Developing a market for kilometres

A low price would see the economic, social and environmental costs of driving continue. A high price that leads to a substantial decrease in driving would impose its own economic and social costs.

Given this possible problem, one alternative is to find a market based solution to the problems posed by increased car numbers and increased driving. There are a number of frameworks for doing this. They are similar to carbon emissions trading systems that have been proposed in order to reduce industrial pollution. One solution I have previously discussed in an article co-written with Alex Collins and published in New Matilda ("Tradeable Car Permits - One Way To Tackle Congestion In Our Cities", April 26, 2006). This system proposed the introduction of tradeable car ownership permits which would limit the number of cars in a city and develop a market price for right to own a car (separate to the price of the car itself).

Another system would involve developing a market for kilometres. One way of developing such a market would involve capping the total number of kilometres driven in a given city in a given year, which is not difficult to estimate. This cap could reflect the current level of kilometres driven, or a lower level. Then, it would involve dividing this total number of kilometres, by the amount of cars in the city. This average amount of kilometres would then be “allocated” to each car owner in the city. By “allocated”, I mean that a car owner would be permitted to drive up to this amount of kilometres per year at no cost.

But what if they wanted to drive more than their allocation? That is where the market comes in. In order to do that, they would need to purchase kilometres from another car owner who intends to drive less than their allocation. This transaction of kilometres would take place at a price that is acceptable to both the car owner that is purchasing and the car owner that is selling the kilometres.

In effect, the kilometres would be purchased and sold at a market price. Intermediaries could be set up in order to facilitate such transactions, possibly using websites to match buyers and sellers of kilometres in a particular city, just like eBay matches buyers and sellers of goods.

There would of course need to be some level of government supervision of the entire system to ensure compliance, in particular to monitor that car owners do not drive in excess of the amount of kilometres they have been allocated or have purchased from other car owners.

Having car owner accounts (which record the amount of kilometres that a car owner is entitled to drive), which are linked with that car owner’s car odometer, would be one method for ensuring compliance. This would of course be dependent on technology constraints. But given the development of electronic tolling and GPS it is likely that such technology is already available or will be in the not too distant future.

Such a system would have a number of advantages, in addition to simply avoiding the inefficiencies caused by having a government authority set the price for driving. First, and most obviously, it would tackle the problem of congestion and air pollution by limiting the amount of driving in our cities to a fixed amount of kilometres.

Second, and importantly, it would also be an equitable system. Because rather than imposing charges on all car owners (as would be the case in other forms of road pricing), including those with lower incomes, it effectively gives all car owners a “free” allocation of kilometres every year. They can choose to use these kilometres, or to sell them at the market price.

Of course, introducing such a system would not necessarily be an easy process for governments. The prospect of additional costs for car owners, on top of the current costs of petrol and car registration, would be likely to prompt some opposition from car owners and particularly from car and road transport lobby groups. However, as congestion and air pollution in our cities becomes more of a problem, support in the community for policies that directly tackle these problems will eventually strengthen.

Just like business lobby groups are now starting to support moves to establish a carbon emissions trading system in Australia, car and road transport lobby groups will also eventually realise that introducing a price for driving is necessary to tackle congestion and air pollution. In any case, policies to tackle congestion and air pollution need to be debated further and now is the time to move this debate forward.