Developing a market for kilometres

With rapid urban growth over the past decades combined with strong economic growth at a national level, Australians are buying more cars and driving more kilometres.

According to ABS data, between 2001 and 2005, the number of registered motor vehicles grew by 17 per cent in Queensland, 12 per cent in New South Wales and 10 per cent in Victoria. The recently released Melbourne Atlas shows that annual distance travelled by cars in Melbourne has risen by over 50 per cent between 1984-85 and 2001-02.

This increase in cars and the amount of kilometres they drive is a policy challenge for a number of reasons.

First, the congestion this causes in our cities imposes economic costs. Put simply, if we are sitting in traffic, we can’t be sitting at the office or factory and working.

Second, this congestion imposes social costs, because if we are sitting in traffic we have less leisure time and less time with our family and friends.

Third, in this time of increased awareness about the impact humans have on our environment and the consequences this is having on our climate, it is important to note that an increase in the amount of driving imposes an environmental cost.

Motor vehicle emissions make up a significant proportion of air pollution, with estimates indicating that motor vehicles produce 83 per cent of the carbon monoxide in Melbourne, while producing 20 per cent of the carbon dioxide and 13 per cent the nitrogen dioxide in Australia. And the more we drive, the more these emission levels increase. And where there is congestion and our car trips take longer, this only further adds to air pollution.

In response to the problems caused by the increased number of cars and the increased amount of driving, some policy makers have proposed introducing some form of direct pricing for car use. The justification for this is that if a direct price is imposed for the use of cars, then they will be used less and more efficiently.

Such pricing can take two basic forms. One is comprehensive pricing, where a per-kilometre charge is introduced for all driving within a city. Another is cordon pricing, where a charge is introduced for all vehicles entering a specified zone in a city, usually the city centre. Such a charge is currently in place in central London.

There is a general consensus that comprehensive pricing is the most effective system. And technology is rapidly evolving to the point where the introduction of such pricing in cities such as Sydney and Melbourne will be possible.

However, one problem with such pricing is that it would effectively involve the artificial setting of a price for driving. Rather than using market forces to ascertain the price for driving (which is the usual way of determining most prices for most goods in free market economies), a government authority would effectively determine the price.

As has often been the experience in other cases where the government has intervened to set the price of something, this may cause certain problems. A possible consequence of such government intervention is that the price for driving will be set too high, or too low, resulting in an excess supply of road space (empty roads) or an excess demand for road space (continued congestion).

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.