COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 20.12.1995 
COM(95)691 final 
TOWARDS FAIR AND EFFICIENT PRICING 
IN TRANSPORT 
POLICY OPTIONS FOR INTERNALISING THE 
EXTERNAL COSTS OF TRANSPORT IN 
THE EUROPEAN UNION 
f.-^rn Green Paper 
>M' 
(presented by the Commission) 
•Mt^jà 

Table of Contents 
EXECUTIVE SUMMARY 
1. INTRODUCTION 
2. THE EXTERNALITIES OF TRANSPORT 
2.1 What are transport externalities? 
2.2 Why do transport externalities matter? 
2.3 How can transport externalities be reduced? 
2.4 How can externalities be measured? — 
2.5 What are the main transport externalities? 
3 INSTRUMENTS TO CURB TRANSPORT EXTERNALITIES 
3.1 Criteria for selecting instruments 
3.2 Market based instruments and regulation 
4 INFRASTRUCTURE COSTS AND CONGESTION 
4.1 Why do infrastructure and congestion costs matter? 
4.2 Measuring and charging for infrastructure costs 
4.2.1 What are infrastructure costs? 
4.2.2 How should we charge for infrastructure costs? 
4.3 Congestion costs : nature, size and charging 
4.4 Congestion charging, efficient infrastructure policies and recovering infrastructure 
costs 
4.5 How are we presently charging for infrastructure and congestion costs? 
4.5.1 Charging systems 
4.5.2 Infrastructure costs recovery : road, rail and inland waterways 
4.6 Charging for road infrastructure and congestion costs : policy conclusions 
5 TRANSPORT ACCIDENTS 
5.1 Introduction 
5.2 Regulatory policies have brought down accidents considerably 
5.3 The cost of road accidents to the Union 
5.4 Possible economic instruments to bring costs closer to users 
5.5 Road accident insurances in the Union 
5.6 Towards fair and efficient pricing for accidents 
5.7 Policy conclusions ~~ 
6. AIR POLLUTION FROM TRANSPORT 
6.1 Emissions from transport : levels and trends 
6.2 The costs of air pollution 
6.3 The current policy approach : scope and limits of regulation 
6.3.1 The current policy approach 
6.3.2 Limits of the current policy approach : differentiated causes and effects of air 
pollution across Europe 
6.4 Reducing emissions from transport : leverage points 
6.5 Economic instruments as a complement to the existing regulatory approach 
6.6 Policy conclusions 
7. NOISE 
7.1 Introduction 
7.2 Existing legislation has only been a mixed success 
7.3 The costs of the transport noise problem 
7.4 Economic instruments 
7.5 Policy conclusions 
^ 
8. TRANSPORT EXTERNALITIES : COSTS AND POLICY OPTIONS 
8.1 Summary of the available evidence on external costs 
8.2 Cost intemalisation as an essential component of a multi-faceted transport strategy 
8.3 Phasing in of policy instruments : priorities 
9. THE COMMUNITY DIMENSION 
9.1 When and why is EC intervention needed? 
9.2 Next steps 
10. FINAL POINTS 
REFERENCES 
ANNEX 
Annex 1 : 
Annex 2 : 
Annex 3 : 
Annex 4 : 
Annex 5 : 
Annex 6 : 
Annex 7 : 
Annex 8 : 
Annex 9 : 
Annex 10 : 
Annex 11 : Effectiveness of a price based approach to solving transport problems 
The monetary valuation of external costs. 
Criteria for selecting policy instruments to curb transport externalities 
Electronic fee collection systems 
Road expenditure, taxation and damage costs 
Road accident statistics 
External accident costs 
Leverage points for reducing air pollutant emissions from road transport 
Intemalisation applied to NOx emissions from cars. The cost-effectiveness of different 
fiscal instruments 
Estimates of external costs 
List of studies to be launched 
AC 
Executive Summary 
1 Transport policy is at the cross-roads. Whilst the fundamental importance of adequate 
transport facilities to modern societies and economies is generally recognised, concern 
about increasing congestion, environmental consequences and accidents is mounting. 
There is a growing realisation that, on current policies alone, transport trends are 
unsustainable. Without substantial change in transport patterns and investments, 
increasing delays and costs are guaranteed. 
2 This insight has triggered a review of transport policies in many Member States. Calls 
for debate at the European level are intensifying and the Cannes Summit (June 1995) 
has asked that measures should be taken to establish fairer competition between modes 
of transport. 
3. The outlines of a more comprehensive policy response to this unsustainable situation are 
gradually becoming clear. Responsible infrastructure investments aimed at removing 
bottlenecks and linking individual modes within an intermodal system are an important 
ingredient. The Transeuropean Transport Network is part of the Community's response 
to this challenge. In addition, efforts are needed to complete the internal market in those 
modes of transport that are generally environmentally friendly and where there is spare 
capacity. Here increased competition should lead to more competitiveness with respect 
to road transport. R&D activities are another ingredient to further the introduction of 
efficient and safe technologies. 
4. This Green Paper looks at pricing. Transport policies have in the past focused largely 
on direct regulation. Whilst rules have brought significant improvements in some areas, 
they have not been able to unlock the full potential of response options that can be 
triggered through price signals. Price based policies give citizens and businesses 
incentives to find solutions to problems. The Union's objective of ensuring sustainable 
transport requires that prices reflect underlying scarcities which would otherwise not be 
sufficiently taken into account. Decisions made by individuals with respect to their 
choice of mode, their location and investments are to a large extent based on prices. So 
prices have to be right in order to get transport right. 
5. The evidence presented in this Green Paper indicates that for many journeys there is a 
significant mismatch between prices paid by individual transport users and the costs they 
cause - both in structure and in level. Costs are seldom imputed at the point of use and 
the prices paid for a journey rarely reflect the true costs of that journey. Some costs -
related to environmental problems, accidents and congestion are only covered partly or 
not at all. The degree to which infrastructure costs are covered varies significantly both 
within and across modes. Some transport users pay too much, others too little. This 
situation is both unfair and inefficient. 
6. The size of these costs which are not directly borne by those who cause them is very 
large - even on conservative estimates. Congestion is estimated to cost the Union some 
2% of GDP every year; accidents another 1.5% and; air pollution and noise at least 
0.6%. All in all this amounts to some 250 BECUper year in the Union and over 90% 
of these costs are related to road transport. This paper therefore concentrates on road 
transport. The available evidence suggests that existing road taxation falls far short of 
covering all these costs. 
A I 
7. This Green Paper explores ways of making transport pricing systems fairer and more 
efficient - by giving users and manufacturers incentives to adjust their transport 
behaviour. The aim is to reduce congestion, accidents and environmental problems. 
The purpose of this policy is not to increase the costs of transport. On the contrary, by 
reducing the negative side-effects of transport - and the sometimes hidden costs they 
represent - the real costs of transport (i.e. those currently paid by individual users plus 
those paid by others or society as a whole) are set to decrease. 
8. A number of key characteristics of an efficient and fair pricing system emerge from this 
analysis. In principle, prices paid for individual journeys should be better aligned with 
the real costs of these journeys. As costs differ across time, space and modes, this 
implies a need for more differentiation. Transparency is important and, ideally, 
accounts should be published identifying the relation between charges and costs. The 
principal aim of such a policy would not be to raise tax revenues, but to use price 
signals to curb congestion, accidents and pollution. If this policy were~ successful, 
revenues from charges would fall. 
9., In the long run telematics - e.g. electronic road pricing - has the potential to provide 
a system which meets these requirements, whilst respecting the privacy of Europe's 
citizens. This would significantly reduce transport problems. There are great benefits to 
be derived from avoiding incompatible systems and European wide rules for 
interoperability are needed. However, the full introduction of these systems will probably 
take a decade and possibly longer. 
