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BEST PRACTICES FOR ESTIMATING EXTERNAL TRANSPORT COSTS

1Faitar Catalin,2NovacIordan

1Constanta Maritime University, Faculty of Naval Electro-Mechanics, 104 MirceacelBatran Street, 900663, Constanta, Romania, e-mail address: [email protected]

Abstract : Transport activities give rise to environmental impacts, accidents, congestion, and infrastructure wear and tear. In contrast to the benefits, the costs of these effects of transport are not fully borne by transport users. Without policy intervention, the so called external costs are not taken into account by transport users when they make travel decisions. Transport users are thus faced with incorrect incentives, leading to welfare losses.The next study gives a perspective to what it could be done

Keywords:external costs, internalization

1. INTRODUCTION

Internalization of transport external costswas a major problem for many years in Europe and the whole world regarding policy development and transport research.

A big number of research projects, including projects sustained by the European Commission, suggest that applying market instruments inspired by the economic concept of establishing the social marginal cost could bring important benefits.

The main elements considered to be part of an internalization policy of external costs in transport domain are the following:

- Internalization activation through instruments based on the market;

- Internalization facilitation through instruments based on the market;

- Building mandatory demands for market instruments;

- Otherpolicy which contribute to cost internalization.

Shortly, internalization of external costs could be made through a combination of instruments. The main approaches recommended for internalization are:

- Costs regarding climate changes could be best internalized through fuel taxes or ETS;

- Costs connected with air pollution, accidents, noise and congestions could be internalized through differentiated taxes per kilometer, differentiated according to: the vehicle characteristics, location, hour of the day, and for the accident costs, also, driver's characteristics.

For the congestion costs, the local schemes could be a good alternative, while for the accidents ‘costs these could be internalized through insurance companies, but it is preferred a tax per kilometre.

2. INTERNALIZATION OF ROAD TRANSPORTEXERNAL COSTS

The road transport is responsible for most of the external costs incoming from transport. So, the internalization policy should start with a new strategy for road transport. The differentiated kilometre taxes and the congestion taxesare two key elements in the approaches proposed for road transport. There is no legal barrier for applying the recommended internalization approaches for autovehicles and LDVs.Despite all this, for HGV, the current legislation doesn't allow fully internalization of external accidents, air pollution, noise and congestion costs.

Nr. Crt. Type of vehicle Costs per unit

1 Car 0.15

2 Motocycle 0.61

3 LCV 0.18

4 Bus 0.48

5 HGV < 16 tonnes 0.44

6 HGV > 16 tonnes 0.61

Chart 1. Medium costs for german highways in 2010 (euro/km)

2.1.Arguments to amend the current directive

Internalization of road transport external costs is not permitted by the existent Eurovignette Directive 2006 / 38 / CE. The directive offers the possibility of adding costs in mountain areas and to charge taxes specific for the urban traffic, congestion taxes or regulatory taxes to combat the negative effects over the environment, including the inferior quality of the air, on any road, but especially in the urban areas. Also, the limited differentiation of taxes is permitted.

Though, the possibilities are very restricted and the full internalization of external costs is not possible. Thus, from the external costs internalization point of view, the directive modification is wanted.

The main arguments formodification of the existent directiveregarding Eurovignette are the following:

1. Current taxes per km are much smaller than the marginal costs per travelled km, this thing leading to significant losses in efficiency;

2. Where thereis no congestion, the highways km taxes for the HGV should be much greater to cover the infrastructure costs and the marginal external costs. In the urban area the situation is much worse because the actual system is completely free of expenses, which reflects marginal costs of air pollution, noise, accidents and, in most cases, congestion, while these costs ar much higher than the one for the highways. The current level of differentiation (the smaller taxes of 50% of the biggest expenses) is much too limited to reflect the differences of external costs in different traffic situations;

3. The incentives given through fuel taxes are perfect for costs internalization connected to climate changes, but these taxes can't internalize correctly the external costs of air pollution, noise, accidents and congestion;

4. There are no adequate incentives at the moment for the users to considerate these costs taking into account their transport decisions;

5. The current legislation is not able to assure equal playing field between different transport modes, especially between the road and rail transport. This thing is valid for the taxes level and structure, and also the differentiation possibility;

6. A first important step to more efficient prices could be a modification of the current directive, so it could allow the UE member states to charge taxes for HGV for all external costs of infrastructure costs.Taking into account the fact that the road transport is the main contributor to transports external costs, the internalization measures could be hard to be obtained in other ways as long as these are not fully activated for the road transport internalization.

