Road pricing - bursting the bubble (again)
This is a revised version of my earlier post, having considered responses to the original and having had a little time to order my thoughts more carefully. I had originally planned a Twitter thread on my thoughts but there is just too much to cover for that format. I am sure there are some logical, factual and theoretical errors, for which I apologise in advance. I suspect this will remain a work in progress, to be edited when I have time.
I know many of my friends are in favour of “smart” road user charging/road pricing. As with most things in life I am sceptical. I want to believe, I really do. The theory of road pricing is sound and the potential benefits enormous. But there are many practical issues that will need resolution both before and during the running of any scheme. Given these issues, it is not the panacea people think it is. By holding out hope for such a scheme, we will lose sight of achievable measures that can be implemented in the foreseeable future; waiting for a nirvana that will never come.
Just to be clear, here I am talking about wide-area (probably) national road user charging/pricing not small-scale measures like the London congestion-charge scheme nor micro-schemes that have been proposed for places like Richmond Park. Those schemes have their issues, not in the least the infrastructure needed and the impact that might have on the asset being protected. The sort of scheme I will discuss is one where the user is charged per mile, tracked by satellite, with the cost per mile varying according to the road conditions at the time of travel. This scheme differs from the small-scale ones by an order of magnitude both in the potential impacts and in the difficulty in delivery. I will just use the short-hand “road-pricing” to denote these more complex type schemes.
I will come off the fence here and say a road-pricing scheme will never be delivered in the United Kingdom. Even if it could ever be delivered, by the time it could be then we will have different transport needs and systems, where pricing per mile will likely not be necessary. In the meantime, we should look for smaller-scale solutions that can deliver many of the benefits with far fewer of the problems.
The economic theory behind road-pricing is sound and few would dispute it. In their use of a service, people impact on other people or on the environment. In the case of road transport, such “externalities” may be extra noise, pollution, risk of accidents, or congestion; with the latter adding to the travel time of other users. The problem is that such externalities are not adequately represented in the current pricing structure for road use. In effect, there are times when the cost of travel is too low, and other times when it is too high. Both situations lead to a sub-optimal amount of travel for society as a whole. Society is better off when all the actors face the full price of their travel.
A simple explanation of the theory behind charging drivers for the congestion they cause is at https://www.economicsonline.co.uk/Market_failures/Road_congestion.html.
Arguably, one of the major externalities, pollution, can be properly captured by charging within the price of fuel, even though imperfectly – assuming a relatively straightforward relationship between fuel used and pollution emitted, one could price an additional component on to the price of fuel. This does not hold for non-fuel sources of pollution, for example, tyre rubber, which is still a problem for electric vehicles.
Congestion has a very different nature, and it is much more difficult to reflect it in a price. It would not be possible to reflect in a uniform tax like fuel duty. In addition, vehicles not subject to fuel duty still contribute to congestion. Travelling in the countryside in the middle of the night will likely have negligible impacts on other users (ignoring other impacts for now); driving in the rush-hour on a busy urban road will have some, potentially major, impact on other drivers. Of course, the marginal impact of one more vehicle will still be quite small – but it is the cumulative effects of many vehicles that causes congestion. Aggregating such cumulative effects is usually the main rationale for motorway widening or village bypasses, ie increasing the supply. But in most urban, and environmentally sensitive, areas this cannot be. Moreover, increasing the supply in one area may be enough to un-cork the demand genie and move the congestion problem elsewhere.
Road-pricing is therefore the answer provided to this – include the externalities in the price road users face so they internalise the full cost. The congestion problem is that some journeys are currently under-priced – road users take the low price and travel more than is optimal. The result is congestion. In theory, if the road user pays the exact amount that they impose on other users; they will make a rational choice on whether to travel, having taken into account the true price of that travel to all of society, not just themselves. Of course, this true price must vary according to the exact road, time of day and other conditions, otherwise it will not work as intended. And therein lies much of the problem.
The reasoning for my pessimism about such schemes is based on five inter-locking concepts:
Equity – would the schemes deliver fairness?
