Internalisation of external costs

Indicator 19 (and 17): Internalisation of external costs

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.

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 NO_x 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.