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A (more detailed and equitable) ode to time-of-use transport pricing

EYE CANDY WARNING: This post contains no pictures.

In a recent post I penned an “ode to demand-based transport pricing”. The main suggestion was that incorporating “time” into our transport pricing would be beneficial because it would help us to allocate our limited transport capacity to people who valued it more highly.

I also proposed a distinction between what I called “strategic” and “operational” issues. This distinction is useful, I think, because it encourages us to step back and examine some pertinent issues with more focus and clarity. That’s not to suggest the issues are fully separable, and in many situations they are not, but more that our understanding of the “whole” can be improved by an understanding of the “parts”, even if we at some point have to stitch them back together to form a “whole”.

The distinction between strategic and operational issues can be understood as answering  the following two broad questions: 1) What are we trying to achieve from a time-of-use pricing scheme? and 2) How might we go about implementing such a scheme to achieve the desired outcomes? The following sub-questions seem to stand-out as being strategically important, i.e. they help us to answer the first question posed above:

  • What are we trying to achieve through time-of-use transport pricing? Time-of-use transport pricing schemes seem to have two over-arching objectives, namely they can raise revenue and/or manage demand. In my opinion demand management should be the focus, because there are many more efficient ways we could raise revenue if required, e.g. fuel taxes and general property taxes. This suggests to me that the main advantage of time-of-use pricing lies in its ability to influence demand, rather than raise revenue.
  • What should we do with the revenue? Even if raising revenue is not the focus, it is a unavoidable outcome. This in turn raises the issue of what to do with the revenue? Some people on this blog have called for it to be ring-fenced for public transport, but I think that’s unnecessarily provocative. What we could do is simply tip the extra funds into an Auckland specific transport fund that could be used to fund whatever was the highest priority project of the day. Of course, time-of-use pricing in itself will reduce the need for major road capacity expansions and increase demand for public transport and walking/cycling, so you would expect more money to flow towards these alternatives. The other thing to consider is that how revenue is used is the major determinant of whether a pricing scheme is progressive or regressive, i.e. its distributional impacts, which is discussed below.
  • What is the process for investigating, developing, trialing, and potentially implementing a time-of-use transport pricing scheme? If there’s one lesson we can take from Stockholm’s experience with time-of-use road pricing, then it’s the potential benefits associated with pro-active public engagement. In Stockholm, time-of-use road pricing was initially implemented as a trial, which was then subject to a public referendum. Over time, public support for Stockholm’s scheme increased from circa 30% to 70% and the scheme has subsequently been permanently retained. Bork bork bork.
  • What transport modes should be considered for time-of-use pricing? Previous conversations about time-of-use transport pricing, such as ARPES,  have had a relatively narrow focus on applications to road pricing (aka “congestion charging”). But are not the general principles of time-of-use pricing also relevant to public transport, even if the pricing differentials would vary between modes depending on their individual demand/supply characteristics? I would have thought that implementing time-of-use schemes for both road and public transport would provide a fairly strong riposte to the claims of unfair treatment that might be put forward by road user groups, such as the AA.

It seems that we could work to gain agreement on the answers to these “strategic” questions, without time-of-use transport pricing being a fait accompli. But it seems to me that until we get agreement on those high-level strategic questions it’s not really worth delving too deeply into the details. Answers to the questions posed above seem to be necessary but not sufficient to implementing a scheme.

Now what can we also say about the aforementioned “operational issues”? From where I’m sitting the main operational questions seem to be:

  • How can we balance precision and simplicity? Singapore and London, for example, have relatively simple pricing structure, but this in turn limits their ability to shape demand. In general, it seems that the simpler the pricing scheme the more one gets away from the objective of demand management and instead it becomes more about revenue raising. In contrast, Stockholm has a more precise pricing structure where costs are allowed to vary in half-hourly increments. This enables those crafty Swedes to price the “peak of the peak” higher than other periods. Bork bork bork.
  • What are the efficiency/distributional impacts of different pricing structures? For example, a gantry-based cordon around the Isthmus, as considered in ARPES, would tend to drive a wedge between the central city and peripheral suburbs. In contrast, putting a charge on all trips into and within the central city (irrespective of whether they cross the cordon) would seem fairer and more effective. Thus the design of the scheme can have a large influence on its efficiency/distributional impacts, as you would expect.
  • How might we manage the efficiency and/or distributional impacts? This is quite straightforward really – it’s basically about investigating whether any of the operational issues raised in answering the previous question can be resolved or mitigated and how those measures might change over time.