10. Given the severity of the problems, action cannot be put off until then. Moreover, there 
are promising possibilities, either at national or Community level, to deal with a number 
of problems that can be introduced at short notice. These include: 
- Adjusting existing Community legislation on road charges for Heavy Goods Vehicles, 
in order to make progress towards fair and efficient pricing; 
- Electronic kilometre charges based on infrastructure damage and possibly other 
parameters (Heavy goods vehicles); 
- Road tolls in congested and/or sensitive areas; 
- Differentiated fuel taxes reflecting differences in fuel quality (e.g. environmental 
characteristics); 
Differentiated vehicles taxes in accordance with the vehicle's environmental and 
' noise characteristics, possibly to be linked with electronic kilometre charges; 
Differentiated landing charges (air transport) and track charges (rail) 
The provision of information on the safety performance of vehicles and modes. 
11. Adjusting the structure of existing tax systems by bringing charges closer to the point 
of use is likely to generate significant benefits. This paper suggests that getting the 
structure of tax and charging systems right should be the first priority. However, the 
uncertainties surrounding external cost estimates do not invalidate the need to raise 
charges where appropriate: the direction and order of magnitude of the required 
changes is often known. A policy of gradually phasing in instruments and charges, 
where needed, as more information becomes available is desirable. 
12. Making progress towards fair and efficient pricing is likely to significantly strengthen 
European competitiveness. Reducing congestion, air pollution and accidents means that 
the associated costs, currently borne by the European economy as a whole, are reduced. 
For example, curbing congestion will reduce the time losses incurred by businesses and 
consumers. A reduction in accidents leads to lower health care costs which translate into 
lower social charges. Bringing down air pollution will also cut health bills and, in 
addition, increase agricultural productivity (e.g. through reduced ozone concentrations). 
Moreover, where higher transport charges might occur, revenues should be returned to 
the economy through reductions in other taxes and charges. In line with the analysis 
presented in the White Paper on Growth, Competitiveness and Employment, reductions 
in social security charges - in particular those on low skilled labour - would seem highly 
promising. Obviously, the incidence of policies will vary across households and 
industries and will have to be carefully evaluated. 
13. The proposed pricing strategy necessitates a high degree of differentiation~and should 
fully take account of local circumstances. This is important for reasons of efficiency and 
equity. In particular, rural areas, where transport problems are of a different nature 
would have to be treated differently, especially as available evidence suggests that prices 
in those areas are approximately right. The same is true for peripheral regions. 
14. The need to make more progress on fair and efficient pricing is reinforced by the 
ongoing efforts to complete the internal market in transport and the move towards 
intermodal transport systems in Europe. Equitable conditions of competition are 
essential for reaping the full benefits from these policies. 
15. Fair and efficient pricing holds out the prospect of better linking charges to 
infrastructure costs. Not only could this reduce repair and maintenance costs, 
appropriate infrastructure charging is also likely to be crucial for mobilising private 
capital for infrastructure construction. Efficient infrastructure pricing would thus 
facilitate the introduction of public private partnerships and relieve demands on tight 
public budgets. 
16. Since some transport policies are formulated at the Community level (e.g. vehicle 
standards, minimum fuel excises etc.), whilst others are introduced by Member States, 
there is need for a broad agreement on the policy approach in order to ensure 
consistency. This is also necessary to safeguard the efficient functioning of the internal 
market and to take account of cross-border effects (e.g. ozone and acidification). 
17. Given the vital importance of transport to our economies and societies, the Commission 
believes that a debate on transport pricing is essential. It is also urgently needed 
because the Commission will have in 1996 to table proposals relevant to transport 
pricing, notably on heavy goods vehicles taxes and on an environmental framework for 
transport. Whatever the form of decisions, the transport system will clearly need lime 
to adjust: location decisions have long lasting implications, technologies to meet 
customer requirements have to be developed over time and vehicle stocks can only be 
replaced in a decade or so. It is precisely for this reason that, as businesses, people and 
governments are beginning to plan for the next century, a clear and urgent signal must 
be given that prices paid by individual transport users will have to more accurately 
reflect the full costs of transport, both in level and in structure. A wide and thorough 
discussion and consultation on how this principle can be implemented in practice is 
therefore urgently needed. 
A i 
1. INTRODUCTION 
Need for policy action 
Transport is an essential service in any society. Goods transportation ensures that products can 
be shipped from factories to markets and passenger transport, both private and public -
allows Europe's citizens to visit each other, go to work or school, and participate in a myriad 
of economic and social activities. Increases in transport efficiency were an essential 
precondition to the industrial revolution and are still a driving force behind international trade 
and tourism. The benefits of transport are many and varied : an efficient transport system is 
a major contributor to economic growth, competitiveness and employment. 
All this explains why the growing realisation that something is going wrong with our transport 
systems is so profoundly disquietening. Increasing transport delays have brought down travel 
speeds in a number of major European cities to levels which prevailed in the age of horse-
drawn carts. Air pollution problems (e.g. ozone) in summer are requiring that, on more and 
more occasions, citizens across Europe have to refrain from outdoor activities. It is estimated 
that thousands of European citizens die each year from just one form of air pollution 
(particulate matter) - according to some studies air pollution from transport kills more than 
6000 people in the UK alone. Road accidents kill some 50,000 annually in the Union and are 
the major cause of death for the under 40's. 
Although some forms of pollution are expected to go down on the basis of current policies 
alone, congestion will increase to unparalleled levels if no further action is taken. Whereas 
technical progress has made transport much safer and the total of road accidents is slowly 
declining further, society is realising that the cost in terms of human suffering, misery and lost 
productivity is unacceptably high. 
All over Europe debates are going on about what is increasingly becoming known as the 
"transport problem". And, whilst the nature of the problem differs across regions, the calls 
for policy action are intensifying everywhere. Member State governments have launched 
discussions and published consultation documents and a wide variety of institutions such as 
the European Parliament, the Economic and Social Committee and others have called for 
action1. Also, the Cannes Council concluded that other measures should be adopted to 
establish fairer competition between modes of transport. 
The need to rebalance the policy strategy 
Clearly, many measures have already been taken on a variety of levels and cities, regions 
Member States and the Union are each making important contributions. 
For example, the Community has laid down progressively tighter standards for vehicle 
emissions, as a result of which tailpipe emissions of a new car are now 90% lower than in the 
early seventies. Also, in other areas - e.g. safety and noise - standards have forced 
improvements. However, many transport problems are related to decisions by individuals with 
regard to the choice of mode, route or timing. Congestion, for example, results from the fact 
that too many people decide to use private cars at the same time and in the same place. 
See references 
% 
Most policies that have been devised so far do not influence these decisions directly and, 
therefore, overlook an important factor - human behaviour. Transport choices are influenced 
by transport prices and there is evidence that for many journeys there is a mismatch between 
transport prices paid by individual users and the underlying costs. The result is that decisions 
are distorted and too much of the wrong sort of transport occurs at the wrong place and the 
wrong points in time. This is clearly inefficient. The same is true of the fact that society pays 
large parts of costs caused by certain transport users. Here there is clearly also an equity 
problem. 
The Commission believes that the potential of pricing instruments to help reduce the most 
important problems of transport - congestion, accidents, air pollution and noise - must be 
addressed. All these problems are characterised by significant differences between what 
various individuals pay in charges and the costs they impose on other transport users and 
society : some pay too much, others not enough. These situations are generally described as 
"externalities" as some costs are external to those who cause them - i.e. not part ofprices paid 
by transport users. Bridging this gap is called the intemalisation of external costs which 
means that someone making a journey should pay the real cost of that journey. 
The importance of ensuring that prices reflect underlying costs has already been emphasised 
in the White Paper on the Future of the Common Transport Policy. It has grown with the 
completion of the internal transport market. Transport operators based in different Member 
States and using different modes of transport have been given the opportunity to offer their 
services across the Union in competition with one another. In order to avoid distortions, and 
to create equitable conditions of competition, it is essential that the principle that individual 
operators and users pay their way be more systematically applied. To do otherwise would be 
unfair, but also inefficient, because transport users would choose operators without taking full 
account of the resource costs their decisions imply. The Commission, if only as guardian of 
the Internal Market, has therefore the responsibility to address this issue and propose solutions. 
Pricing should generally be seen as a complement, not a substitute for regulatory and other 
internal market policies. In some cases price based approaches might allow a certain reduction 
in red tape and could lead to a removal of some rules from the statute books, but in others, 
rules will continue to be necessary for the efficient functioning of the internal market, for 
guaranteeing essential health and safety requirements and protecting consumers2. Other 
policies relating to information, research and development and the promotion of public 
transport (as advocated in the Green Paper on the Citizens' Network) can also contribute to 
reducing transport problems. Therefore, the proposed approach consists of a rebalancing of, 
rather than a revolution in, transport policy making. 
