Recent posts (here, here, and here) have touched on the issue of time-of-use road pricing. In this post I will briefly examine its merits, before suggesting a strategy for how it might be implemented in a way that overcomes it’s main disadvantages. The main recommendation is that rather than compelling drivers to participate in time-of-use road pricing schemes, we should instead implement a voluntary scheme – but charge a premium (through higher fuel taxes) for those who opt out.
But first let’s provide some background to time-of-use road pricing for people who missed the earlier posts. Time-of-use road pricing has two main advantages over fuel taxes, namely:
- Fuel taxes charge based on the distance that you drive, which provides no incentive to travel at off-peak times. Because electronic time-of-use road pricing provides an incentive to avoid driving in peak periods, road capacity is used more efficiently (e.g. from peak spreading and car pooling) and congestion is greatly reduced – this in turn mitigates the need for expensive capacity expansions and subsidies for public transport.
- Fuel taxes tend to penalize low-income households, which own larger, less efficient cars and drive on rougher roads; hence they consume more fuel (and pay more tax) per kilometre. And as more high-income households buy efficient cars, fuel taxes will need to increase – further exacerbating this inequity. The people who drive at peak times in urban areas tend to be well-off, so time-of-use road pricing is – on average – reasonably equitable.
Electronic time-of-use road pricing is therefore efficient and equitable. And schemes have been implemented successfully overseas, with cities such as Singapore and London leading the charge. But the schemes in these cities are blunt – they simply charge a fixed fee to enter the central city at any time of the day.
Stockholm, however, has a much more nuanced scheme. Here it is free to drive into the central city before 630am, after which the toll applies. The toll starts out low but increases in approximately 50 cent increments – reaching a peak of around $2.50 from 730-830am. The toll then drops back to a residual level (of about $1) through the middle of the day, before rising again for the evening peak. Finally the toll drops again to zero overnight. The scheme has been credited with a 25% reduction in peak hour traffic volumes, which has basically eliminated queues. Obviously Swedish creativity and ingenuity extends to more than just puppet chefs, ABBA, and flat-pack furniture (warning, that last link is possibly the most boring YouTube video ever).
But if time-of-use road pricing is such a winner (and it has been extremely effective in Stockholm) why has it not been implemented in many more cities around the world? The truth is that time-of-use road pricing has some major (mainly social/political) barriers, namely:
- Collection costs – in London these run as high as 50%, whereas in Stockholm they run at about 30%. In either case this cost is much higher than the cost of collecting fuel taxes. Nonetheless, it’s important to note that even with these high collection costs economic analyses of the Stockholm scheme found it still delivered economic benefits.
- Big brother – collecting data on people’s vehicle movements does create some interesting privacy issues. While I think these issues are resolvable (after all, your mobile phone company not only knows where you are but also who you talk to), it is nonetheless a factor that stimulates some opposition to time-of-use road pricing schemes.
- Boundary effects – This problem arises in two primary forms. First, by linking the time-of-use toll to a defined area, there is the risk that traffic will avoid the area and increase congestion in other parts of the city (this effect was noted in Stockholm). Second, certain businesses within the affected cordon may suffer if they rely on customers coming into the city to shop (studies in Stockholm did not find any evidence of this).
Advocates of time-of-use road pricing (and I am one) need to be aware of these issues and strive to resolve them. My suggested solution is this: Time-of-use road pricing schemes should be voluntary and not be based on a cordon. That is, drivers should be encouraged, rather than compelled, to join a time-of-use pricing scheme, and it should not focus solely on the central city (after all, there’s congestion on many roads in peak periods).
Here’s how such a voluntary scheme could work:
- NZTA supply GPS tracking devices which are installed in people’s cars. These devices record time/distance/location, for which users pay differential rates.
- Users that sign up to the time-of-use pricing scheme would then be exempt from fuel taxes (there would need to be some verification and/or refund process).
- People who did not want to participate in the scheme would remain with the current system. So fuel taxes would operate alongside the GPS scheme.
A voluntary approach would basically neutralize (I think) the disadvantages noted earlier. First, collection costs are much lower because you avoid the need to install much of the fixed infrastructure associated with a central cordon. And because people are “signing up” voluntarily you could make them agree to efficient electronic payment (and avoid the need for costly toll booths and call centres). Second, knotty privacy issues are soothed because the scheme is voluntary; data security remains important, but the act of simply collecting the data is not an issue. Third, the scheme avoids the need to set-up a physical cordon with a hard boundary, or at least lessened, which allows much greater flexibility for setting charges on roads across the city (after all many roads are busy in the peak – not just the central city).
Encouraging people to switch over is also easy: Just increase the differential between the time-of-use scheme and fuel taxes. This will encourage more and more drivers to switch, but always voluntarily. The voluntary approach is really no different from many internet plans. Think of it this way: The “fuel tax” plan offers a flat rate, but with high average costs, whereas the “time-of-use” plan offers variable rates, with low average costs – but only if you avoid driving in peak times. People who value simplicity might stick with the fuel tax plan (and what’s wrong with that if they’re prepared to pay the costs of doing so?), whereas people who are keen to take the opportunity to reduce their fuel bill would be likely to switch to the time-of-use scheme.
The main potential downside is that a voluntary scheme would lose some scale. But then again, because a voluntary scheme is based on GPS trackers (avoiding the need for physical cordons, gantries, and all the associated infrastructure) it could be rolled out nationwide at the same time. Personally I think a voluntary scheme (with targeted incentives to switch over) is the only way that time-of-use road pricing scheme that is palatable enough to be implemented in the near future. More controversially, I’d also suggest that a voluntary time-of-use road pricing scheme should be implemented before Auckland even thinks about horrendously expensive capacity road/rail capacity improvements. That includes the next Waitemata Harbor Crossing AND the City Rail Link.
Who knows how people will respond to better targeted price signals? They could work at home, car-pool, or move – or maybe they will switch to public transport. Whatever they do, it’s in our interests to find out before we pour money into expensive tunnels. It’s also in our interests to “smooth the transition” so that we can monitor people’s behavioural responses and plan accordingly. With a voluntary approach the transition will be much smoother, allowing the government to tailor their incentives to get the outcomes they want. We may find that people do switch to rail – in which case the business case for the City Rail Link would be that much stronger and more certain. Either way, more information and more choice can only be good news – for both the government and individuals.
N.B. My inspiration for voluntary time-of-use road pricing comes from the Dutch “Spitsmijden” experiments, which investigated the effects of offering rewards to drivers who voluntarily avoided travelling at peak times. I have written a summary of these experiments (which are a wonderful initiative in their own right) that is available here.