A second reason for which the member states haven't yet applied the full potential of the current directive could be the fact that introducing a differentiated regime is much more sophisticated end more expensive than a paying tax system. Because of the requirement that the incomes don't exceed the medium costs of infrastructure, the complexity of an intelligent system doesn't reflect in higher incomes.

Although it wasn't used the full potential of the current directive, we have to notice that the newest introduced systemsand the ones pending or still under development include differentiations, at Euro standard. Moreover, other types of differentiation are taken into account like location and hour of the day. Also, for taxes, other than the passing taxes, the number of differentiations with relevant parameters, from the Social Marginal Costs perspective, is growing.

2.2.Possible adjustments

Efficient taxing means that the prices reflect better the external marginal costs of the environment, accident costs, congestion costs and infrastructure costs. This thing needs higher levels of taxing and differentiation. Taxing levels shouldn't reflect only the infrastructure costs but also the external costs. In addition, a much more powerful differentiation for various parameters is needed, such as axle load (infrastructure costs), Euro standard, vehicles with or without particle filters, day/night, rush hour or not and location. Particular differentiation between urban and interurban areas is important because of the great differences in levels of marginal costs.

As a potential, it could be permitted a differentiation between the noise classes of vehicles.The current directive still permits some differentiations but the bandwidth is too small to reflect the real differences in costs.

For these reasons, is recommended that the directive is adapted as follows:

1. Allowing the member states to introduce differentiated taxes for marginal external costs of air pollution, noise and accident over the infrastructure taxes, to a certain level. An alternative could be ignoring the actual costs of the accident and opt for the costs internalization based on accidents through insurance companies.

2. Allowing the member states to differentiate the recovering taxes of infrastructure costs so that it reflect marginal infrastructure costs and congestion costs. This results in a more powerful differentiation regarding the location, hour of the day and type of vehicle. Another condition that could be set is that the other road users, especially the small cars, to pay the congestion tax.

3. Stating explicitly that the permitted taxes include other congestion taxes in urban and mountain areas on top of the taxes regarding infrastructure medium costs, air pollution, noise and accident costs.

2.3. UE coordination to avoid overcharging

In the discussions that took place regarding modification of Directive 1999 / 62 / CE, there was a problem concerning overpricing. There could be a risk of overpricing when the member states are authorized to determine the price for external costs over the infrastructure costs. It is important to limit this risk because overcharging could lead to economic inefficiency.  Overestimation could deflect the unwanted traffic and could obstruct a proper functioning of the internal market.

As a particular matter, there seems to be a fear from the member states situated, geographically, at the periphery of UE, because there is an overestimating risk regarding the use of infrastructure by the member states situated in the central UE. This could have an effect of redistribution from the peripheral countries to central countries.

These risks need some sort of coordination from UE. An option for this kind of coordination could be a certain limit of the taxes level which could be raised by defining a limit.

It should be noticed that a limit to strict could make the member states not to be able to establish the most efficient prices.

Generally, there could be taken into account the next options:

1. No limit.

2. A limit for each member state, for each type of vehicle regarding the tax for environment external costs and accident costs.

3. A limit for the tax per kilometer differentiated for the vehicle characteristics (i.g. Euro standard), location (i.g. urban/non-urban/metropolitan) and day / night time (i.g., rush hour or not).

4. A limit for the tax per kilometer differentiated for the vehicle characteristics (i.g. Euro standard), population density in that area, and day / night time (i.g., rush hour or not).

5. A limit for incomes from medium external costs and accidents, according to km per vehicle and a medium external cost per km.

6. A limit for incomes from medium external costs and accidents, defined as a percentage of incomes from infrastructure medium costs.