The need for making urgent progress on the required rebalancing can perhaps best be 
illustrated by the size of the costs that individual transport users impose on others or society 
as a whole: aggregate external costs of land transport have been estimated in various OECD 
studies at up to 5% of GDP. Although there is a large uncertainty surrounding cost estimates 
of individual externalities and costs vary significantly across and within modes, time and place 
of use, the order of magnitude of the total costs - which is broadly comparable to the total 
direct contribution of the inland transport modes to GDP - is so large that policy action is 
definitely warranted. 
In conformity with Article 129A of the Treaty. 
2 
Table 1.1 Rough estimates of the external costs of transport 
(expressed as percentages of gross domestic product) 
Air pollution00 0.4 % 
Noise 0.2 % 
Accidents 1.5 % 
Congestion 2.0 % 
(a) excluding global warming 
Source: Various studies and OECD (1994) 
Estimates suggest that over 90% of these costs are related to road transport. External costs 
of railways and inland waterways are estimated at only a fraction of the total, although there 
are complicated infrastructure cost recovery issues to be dealt with. To date, lessTnformation 
is available for maritime and air transport, where the required policies are also likely to differ 
from those in inland transport due to the highly intercontinental nature of trade in these 
services. 
These findings explain why, whilst fully recognising that the principles developed in this 
paper should apply to all modes, it concentrates on road transport, without however, 
overlooking the other transport modes in relevant cases. 
Objective and outline of this paper 
The objective of this paper is to launch a discussion on how, as part of a multifaceted 
transport policy, pricing instruments can contribute to solving the most important transport 
problems with which the Union is currently faced. Different levels of policy making - local, 
national and Community - are involved in such a strategy and their respective competencies 
will have to be defined. 
Chapters 2 and 3 analyse the general problem of externalities and which policy instruments 
are, in principle, available to address them. These two chapters clarify concepts and lay down 
general principles. In the next part of the paper - Chapters 4-7 - these principles are applied 
to the main externalities of transport: congestion, accidents, air pollution and noise. Each 
chapter contains a brief analysis of the problem, presents cost estimates and suggests policy 
options for solving the underlying problems. Chapter 8 subsequently summarises the 
discussion and analyses the role of possible Community measures. Chapter 9 addresses the 
next steps the Commission intends to take in line with the development of the Common 
Transport Policy. Finally, Chapter 10 presents the main conclusions of this document. 
2. THE EXTERNALITIES OF TRANSPORT 
2.1 What are transport externalities? 
Transport externalities refer to a situation in which a transport user either does not pay for 
the full costs (e.g. including the environmental, congestion or accident costs) of his/lter 
transport activity or does not receive the full benefits from it. 
Any transport activity creates benefits (otherwise people would not engage in it!) as well as 
costs. However, not all of these costs and benefits accrue only to those who pay for this 
transport activity (i.e. the transport user). Some of the costs fall on other persons or on 
society as a whole. One can therefore distingui5h between the so-called "internal11 or private 
costs, those that are borne by the person engaged in the transport activity (e.g. time, vehicle 
and fuel costs) and the so-called "external costs", i.e. those that accrue to others. The sum 
of both types of costs is called "social costs". In general terms, externalities arise: whenever 
the well-being of an individual is affected by the activities of others who ignore this "spill­
over" when taking their decisions. 
The criterion for separating the internal from the external costs of a journey is the person who 
pays. If a transport user has to pay for the use of a resource (e.g. the use of energy, 
infrastructure, etc.), the associated costs can be considered as internal costs. If, on the other 
hand, the transport user affects the well-being of others (e.g. by polluting the air) without 
paying for this then the ensuing costs are external to that person. As can be seen, there is a 
clear link with the "polluter-pays-principle", which requires the polluter to cover the costs of 
pollution. This principle is laid down in the Treaty (Article 130R2). 
Table 2.1 presents a breakdown of total social costs of transport in external and internal costs 
for a number of cost items. 
Table 2.1 Classification of the Costs of Transport 
Cost Categories Social Costs 
Internal/Private Costs External Costs 
Transport Expenditure - fuel and vehicle costs; - costs paid by others (e.g. free 
tickets/fares provision of parking spaces) 
Infrastructure Costs - user charges, vehicle taxes - uncovered infrastructure costs 
and fuel excises 
Accident Costs - costs covered by insurance, - uncovered accident costs (e.g. pain 
own accident costs and suffering imposed on others) 
Environmental Costs - own disbenefits - uncovered environmental costs 
(e.g. noise disturbance to others) 
Congestion Costs - own-time costs - delays/time costs imposed on 
others 
2'2 Why do transport externalities matter? 
The crucial importance of transport externalities arises from the fact that, In a market 
economy, (economic) decisions are heavily dependent on market prices. However, when 
market prices fail to reflect existing scarcities (clean air, absorptive capacity of the 
environment, infrastructure etc.), the individual decisions of consumers and producers no 
longer add up to an outcome that provides maximum benefits to society as a whole. Thus, 
pricing on the basis of full social costs is a key element of an efficient and sustainable 
transport system. 
Externalities impair the efficient distribution of resources across sectors and activities. For 
example, if the use of a certain vehicle type entails significant air pollution and road damage 
costs which are not charged, then the demand for this vehicle type will be "too" high and the 
demand for cleaner and less damaging vehicles "too" low. This represents an inefficient use 
of resources. Externalities imply that individual transport decisions no longer lead to an 
outcome that is desirable from the point of view of society as a whole. Moreover, the 
external costs are paid by others: tax payers implicitly end up footing the bill of road 
maintenance and health care due to damage from air pollution, whilst damage to buildings and 
crops resulting from acidification and other forms of pollution is paid by house owners, 
businesses and farmers. This is unfair and inefficient. 
To correct this, there is, therefore, a need for government measures. 
2.3 How can transport externalities be reduced? 
Government measures should aim at curbing these externalities, both for reasons of 
economic efficiency and equity. A price based approach ensures that prices paid by 
transport users better reflect total costs: this can be achieved by internalising the external 
costs - i.e. imputing them to users. The intemalisation approach represents a different type 
of government policy than the traditional regulatory measures usually relied upon in the 
past. 
Both policy approaches try to reduce the size of the (transport) externality (e.g. pollution, 
noise etc.). The intemalisation approach does this by ensuring that each transport user pays 
the full social (i.e. private, environmental and other) costs associated to each individual trip 
and therefore has an incentive to reduce the underlying problem. Clearly, economic 
instruments are only effective if transport choices are sensitive to prices.. Annex 1 shows that, 
certainly in the longer run (say 5 years), most transport behaviour is strongly affected by 
transport costs and prices. The regulatory approach tries to reach a reduction in the 
externality without relying on the price mechanism for changing transport behaviour. This 
approach consists, for example of laying down rules for products which reduce the 
environmental consequences of transport. Chapter 3 contains a more elaborate discussion on 
these two approaches. 
The ideal case of an absence of externalities is by no means identical to the complete absence 
of environmental damage, accidents or congestion. There would be no transport activity if 
the level of noise, accidents or emissions had to be zero. Instead, the negative side-effects 
of transport activity should be at a level that is "optimal" from the point of view of society 
: the marginal costs3 of further reducing these side-effects exactly equal the marginal benefits 
from doing so. Reducing the side-effects by more would entail higher costs than benefits. 
In order to devise policies for internalising transport externalities, it is first necessary to 
measure them. 
2.4 How can externalities be measured? 
Externalities can be measured in monetary terms either by inferring their value from 
observed market transactions (e.g. expenditure on damage avoidance, health costs, property 
value loss etc.) or by asking people how much they would be willing to pay for the 
reduction of a specific negative transport externality by a certain amount. 
Estimates concerning the present total external costs of transport, as a percent of GDP in 
different Member States, are useful to highlight the size of the problem, but they are only of 
limited value for implementing sound policies for dealing with individual cases. For this 
purpose, detailed estimates are required, distinguishing transport modes, times and places, as 
well as types of externality. 