I’m sure there are many other operational issues that I have not touched on. But in the interests of keeping this post to a reasonable length I’ll leave those to others to highlight. Before finishing up I wanted to tackle one final issue in more detail: Namely the often-raised concerns over the distributional impacts of time-of-use pricing schemes (aka “equity impacts”).

But first I want to place two important caveats on this discussion. The first thing is that I place a high value on equitable social outcomes. So much so that I would say that child poverty and inequality of opportunity, rather than transport ;),  is the #1 issue facing New Zealand. The second caveat is that the distributional impacts of time-of-use transport pricing is sufficiently important to deserve their own post, so I hope you’re not too disappointed with a quick discussion now.

Nonetheless, there is one concept that I have been pondering that I think is worth raising, namely the issue of “transient distributional impacts” (for lack of better jargon). What I mean by this is that the distributional impacts of time-of-use transport pricing may in themselves vary considerably over time. This might occur because:

  1. Our current transport pricing is (on the surface at least) relatively regressive. This is because low income households tend to own less fuel-efficient cars and travel more regularly at off-peak times. So they tend to pay more fuel tax per kilometre, and pay more for capacity expansions they probably should. Thus, shifting the costs of major capacity expansions more onto the people that are creating the need for them may be broadly progressive compared to the status quo.
  2. Low income households are more sensitive to prices and also tend to occupy less specialised and more dispersed jobs. So in the long run, low-income households may be more responsive to time-of-use price signals, even if there are some households that are adversely affected in the short run.  Low-income customers tend to have more flexibility about when and where they travel and thus benefit more, on average, from lower off-peak prices.

For this reason I would encourage those who are concerned with regressive distributional impacts in the short-term to think very carefully about whether they are potentially forgoing progressive distributional impacts in the long-term (and perhaps forever). Put another way, while time-of-use transport pricing may potentially have adverse distributional impacts on a small number of households for a few years following implementation, it may also have large positive impacts for many households for many years into the future (if not permanently).

If this is indeed the case, then the distributional impacts of time-of-use transport pricing may be best managed by implementing some targeted transitional measures to support adversely affected low-income households, at least for a few years after the scheme is implemented, rather than not implementing it at all. The challenge becomes one of managing the negative distributional impacts in the beginning, knowing that in the long run the distributional impacts are likely to be positive.

So my takeaway point is this: As a society let’s not stop thinking about time-of-use transport pricing even if the “right” answer is not immediately obvious. Or put more succinctly “we haven’t got the money, so we’ve got to think.”

P.s. If you would like to read more about time-of-use transport pricing then here’s some links you may find interesting:

20 comments to A (more detailed and equitable) ode to time-of-use transport pricing

  • Mr Anderson

    I think separating off strategic and operational questions about time of use pricing is useful in advancing the conversation. However those operational issues need to be resolved because it always seems that time of use schemes work great in theory but are rarely introduced, suggesting massive difficulties with overcoming the operational concerns.

  • Bryce P

    I’m sure someone mentioned that when the current parking meters are replaced they will be changed to HOP compatible meters. If the parking can all be linked together to create a network and then introduce congestion based parking, kind of like San Francisco, would that be easier to implement? As it is HOP based, the card could have the same concession type of details. Using the power of computing, there could be a percentage of meters (across all meters) that would allow low cost parking to those with cards that have a WINZ concession on them? You do have to draw a line somewhere though as the real task is to get people to use PT, especially if they are travelling at peak times. Perhaps discounts on PT travel for those listed as WINZ clients (as an example) would be a good way of alleviating this situation (max cost for a day or month like in the Canberra system)? Make those who really want to drive to work and will not find another solution pay for those who use PT?

    • Jamie Walton

      Bryce, I agree, and re. your last sentence, I suggested a smart card/transponder system to do this when I was in Melbourne in 2001, but the person I spoke with in officialdom was immediately anti and said that they can’t “create winners and losers” (I thought I was suggesting a win-win situation, but maybe I didn’t pitch it right?).

  • Sacha

    Stu, I’m still not sure why you are relegating differential access as an ‘operational’ issue. If it’s not in the strategic mix when decisions are made then unfair outcomes are almost guaranteed. If you were talking about a private service rather than a public one, that’s much less of an issue.

    Also interested in references to back up this statement:

    “Low-income customers tend to have more flexibility about when and where they travel and thus benefit more, on average, from lower off-peak prices.”

