In this recent post on Auckland’s transport funding gap, Peter Nunns espoused the merits of time-of-use transport pricing as a way of increasing the productivity of the transport system. Peter came up with this analogy to help highlight the merits of time-of-use transport pricing:
Let’s say you’re managing a factory. Your machines are running at 100% utilisation ten percent of the time, and 20% utilisation the rest of the time. This is constraining your ability to produce more, so you ask the chief executive for money to buy more machines. His answer, if he’s got any sense, will be: “Get knotted. You need to manage your workflow better.”
As some of you may know I also support time-of-use transport pricing (articulated in posts here and here). Notwithstanding my general support, I do accept there’s important design and implementation issues to work through. For this reason I’m relatively relaxed about timing and would prefer that – instead of rushing headlong into a particular solution (as the NZCID would have us do) – we instead took the time to have a decent/informed public debate about the concept. I hope that such a debate would end with the majority of people supporting the idea in principle, which would then enable political/technical leaders some space to work out exactly what we should do, how we should do it, and by when.
In this post I simply wanted to reflect on two of the dissenting comments raised in response to Peter’s post. For example, one person commented:
My understanding is that NZTA and the government are principally opposed to a discriminatory tax on assets that have already been paid for.
This statement suggests that time-of-use road pricing is a “tax”. From what I understand, taxes are typically used by governments to fund any number of activities that are largely unrelated to the activity being taxed. Income tax and GST, for example, are used to fund a whole manner of things, such as education and health. In contrast, revenue raised from transport activities (at least in New Zealand) are hypothecated to operating, maintaining, and improving the transport system (the MED website provides a breakdown of the various duties, taxes, and levies that are applied to liquid motor fuels in New Zealand for those are you who are interested).
The second part of the aforementioned comment part inferred that time-of-use transport pricing was wrong because the “assets have already been paid for“. I don’t think this is a credible argument for several reasons.
The first reason is that it presumes new roads do actually pay for themselves, insofar as the fuel duties paid by drivers are adequate to cover the lifetime costs of construction and maintenance. This is patently not true of local roads, where costs are part-funded by rate-payers, not road-users. I suspect it’s also not true of many of the RoNS, which would certainly struggle to cover their costs. Hence, it’s not really the case that new roads are paying for themselves, it’s just that their financial ass is being covered by old roads that have more than paid for themselves. I don’t know when roads actually “break-even” (and suspect it varies a lot from place to place), but suspect that many of our recent improvements don’t come close.
But the more critical issue with the suggestion that the “assets have already been paid for” is that the costs of a road do not end with construction and maintenance.
More specifically, roads incur ongoing congestion costs, which tend to arise at peak times. Now I do understand that congestion is a less tangible economic costs than construction and maintenance costs, which must be funded directly out of the transport budget. In contrast to these costs, congestion is an external, non-monetary cost. When we say “external” we are referring to the fact that the person who chooses to drive in congested conditions does so without having to bear the additional delays they cause to other drivers that are stuck in the queue behind them. Hence congestion is an external cost that arises from our individual decisions to drive. Despite being less tangible, it’s nonetheless real – as any commuter will know!
So rather than being a tax, time-of-use transport pricing is, I think, better seen as a targeted user-charge. One which seeks to place the costs associated with travelling at peak times at the feet of the people who are making those decisions. And given that much of our transport budget is currently being spent on transport projects that are designed to cater for people that are travelling at peak times, then it makes sense to charge more for these trips than for trips that take place at off-peak times.
Having raised those two issues, the same person went onto state:
The charge is a mechanism to force people to change the mode they use to travel. In the case of congestion charging it makes PT more attractive in comparison to driving … In effect you are shifting the equilibrium in favour of the poor using PT and the wealthy driving.
My first issue with this statement is the presumption that the primary benefit of time-of-use road pricing is that it changes existing behaviour. Naturally modal shift from cars and to PT would occur and result in less congestion. Such a benefit can be thought of as a “static efficiency“, in that the benefit arises from improving the efficiency with which people currently travel. In saying that the experience with time-of-use road pricing overseas is that 80% of people keep driving, i.e. the majority of people kept doing what they have always done, and there is very little change in PT use.