Different methods for measuring externalities can lead to significantly different results. But 
this does not invalidate such estimates. A large part of the differences can in fact be 
explained either by different assumptions (which can be harmonised) or by different degrees 
of comprehensiveness. In particular, market related valuation approaches tend to 
systematically underestimate the full amount of external costs by only including those that 
lead to easily identifiable changes in prices. Estimates based on willingness-to-pay or 
willingness-to-accept permit a more comprehensive measurement to be made (see Annex 2 
for more details on this). Cost estimates reported in this paper for individual externalities 
generally refer to conservative assessments relying heavily on observed market transaction 
evaluation methods. For accident externalities, however, account is taken of peoples' 
willingness to pay for reduced mortality and morbidity risks as this is a crucial factor in 
evaluating accident costs (see chapter 5). 
Research under the EU's Fourth Framework Programme is analysing different methods of 
measuring externalities as well as the effectiveness of selected pricing options (see Annex 10). 
Marginal costs are the additional costs of providing one extra unit of a good or service. For example, 
the marginal costs of reducing air pollution equal the additional costs of reducing air pollution given 
certain prevailing air quality levels. The more stringent the air quality objectives are, the higher are the 
marginal costs for a given improvement, because it becomes increasingly harder (and, therefore, more 
expensive) to reduce emissions. 
2.5 What are the main transport externalities? 
The size of transport externalities varies significantly between transport modes, times and 
places. Thus, caution has to be applied when making general statements. Nevertheless, on 
the basis of the existing studies it appears that generally external congestion costs are the 
largest individual externality, followed by accident and environmental problems (air 
pollution and noise). 
This Paper therefore concentrates on those externalities, without, however, overlooking 
infrastructure costs (closely related to congestion) which should, of course, also be covered 
by a comprehensive, accurate and fair pricing system. 
It is sometimes argued that transport creates significant positive externalities because it 
stimulates productivity and economic growth. Increased productivity leads to economic 
benefits, which, however, are internal to the user and can thus not be treated as externalities. 
The bulk of the available scientific evidence suggests that, in modern industrialised 
economies, increases in transport efficiency are generally reflected in decreased transport 
costs: these effects are internal to the market mechanism and not external. Some studies 
claiming external benefits of transport seem to refer uniquely to private benefits. 
Moreover, an important distinction has to be made between externalities resulting from the 
provision of infrastructure and the use of infrastructure : whereas, in planning infrastructure 
projects on the basis of cost benefit analyses, full account should be taken of possible benefits 
elsewhere in the network and of possible regional policy objectives, this does not mean that 
the benefits people derive from its use are external. This paper does not, therefore, analyse 
the case of positive externalities. 
7 
3. INSTRUMENTS TO CURB TRANSPORT EXTERNALITIES 
In designing policy instruments to deal with different transport externalities - which will be 
discussed in the subsequent chapters - possible options have to be evaluated on the basis of 
clear criteria. 
3.1 Criteria for selecting instruments 
Among the most important criteria for selecting policy instruments to deal with transport 
externalities are effectiveness, cost-effectiveness, transparency, fairness (distributional equity), 
and the existence of possible (positive or negative) side-effects on other transport externalities 
or policies. In addition, the subsidiarity principle has to be applied in order to decide on the 
best role for the European Community. These are discussed in more depth in Annex 3. 
It is clear that instruments should be effective in reaching their objective Tjf reducing 
underlying transport problems. When policies impinge on a variety of problems, then these 
side-effects should be taken into account. Also, their costs should be compared. For example, 
if a differentiated circulation tax (based on emission per kilometre and mileage) can reduce 
vehicle emissions at nearly a twentieth of the cost of a fuel tax (see Chapter 6 and Annex 9), 
then the former instrument is much more cost-effective than the latter. Fairness is of major 
importance in assessing instruments: the incidence of measures and their associated costs and 
benefits on different income groups must be reviewed and corrective action taken where 
necessary. Finally, in devising policies it has to be decided which level of government does 
what. In accordance with the subsidiarity principle, competences should only be allocated to 
the Community if the objectives can be better achieved at the Union level. 
3.2 Market based instruments and regulation 
There are, as discussed in the previous chapter, two basic approaches to curbing transport 
externalities: market based instruments (e.g. pricing) and direct regulation (also sometimes 
described as "command and control"). 
In comparing the attractiveness of policies belonging to the two classes, ideally, a case by case 
approach is needed. Nevertheless, there are a number of general insights to be drawn. 
Provided that economic instruments can be closely linked to the problem at hand, they are 
likely to be much more cost-effective than direct regulation because they allow citizens and 
businesses to rely on a variety of response channels to reduce the externality4. The cost-
effectiveness is likely to be particularly high when problems vary across space and in time: 
charges can reflect these differences, whereas rules - certainly Community legislation - tend 
to coincide with jurisdictional boundaries. Economic instruments dovetail nicely into the 
market system and, therefore, generally require less red tape than comparable regulation. 
However, it has to be pointed out that market failures, high transaction and implementation 
costs and classification problems could significantly undermine the cost-effectiveness of 
economic instruments. If markets do not function efficiently then obviously price signals will 
not be transmitted efficiently and the effectiveness of economic instruments will be impaired. 
For example, an emissions fee could trigger the development of more environmentally friendly 
vehicles, could lead to shift in the composition of the car fleet, higher vehicle occupancy rates, an 
increased use of public transport etc. Chapter 6 contains a more elaborate discussion of this point. 
8 
High transaction costs - e.g. because advanced and expensive metering technology is needed -
will obviously also reduce the cost-effectiveness. Classification problems could imply that it 
is difficult to link charges directly to problems. As discussed above, the less charges reflect 
costs at the level of individual transport users, the less attractive are economic instruments. 
Harmonised direct standards ensure a predictable regulatory environment for manufacturers 
to produce one version of a vehicle, thereby allowing economies of scale to be reaped. The 
approach taken by the Community has been to establish ambitious standards based on 
advanced technology. Regulations have also been easy to implement. The attractiveness of 
harmonised technical regulations will have to be compared with tax systems applied with 
sufficient uniformity and coherence at EU level. 
In these cases direct regulation might have advantages because changes are mandated directly 
and the instrument, therefore, does not rely on the market mechanism. Direct regulation is also 
needed when the precise attainment of health and safety standards is crucial or when physical 
thresholds have to be guaranteed. For internal market reasons, it is in cases whichxoncern the 
free circulation of goods often desirable to lay down minimum standards (e.g. maximum 
emission limit values) at the Community level. 
This discussion shows that policies should consist of a mix of instruments belonging to both 
approaches and that solutions have to be developed on a case by case basis. Transport 
policies - both in the Union and in the Member States - have in the past relied heavily on 
regulation for achieving improvements in the safety and the environmental performance of 
transport while the use of economic instruments, although increasing, is still limited (see 
chapters 4-7). 
There are various reasons for suggesting that it would be useful to review this approach. First, 
the general awareness of the problems has risen and calls for policy action are intensifying. 
On current policies alone, a number of problems are forecast to deteriorate significantly, while 
others will not improve satisfactorily. Regulation does not seem capable of tapping all 
mechanisms for solving the problems as some are closely related to human behaviour. 
Secondly, in some areas the costs of achieving further improvements have risen, and there is 
a general need for assessing the cost-effectiveness of policies. To the extent that economic 
instruments can be substituted for direct regulation, this would - as a side effect - also lead 
to a reduction of red-tape and bureaucratic rules. Thirdly, it seems that the technical 
possibilities to introduce efficient economic instruments have increased (e.g. telematics). 
Fourthly, the liberalisation of the internal market calls for removing distortions across modes 
and between operators of different nationalities. As the degree of cost-internalisation differs 
in different parts of the Union, more action is needed. Finally, as discussed above, the 
"transport dilemma" consists of a series of inter-related problems requiring an integrated 
response. A policy strategy that also relies on economic instruments is generally better able 
to provide such a response. 
This paper, therefore, investigates the potential for making prices fairer and more efficient as 
part of a multifaceted transport policy. 