3. INTERNALIZATION OF NON ROAD EXTERNAL COSTS

Internalization of external costs in road transport is much more relevant than the other ones and that's way has the biggest impact over the society.

However, for the other kinds of transport, internalization of external costs could lead to significant benefits. In size of external costs, maritime transport and aviation are most relevant main non-road modes of transport, but the internalization policy should be more developed also for the interior navigation and rail transport.

For the non-road transport there are some legal barriers for full internalization of external costs.

3.1 Railway transport

For railway transport, external costs charging is permitted under the conditions in which is made in competition with competing modes of transport.

Other policy initiatives which could support external costs internalization of railway transport are the following:

- The commission could encourage member states to use taxes for railway infrastructure by giving incentives for diesel trains emissions reduction and noise reduction, for example by using taxes as part of a incentive package for wagons with low noise breaks;

- The commission could encourage member states to use more the loading deficit to eliminate blockage and raise capacity.

3.2 Inland waterways transport

The main legal barriers for inland waterways navigation are the Conventions regarding Mannheim and Danube. Elimination of this type of legal barrier is a main step for inland waterway transport. This thing could make possible the external costs internalization and, also, infrastructure taxes, according to pricing model for road and railway transport. The commission, together with Central Commission for Rhine navigation could investigate the options to remove these barriers.

External costs internalization regarding inland waterways navigation should focus on air pollution costs and climate changing. A further evaluation of the instruments for costs internalization could be made focusing on km taxes and port charges for fuel costs internalization, air pollution and climate changing costs. Moreover, at present it doesn't have a calculation method of infrastructure costs regarding inland waterways navigation. As part of an internalization strategy, the commission could propose this kind of method.

3.3 Sea transport

For maritime transport, air pollution and changing climate costs are the most relevant external costs. Port taxes seem to be the most appropriate for air pollution costs internalization. Maritime port authorities or national governments could give incentives for the least pollutant engines through further differentiation and existent port taxes. However, many harbors are reticent in introducing this kind of system because they are afraid of losing the market share. There is need for further investigations regarding different alternatives for changing climate costs internalization. Especially, emissions trading options have to be analyzed, if possible, in cooperation with IMO.

Type of ship Load European sea area

Baltic Sea Black Sea Mediter

ranean Sea North Sea N-E Atlantic

Crude oil tanker 0-10 kt 1761 3.1 3.1 3.1 3.1 3.1

Crude oil tanker 10-60 kt 18413 0.8 0.8 0.8 0.8 0.8

Crude oil tanker 80-120 kt 49633 0.5 0.5 0.5 0.5 0.5

Products tanker 0-5 kt 810 4.1 4.1 4.1 4.1 4.1

Products tanker 5-10 kt 3150 2.7 2.7 2.7 2.7 2.7

General Cargo 0-5 kt 1527 1.4 1.4 1.4 1.4 1.4

General Cargo 5-10 kt 4174 1.5 1.5 1.5 1.5 1.5

Bulk carrier (feeder) 1440 2.7 2.7 2.7 2.7 2.7

Bulk carrier (handysize) 14300 0.7 0.7 0.7 0.7 0.7

Bulk carrier (handymax) 24750 0.5 0.5 0.5 0.5 0.5

Chart 2. Marginal costs for climate changing for sea transport in 2010 (euro/1000 tkm)

3.4 Air transport

In air transport domain, including ETS is an important step. If emission credits are auctioned and the limit is at a restrictive level than this thing could be considered as a changing climate costs internalization, except the emissions impact, other than CO2.For those to happen, the commission studies, at present, alternatives for NOx taxes.

Regarding the noise costs internalization there already are some examples of differentiated taxes for the airlines. Some airports are afraid of losing the market share in favor of competing airports, and so, it tend not to introduce this kind of noise costs elements in their charges. The commission could take the lead in this domain to search for a way to eliminate this barrier.

The most important action would be taking the lead in IACO and eliminate the legal barriers for the external costs internalization, such as adjustments for the Chicago Convention (for example, permitting fuel taxation).