    To my eyes, that seems to fit retired people and beneficiaries but not low-income workers who if anything have less time, energy and resources to spare.

    • Stu Donovan

      Sacha, are you opposed to pricing in principle?

      It seems to me that we already “price” transport through fuel taxes and fares etc. That being the case, I’m not exactly sure why you’re so opposed to these ideas. I’m simply looking for ways to make *existing* price structures more efficient and more progressive.

      And yes, I do believe that both outcomes are achievable.

      • Sacha

        Market approaches like pricing can work fine if they take all the relevant factors into account.

        Stu, right at the top you say: “allocate our limited transport capacity to people who valued it more highly”. As in previous posts, you seem frankly confused about the difference between valuing something and being able to afford to pay for it. Not sure if that’s a logic problem your profession shares but it disturbs me.

        Here’s why it raises a red flag. New Zealand has a history of that sort of thinking (and acting) since the 1980s. For example, when commercial State Owned Enterprises were first proposed they were meant to result in transparency about subsidies for certain activities or groups, which could then be allocated openly by government to make up for the introduction of market economics and user-pays. You can guess what was missing from the actual implementation right from the get-go, and who was disadvantaged by that. We’d be silly to forget such lessons, regardless of other benefits from the change.

        If the aim is not revenue-raising then resource-management options should include virtual markets and models that don’t impose such high overheads. Universal provision might be cheaper overall. As was discussed on the beach access pricing thread, timely information can help steer people in different directions to manage demand patterns.

        There are problems with ‘voucher’ systems, but in this case allocating credits to all market participants based on need could be one way to help avoid locking groups of people out of a public resource that we all own.

        That’s not a wee ‘operational’ detail to be worked out later. Free-market theorists seem to forget our place as citizens as well as consumers, and it often makes their ideas a poor fit in public systems unless they are balanced out by broader thinking and civic stewardship.

        I agree the current system is not that fair either, but there seems little point in replacing it with something just as bad or worse when we can do so much better. I have faith in Kiwi ingenuity and agility but I prefer policy based on evidence about what people actually do, not economic theories with proven and predictable problems.

        I urge us all to think about how the systems we propose can really deliver not just on efficiency but on our ideals about fairness and a productive future for everyone. Long-term sustainability includes the social, or resources get wasted in needless ongoing conflict. We need all hands on deck.

        • Stu Donovan

          I’m not confused about “the difference between valuing something and being able to afford to pay for it”.

          You seem to assume that willingness to pay (WTP) equates to income, while playing down the relationship between WTP and personal preferences, or value. This manifests in your general conclusion (paraphrasing) that pricing transport more accurately is likely to lead to rich people being able to travel when they want.

          On the other hand, I think that WTP for travel is positively correlated with both personal value and personal income, i.e. I accept that both relationships are positive. There’s a load of evidence to show that both these relationships are positive, eg.:
          1. The same person’s WTP to travel depends on the purpose of the travel; and
          2. People with different incomes have different WTP.

          I feel like I accept both these relationships, while you focus exclusively on #2. I’m not a free market theorist. However, I do think that prices are useful for nudging, or coordinating, our individual decisions in directions that are in our collective interest.

          Of course, prices are not the only tool for influencing people’s behaviour, as you note. But as Stockholm has shown (I hope you watched the video) more accurate transport pricing is extremely effective. The 20% reduction in peak vehicle volumes that they achieved in Stockholm has probably saved billions of dollars in avoided congestion and road construction costs. That’s billions in dollars less that they needed to collect in fuel and/or other taxes. Such large changes in travel behaviour is not, as far as I know, possible through any other measure, even a massive investment in PT.

          I think people who have an “old left” perspective, such as yourself, tend to throw the pricing baby out with the neo-liberal bathwater by assuming that all forms of pricing are a conspiracy to screw over poor people and/or privatize public assets. In doing so, they ignore all the evidence that accurate pricing schemes, when implemented carefully and considerately, can be progressive. I accept that in the past this may not have been the case, but I don’t think we should dwell in the past too much. Learn the key lessons and move on.

          You may be heartened to know that in the time that I have been working in the transport industry (last decade or so) the SuperGold pass has enabled retired people to travel for free on public transport, while the tertiary student discount in Auckland has been doubled (from 20% to 40%). Basically, our fare structure have been steadily shifted in favour of low-income demographics.

          Personally, I don’t think this is a debate where “left versus right” ideology has much currency and any reference to the privatizations of the 1980s are not, at least in my mind, particularly helpful.