Simplicity – would the schemes be easy to understand
Efficacy – would they work?
Deliverability – how easy will it be to put in place?
Acceptability – would the public accept such schemes?
These concepts can work both together and against each other. A simple scheme may be more acceptable because it is understandable but if it does not deliver the benefits it is at the same time less acceptable. A more complex scheme may have better benefits in theory, but if it cannot be delivered, it is pointless. A scheme that does not track users’ position may be more acceptable but if it does not reduce congestion sufficiently, it may not be worthwhile.
Efficacy - do not believe the economic benefits, small errors in the price will not only diminish the benefits but will also undermine the acceptance which will be precarious in any case.
Let us assume for the sake of argument there is a “true” identifiable economic price for driving at a given time to a given place by a given route, taking account of all the externalities. If this price is levied on each user, the level of traffic is economically optimal. I accept the economic theory of this. My issue is with the practice.
Any error in the price (again putting aside arguments about whether there is a true price) actually offered before travel or levied during travel will impact on whether people get charged too much and decide not to drive at all, leaving the road too empty and the economic benefit of the scheme too low. If there is an error in the opposite direction, people pay too little, and the road is too full. Not only will the scheme benefit be lower than optimal but if people pay any price, they will expect a premium service; if they do not get that service, acceptability falls. Decisions made at the start of journey (eg to go ahead at a certain price) will be affected by temporary occurrences such as accidents. How will a system take these into account?
What would the economically optimal level of congestion look like? Would it be acceptable to road users and wider society?
In order to deliver the maximum benefits, the scheme has to influence travel decisions before they are made. Some kind of slot booking system would be ideal but very difficult to deliver in practice and would be unacceptable to drivers used to driving when they like. How else could road space be charged whilst keeping the theoretical benefits? Consider Waze - an excellent app. But it does not always get the route right, it cannot as road conditions change too quickly. Temporary issues such as accidents will complicate driving times. The best Waze can do once some drivers get hit by poor conditions is to ensure following drivers get diverted if necessary. People will not see benefits all the time and at times Waze will direct them on a route that eventually works out as longer. But Waze is a voluntary app to assist the driver. The stakes are much higher with a money-levying app/device. People will expect a better service.
Let us say a person chooses a cheap but slow route in preference to the expensive but fast route. What happens if the latter is delayed due to an accident? Traffic may divert to the cheaper route. Does the price on that route now go up? In theory it should do so to maximise the scheme benefits - but is it fair? How would the driver be presented with the choice of route and price? Will drivers get price anxiety (“I must get home before the price goes up”, “I’m stuck in traffic, look at the price meter go up”) - would that affect the safety of their driving? (“I’m going to overtake here to reduce my costs”).
So consider what would happen if the price is allowed to vary, a driver chooses to drive at a certain time because it was going to cost £5, the journey gets affected by an accident and the driver has to pay £10 because the congestion increased. Will they be content that the new price is economically optimal given the (revised) traffic conditions? I doubt it. Once acceptance has been lost (if it was ever gained) we have seen with the poll tax what happens.
So, then the decision made at the journey origin might no longer be the best one. Could a system have risk built-in, so the offered price is the expected price? This is arguably better but then the offered price is wrong if nothing occurs and still not necessarily the correct one if an incident occurs. So again, the scheme benefit is lower than the theory would suggest. Perhaps a probability-based range estimate of the cost like Uber use would be deliverable but at that point, we have already moved even further away from the maximum benefit and efficacy. Are the right economic incentives clear enough to users to make the “right” decisions? The evidence is not good that people understand probability so would they understand such a system?
The London congestion charge has had to be turned off for certain incidents (for example, during the aftermath of terrorist attacks or during the 2020 Coronavirus outbreak) – would this be necessary for a wider scheme? Potentially, yes. Again, turning the scheme off will potentially lead to massive disbenefits as drivers take advantage of the lower price and cause congestion, or at least this would be one less day of benefits.
