5.5.1.2 Taxation and pricing
Transport pricing refers to the collection of measures used to alter market prices by influencing the purchase or use of a vehicle. Typically measures applied to road transport are fuel pricing and taxation, vehicle license/registration fees, annual circulation taxes, tolls and road charges and parking charges. Table 5.14 presents an overview of examples of taxes and pricing measures that have been applied in some developing and developed countries.
Table 5.14: Taxes and pricing in the transport sector in developing and developed countries
| Instrument | Developing countries/EIT | Developed countries |
|---|
| Tax incentives to promote use of natural gas | Pakistan, Argentina, Colombia, Russia | Italy, Germany, Australia, Ireland, Canada, UK, Belgium |
| Incentives to promote natural gas vehicles | Malaysia, Egypt | Belgium, UK, USA, Australia, Ireland |
| Annual road tax differentiated by vintage | Singapore and India (fixed span and scrapping) | Germany |
| Emission trading | Chile | |
| Congestion pricing including Area Licensing Scheme; vehicle registration fees; annual circulation tax | Chile, Singapore | Norway, Belgium |
| Vehicle taxes based on emissions-tax deductions on cleaner cars e.g., battery operated or alternative fuel vehicles | South Korea | Austria, Britain, Belgium, Germany, Japan, The Netherlands, Sweden |
| Carbon tax by size of engine | Zimbabwe | |
| Cross subsidization of cleaner fuels (ethanol blending by gasoline tax - through imposition of lower surcharge or excise duty exemption) | India | |
Pricing, taxes and charges, apart from raising revenue for governments, are expected to influence travel demand and hence fuel demand and it is on this basis that GHG reduction can be realized.
Transport pricing can offer important gains in social welfare. For the UK, France and Germany together, (OECD, 2003) estimates net welfare gains to society of optimal charges (set at the marginal social cost level) at over 20 billion €/yr (22.6 US$/yr).
Although the focus here is on transport pricing options to limit CO2 emissions, it should be recognized that many projects and policies with that effect are not focused on GHG emissions but rather on other objectives. A pricing policy may well aim simultaneously at reducing local pollution and GHG emissions, accidents, noise and congestion, as well as generating State revenue for enlarging of social welfare and/or infrastructure construction and maintenance. Every benefit with respect to these objectives may then be assessed simultaneously through CBA or MCA; they may be called co-benefits. Governments can take these co-benefits into account when considering the introduction of transport pricing such as for fuel. This is all the more important since a project could be not worth realising if only one particular benefit is considered, whereas it could very well be proved beneficial when adding all the co-benefits.
Box 5.6 Examples of pricing policies for heavy-duty vehicles
Switzerland: In January 2001, trucks of maximum 35 tonnes weight were allowed on Swiss territory (previously 28 tonnes) and a tax of 1.00 cent/tkm (for the vehicle middle emission category) was imposed on trucks above 3.5 tonnes on all roads. It replaced a previous fixed tax on heavy-duty vehicles. The tax is raised electronically. Since 2005, the tax is higher at 1.60 cent/tkm, but 40 tonnes trucks are allowed. Over the period 2001–2003, it was estimated that it contributed to an 11.9% decrease in vehicle-km and a 3.5% decrease in tonnes-km of domestic traffic. The tax led to an improved carriers’ productivity and it is anticipated that, for that reason, emissions of CO2 and NOx would decrease over the period 2001–2007 by 6–8%. On the other hand transit traffic, which amounts to 10% of total traffic, was also affected in a similar way by the new tax regime, so that the number of HDL has been decreasing at a rate of about 2–3% per year, while, at the same time, increasing in terms of tonnes-km (ARE, 2004b; 2006). A part of the revenues are used to finance improvements to the rail network.
Germany: A new toll system was introduced in January 2005 for all trucks with a maximum weight of 12 tonnes and above. This so-called LKW-MAUT tax is levied on superhighways on the base of the distance driven; its cost varies between 9 and 14 Eurocents according to the number of axles and the emission category of the truck. Payments are made via a GPS system, at manual payment terminals or by Internet. The receipts will be used to improve the transport networks of Germany. The system introduction appears successful, but it is too early to assess its impacts.