4. INFRASTRUCTURE COSTS AND CONGESTION 
4.1 Why do infrastructure and congestion costs matter? 
Building and maintaining infrastructure entails costs. This raises the question of how these 
costs should be recuperated from the infrastructure users. Many of the charges that are 
currently used are not or, are only partly related to the actual costs of providing or using the 
infrastructure. Clearly, there is an important link between congestion and infrastructure costs, 
because congestion implies that infrastructure is used beyond the designed capacity (i.e. there 
is infrastructure scarcity). Congestion in infrastructure networks is increasing strongly in the 
Union. Congestion implies that transport decisions made by one user impinge on all other 
users of the network. For example, in some cases of congestion a car driver losing 10 minutes 
of her or his own time, imposes total time losses of 45 minutes on other road users. Since 
transport users only take their own losses into account they underestimate the full costs of 
their decisions. As a result, demand for transport in congested situations is too high. The 
introduction of a charge to bridge the gap between private and total costs could, therefore, 
generate significant benefits. By reducing the traffic volume, the imposition of a charge 
increases traffic speeds. This represents a net benefit for society. 
4.2 Measuring and charging for infrastructure costs 
4.2.1 What are infrastructure costs? 
In evaluating infrastructure cost it is essential to make a distinction between: 
(i) capital costs : Road, rail and inland waterway networks, as well as port and airport 
installations, represent important assets. The provision of these assets implies real 
costs. 
Clearly, the capital invested in the provision of a transport infrastructure gives rise to a fixed 
cost that bears no relationship to the actual use of the infrastructure. The capital value of the 
transport infrastructure increases over time with additions made by new investments. It is 
important to distinguish annual investments (expenditure) from annual capital costs: these are 
very different concepts and there is no reason to make users pay annually for the investment 
costs that were incurred in a particular year (see Graph 4.1). 
However, measuring the asset value of the network requires detailed information on 
parameters such as the replacement value of the infrastructure. Evaluations on road capital 
costs are presently only available for a number of countries, such as Germany, Austria, the 
UK and Finland. For other Member States, only annual outlays are calculated. More 
information needs to be collected, preferably on a harmonised basis, allowing cross-country 
comparisons to be made. 
(ii) operating and maintenance cost. Examples of these types of costs are: 
- the (annual) maintenance expenditure for roads; 
- the expenditure for dredging a canal or a harbour. 
Some of the operating costs vary with transport volumes, but other factors, such as weather 
conditions also play a role. For example, the pavement of a road is damaged by the axle 
weight of the vehicles travelling on it but also by temperature variations, rain, snow and 
excessive heat. 
10 
Data on operating and maintenance costs are generally available, although no harmonised 
approach for measuring these costs exists at the level of the Union. 
Graphs 4.1 show the allocation of 
annual road expenditure in the UK 
and an illustrative breakdown of road 
costs as calculated in a recent study. 
Source: David Newbery (1995) 
In addition, the construction of 
infrastructure often has major land-
use implications. It can lead to a 
disturbance of eco-systems and 
might create so-called barrier effects. 
The associated costs are not well 
understood, but could be significant 
(UK Royal Commission on 
Environmental Pollution) and should, 
amongst others, be taken into 
account in the design stage. 
4.2.2 How should we charge 
for infrastructure costs 
Infrastructure cost charging should 
ideally meet three criteria: Total Costs UK 10860 million UK£ — 
Policing and 
traffic 
wardens 
4% 
Maintenance 
30% 
Interest on 
Capital value 
66% 
Total Expenditure UK 6720 million UK£ 
Policing and 
traffic 
wardens 
6% 
Maintenance 
48% Capital 
expenditure 
43% 
Graph 4.1 
The system should link charges as much as possible to actual costs (i.e. marginal cost 
pricing) at the level of the individual user: 
Marginal cost pricing is important for the efficiency of the transport system since it 
gives individual users an incentive to reduce the underlying costs because cost savings 
are rewarded by lower charges. For example, traffic induced road wear and tear can be 
taxed relatively easily and efficiently by charging trucks on the basis of their axle 
weights (which determine the damaging power -see below) and their mileages. Such a 
system gives hauliers an incentive to use configurations with lower axle weights, to 
reduce empty runs or, in some cases to use combined transport. 
In total, infrastructure charges should recover aggregate infrastructure costs: 
If significant parts of total costs are not use dependent - as is the case with capital costs 
- then marginal cost pricing alone will not lead to full cost recovery. Cost recovery is, 
however, important for a number of reasons. First, private owners of infrastructure have 
to recover costs. Privately owned ports, airports and toll-roads have all developed 
pricing schemes that relate charges to other parameters (e.g. access, landing rights, slots 
etc.) to recover full costs. Secondly, in the absence of full cost recovery in the transport 
sector as a whole, the general budget would have to fund the sector by imposing 
taxes/charges elsewhere. It is generally felt that, although for reasons of economic 
efficiency marginal cost pricing has major advantages, large transfers between sectors 
are undesirable. Therefore, in principle, total infrastructure costs should be recovered 
in the long run. 
11 
A number of considerations have to be kept in mind when implementing the cost 
recovery criterion. First, it is quite common and perfectly legitimate to invest in 
infrastructure for non-transport related policy reasons, such as regional balance. It seems 
unreasonable to require transport users to cover the infrastructure cost imposed 'on these 
grounds. This highlights the need for a clear system of accounting. Secondly, past 
decisions on infrastructure projects that no longer meet present day transport demands 
have, in some cases, generated high costs which cannot be recovered by users. This kind 
of infrastructure has to be given special treatment. 
Transparency: 
The system of charging for infrastructure costs should be clear to citizens and 
businesses. 
4.3 Congestion costs: nature, size and charging 
Congestion is a waste of time. It arises when infrastructure networks carry more transport 
users than their design capacity. In such a situation every user incurs delays and imposes 
delays on others. These delays represent economic losses because people value time and, in 
addition, energy use increases with delays. Delays increase more than proportionally as more 
users enter the network until traffic comes to a standstill. This is why, in congested networks, 
a small reduction in traffic levels can significantly speed up flows. 
Congestion deals with infrastructure scarcity through queuing (i.e. quantity rationing): 
everybody gets stuck in a traffic jam and incurs time losses whilst imposing further delays on 
others. When making transport choices, every individual transport user only takes his or her 
own time (and other) costs into account, ignoring those imposed on others. As everybody does 
the same, there is too much traffic and all infrastructure users waste time. Although, in the 
resulting situation all infrastructure users put together pay for the total time costs, there is still 
an externality and an ensuing wastage of scarce resources (time, energy). This results from 
the fact that there is a "market failure" because, as stated above, an individual infrastructure 
user does not compare the private benefits of his/her decision with the total costs this decision 
imposes on society as a whole (the so-called marginal social costs). A price based solution 
to infrastructure scarcity corrects this "market failure" by ensuring that prices paid by 
individuals reflect the full costs of transport choices to all other infrastructure users. The result 
is that trips which carry higher costs than benefits are avoided. The ensuing reduction in 
transport volumes leads to higher travel speeds and time savings, which represent a benefit 
to all. 
An important point to note here is that the value of time differs considerably between 
different infrastructure users. The costs of being stuck in a traffic jam are much higher for 
a lorry carrying supplies for a production line or a businesswoman hurrying to catch a plane 
than for someone whose trip purpose does not depend so much on a specific arrival time. 
However, in the present situation without charging for congestion costs, there is no means of 
allocating the scarce infrastructure capacity to those who derive the largest benefits from using 
it. As a result, money is wasted and society as a whole does not reap the maximum benefit 
from its infrastructure networks. 
12 
Congestion on Dutch Motorways 
200 y 
150-
100 
50 
0 m Traffic 
D Congestion 
1986 1994 
Graph 4.2 : Congestion 1986-1994, 1986=100 Graph 4.2 shows that congestion on 
Dutch motorways has doubled in the 
past ten years. It gave rise to costs of 
0.7 bn ECU in 1994 (0.25% of 
GDP). The US experience of the past 
ten years hints at developments in 
congestion that can be expected to 
occur in Europe as, in the next 
decades, EU car ownership levels are 
forecast to increase and approach 
levels currently prevailing in the US. 