Moving away from incidents, how would the standard range of prices be set? Would local authorities be able to influence them in any way? Would there need to be an “Offroad” regulator to ensure proper pricing decisions? if the demand for road travel increased, would the government have the political strength to increase the price? The current 10 year pause on fuel duty increases suggests not. Would a climate change component be added and therefore vehicle type also affect the price? What about other environmental costs such as pollution or heritage? Do not forget obesity, would the price reflect some encouragement of more active travel? What about the risks of serious accidents at different times of day? Should all of these be in the calculation? Ideally, yes as all of them are externalities of road use. But some do not have good cost estimates. There needs to be transparency but again for maximum benefits the price needs to be economically optimal - can all this be done? Again, move away from the precise optimal price and the scheme benefit will fall. Exclude an externality from the calculation and there may be unintended consequences.
Would there need to be some rounding involved in the pricing? Are there legal implications to charging fractions of a pence per mile? If prices had to be rounded up, would this move away from the optimal price?
There are many other issues that would need addressing. For example, in theory, an exit lane for a motorway should be charged differently to the main carriageway. But we do not have the technology to adequately determine the vehicle position to that accuracy. Even if we did (and with better satellite coverage we might), we might see driver behaviour change - people cutting in late to save money, risking accidents. Would this need infrastructure or legal changes to reduce the risk? Again, the scheme benefits fall.
Equity. We must accept that we are moving from the current position, however imperfect it might be. As with all changes, some people will lose, some will gain - though the idea is that society benefits in aggregate.
We can protect those we think are worthy (however we might come to define that) with transfers, not necessarily money, perhaps travel vouchers? Free miles, bus passes, cycle schemes? But it would not be possible to do this in every area. If society deems it best for those who could not otherwise afford car travel, then we could provide money through some route. If universal basic income existed, that could be one route. But how would we set the level of support? Would it differ for those in cities with adequate public transport versus those in other areas? How would this keep in line with costs? Transparency would be needed. Would people believe the government and trust it to set the appropriate level? Balanced against the equity for drivers, we need to consider the impact on those who live near roads. Is reducing traffic noise and fumes outside (and inside) their homes worth reducing transport choices for other people? How will we trade-off these transfers?
Any system can be cheated, the higher pay-off for success (less cost and better traffic conditions) will undoubtedly spur some attempts. It would have to be widespread to impact on benefits, but any cheating will impact on acceptability. A scheme must be robust enough to minimise the possibility of cheating. This would probably mean any device has to be installed in a vehicle in such a way that it is immediately obvious from outside the vehicle when the device is not present or is not functional.
There are other equity issues that might not be fixable with transfers. Some people might be less capable of understanding, what is to them, a Byzantine charging structure. How much will it be for me to visit my grandchildren on Saturday? If I wait until 8pm how much do I save? These may not be easy calculations for some, even with apps to assist them, and they may just avoid travel instead. This may well be sub-optimal.
What alternatives will people have? Cities are much easier to provide for, though new build is often impossible. If there are no real alternatives, for example in rural areas, then is it fair to price some people out? Arguably yes, in the longer term so that longer term decisions on residential and job location etc are made. But that will mean a lot of short-term pain which is almost certainly politically unacceptable and arguably unfair on those who have to bear the brunt of that pain while planning systems adjust over many years. Few politicians would go down this road.
One issue of a road pricing scheme is that because the cost of driving is now more apparent, so will be the driver benefits of new build – reduced congestion (at least in the short-term) will mean lower prices. Will this apparent benefit distort the provision of new build?
In the long term, is personal motorised transport going to be on the same scale as now? If not, then how long should scheme costs and benefits be valued? We have seen with the current crisis how much work can be done (or not) at home. Will this change in the longer term? If so, will we need to tackle road congestion at all? Conversely, if public transport is a no go for virus reasons, will the road user price need to be so high as unacceptable?
There are potential issues with the way that the difference between work and leisure travel time is presently accounted for in road building schemes that would need to be considered.
Acceptability of technology and of the concept - to me, this is where the early 2000s DfT road pricing study went wrong, there is a massive difference between what people will accept for personal use and for taxation/charging purposes.
