisation of external costs

Indicator 19 (and 17): Internalisation of external costs


  • Although there are many methodological problems, it is estimated that in 1991 only about 30 % of road infrastructure and external costs were recovered from users and only about 39 % for rail.
  • Internalisation of transport costs is expected to lead to efficiency improvements, while non-transport taxes should decrease as a result of external costs being transferred from government to transport users. The impact on GDP growth or industrial competitiveness should, again in principle, therefore be small.

Figure 5.8: Proportion of external and infrastructure costs covered by revenues in transport (1991)

Source: EEA, 1999b, using data from UIC, 1994 and ECMT, 1998

Objective
Recover the full costs of transport including externalities from users.

Definition
The proportion of external costs that are covered by revenues from relevant taxes and charges.

Note: External costs are those that transport users inflict on others, such as noise, air pollution, accidents, climate change, congestion, and infrastructure costs. With improvements in data and method they could also include the use of land, solid waste generation, water pollution, fragmentation of human and animal communities, and the aesthetic impacts of infrastructure and traffic.

 

Policy and targets

An important aspect of the EU transport policy is the concept of fair and efficient pricing, described in the Commission Green Paper on Fair and Efficient pricing (CEC, 1995). This proposes to apply the ‘polluter-pays’ principle to ensure that transport users pay all the costs they impose on others. External costs should be recovered via taxation, and these taxes should be differentiated according to the environmental performance of each mode.

Internalisation is a policy instrument to correct market imperfections and the resulting inefficient allocation of resources that can occur when costs are not borne by those who incur them. Internalisation of external costs such as those related to air pollution, noise and accidents should also reduce the environmental costs of transport by providing incentives to reduce demand.

It is widely accepted that transport prices do not recover external costs, but there is less agreement about the extent of the shortfall. Any move towards internalising costs should however produce significant social and community benefits. The recent ECMT report on policies for internalisation concludes that the main response to internalisation is likely to be significant technological and operational efficiency improvements. The overall effect on demand for mobility and modal shares is likely to be relatively small. But the increase in transport costs will be offset by efficiency improvements and there will be opportunities for reducing non-transport-related taxes. So the impact on GDP growth or industrial competitiveness is likely to be small (ECMT, 1998).



Findings

The external costs of transport in the EU caused by environmental damage (noise, local air pollution, and climate change) and accidents are estimated to be around 4 % of GDP (ECMT, 1998).

In 1991, cost recovery (Figure 5.8) was generally higher for rail (39 %) than for road transport (30 %) (with the exception of the Nordic countries and Ireland). This is partly due to rail infrastructure subsidies being used to encourage greater use of rail transport. Overall, the degree of internalisation remains below 50 %. The highest cost recovery rates are found in France, Austria, Denmark and Spain, while Belgium and Portugal show the lowest.

It is estimated (see Figure 5.9) that of total EU external transport costs:

  • road traffic accounts for about 83 %;
  • aviation for about 13 %;
  • rail for about 3 % (Germany, Italy, the United Kingdom and Spain dominate with three-quarters of this);
  • inland shipping for about 1 % (only significant in Germany and the Netherlands).

Figure 5.9: External costs of transport per capita (1991)

Source: UIC, 1994

Currently, it is impossible to calculate internalisation percentages for inland shipping and aviation, as data on taxes and charges is not available. Also no levies are imposed on the River Rhine, which includes the bulk of inland navigation in the EU. Similarly, aviation is exempt from excise duties and VAT.

Finally, another important issue in considering the policy of internalisation is the role of public transport subsidies. In the short term, before full internalisation has been achieved, subsidies can provide another way of promoting less environmentally harmful transport modes. Some governments subsidise passenger train services in order to provide an alternative to car transport and to help ensure social equity.

Box-5.3: Peak car reference prices and costs

In the TRENEN II STRAN research project urban and interregional models were developed to assess pricing reform in transportation in the European Union. The models were applied in six urban case studies and three interregional case studies.

