Indicator 19 (and 17): Internalization of external costs
Despite many methodological problems, it is estimated that in 1991 only about 30% of road infrastructure costs and external costs were recovered from users, and only about 39% for railways.
The internationalization of transport costs is expected to improve efficiency, while non-transport taxes are expected to fall as external costs are shifted from government to transport users. The impact on GDP growth or industrial competitiveness will therefore be in principle 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
Full recovery of transportation costs including external impacts from users.
identification
The proportion of external costs covered by revenue from relevant taxes and fees.
Note: External costs are those that transportation users impose on others, such as noise, air pollution, accidents, climate change, congestion, and infrastructure costs. With improvements in data and methods, external costs can also include land use, solid waste generation, water pollution, fragmentation of human and animal communities, and aesthetic impacts of infrastructure and traffic.
Policy and objectives
An important aspect of EU transport policy is the concept of fair and efficient pricing, which is described in the European Commission’s Green Paper on Fair and Efficient Pricing (CEC, 1995). This paper proposes the application of the ‘polluter pays’ principle to ensure that transport users pay all the costs they impose on others. External costs should be recovered through taxes, and these taxes should be differentiated according to the environmental performance of each mode.
Internationalization is a policy tool to correct market imperfections and the inefficient allocation of resources that can occur when costs are not borne by those who bear them. The internationalization of external costs such as those associated with air pollution, noise and accidents can also reduce the environmental costs of transport by providing incentives to reduce demand.
It is widely agreed that transport prices do not offset external costs, but there is less agreement on the extent of the shortfall. However, any move towards internalisation should yield substantial social and societal benefits. The recent European Transport Commission report on internalisation policies concludes that the main response to internalisation is likely to be substantial improvements in technological and operational efficiency. The overall impact on mobility demand and modal shares is likely to be relatively small. But the increase in transport costs will be offset by efficiency improvements and opportunities for non-transport tax cuts. The impact on GDP growth or industrial competitiveness is therefore likely to be small (European Transport Commission, 1998).
the findings
The external costs of transport in the EU due to environmental damage (noise, local air pollution, climate change) and accidents are estimated at around 4% of GDP (ECMT, 1998).
In 1991, cost recovery (Figure 5.8) was generally higher for rail (39%) than for road transport (30%) (except for the Nordic countries and Ireland). This is partly due to the use of railway infrastructure subsidies to encourage greater use of rail transport. Overall, the degree of internationalization remains below 50%. The highest cost recovery rates are found in France, Austria, Denmark and Spain, while Belgium and Portugal show the lowest rates.
It is estimated (see Figure 5.9) that the total external transport costs of the EU are:
Road traffic accounts for about 83%;
Flying by about 13%;
Railways contribute about 3% (Germany, Italy, the United Kingdom and Spain control three-quarters of this share);
Domestic shipping is approximately 1% (this only matters in Germany and the Netherlands).
Figure 5.9: External costs of transportation per capita (1991))
Source: UIC, 1994
At present, it is impossible to calculate the localization rates for domestic shipping and aviation, as there is no data on taxes and duties. There is no toll on the Rhine, which covers the bulk of domestic shipping in the EU. Similarly, aviation is exempt from customs duties and VAT.
Finally, another important issue in considering localization policy is the role of public transport subsidies. In the short run, before full localization is achieved, subsidies may provide another means of encouraging less environmentally damaging modes of transport. Some governments subsidize passenger rail services to provide an alternative to car transport and help ensure social equity.
Box 5.3: Maximum reference car prices and costs
Within the framework of the TRENEN II STRAN research project, urban and regional models were developed to evaluate transport price reform in the European Union. The models were applied to six urban and three regional case studies.
Despite some methodological and data problems that remain, the project results show that the discrepancy between current prices and external costs under congested urban conditions is often large. Figure 5.10 shows, for some case studies and for 2005, the expected public prices and marginal social costs of a small petrol car driven alone during peak hours and not paying to park at the destination. The figure shows that peak-hour car use covers only a third to a half of its full marginal costs. There are two main sources of error: parking without paying for parking and omitting some external congestion costs (such as the time costs that each user imposes on others). Parking without paying for parking distorts prices during and after peak hours. The significance of this varies from city to city: 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 case studies of intercity passenger transport (results for Belgium and Ireland in the figure), the difference between current taxes and fees and external costs was found to be less significant than for urban transport.
Figure 5.10: Peak prices and costs of benchmark cars (projected situation for 2005 with constant pricing policies)
Source: TRENEN II STRAN ST 96 SC 116 – Final Summary Report
Note: The generalized price (left block for each city/country) includes resource costs (excluding parking), taxes, and private time costs. The generalized marginal social cost (right block) includes resource costs, parking resource costs, private time costs, and marginal external costs.
Future work
Problems in the analytical approach and data deficiencies make estimates of external costs and the degree of internal interference uncertain. These problems must be overcome to improve this indicator.
Environmental costs from water and soil pollution, vehicle production and disposal pollution, impacts on ecosystems, visual disturbance and community fragmentation due to transport infrastructure are not adequately covered, and methods for estimating them need to be improved.
Climate change estimates include many uncertainties and do not take into account emissions of nitrogen oxides and carbon dioxide from aircraft. Therefore, the external costs of aviation are underestimated.
Environmental impacts of shipping were not included due to data gaps and definition problems.
An update of the study conducted by the International Federation of Health Workers/International Institute for Health Research (UIC, 1994) is currently being prepared with the aim of improving understanding of the magnitude of external costs in member countries.
The European Commission has laid out plans to develop methods for calculating the external and internal costs of transport (CEC, 1998d).
At present, data on subsidies (i.e. TERM 17) are not collected in such a way as to be able to produce an EU-wide indicator. Such an indicator would likely 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
an average (%)
road
Railroad
road
Railroad
road
Railroad
road
Railroad
road
Railroad
Austria
6 665
112
3 713
1 283
10 378
1 395
2 613
729
25.2
52.3
Belgium
8680
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
3068
283
6 276
377
1 829
46
29.1
12.2
France
34 998
335
22 853
4 265
57 851
4600
19 407
2 604
33.6
56.6
Germany
61 846
1445
25049
4 724
86 895
6 169
22 583
2008
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
20649
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
Holland
7 829
139
4 142
522
11 971
661
4920
305
41.1
46.1
Portugal
5 445
118
676
133
6 121
251
590
78
9.6
31.1
Spain
20 702
293
7082
1 718
27 784
2011
5 934
1003
21.4
49.9
Sweden
5527
69
2 947
5 216
8 474
5 285
5047
690
47.9
13.1
United kingdom
38 508
538
13 142
2 132
51650
2 670
19750
1 245
38.2
46.6
European Union 15
236 779
4 294
107 582
25 255
344 361
29 549
109 952
10 682
30.3
39.1
Note: External costs include accident costs.
Source: European Environment Agency, 1999 using data from University of Illinois at Chicago, 1994 and ECMT, 1998