People might choose to use Waze and give away their location for such purposes, they will be far less likely to for charge-levying purposes. Some kind of “black box” would be needed. This is ideally also needed for road safety (like the proposed EU box) but then perhaps even harder to get acceptability if the same device were to be a “spy in the car”. Perhaps if it were mandated by insurance companies it might be easier, but then might it be seen a stealth taxation device? What is the win for drivers? Will they really perceive the benefits? Road pricing was not acceptable in 2005; the political environment is even less favourable now.
What transparency would there be on how the money is used? In economics, the net charge should just be taken by the Treasury, but would hypothecation be necessary for acceptance? But at what level – should it go to all transport, just to road users, just to car users, at what geography? What if the money were used to deliver better alternative travel making those modes more attractive? This would impact on the road price. Would the Treasury come to rely on the scheme revenue and not wish to change prices despite changes in need? Would hypothecation strengthen “ownership” of the road?
Deliverability - this would be one of the most complicated projects ever delivered in this country, in terms of both the technology and the charging structure
It is no surprise that the one place a GPS-based road pricing system is likely to be introduced (albeit on a limited scale) is within authoritarian Singapore. The UK government does not have the luxury of discounting the opposition to wider charging.
I’ve not even touched on the likelihood of a road-pricing system being delivered by the public sector, even with most delivered by the private sector - would anyone have any confidence in cost estimates for the delivery of a scheme? How many unknown issues will arise in the delivery stage and in the final product? Some, such as the IEA, will see this as an opportunity for more private sector involvement in the delivery and maintenance of roads.
I have identified quite a few issues here but any scheme with complex technology, public acceptability issues, novel legal concerns, and complex pricing structures will be certain to bring up totally new issues no-one has or could consider beforehand. Furthermore, there would also be entirely unintended consequences of a scheme.
The British political system is based around periodic elections, unfortunately for the deliverability of road pricing, the gaps between such elections are far too small for a scheme to be designed and implemented, let alone, bedded in. There will be far too great an incentive for an opposition party to point to defects in the proposed system and to make populist hay with their alternatives.
Finally, a mantra we hear all the time: “we paid for the use of the road”. Notwithstanding the fact that most such discussion of “road tax” is misinformed (to be polite), that many motorised vehicle users don’t pay Vehicle Excise Duty or pay very little, and that many non-motorised users pay VED and/or the other taxes (like council tax) that actually pay for roads, this refrain will be even stronger in a world with road pricing. “I’m paying extra for this road space at this time, get out of my way!”. Mr Toad will not be happy. Further if space for motorised vehicles were to be reduced, and prices go up to reflect, surely the conflict between “paying” and “non-paying” users will only increase?
As the various benefits of a complex scheme fall by the roadside so the balance shifts to “cruder” but simpler, arguably more acceptable alternatives. At what point does this mean a simpler system would in practice be better (taking into account deliverability)? The government has very limited measures to hand - fuel duty cannot be applied regionally and, in any case, if congestion is the main issue being targeted, EV users don’t pay fuel duty.
So, what are the alternatives? Do nothing is always an option; it is just not a good one for dealing with congestion. It is all too easy to put our hands up and say it is too difficult – after all, that is exactly what I have done above. But there are some measures that can be introduced.
We must accept that some journeys are not in the best interests of everyone, including other drivers, and use non-pricing measures wherever possible. Not everyone can use alternative means of transport – but a lot more can than currently do so. The fewer who drive who do not really need to, the more space there is for those who really do. If we do not accept this simple fact, then there are no solutions that will work.
We could make some journeys less easy by enforcing and re-enforcing existing legislation on parking, idling, speeding, phone use, etc. Little nudges can go a long way. We can ensure that those drivers deemed not fit or proper to drive do not do so, for these people often impose the highest costs on other road users. Safer roads mean less accidents mean less congestion.