Country Airport Outside population Population exposed to noise

Austria Vienna International Airport 10.8 14.8

Belgium Brussels National Airport 59.1 76.9

Czech Republic Prague Ruzyne International Airport 3.3 4.2

Denmark Roskilde Airport 0.5 0.7

Denmark Copenhagen Airport 1.2 5.8

Finland Helsinki Vantaa Airport 0.1 0.2

France Paris Charles de Gaulle Airport 66.3 110.6

France Paris Orly Airport 2.8 221.3

France EuroAirport Basel-Mulhouse-Freiburg 2.4 3.5

Germany Hannover Langenhagen Airport 95.7 115.8

Germany Hamburg Airport 96.2 124.1

Germany Frankfurt am Main Airport 136.3 180.7

Germany Berlin Tegel Airport 702.2

Greece Athens International Airport 11.0 0.0

Hungary Budapest Ferihegy International Airport 12.0 259.6

Italy Milan Malpensa International Airport 36.2 43.8

Italy Naples International Airport 85.2 385.5

Italy Roma Fiumicino - Leonardo da Vinci Airport 26.9 34.9

Italy Turin International Airport 32.7 50.7

Luxembourg Luxembourg International Airport 249.3 284.9

Netherlands Amsterdam Schipol Airport 0.6 38.8

Poland WarszawF.Chopin Airport 4.1 27.1

Portugal Lisbon Airport 5.9 205.3

Spain Gran Canaria Airport 8.2 10.2

Spain Madrid Barajas Airport 19.7 28.3

Spain Bilbao Airport 44.6 53.7

Spain Valencia Airport 100.7 170.4

Sweden Goteborg-Landvetter Airport 1.6 1.9

Sweden Stockholm-Arlanda Airport 1.7 2.4

UK London Stansted Airport 14.8 19.6

UK Southampton Airport 0.5 82.3

UK Birmingham International Airport 2.0 160.9

UK Bournemouth Airport 2.4 17.2

UK Bristol International Airport 15.3 19.5

UK Nottingham East Midlands Airport 44.3 59.6

Chart 3 Medium cost for major airports in 2010 (euro)

4. INTERNALIZATION FACILITATION

The most efficient method of establishing the price is restricting it so there could be offered more incentives to reduce external costs. As mentioned before, this thing needs differentiated taxes for different parameters. In case of many countries opt for this kind of differentiated taxing system, harmonization is important to limit the transaction costs for the transport users. To facilitate the internalization policy by the member states, the commission could take the lead for:

- Vehicle classification (including trains, ships and airplanes) according to the environment characteristics as a differentiated taxing base. This is the best idea for Euro standard air pollution differentiating.

- Other parameters classification for differentiating such as location and the hour of the day. This type of differentiating could be made by defining some categories such as rural, urban or metropolitan; rush hour or not. Despite all this, in some cases, the local conditions could need other categories such as congestion taxes. Therefore, this type of coordination done by the commission doesn't seem to deserve the biggest priority.

- Pricing system (technology, projection and execution), such as a standard for pricing system and charging per km. Developing a European standard is very necessary to avoid an excessive number of different systems. To ensure that the future board units are capable of learning the main cost factors, should include the necessary demands to differentiate the taxes, such as the capacity to see the difference between location, hour of the day and Euro standards.

-Occasional and border treatment. Developing a new electronic taxing system confronts the problem of in which way the occasional users should pay. This problem is mostly connected to foreign traffic.

An important connection should be done with the policy in climate changing domain. From the economic point a view, raising fuel prices (CO2 taxation) and/or including transport sector in an emission trading system seems to be an optimal first solution. Including it in EU and ETS is the best way to follow for the maritime and air transport; for the road and railway transport, both fuel taxes and ETS could be taken into consideration. At a global level, orientation is onto measures to address the problem of CO2 emissions and, at a local level, the focus is on the measures to counteraction the local external effects which should be different in future internalization strategies.

