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Use of economic instruments in transport policy

Spectrum was a project funded by the EU as part of the Fifth Framework Programme. The main objective of the spectrum project was to develop a theoretically sound framework for defining combinations of economic instruments, regulatory and physical measures in reaching the broad aims set by transport and other relevant policies' in terms of efficiency and equity.

As there is a tension between managing the transport system in such a way as to minimise social costs and simultaneously managing the system to meet increased demand, the work of Spectrum will address this problem by looking at the potential effects of using either individual instruments, complementary packages of instruments, or the consequences of substituting instruments, in managing the transport system.

Results of the inter-urban and urban case studies are summarised below. The uni-modal case studies highlighted the importance of the social costs associated with externalities and the appropriateness to internalise them through economic instruments was pointed out in all case studies.

Specific results are as follows:

- In the airport case study, the instruments under scrutiny demonstrated the close inter-relationship and very frequently they were found to be implemented as packages. In addition, economic instruments appeared to be very relevant, representing a valid (sometimes optimal) capacity allocation mechanism and a market based way to internalise problematic externalities at airports. Specifically, the air case study demonstrated the relevance of introducing specific noise charges to address noise problems.

- The rail case study determined that operators should be charged for the capacity they use in accordance with the social opportunity cost of that capacity. Simulation exercises (Praise) established that if auctioning could be arranged with appropriate subsidies in place, it would give the best outcome in terms of social welfare.

- Analysis of infrastructure expansion was the main objective of the sea case study. Important benefits were generated for shippers, passengers and shipping companies, though in the case of the instruments removing locks a large part of the problem shifted towards the handling side and therefore towards terminal operators.

- For the road case study, as with the other case studies, economic instruments were prominent in the analysis. It was found that motorway tolls would have a relatively small welfare effect compared to fuel taxes. The results from the multimodal case studies indicated that instruments linked to internalisation of externalities had significant effects on welfare. Specific results are as follows.

- The EC initiatives concerning fair and efficient pricing are likely to be welfare enhancing even implemented on their own.

- The planned investment programme with respect to the Trans-European Network (TEN) should be implemented as part of a package with fair and efficient pricing. This could be linked to the issues concerning revenue recycling, i.e. how to use the pricing revenue. The urban case studies showed that some of the best performing packages involved distance charging and fuel tax, however in terms of implementation there are questions on the public acceptability of such measures, especially with short term implementation. Cordon charging was also a high performing measure in some cases (but not in other case studies) and the interpretation on this finding needs some care.

Other key conclusions are:

- In some cases, an instrument combination generated benefits when assessed in a short term time horizon in a road sector case study, but generated positive benefits when assessed over a long term time horizon (such as 30 years) in a multimodal case study.
- Synergy was found with respect to two combinations: cordon pricing and traffic signal optimization (in York); and distance-based road pricing and bus lanes (in Leeds).

In general it has been found that there remains considerable potential for the greater use of economic instruments at both urban and interurban levels, particularly when implementation in packages with other instruments.

User consultation highlighted the following:

- Political acceptability of some measures is a concern which may outweigh the benefits in terms of efficiency; moreover the perception of what is acceptable seemed to vary according to the nationality of the respondent.
- In the urban context, there was strong support for including various public transport measures regardless of efficiency or other performance.
- The administrative issues in implementing packages that included measures implemented at local level e.g. public transport and those generally implemented at national level (e.g. fuel taxes) were raised. Further administrative issues were raised in the interurban context with respect to the setting of rail fares and frequency.
- Fuel taxes were seen by some stakeholders to have particular negative equity implications.
- Infrastructure expansion (e.g. through TEN) was perceived to be inevitable and therefore a key question was to identify which other measure, or combination of measures, would support this in bringing additional benefits.

Analysis of instruments from the twofold point of view of efficiency and feasibility led to the following:

- In the urban context, economic instruments performed best overall when implemented in packages with other instruments - particularly those that involved improvements to public transport. Urban instruments performing less well overall included economic instruments implemented in isolation.
- Overall it should be considered that policy instruments that provide efficiency gains without costs to a particular stakeholder or group are rare and possibly non-existent. For example, changes in public transport fares would be at the cost of the operator, which may be unacceptable for privately operated public transport systems.
- The key to a successful move towards a greater use of economic instruments would seem to lie in a package of measures where the costs are spread in such a way that the barriers on feasibility are low across the board and there is not a strong adverse impact on any single indicator.
- A final issue may be the maturity of the transport system. A system that is already mature (in the sense of levels of saturation, current instruments in use, levels of future demand and other factors) may have much to gain from a step change in management approach and be less resistant in terms of barriers.

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University of Leeds
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