Do motorists pay their way?

I was a panellist on Radio National’s Life Matters program discussing The evolution of the Australian city with Lucy Turnbull from the Greater Sydney Commission and Mark Steinert from Stockland.

A commenter on the ABC’s web site picked up on something (I think) I said about motorists not paying for their use of roads:

“We don’t pay for road usage” – what is vehicle registration and council rates then!

I’ve observed before that the best evidence we’ve got indicates that motorists do in fact pay the full financial cost of building and maintaining the roads they require. They do this via imposts like the fuel excise and registration fees (see Should cars be subsidised?).

But they don’t pay their way in terms of the “external” costs they impose on society, principally lost time due to traffic congestion, but also diminished health from traffic crashes and pollution, and unpaid parking.

Urban public transport users on the other hand only pay around a third of the financial cost of providing the service they receive but score well on minimising the sorts of negative “externalities” that bedevil private vehicles.

The upshot is the financial subsidies paid to public transport users are pretty well equal to the (unpaid) negative externalities imposed on others by motorists. In other words, both modes are subsidised by society – one directly via cash, the other via economic costs – to a similar extent.

Put another way, motorist don’t pay what it would cost to provide enough roads to eliminate or at least significantly reduce congestion.

That would require a huge, never-ending program of construction with attendant problems of social dislocation and environmental damage. And it’s unlikely motorists would in any event be prepared to pay the full cost of construction; note that most new urban toll road proposals now require government subsidy.

Some way of rationing road space is necessary in order to avoid or minimise the social costs of congestion. That might be done randomly (e.g. odd or even number plates) but a far more efficient way is to allocate space on the basis of preparedness to pay.

This is how we manage scarce resources like energy; customers are charged at a higher rate in peak periods. That gives them an incentive to change behaviour e.g. to shift consumption to off-peak periods when there’s already spare generating capacity available. It reduces the pressure to build expensive additional capacity just to meet a relatively short peak period.

Levying a new charge on motorists to account for the social costs they impose would be a difficult political issue in Australian cities given most residents use cars as either a driver or a passenger. Driving is hardly the only activity where costs are imposed on others; the world is awash with externalities.

But policy-makers probably don’t need to raise additional revenue to get an acceptable outcome on key issues such as traffic congestion. They could instead discourage low value or marginal travel by changing the way existing taxes and charges are levied.

The problem with charges like vehicle registration is they’re annual one-off imposts. Once paid, they’re not part of the motorist’s calculation of whether or not to take a particular trip by car.

But if registration fees were instead levied on kilometres of travel, they’d be a more visible component of the cost of a trip. Since the charge could be avoided by not taking the trip – or reduced by chaining it with another trip – it would act as a disincentive to drive.

This is the way the existing 0.39 cents per litre fuel excise works; it increases the price of petrol significantly and hence discourages driving and/or encourages a shift to a more fuel-efficient vehicle.

That’s good because it reduces car travel but its not enough. It does little to reduce traffic congestion because that depends on when and where driving takes place.

If the fuel excise and other fees were also levied with regard to place and time – say at a higher rate per kilometre in the morning peak on busy roads – they could help reduce traffic congestion. It would give motorists an incentive to forego some low-value trips entirely, shift them to a non-congested period, or use an alternative mode like walking, cycling or public transport.

The big political obstacle with anything to do with road pricing is the perception that it’s inequitable. This was perfectly illustrated by the reluctance of the Greens and Labor to endorse the Abbot government’s move to index the fuel excise i.e. not to increase the tax but simply to maintain its real value.

The curious thing is this timidity doesn’t seem to paralyse politicians when it comes to energy pricing. Or when it comes to charging train passengers from outer suburbs a higher fare for longer journeys. There’s every reason to think that even a proposal that merely replaces existing revenue would face formidable political opposition.

As I’ve argued before, policy shouldn’t be designed by assessing the equity effects of specific measures in isolation. The sensible approach is to evaluate equity outcomes at the level of the entire tax and transfer system (see Are equity concerns with congestion charging a deal breaker?).