Taxes
Empirically, throughout the last 30 years, regions with relatively low fuel prices have low fuel economy (USA, Canada, Australia) and regions where relatively high fuel prices apply (due to fuel taxes) have better car fuel economy (Japan and European countries). For example, fuel taxes are about 8 times higher in the UK than in the USA, resulting in fuel prices that are about three times higher. UK vehicles are about twice as fuel-efficient; mileage travelled is about 20% lower and vehicle ownership is lower as well. This also results in lower average per capita fuel expenditures. Clearly, automobile use is sensitive to cost differences in the long run (VTPI, 2005). In theory, long run impact of increases in fuel prices on fuel consumption are likely to be about 2 to 3 times greater than short run impact (VTPI, 2005). Based on the price elasticities (Goodwin et al., 2004) judged to be the best defined results for developed countries, if the real price of fuel rises by 10% and stays at that level, the volume of fuel consumed by road vehicles will fall by about 2.5% within a year, building up to a reduction of over 6% in the longer run (about 5 years or so), as shown in Table 5.15.
Table 5.15: Impact of a permanent increase in real fuel prices by 10%
| | Short run/within 1 year (%) | Long run/5 years (%) |
|---|
| Traffic volume | -1 | -3 |
| Fuel consumption | -2.5 | -6 |
| Vehicle fuel efficiency | -1.5 | -4 |
| Vehicle ownership | Less than -1 | -2.5 |
| Source: Goodwin et al. 2004. |
An important reason why a fuel or CO2 tax would have limited effects is that price elasticities tend to be substantially smaller than the income elasticities of demand. In the long run the income elasticity of demand is a factor 1.5–3 higher than the price elasticity of total transport demand (Goodwin et al., 2004). In developing countries, where incomes are lower, the demand response to price changes may be significantly more elastic.
Recent evidence suggests that the effect of CO2 taxes and high fuel prices may be having a shrinking effect in the more car-dependent societies. While the evidence is solid that price elasticities indicated in Table 5.15 and used by Goodwin were indeed around –0.25 (i.e., 2.5% reduction in fuel for every 10% increase in price), in earlier years, new evidence indicates a quite different story. Small and Van Dender (2007) found that price elasticities in the USA dropped to about –0.11 in the late 1990s, and Hughes et al. (2006) found that they dropped even further in 2001–2006, to about –0.04. The explanation seems to be that people in the USA have become so dependent on their vehicles that they have little choice but to adapt to higher prices. One might argue that these are short term elasticities, but the erratic nature of gasoline prices in the USA (and the world) result in drivers never exhibiting long-term behavior. Prices drop before they seriously consider changing work or home locations or even buying more efficient vehicles. If oil prices continue to cycle up and down, as many expect, drivers may continue to cling to their current behaviors. If so, CO2 taxes would have small and shrinking effects in the USA and other countries where cars are most common.
As an alternative to fuel taxes, registration and circulation taxes can be used to incentivise the purchase (directly) and manufacturing (indirectly) of fuel-efficient cars. This could be done through a revenue neutral fee system, where fuel-efficient cars receive a rebate and guzzler cars are faced with an extra fee. There is evidence that incentives given through registration taxes are more effective than incentives given through annual circulation taxes (Annema et al., 2001). Buyers of new cars do not expect to be able to pass on increased registration taxes when selling the vehicle. Due to refunds on registration taxes for cars that were relatively fuel efficient compared to similar sized cars, the percentage of cars sold in the two most fuel efficient classes increased from 0.3%–3.2% (cars over 20% more fuel efficient than average) and from 9.5%–16.1% (for cars between 10 and 20% more fuel efficient than average) in the Netherlands (ADAC, 2005). After the abolishment of the refunds, shares decreased again. COWI (2002) modelled the impact on fuel efficiency of reforming current registration and circulation taxes so they would depend fully on the CO2 emissions of new cars. Calculated reduction percentages varied from 3.3–8.5% for 9 European countries, depending on their current tax bases.
Niederberger (2005) outlines a voluntary agreement with the Swiss government under which the oil industry took responsibility for GHG emissions from the road transport sector, which they supply with fuel. As of 1 October 2005, Swiss oil importers voluntarily contribute the equivalent of about 5 cents per gallon (approx. 80 million US$ annually) into a climate protection fund that is invested via a non-profit (non-governmental) foundation into climate mitigation projects domestically and abroad (via the emerging carbon market mechanisms of the Kyoto Protocol). Cost savings (compared with an incentive tax) are huge and the private sector is in charge of investing the funds effectively. A similar system in the USA could generate 9 billion US$ in funds annually to incentivize clean alternative fuels and energy efficient vehicles, which could lower US dependency on foreign fuel sources. This policy is also credible from a sustainable development perspective than the alternative CO2 tax, since the high CO2 tax would have led to large-scale shifts in tank tourism – and bookkeeping GHG reductions for Switzerland – although the real reductions would have been less than half of the total effect and neighbouring countries would have been left with the excess emissions.