We must look for reinforcing behaviour which reduces the need for road use, particularly at peak times – for example, making streets safer for school children to walk or cycle can create a virtuous circle. But such measures can often be divisive and need to be carefully designed to avoid unintended consequences. The collection of good data is key.
We could reduce capacity (inherently increasing the cost but for all drivers so doing it inefficiently) either directly per road (for example, increasing the width of pavements) or indirectly via measures that reduce the supply or increase the cost of parking such as a workplace parking levy. Physical reductions can be done in many ways, whether reducing the physical width of roads, the numbers of roads available, the times that roads can be used, the length of time that traffic signals provide for vehicles, etc. We could make other travel methods more attractive, hence affecting the implicit relative price between modes. Some of the measures to do that may also reduce the physical road space for motorised vehicles. But this is often politically very difficult to implement.
We can work with the providers of navigation devices and applications, either voluntarily or via statutory means, to iron out some of the perceived disbenefits of those systems. Could they have “soft” speed limits or diversions at certain times? We have seen, in effect, an increase in capacity with the use of these applications – roads previously more or less hidden from drivers have now been opened up. Purely from the drivers’ perspective, this is a good thing. But again, because they are not paying for their externalities, the allocation of road space is sub-optimal. Often the side roads now being used are not designed for the speeds being driven nor are the houses designed to reduce the noise from traffic. We need more localised research into why particular drivers are driving and to help find them alternatives where possible.
Some small measures which purport to help increase the flow of traffic may in the long-term actually hinder it. For example, reducing the pedestrian phases at traffic lights will merely attract more vehicles to a route over time, as well as make alternatives to vehicle journeys even less attractive. And that is ignoring the obvious equality impacts on disabled and other road users. Furthermore, incidents will always happen, if more traffic is in a system it becomes much harder to reroute it – some slack in a system is necessary.
We could move to a simpler per mile charging system that has been suggested by the AA chairman, with an equity scheme such as some miles included upfront. However, this would still entail some kind of black box solution that itself might be unacceptable and, by definition, it would not be able to target the congested areas so will have less benefits than a “proper” system. But it might be a useful replacement for fuel duty once enough EVs replace ICE vehicles.
A higher purchase levy or annual duty on vehicles to make up for reduced fuel duty take will merely shift the burden from higher-mileage to lower-mileage users, exactly the opposite impact needed to tackle congestion. Moreover, some users will rationalise their use on a sunk-cost fallacy. Regional pricing is a non-starter since users will use false addresses or find other ways around it and, in any case, it would also be very sub-optimal.
In some areas, it might be possible to increase the cost of or ration the number of residential car parking permits and this may have some marginal impact on congestion. Some users will decide it is no longer worth maintaining a vehicle and that will be one less vehicle on the road. However, without other measures this will just attract some other user from another area who was previously just short of deciding to purchase a vehicle. There are plenty of reasons to reduce parking permits (in particular, road safety) but I do not think congestion is one of them.
The combined effect of those smaller measures that could be introduced might be enough to mean a full road-pricing system is no longer justified.
All such intermediate measures will be seen as a war on drivers. But all will reduce the eventual price that drivers have to pay, either in congestion or in a full-on road-pricing system were it to come to that. The question for drivers is what is acceptable – a range of small measures, a full-on road pricing scheme, or continued congestion?
One less driver on the road is one less in other drivers’ way. But we need to be careful not to just shift the incentives from one set of drivers to another, so that we just have a different set of drivers on the road. That is the inherent beauty of the theory of road pricing – it is totally ambivalent as to who is driving and their reasons for doing so. Of course, that is why equity is such a big issue and why there would almost certainly have to be some kind of monetary or other transfer to those priced out of driving in order for it to be acceptable. It also means it has to be precise in order to deliver the benefits to the right people at the right time. I do not think this will be possible.
Conversely, we could increase road capacity where possible. There will be some short-term gains for some users, but the history of road capacity is that it soon fills up, and that such changes distort planning and housing provision, leading to more and more road journeys. This just creates a traffic bubble; at some point it must burst. But will road pricing be able to burst it? I think not.
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