Transportist: Road Pricing Redux
A collaboration with #ChatGPT4
Good news everyone, road pricing is back on the agenda in New South Wales!
The previous NSW administration passed a law that said that EVs will have to pay an odometer tax by 2027, or once they reach 30% market share of new vehicles, whichever comes first. This introduces road pricing one vehicle at a time.
Now the State has established a new toll road review,1 which will examine the patchwork of tolling rates on different tolled motorways2 under different contracts (almost all between the same two parties, the State of New South Wales and TransUrban, the publicly-traded (which is to say private)3 corporation which manages toll roads on behalf of its owners, mostly superannuation4 funds (including mine, full disclosure).
The inquiry has already ruled out a Congestion Charge (an extra charge for driving to or through the CBD on all roads, not just motorways), and presumably more general Road Pricing (charging for the use of all roads). It seems open to time-of-day pricing differences (or dynamic (congestion varying real-time pricing, though I am far less keen on that, as it reduces price reliability for travellers.)
So while it is unambitious from my perspective, it is better than the alternative of retaining the status quo. Nevertheless, if one opens up the can of worms, one doesn’t know where those worms will get to.
The argument for road pricing
Road pricing represents the single most significant step society could make towards a more efficient, sustainable, and accessible transport system. It is also one of the most challenging to implement politically. Charging a fee for the use of roads during peak hours has the potential to dramatically improve mobility and reliability and reduce congestion and pollution, benefiting both individual travelers and society as a whole.
Road pricing introduces a price signal that reflects the actual demand for road space. By doing so, it encourages drivers to shift their travel to off-peak hours, use alternative modes of travel (public transport, walk, bike), telecommute, shop online, or travel less altogether. This, in turn, leads to a more efficient and sustainable use of the road network, benefiting both individual travelers and society as a whole.
For example, if a driver travels during peak hours, they will pay a higher fee than if they were to travel during off-peak hours. This provides an incentive for drivers to adjust their travel patterns, reducing peak period congestion and improving mobility.
Moreover, road pricing also provides a source of revenue that can be reinvested in transport infrastructure, maintenance, and public transport systems, further improving the overall accessibility and sustainability of the transport system.
Without effective demand management strategies, the deployment of electric and especially autonomous vehicles will lead to even more congestion and reduced mobility. EVs don’t pay fuel taxes. AVs won’t have to pay for parking, and in the worst of all possible world, in the absence of road charges, would just drive around the block empty waiting for their owner to finish their business.
By introducing a market-based solution to congestion, road pricing has the potential to ensure that the benefits of these new technologies are realized, and that the transport system remains accessible, efficient, and sustainable for all.
Road pricing as a policy has suffered failure to launch
Despite its potential benefits, road pricing has eluded most cities (or maybe most cities have eluded road pricing, depending on your point-of-view).
So, why hasn't road pricing been widely adopted?
Political opposition: Road pricing is a controversial topic, and many politicians are hesitant to implement it due to fears of backlash from voters. Politicians don’t stay politicians without having some sense of what is popular and what is unpopular. This is especially true in countries with low levels of public trust in government.
Technical challenges: Implementing a road pricing system can be technically challenging, especially in cities with large numbers of cars and complex road networks. In addition, many people are concerned about privacy issues associated with tracking vehicles.
Lack of public awareness: Many people are unaware of the potential benefits of road pricing, and may not understand why they would need to pay for something that has previously appeared “free”. This can make it difficult to build public support for road pricing.
Equity concerns: Road pricing has the potential to disproportionately impact some people versus others. This has led to the expression of concerns about the equity of road pricing. While any change to tax basis will effects some people more than others, I personally believe most of these expressions of concern (and to be fair, most arguments about equity) are a political smokescreen, and very few advocates are also monks. My review paper on the Equity Effects of Road Pricing can be read here.