In 1991, 47.2% of urban interstate 
mileage took place under congested 
conditions, up from 30.6% in 1983. Even on rural interstates congestion is currently 
problematic, affecting some 9% of total traffic, having tripled in just eight years (Gramlich 
1994). 
There is only a limited number of estimates available for congestion costs and most of these 
estimates refer to roads. A recent survey by the OECD (Quinet (1994)) puts road congestion 
costs in Western industrialised societies at some 2% of GDP. This figure suggests costs of the 
order of 120 Billion ECU for the EU as a whole. Estimates for other modes arrive at 
significantly lower numbers. For example, congestion costs in European aviation are put at 
some 2.4 Billion ECU in a recent study (ECAC (1995)), but this study seems to exclude time 
losses of passengers. One study for rail suggests that costs in France total some 0.15 billion 
ECU. If this were representative of Europe, total costs would be around 0.85 billion ECU. For 
inland waterways congestion costs are negligible as capacity is abundant. No figures are 
available for maritime transport. 
The conclusion to be drawn from these studies is that congestion represents a major external 
cost, which is largely concentrated in road transport. 
An important characteristic of congestion is that it varies strongly across space and in time. 
Clearly, this is a function of the spatial organisation of Western societies (80% of the 
population live in cities) and relatively fixed patterns of work and school over the day and 
week. 
Table 4.1 presents results from a recent study for road congestion in the UK which strongly 
underlines this point. Road congestion is largely concentrated in urban areas. Costs during 
peak hour are significantly higher than during off-peak. Whilst traffic in rural areas accounts 
for more than 20% of total traffic, its share in total congestion costs is estimated at less than 
1%. 
13 
Table 4.1 : Costs of Congestion in Great Britain, 1993 
Motorway 
Urban central peak 
Urban central off-peak 
Non-central peak 
Non-central off-peak 
Small town peak 
Small town off-peak 
Other urban 
Rural dual carriageway 
Other trunk and principal 
Other rural 
Weighted average SHARE IN TOTAL 
COST % 
1 
13 
27 
17 
26 
6 
9 
0 
0 
1 
0 CONGESTION COSTS 
(pence per car km) 
0.32 
44.74 
35.95 
19.51 
10.75 
8.47 
5.17 
0.08 
0.06 
0.23 
0.06 
4.18 . SHARE IN 
TRAFFIC % 
17 
1 
3 
4 
10 
3 
7 
14 
12 
18 
12 
Source: Newbery (1995) 
The conclusion to be drawn is clear: policies to curb congestion must be differentiated in time 
and space. Across the board increases in charges are unlikely to be effective as they do not 
allow for the required differentiation. Moreover, they would be unfair. Very strong increases 
in such charges would penalise rural areas and would still fall short of what is required in 
heavily congested conurbations. 
An efficient and equitable solution would thus comprise introducing highly differentiated 
charges which vary over time and space. These charges should reflect the cost of congestion 
to all transport users and would give citizens an incentive to base their transport decisions on 
the full social costs of transport1. This would dissuade those trips of which the total costs are 
higher than the concomitant benefits and thereby raise welfare by lowering congestion. 
Pricing is only one element of a comprehensive strategy to curb congestion. Other policies 
also have an important role to play. For example, the introduction of telematics based traffic 
guidance, management and information systems can significantly increase the "virtual" 
capacity of infrastructure networks. Similarly, the provision of efficient public transportation 
services, as advocated in the Green Paper on the Citizens' Network, will facilitate the transfer 
of travellers from private cars to bus and rail. Moreover, teleworking, teleconferencing, and 
teleshopping can all reduce the need for mobility. Clearly, the different components of a 
strategy have to dovetail in order to maximise its effects. 
The full introduction of such a system would necessitate electronic road charging which has 
significant advantages in terms of flexibility and non-interference with traffic flows (as 
vehicles would not have to stop at toll stations). Recent systems can fully respect the privacy 
of motorists by relying on smart-card technologies. Significant progress has already been 
made in developing such telematic systems and a large variety of trials are carried out in the 
Union (see Annex 4). The fact that such systems are very close to the market is proven in the 
case of Singapore which has awarded a $140 million contract for the building of a system due 
to be phased in as of late 1997. Also, Austria has announced its intention to introduce 
electronic road pricing systems possibly before the turn of the century. In Germany and the 
Netherlands the introduction of road pricing is being considered for the period after 2001. 
It can easily be demonstrated that the charge should be set so as to equal marginal costs which reflect 
the increase in delay and other costs to all other road users and society of an additional unit of transport. 
14 
4.4 Congestion charging, efficient infrastructure policies and recovering infrastructure 
costs 
It is sometimes argued that the best remedy against congestion is to simply provide more 
infrastructure. Notwithstanding the need for additional infrastructure in Europe for other 
reasons, this statement is generally untrue: as motorists are discouraged from using a 
congested road there is a "latent" demand which is triggered once extra capacity becomes 
available. In the long run congestion will persist. This has been demonstrated by numerous 
studies and real-life examples. Apart from introducing bans - which suffer from a wide variety 
of disadvantages - the only way to curb congestion in the long run is to set an explicit price 
for infrastructure capacity. 
The introduction of congestion charging would also bolster the efficient provision of 
infrastructure. Efficient infrastructure provision basically entails making decisions on capacity 
by comparing the benefits from capacity extensions (e.g. time savings) with the costs 
(construction and maintenance): Optimal infrastructure provision requires infrastructure to be 
extended to the point where the costs of doing so are no longer outweighed by the benefits. 
However, in the absence of congestion charging transport speeds will - in the long run -
always be too low because of the persistence of congestion and at the same time traffic 
volumes will be higher than what is desirable. Therefore, in the absence of congestion 
pricing, it will generally be attractive to build more infrastructure than that which is socially 
desirable. Congestion pricing could hence lead to important savings in resource costs of 
infrastructure2. 
It has been shown that if infrastructure is provided efficiently and capacity is priced through 
congestion charging, both the amount and the use of infrastructure would be such that it is 
impossible to accommodate more traffic and higher speeds on the network at costs that are 
lower than the associated benefits. The joint use of congestion charging and efficient 
investment rules is thus an essential precondition for arriving at a balanced transport system. 
Studies for the US have indicated that moving in this direction could lead to annual cost 
savings of 7.75 billion dollars - or nearly 18% of total 1982 highway expenditure. 
Congestion charging would also raise significant revenues. These revenues could go a long 
way to recovering the capital costs of the network and might - if a number of conditions are 
met - ensure full recovery (Winston (1985)). Such an approach would have several 
advantages. First, the revenues from such charges would remain within the (road) transport 
sector and would, therefore, benefit those who pay them. Secondly, these revenues would 
allow other taxes which are currently used for the public financing of infrastructure but which 
are largely unrelated to the costs of infrastructure use to be cut. Thirdly, revenues could be 
used for financing other parts of a comprehensive strategy to deal with congestion (e.g. route 
guidance systems, public transport etc.). In the long run, congestion charging holds out the 
prospect of reforming transport taxation in a manner that would greatly increase the efficiency 
and equity of our transport system. 
Clearly, this finding is also of major importance to the financial viability of public private 
investment partnerships (PPPs): the introduction of charging would provide a stable revenue 
source which could cover large parts of the costs. The Union's objective of furthering PPPs 
in infrastructure, is an additional reason for introducing road pricing. 
Moreover, it can be demonstrated that an efficient congestion charge is a helpful guide for making 
infrastructure decisions. Newbery (1988) shows that if the congestion charge is higher than the costs 
of building more infrastructure, it is generally attractive to expand the capacity of the network. 
15 
4.5 How are we charging for infrastructure and congestion costs now? ' 
4.5.1 Charging systems 
No Member State charges explicitly for congestion, although some toll systems have different 
rates for peak periods. Policies to curb congestion are mainly of a regulatory nature and local 
authorities apply a host of measures such as parking restrictions, public transport subsidies, 
land use decisions etc to fight congestion. Whilst some of these measures are relatively 
successful, the steady increase in congestion across the Union shows that more progress on 
pricing is needed. 