So I would argue that the primary economic benefit of time-of-use road pricing lies less with it impacts on people that are currently driving, and more with how it impacts on people’s future decisions about where they live/work/play; it impacts on our future land use and transport decisions.
Benefits from more efficient decisions being made in the future can be thought of as “dynamic efficiencies“. By sending a price signal about the relative scarcity of road space at peak times, time-of-use road pricing will progressively encourage people and businesses to make choices in the future that help them to avoid situations the need to drive at peak times. Thus, the dynamic efficiencies of time-of-use transport pricing will accrue progressively over time, by discouraging people from making decisions that result in inefficient transport and land use outcomes.
I would suggest the dynamic efficiencies of time-of-use transport are more important in a city like Auckland, which is expected to grow rapidly over the coming decades.
As an aside, the potential for time-of-use road pricing to deliver dynamic efficiencies is a major reason why I don’t buy the line that “we need to invest in alternatives first” before we consider implementing a time-of-use transport pricing scheme. The reality is that we already have the primary “alternative”: We simply need people to exercise more discretion about where they live/work/play to ensure they don’t end up driving so much at peak times. And the longer we go without time-of-use transport pricing, then the fewer people who make transport/location decisions in consideration of their true costs and the harder it will be to implement such a scheme in the future.
Consider, example, the Auckland Plan’s proposed greenfields development around Hobsonville and Pukekohe. Do you think such locations would be equally attractive with time-of-use road pricing? And do we think that implementing time-of-use transport pricing will be more or less easy once these suburbs have developed and lots of their residents are now driving elsewhere to work? Personally, I think the answers are “no” and “much less easy” – which is why I suspect the dynamic efficiencies of time-of-use transport pricing would quickly dominate the static efficiencies associated with (relatively small) mode shift.
The second issue that I would like to address is the suggestion that “the equilibrium will shift in favour of the poor using PT and the wealthy driving“. The point that is being made here is that time-of-use transport pricing is likely to result in our transport system being prioritised for high-value travel. And it is true that the latter is positively correlated with income.
In saying this, I think it’s important to consider the following issues:
- Income is not the primary/sole determinant of people’s willingness-to-pay for travel. I would argue that many other factors determine how much someone is willing to pay for transport, e.g. the purpose of a trip is more important than someone’s income. Speaking from personal experience, I know that if am travelling for work purposes then I am more prepared to pay more than if I travelling for recreational purposes. The key point to note here is that willingness to pay varies greatly depending on the reasons why someone is travelling and while income is likely to play a role (if only for framing their perspective on relative costs), it’s not as straight-forward as the comment above makes out.
- It makes presumptions about how a scheme would operate. As mentioned in some of my earlier posts, the degree to which a time-of-use road pricing scheme impacts on low/high income households depends very much on its design and wider policy decisions about how the resulting revenues are used. If the scheme was designed to be revenue neutral, for example, then the additional revenue could be used to lower fuel excise duties and/or improve public transport – in this way resulting in a situation where low income households were much better off (remembering of course that low income households tend to drive less, especially at peak times, and own less efficient cars – hence they pay more fuel tax per kilometre).
Before I wrap up, I should say that I think the whole time-of-use transport pricing debate could be flipped on its head if it was presented as 1) revenue neutral and 2) linked to lower prices for off-peak travel. In fact, what we should actually be discussing is not “higher peak charges”, but higher peak charges that are used to fund lower off-peak charges.
Finally, some of you may have noted my preference for “time-of-use transport pricing” rather than “time-of-use road pricing”. The reason I prefer the former terminology is that it emphasises the general concept, rather than its specific application. Indeed, very similar arguments apply to the use of public transport: Maybe we should consider charging public transport users more to travel at peak times, with the additional revenue in turn helping to fund lower off-peak travel? I think so.