          • Jim

            From an economic perspective the premise of charging appears great, however the impact that this activity has on other demographics, policy, taxing etc is far from understood and I am not aware of any implementation where this has been done, that works, where everybody is happy and it is a resounding success (for the objectives of all stakeholders). In a closed system it might be easier to identify the impacts.

            For the most part this ends up being an extra tax, wether that be a financial tax to the guy who pays the extra money to park the car or an amenity tax to the guy who can’t afford to pay the additional car park fee so ends up not being able to enjoy the park, which he already pays for in his rates and other taxes. Regardless of willingness to pay or the value assessment.

            Some people value sitting motionless in traffic more than paying the price of a northern express ticket, I know I do. I can play my music at full volume, finish getting ready, drink my coffee etc etc

            Sweeping statements such as people with lower income have more free time, can travel off peak and have less fuel efficient cars goes nowhere to support your argument and demonstrates a very narrow view, which seems to be popular with proponents of this approach and people with $ signs in their eyes. Once this starts happening where does it stop?

            Not saying I know the answer as I don’t, but chaos theory is not a distant relative..

  • Mr Anderson

    I had wondered whether low wage workers have less flexibility in terms of time. It’s fine waltzing into the office a bit late, but not if you work at a fast food joint or at a call centre.

    • Jamie Walton

      Sacha, I agree, it should be self-evident that low-income workers have less time, energy and resources (i.e., money) to spare (and therefore, less choice).

      • Flexibility might not be quite the right word, but er, the examples of both fast food joints and call centres would be workplaces that don’t run 8:30/9-5/5:30, but generally have shifts of workers, who would often be commuting to work outside of peak times, so would be charged relatively less. And if lower wage jobs are also more likely to be located outside the CBD, they may be less likely to be travelling on high demand routes. Some data would certainly make (or break) these arguments.

        • Stu Donovan

          Yes, “flexibility” is probably not the right word. But DistractedScientist has interpreted what I meant – low income jobs tend to be more distributed both in time (outside of peak hours) and space (away from congested areas), as such the proportion of low income workers affected by congestion charging is likely to be relatively low, as a percentage of the total.

          Of course the actual number depends on the scheme being proposed. My only “evidence” is logic :).

          • Bob

            Your logic is flawed and appears naive. What is the basis for these assumptions?

            I would wager that there will be a large number of low income, 9-5 employees who work in the CBD and other urban centers who would get whacked with your congestion tax. They could possibly make up the majority in some of these areas.

  • I think giving early morning commuters an off peak discount largely answers the questions about equability. Otherwise, I’m a supporter of the proposed 50% off peak discount for Wellington and many other places. Squeezes out air on off peak services, which are generally cheaper to provide anyway.

  • Sacha

    I trust everyone can grasp there’s a difference between ‘willing’ and ‘able’. Of course what people value is broader than their ability to pay.

    But thinking of the latter as a preference, a choice or a proxy for the former is fundamentally misguided regardless of your politics. That’s certainly a “key lesson” from our history. I’ve focused on systemic access in some major health and disability research and policy projects, and it crops up there too.

    I’m only dwelling on this because it seems a blind spot in your otherwise detailed arguments about managing demand – spanning several posts now, Stu. I’m glad other people are raising interesting points about other aspects, and once I’ve read more of the background material I might too.

    Integrated ticketing and other network improvements offer Auckland a chance to be smarter about how we get the most out of our whole transport system. That won’t happen if decision-makers are fed options built on flawed assumptions about how humans think and act or naive ones about how resources are allocated in our political system.

    I offered the example of the difference between SOE policy proposals and implementation not because of anything to do with ‘left’ or ‘right’ but as a classic example of ‘let’s deal with those minor details later’. (Seriously, if I were ‘old left’ would I believe in markets at all?)

    Fairness is valued across our political spectrum. This nation is blessed with good people. We just need changes to be “implemented carefully and considerately” as you say. I’m heartened by the potential for improving wellbeing across the board, and I accept that pricing can be part of that.

  • Great post, Stu. Just a minor correction re Singapore. You said they have a simple price structure for their road pricing. Not so. The rates can be different from one half hour to the next, just like Stockholm. And, unlike Stockholm, the rates are reviewed every three months to reflect prevailing traffic conditions. If speeds were “too high”, the price drops at the relevant gantry. If speeds were too low, the price rises. More details and the current set of prices can be seen via http://www.onemotoring.com.sg/publish/onemotoring/en/on_the_roads/ERP_Rates.html

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