Fuel kg CO2 per litre of fuel g CH4 per litre of fuel g N2O per litre of fuel Climate changing costs, € per litre of fuel

Gasoline 2.25 0.81 0.26 21.1

Diesel (roads and railways) 2.66 0.14 0.14 24.3

Marine diesel oil 2.99 0.27 0.08 27.2

Kerosen 2.86 0.02 0.08 26.0

LPG (50% propane + 50% butane) 1.77 1.74 0.01 16.3

CNG (methane) 1.57 2.58 0.08 14.9

Chart 3. Climate changing costs per unit of fuel consumption in 2010

5.MANDATORY REQUIREMENTS FOR INSTRUMENTS BASED ON THE MARKET

Another element which could be part of a UE policy is to apply mandatory requirements for member states for internalization through market based instruments.

An example for this kind of mandatory requirements is that each member state to perceive a minimum share (with a growth up to 100% in time) of marginal external costs for each mode (marginal taxes and taxes). Considering different types of cost drivers, it is recommended to make a difference between km taxes and fuel taxes and taxes. Additional requirements could be that fuel taxes for changing climate costs for internalization should be based on the carbon content of fuel. Another additional requirement for km taxes would be that it would be differentiated at least regarding the location (urban/interurban), emission class, noise class (where is possible) and time of day.

These types of requirements could be applied for road, railway and inland waterwaystransport. It can contribute to harmonize the transport prices in different member states.

Establishing mandatory requirements needs a clear definition in which taxes can be considered internalization measures. However, the choice regarding the way of evaluation fuel taxes is more a policy measure than a scientifically one.

These requirements could be hard to apply because it will interfere with the taxing individual policy of the member states. This could be considered as being in conflict with the subsidiary principle.

Costs internalization regarding changing climate should be considered as part of a climate global policy. Both taxes, ETS and fuel are excellent instruments of external costs internalization regarding changing climate. Including aviation in ETS is a policy proposal and the electric railway transport is already part of ETS. Also, other modes of transport could be under the ETS. Another option could be putting surface transport in a different trading system, except ETS.

Also, fuel excises could be used for changing climate costs internalization. As mentioned before, this could be done by raising the existent excises or by designating a part of the existing excises as CO2 tax. However, more transparency is needed when it comes to internalize the changing climate costs. So, for each mode, is recommended a marketing strategy for the emissions or a CO2 tax.

6. CONCLUSIONS

The analysis of the important factors shows that it is important to destinguish the following types of taxes and expenses: the fix ones (which have no connection with the transport activity), fuel taxes and km taxes. External costs internalization is recommended through the use of a combination of instruments. The main recommended approaches for internalization are:

- taxes based on fuel which contents carbon or including in ETS for the internalization of changing climate costs;

- differentiated km taxes for the air pollution costs internalization, noise and congestion. These taxes should be differentiated according to vehicle characteristics (including Euro standard and particle filters), location and hour of the day. Accidents costs could be internalized through a km tax (differentiated for relevant parameters such as: location, type of vehicle and driver characteristics) or through taxes for insurance companies based on accidents. The last option is prefered, but it needs forward analysis. For congestion costs, local road pricing system could be a good alternative for the differentiated km taxing. For aviation and maritime transport, a good taxing basis could be the number of visits in ports or airports.

Figure 1. Total external costs of transport by externality in 2010

6. REFERENCES

[1] European Commission – Update of the Handbook on External Costs of Transport, January 2014;

[2] European Commission – Internalization measures and policy for the external costs al transport, June 2008;

[3] Beziris Anton, BamboiGh., Transportulmaritim, EdituraTehnica, Bucuresti, 1988.

[4] Bombos Sever G., Transportul intern de marfuri, EdituraTribunaEconomica, Bucuresti, 1999.

[5] Gh. Turbuţ , I Boicu , E Spirea , Sisteme de transport ,EdituraTehnică , Bucureşti ,1978

[6] CaraianiGh., Tratat de transporturi, Editura Lumina Lex, 2001.

[7] CaraianiGh., Transporturilesiexpeditiilerutiere, Editura Lumina Lex, Bucuresti, 1998.

[8] CaraianiGh., Stancu I., Transporturileferoviare, Editura Lumina Lex, Bucuresti, 1998.

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