Where road pricing has been adopted, in little tiny steps
Congestion pricing has been adopted in several cities around the world, notably:
Singapore was one of the first cities to implement road pricing in the form of an electronic road pricing (ERP) system. The ERP system, introduced in 1998, charges drivers for using certain roads during peak hours based on the time of day and vehicle type.
London introduced a congestion charge in 2003, which charges drivers for entering the central city during peak hours. The charge has been credited with reducing traffic congestion and raising revenue for transport projects.
Stockholm introduced a congestion tax on a trial basis in 2006, made permanent after a vote a year later, which charges drivers for entering the central city during peak hours. The tax has been credited with reducing traffic congestion, reducing air pollution, and raising revenue for transportation projects. Gothenburg, Sweden has a similar tax introduced in 2013.
Milan introduced a congestion charge in 2008, which charges drivers for entering the central city during peak hours. The charge has been credited with reducing traffic congestion and raising revenue for transportation projects.
New York City has recently received environmental approvals to implement congestion pricing (why do they need environmental approvals? American exceptionalism at its finest). If nothing bad happens between now and April 2024, we may be able to add another city to our list.
Many cities, from my perspective notably Minneapolis, have High-Occupancy Toll lanes, allowing Single-occupant vehicles to pay a toll to use the otherwise High-Occupancy Vehicle lanes. These are fine if the HOV lanes are under-utilised. However dynamic pricing has surprising effects, as described in our paper with the sexy title: HOT or Not.5
Back to Sydney
Sydney, where I reside has one of the most comprehensive and most expensive toll regimes in the world. Most motorways are tolled, and most of those are owned in some form by TransUrban (the ownership structures are somewhat complex, TransUrban is just a shorthand really, though they do manage most of them) which acquired a few of those roads from bankruptcy.6 [This is a really good footnote, but definitely a footnote]
While the tolls are expensive, they are only on selected facilities. As a result, many drivers avoid the motorways. So local roads are more congested than they should be, and the motorways are largely underutilised, especially compared to a social optimum, though I suspect they are also underutilised compared to the profit maximising case — one normally has to assume a toll road operator would know how to profit-maximise, I don’t think that’s the case here, if they lowered tolls, they would attract more traffic, perhaps enough to make up for it immediately, but definitely over the long run as people adapted to the use of toll roads. As it is now, they are avoided like the plague and often empty. This is not good for anyone except the wealthiest drivers.
Because tolls are too high in Sydney on motorways, and too low everywhere else, we see an underconsumption of motorways and overconsumption of local roads. If tolls on motorways are reduced, without the cost of travel on non-motorways being increased (either through new tolls, lowered speed limits, and/or lowered capacity though road space reallocation - taking away lanes for movement for private cars and allocating them to bus lanes and bike lanes and wider footpaths and trees and lots of other things that are less environmentally detrimental) induced demand theory (for which there is lots of evidence7) tells us that total travel will increase. Of itself this is an economic benefit, more people can reach more things than before … but that also means the negative externalities of roads will increase (more pollution, more carbon emissions, more pedestrian deaths, more noise).
The better policy would be to impose tolls on all the roads (motorways and not, alike), and lower those tolls in the off-peak hours. David Hensher in 2019 argued for $AU0.05 per km in the peak, $0.00 in the off-peak. Seems too low to me, but it is better than where we are now.
A few years ago I estimated the Road Rent, the real estate value of roads and how to allocate those costs to road users. In an example I estimated between $AU0.04 and $AU0.25 per km depending on the case, though obviously a more thorough study would be required before application.
There is a consultation. Details here: https://www.nsw.gov.au/have-your-say/toll-review
Most but not all freeways are tolled in Greater Sydney. Tolled freeways are referred to as Motorways, and have an M-designation. Untolled Freeways have an F-designation.
“Public” companies are private, just like “public” schools in the UK.