Although some methodological and data problems remain, the project findings shows that the discrepancy between current prices and external costs in congested urban conditions are often considerable. Figure 5.10 gives, for some of the case studies and for 2005, the expected generalised prices and marginal social costs of a small petrol car driven in the peak period by a lone inhabitant who does not pay for his parking at destination. The figure shows that peak car use covers only one-third to half of its full marginal costs. There are two main sources of error: unpaid parking and the omission of some external congestion costs (e.g. the time costs that each user imposes on others). Unpaid parking distorts prices in the peak and off-peak. Its importance varies across cities: parking costs are much higher in London and Amsterdam than in Brussels and Dublin. The external costs shown in the figures cover congestion air pollution, accidents and noise.

In the inter-urban passenger transport case studies (results for Belgium and Ireland in the figure), the difference between current taxes and charges and external costs were found to be less important than for urban transport.

Figure 5.10: Peak car reference prices and costs (expected situation for 2005 with unchanged pricing policies)

Source: TRENEN II STRAN ST 96 SC 116 - Final Summary Report
Note: The generalised price (left block for each city/country) includes the resource costs (except parking), taxes and own-time costs. The generalised marginal social cost (right block) includes resource costs, parking resource costs, own-time costs and marginal external costs.

Future work

  • Problems in analytical method and data shortcomings make estimates of external costs and the degree of internalisation uncertain. These must be overcome to improve this indicator.
  • The environmental costs of water and soil pollution, vehicle production and disposal pollution, effects on ecosystems, visual annoyance and splitting communities with transport infrastructure are inadequately covered and methods of estimating them need to be improved.
  • The estimates for climate change include many uncertainties and do not allow for NOx and CO2 emissions from aircraft. The external costs of aviation are therefore underestimated.
  • The environmental impacts of maritime shipping are not included because of gaps in data and definition problems.
  • An update of the IWW/INFRAS study (UIC, 1994) is being prepared to improve understanding of the magnitude of external costs in Member States.
  • The European Commission has outlined plans to develop methods of calculating the external and internal costs of transport (CEC, 1998d).
  • At present, data on subsidies (i.e. TERM Indicator 17) is not collected in a way that enables an EU-wide indicator to be quantified. Such an indicator is likely to show wide variations in subsidy policy and level across the EU.

Data
Proportion of external and infrastructure costs covered by revenues in transport, 1991

Unit: million ECU for cost data and % for recovery rate

 

External costs

Infrastructure costs

Total costs

Revenues

Cost recovery
rate (%)

 

road

rail

road

rail

road

rail

road

rail

road

rail

Austria

6 665

112

3 713

1 283

10 378

1 395

2 613

729

25.2

52.3

Belgium

8 680

126

1 152

600

9 832

726

664

351

6.8

48.3

Denmark

3 424

120

1 338

171

4 762

291

2 467

90

51.8

30.9

Finland

3 208

94

3 068

283

6 276

377

1 829

46

29.1

12.2

France

34 998

335

22 853

4 265

57 851

4 600

19 407

2 604

33.6

56.6

Germany

61 846

1 445

25 049

4 724

86 895

6 169

22 583

2 008

26.0

32.5

Greece

3 240

29

687

112

3 927

141

756

65

19.3

46.1

Ireland

1 572

35

800

48

2 372

83

955

28

40.3

33.7

Italy

34 795

832

20 649

2 439

55 444

3 271

22 288

1 424

40.2

43.5

Luxembourg

340

9

284

28

624

37

149

16

23.9

43.2

Netherlands

7 829

139

4 142

522

11 971

661

4 920

305

41.1

46.1

Portugal

5 445

118

676

133

6 121

251

590

78

9.6

31.1

Spain

20 702

293

7 082

1 718

27 784

2 011

5 934

1 003

21.4

49.9

Sweden

5 527

69

2 947

5 216

8 474

5 285

5 047

690

47.9

13.1

United Kingdom

38 508

538

13 142

2 132

51 650

2 670

19 750

1 245

38.2

46.6

EU15

236 779

4 294

107 582

25 255

344 361

29 549

109 952

10 682

30.3

39.1

Note: external costs include cost of accidents
Source: EEA, 1999 using data from UIC, 1994 and ECMT, 1998

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