Member States use different systems for allocating and recovering road infrastructure costs, 
which all rely on annual vehicle taxes and fuel excise duties. In six Member States (France, 
Italy, Austria, Spain, Greece and Portugal), road tolls are also used. Moreover^ road user 
charges - based on the time during which the infrastructure network is used - were introduced 
for trucks in 1995 in Germany, Denmark and the BENELUX countries. Sweden, prior to 
joining the EU, also applied a distance related tax on diesel fuelled vehicles which depended 
on weight and the number of axles, the so-called kilometre tax. 
Annual vehicle taxes in Member States are often based on overall weight and, sometimes, axle 
weight of the truck. However, the relation between total taxes paid and damage caused is 
generally quite poor. This is because there is no link with mileage in the annual vehicle tax 
systems. Moreover, the relation between fuel consumption (taxed through fuel excises) and 
road damage is also imprecise, especially for larger trucks. Annex 5 presents evidence on the 
road damage costs of different types of heavy goods vehicles. The conclusion from this 
evidence is clearly that these costs vary significantly in function of vehicle characteristics. 
Moreover, when it is realised that the costs of similar infrastructure are also likely to vary 
significantly across the Union in function of local characteristics (e.g. geography) it is clear 
that an efficient charging system for road damage costs will have to be highly differentiated. 
Minimum levels of annual circulation taxes and maximum levels for road user charges are laid 
down, for commercial vehicles, in Community law. Minimum rates of fuel excise duties are 
also laid down. However, the actual rates applied still differ significantly. Table 4.2 presents 
information on this matter. 
The present system is a mix of taxes based on the nationality principle (e.g. annual vehicle 
taxes) which holds that taxes are paid in the country of origin and the territoriality principle 
which implies that charges are paid where the costs are caused (e.g. tolls, road user charges 
and, to a lesser extent fuel excise duties). Clearly, the need to link charges as closely as 
possible to costs would imply that the principle of territoriality is followed3. 
3 This was also favoured by the European Parliament (OJ N° CI58, 1989; OJ N° CI50, 1992; OJ Ne 
C21, 1993) in its opinion to the so called Eurovignette Directive (93/89/EC). 
16 
Table 4.2 : Road taxes applied in the European Union - ECU 
Member State 
Annual Vehicle 
Tax1 
Fuel Excise 
Duty2 Belgium 
9403 
298.3 Denmark 
1245 
289.6 Germany 
2676 
324.9 Greece 
3074 
243.4 Spain 
4644 
257.6 France 
787 
328.2 Ireland 
1965 
301.8 Italy 
711 
375.8 
Member State 
Annual Vehicle 
Tax1 
Fuel Excise 
Duty2 Lux 
779 
260.1 NL 
1038 
316.5 Austria 
2825 
297.0 Portugal 
3494 
315.0 Finland 
3333 
284.5 Sweden 
2591 
316.2 UK 
4100 
399.3 EU legislation 
(min) 
700 
245 
Source : Commission services 
1 HGV 38 tonne (1994) 
2 Diesel per 1000 L (1995) 3 HGV 40 tonne (1994) 
4 Greece, Spain and Portugal 
allowed lower rates until 1.1.97 are 
The significant differences reported in Table 4.2 also point to a potential distortion of 
competition between hauliers of different nationalities as hauliers operating the same vehicles 
and carrying identical consignments are charged differently on the basis of their nationality. 
This, in turn, constitutes an obstacle to the efficient functioning of the internal market. More 
harmonisation of minimum levels is needed to create a level playing field for hauliers of 
different nationalities. 
The systems used to recover infrastructure costs in rail and inland waterways also differ 
strongly between Member States. This is to a large extent a consequence of the highly 
regulated market organisations that (used to) characterise these modes. In some countries 
track charges are used in rail whereas in other Member States flat charges are imposed or 
access is free. Similarly a great degree of variation exists in inland waterways. 
4.5.2 Infrastructure cost recovery: road, rail and inland waterways 
The question arises whether the individual modes cover their infrastructure costs and whether 
there are significant differences across modes. The evidence in Annex 5 suggests that, on 
balance, taxes paid by road users are significantly larger than current infrastructure 
expenditure. Road expenditure averages some 1.0% of GDP in the Union, total tax revenues 
from road users (tolls and vehicle and fuel taxes) equal 2.0% of GDP. The difference can 
be roughly estimated at some 65 BECU and should be compared with the external costs of 
road transport (see Chapter 8). Available studies suggest that road users also cover 
infrastructure costs. Nevertheless, significant distortions seems to occur within the road 
sector. Studies where cost is allocated to different road users show that the overall levels of 
HGV taxation in some Member States do not cover the infrastructure costs of these vehicles. 
In these cases passenger cars seem to compensate for these costs of trucks. 
17 
Both rail and inland waterways appear to have much lower cost recovery rates than road 
haulage. For example, a recent study concluded that the average infrastructure cost recovery 
rate of European railways is 56% (IWW/INFRAS 1995). It has, however, to be"pointed out 
that in both cases significant problems of measurement play a role and that, on balance, the 
problem seems to be as much one of accountancy and transparency as of uncovered costs. 
The cost recovery figures for inland waterways, for example, do not seem to take account 
of the fact that waterways provide water supplies for both domestic and industrial customers, 
maintain ground water levels and are relevant to a multitude of objectives and activities such 
as flood protection, tourism, fishing, irrigation etc. Studies by the Service de la navigation 
de la Seine, which attempt to take these factors into account, suggest that only 18% of total 
infrastructure costs of the river Seine should be allocated to waterway transport. 
Similarly, for rail the cost recovery figures can be questioned because it is unclear to what 
extent the figures have been corrected for public service obligations that have been, and are, 
imposed on railways. It would appear that much of the "uncovered" infrastructure costs 
would continued to be paid by Member States in order to maintain certain public services. 
It seems that there is a major mismatch between the present infrastructure networks and the 
commercial demands of modern railway operations. The Community's railway policy implies 
a gradual liberalisation of the sector which should make operators increasingly sensitive to 
market forces: as operators adjust the structure of their services their demand for 
infrastructure use will also change. Provided that Member States restore railway finances, 
where these have been eroded by past public service requirements - as required by Directive 
91/440 - and pay market based prices for future public services, the railways should be 
expected to be in a much better position to pay for infrastructure costs. 
4.6 Charging for road infrastructure and congestion costs: policy conclusions 
The long run 
Efficient charging implies that charges should be linked as closely as possible to costs. As 
infrastructure and congestion costs vary significantly across vehicle characteristics, in time 
and in space, efficient charging systems will have to differentiate accurately in a large 
number of respects. Such a high degree of differentiation would require the introduction of 
telematics based pricing systems, notably in road transport. It is clear that, in view of the 
significant and rising congestion costs and the inefficiencies of current infrastructure cost 
recovery systems, the Union should give high priority to the development of this approach. 
The objective should clearly not be to equalise charges across Europe (since infrastructure 
costs for the same type of road vary according to local/national circumstances), but to make 
infrastructure charging more transparent and fairer by basing it on the same principles and 
methods. This is all the more important in the case of commercial heavy goods vehicles, 
where a fair, non-discriminatory charging system is essential for the elimination of distortions 
of competition among Union hauliers. Equitable cost recovery systems are of major 
importance as full liberalisation of the road haulage market is achieved. 
The infrastructure charging policy should in principle aim at full cost recovery, covering both 
capital costs (and not current expenditures) and operating costs. Common principles for 
computing the value of the capital base and the rate of return to be used might be needed. 
18 
Also, the allocation of costs to different road users should be reviewed. Congestion pricing 
and road damage recovery on the basis of marginal cost pricing should ideally recover most 
of the costs in the future, but charges based on average costs will probably have to 
complement revenues from these sources, certainly in the early phases of this policy. The 
system to be introduced will have to be examined and evaluated from the point of view of, 
fairness towards international users, towards other modes of transport and, within the road 
sector, between rural and urban users or different classes of vehicles. The introduction of 
such an approach would, in the long run, reduce the need for using existing charging systems 
for infrastructure cost recovery. A system which closely links costs to charges would be very 
transparent and would, in addition, allow to assess whether taxes are raised for pure revenue 
reasons. The Commission considers that in principle charges on transport should only be 
related to the recovery of infrastructure and external costs and would therefore welcome the 
publication of detailed accounts on transport fiscality. The introduction of taxes over and 
above this recovery level could lead to distortions in transport as in any other sector of the 
economy, and should therefore be carried out only for general revenue raising-purposes. 