Superannuation fund is a fancy Oceanic word for retirement fund or pension fund
Janson, Michael and David Levinson (2014) HOT or Not: Driver Elasticity to Price on the MnPASS HOT Lanes. Research in Transport Economics 44 21-32. [doi]
In 2005, Dr. John Goldberg, a 75-year-old scholar from the University of Sydney, published a paper stating that Australian toll road companies would not be viable without the government's ongoing financial support through its infrastructure bond scheme. This claim was dismissed by toll road operators such as Transurban and Macquarie, who challenged the idea that this individual could be correct while broking analysts, institutional investors, and other experts could be mistaken. PricewaterhouseCoopers, which serves as an auditor and consultant to many infrastructure structures, was also brought in to counter Goldberg's argument that the toll road business model was fundamentally flawed.
The situation deteriorated for Goldberg when the University of Sydney's Vice Chancellor, Gavin Brown, acquiesced to a demand from Macquarie to disavow the university's connection to Goldberg's work without informing Goldberg. Records obtained under Freedom of Information laws reveal a request from the bank's lobbyist and Federal MP Warwick Smith to Brown, asking the University of Sydney to publicly distance itself from Dr. Goldberg's paper and his controversial comments made on ABC's 7.30 Report on October 20, 2005.
Complying with this request, Brown issued a statement creating a separation between the university and its scholar, who was an honorary associate in the School of Architecture, Design, and Planning, based on the fact that he was honorary and no longer on the payroll. [Why was any of this necessary, the University NEVER endorses the research of its scholars anyway, even those of it pays, that’s just good policy.]
Despite these setbacks, Goldberg continued his research, forecasting the collapse of Sydney's Cross City Tunnel and the Lane Cove Tunnel projects. His predictions came true. The projects failed due to excessively optimistic traffic projections and heavy debt burdens, just as Goldberg had anticipated.
See
Parthasarathi, P., Levinson, D. M., & Karamalaputi, R. (2003). Induced demand: a microscopic perspective. Urban Studies, 40(7), 1335-1351. https://doi.org/10.1080/00420980320000846
Zhu, S., Levinson, D. & Liu, H. (2017)Measuring winners and losers from the new I-35W Mississippi River Bridge. Transportation 44, 905–918 . https://doi.org/10.1007/s11116-016-9684-8
There was once the fundamental argument that toll roads were private ventures to provide those with means the ability to avoid congested public roads. The public road alternative stayed available when the private road was built. Therefore the benefit of providing a product to the public was realised through the toll and shareholders theoretically made a motza. The public policy supported them because it took traffic from public roads, increasing flow on them. And for this benefit the concessionaires extracted a great deal of benefit from the State in negotiations. But when toll roads failed financially there was no loss to the State. They were simply sold on, as private businesses. The old wisdom is you make more money buying a toll road than building one, though Transurban has often proved otherwise. This public/private road policy is now a little skewed because of NorthConnex and the legal requirement for heavy goods vehicles to use the tunnel, banning them from the public road network which sits atop the tunnel (with real public benefit). But it largely holds true in policy. However, the reliance on private roads to enable freer flow on public roads has created a public perception that they are a part of the general road network, and thus political liability (as always) has failed to be contracted out. As to the most recent motorways, a certain retired Roads Minister insisted they be built way beyond required capacity "for the future", and thus the tolls reflect the higher price of the bloated infrastructure. Clearly nobody anticipated a pandemic that would fundamentally alter demand, but the Minister might have done well to realise that his own Government's investment in high quality public transport would also greatly reduce demand, along with the lack of capacity in the city to absorb more vehicles. Hubris over evidence, so a bad public policy outcome. But for Transurban I suspect it can carry the debt and the induced demand will come back over a longer pay-back period. Temporary cost of living crises pass, roads congest and private roads fill up. The real question is with the amount of concessions that the State provided, how much traffic could have been displaced to public transport with land-use/transport integrated government investment of those monies?
One reason why we have a problem convincing policy makers about congestion pricing is that the economists from Walters on have got details of the theory wrong. In particular Walters did not realise the distinction between demand and flow. Getting the theory right, together with modern technology, opens up the opportunity to implement an effective pricing system that addresses many of the concerns expressed in the article. See https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3093395