Licensing and parking charges
The most renowned area licensing and parking charges scheme has been applied in Singapore with effective reduction in total vehicular traffic and hence energy (petroleum) demand (Fwa, 2002). The area licensing scheme in Singapore resulted in 1.043 GJ per day energy savings with private vehicular traffic reducing by 75% (Fwa, 2002).
Unfortunately there is currently a lack of data on potential GHG savings associated with policy, institutional and fiscal reforms/measures with respect to transport particularly in other developing countries. General estimates of reduction in use of private vehicle operators resulting from fuel pricing and taxing are 15–20% (World Bank, 2002; Martin et al., 1995).
Table 5.16: Potential energy and GHG savings from pricing, taxes and charges for road transport
| Tax/pricing measure | Potential energy/GHG savings or transport improvements | Reference |
|---|
| Optimal road pricing based on congestion charging (London, UK) | 20% reduction in CO2 emissions as a result of 18% reduction in traffic | Transport for London (2005) |
| Congestion pricing of the Namsan Tunnels (Seoul, South Korea) | 34% reduction of peak passenger traffic volume. Traffic flow from 20 to 30 km/hr. | World Bank (2002) |
| Fuel pricing and taxation | 15-20% for vehicle operators. | Martin et al. (1995) |
| Area Licensing Scheme (Singapore) | 1.043 GJ/day energy savings. | Fwa (2002) |
| | Vehicular traffic reduced by 50%. Private traffic reduced by 75%. | |
| | Travel speed increased 20 to 33 km/hr. | |
| Urban gasoline tax (Canada) | 1.4 Mton by 2010 | Transportation in Canada; www.tc.gc.ca/pol/en/Report/anre1999/tc9905be.htm |
| | 2.6 Mton by 2020 | |
| Congestion charge trial in Stockholm (2005-2006) | 13% reduction of CO2 | http://www.stockholmsforsoket.se/templates/page.aspx?id=2453 |
Box 5.7 Policies to promote biofuels
Policies to promote biofuels are prominent in national emissions abatement strategies. Since benefits of biofuels for CO2 mitigation mainly come from the well-to-tank part, incentives for biofuels are more effective climate policies if they are tied to the whole well-to-wheels CO2 efficiencies. Thus preferential tax rates, subsi-dies and quotas for fuel blending should be calibrated to the benefits in terms of net CO2 savings over the whole well-to-wheel cycle associated with each fuel. Development of an index of CO2 savings by fuel type would be useful and if agreed internationally could help to liberalise markets for new fuels. Indexing incentives would also help to avoid discrimination between feedstocks. Subsidies that support production of specific crops risk being counterproductive to emission policies in the long run (ECMT, 2007). In order to avoid negative effects of biofuel production on sustainable development (e.g. biodiversity impacts), additional conditions could be tied to incentives for biofuels.
The following incentives for biofuels are implemented or in the policy pipeline (Hamelinck, et al. 2005):
Brazil was one of the first countries to implement policies to stimulate biofuel consumption. Currently, flexible fuel vehicles are eligible for federal value-added tax reductions ranging from 15–28%. In addition, all gasoline should meet a legal alcohol content requirement of 20–24%.
Motivated by the biofuels directive in the European Union, the EU member states have implemented a variety of policies. Most of the member states have implemented an excise duty relief. Austria, Spain, Sweden, the Netherlands and the UK have implemented an obligation or intend to implement an obligation in the coming years. Sweden and Austria also implemented a CO2 tax.
The American Jobs creation act of 2004 provides tax incentives for alcohol and biodiesel fuels. The credits have been set at 0.5–1 US$/gallon (about 0.11–0.21 >/litre). Some 39 states have developed additional policy programmes or mechanisms to support the increase use of biofuel. The types of measures range from tax exemptions on resources required to manufacturing or distributing biofuels (e.g. labour, buildings); have obligatory targets for governmental fleets and provide tax exemptions or subsidies when purchasing more flexible vehicles. One estimate is that total subsidies in the US for biofuels were 5.1–6.8 billion US$ in 2006, about half in the form of fuel excise tax reductions, and another substantial amount for growing corn used for ethanol.
New blending mandates have also appeared in China, Canada, Colombia, Malaysia and Thailand. Four provinces in China added dates for blending in major cities, bringing to nine the number of provinces with blending mandates (REN21, 2006).