Decisions on this matter would, therefore, ideally have to take account of the relative costs 
of different options and the impact on the Single Market. 
Significant measurement and allocation problems play a role in inland waterways and rail. 
As both sectors are currently undergoing a process of structural change due to liberalisation, 
it would not seem logical to target these sectors for ensuring full cost recovery in the short 
run. The Commission intends, however, to launch studies into cost imputation methods for 
rail and inland waterways and will draw up proposals for guidelines on this basis at a later 
stage (see Annex 11). 
The short and the medium run 
It is clear that the telematics technology will not be available for wide-scale implementation 
in the short to medium run except for dense urban areas where significant possibilities exist 
and a number of European cities are already introducing such systems. On the secondary and 
peripheral network the introduction will, most probably, not be feasible for another decade. 
Therefore, the question has to be asked whether transitional measures should be taken in the 
short to medium run. 
Here it seems that, in addition to making proposals on interoperability of road pricing 
apparatus and preparing discussion documents on the principles of the system to be 
introduced, there are three actions that could be taken with relative urgency: 
the Commission could draw up proposals to better align the current levels of 
charges for road haulage in the Member States with infrastructure costs. This 
would require a revision of the various rates that are currently in force at the 
Community level; 
it should be seen to what extent the structure of the current system can be 
improved so as to better enable it to accommodate the high degree of 
differentiation in costs; 
the Commission will take account of the question of internalising the external costs 
of passenger cars in its current review of vehicle taxation and associated policies 
in Member States. 
19 
With respect to these points a first step could be to revise the rates (for annual taxes and user 
permits for Heavy Goods Vehicles) laid down in the so-called Eurovignette directive 
(93/89/EC) and to see to what extent more differentiation could be introduced so"as to better 
align charges with costs. Significant possibilities would seem to exist with respect to better 
accommodating geographical differences in infrastructure costs and further differentiating 
charges according to vehicle characteristics. These issues will also be considered in the 
Commission's overall review of car taxation which is underway and will also be taken into 
account, as appropriate, in the next review of the minimum rates of excise duty which is 
scheduled for 1996. 
It would also be worthwhile investigating whether, as a first step towards an efficient system 
of charging, a so-called electronic kilometre charge - based on axle-weights and other 
characteristics - could be introduced for heavy goods vehicles. This system is mileage based 
and can differentiate very finely across different vehicle types. 
A more primitive version of this system was used in Sweden prior to its accession to the 
Union and relies on proven technology. Essentially, an electronic odometer would keep track 
of the mileage driven and charges would be imposed on the basis of a registration card 
stamped in the vehicle's meter4. The major advantage of this system is that charges could be 
brought close to road damage and other costs. Graph 4.3 illustrates that this system allows 
charges to be closely linked to actual road damage costs and has significant advantages over 
using diesel excises which are not strongly related to costs. The current version is not able 
to differentiate across time and space. It would, therefore, be useful to investigate whether 
improvements in this respect can be introduced which would further enhance its attractiveness 
(the possibility to link this instrument with the electronic tachograph should also be 
analysed). Also, revenue redistribution issues between Member States would have to be 
addressed for international road haulage. Lessons could possibly be learned from the 
operation of the Eurovignette system and the Commission intends to launch a study into the 
possibilities and advantages of moving towards an electronic kilometre charge for Heavy 
Goods Vehicles. 
Graph 4.3 : A kilometre tax is a more efficient instrument than a fuel tax to charge for road damage 
costs'8'. 
1.5T 
"5 
•a" u 
en o 
(3 O 0.5 
2 0 Marginal Infrastructure Costs 
(ECU/10 km) Sweden 
16 18 19 26 
Vehicle Weight 
ACTUAL 
COSTS AXLE WEIGHT 
KM TAX 44 60 
OPTIMAL 
ROAD USE 
CHARGE ON 
DIESEL FUEL (a) Road damage costs 
depend on axle weights. 
The road costs in this 
graph refer to standard 
configurations for 
vehicles. 
Source : Lindberg (1994) 
Two types of odometers have been developed in Sweden. The wire driven odometer cost about 800 
ECU and an electronic hub odometer was produced - but never implemented - for around 300 ECU. 
The administrative cost of the charge was around 1% of the revenues generated, which is very low 
compared to other charges and taxes (see Hoornaert (1992)). 
20 
5. TRANSPORT ACCIDENTS 
5.1 Introduction 
Transport accidents are a human tragedy, whether they occur in road, rail, inland waterways, 
aviation or, maritime transport. In the Community every year about 50,000 individuals are 
killed in transport accidents, almost all in road traffic accidents. The consequences for the 
EU of the total road accidents have been consistently undervalued to date primarily because 
of the inadequacy of recorded accident, in particular non fatal injury accident, data. If the 
statistical data from Member States are adjusted to those of the most thorough Member 
State's records the number of persons suffering from severe and slight injuries is above three 
million. In rail transport approximately 600 fatalities occur every year and in commercial 
aviation in 1994 eighteen fatalities occurred. 
Table 5.1 : Transport Fatalities, Casualities and Accident Risk in the European Union by mode 
Road (1993) 
Rail (average 88-92) 
Aviation0 (1994) 
Inland waterway & 
maritime Fatalities 
47,800 
600b 
18 
na Casualties 
3,300,000a 
1300 
6 
na Fatalities per billion passenger kilometres 
EU average 
13 
2 
0.5 
0.5d MS with 
lowest risk 
6 
1 
-
-MS with 
highest risk 
118 
10 
-
-
Source : Commission Services 
a) adjusted for under reporting 
b) no railway personnel, 50% of accidents at level crossings are included 
c) only commercial aviation 
d) based on UK statistics 
There is an alarming difference in recorded injuries and in the definition of serious injury 
across the Community (Annex 6). So important is this difference that it renders four fold 
variations in recorded injury accidents (based on the ratio between what Member States report 
and an assumption of the number of injury accidents based on the number of recorded 
fatalities). There must be an acceptable convergence in accident statistics gathering if trends 
can meaningfully be compared. The gross under reporting of injury accidents radically affects 
the overall accidents costs and, thereby, possibly attitudes to road and vehicle safety policy. 
5.2 Regulatory policies have brought down accidents considerably 
Large regulatory efforts have been made, and should continue to be made, to reduce the risk 
of accidents in transport irrespectively of mode. However, due to the relative magnitude of 
the accidents in road transport compared to other modes the main concern is the problem of 
road accidents. Member States are, on the whole, making good progress in improving road 
safety, and especially in reducing deaths and serious injuries substantially despite the 
continuing rapid growth in traffic. These improvements are for the most part the result of 
many different measures, most of which make a fairly modest contribution to the overall 
achievement, but which collectively provide a very worthwhile improvement. 
21 
Among the measures taken, which have contributed to the positive trend of declining road 
accidents, are the enforcement of speed limits, drink/driving legislation, traffic and road 
engineering and vehicle safety performance standards. It is important that further measures 
are developed and applied if the current downward trends are not to reverse under the 
influence of traffic growth in the future. New design methods can increase the protection of 
passengers and, through adequate design of the exterior of cars, reduce injuries to pedestrians. 
Moreovor, further improvements may be expected through the introduction of active safety 
technologies, which should help prevent collisions from occurring in the first place. 
5-3 The cost of road accidents to the Union 
Road accidents are the primary cause of death among the under 40s and, for this reason 
responsible for the greatest loss in terms of years of life. A road accident fatality on average 
represents 40 lost years whereas death from cancer represents 10.5 lost years and death from 
cardio-vascular disease 9.7 years. 
The concept of cost in relation to accidents is complicated; both with regard to the-underlying 
economic theory, practical estimates and the ethical questions it raises. However, it is 
estimated that a year's road accidents costs the Union approximately 15 Billion ECU in 
medical, administrative and damage reparation expenditures alone. The future lost (net) 
production is estimated to be a further 30 Billion ECU1. In addition, road users are estimated 
to have a willingness to pay of over 100 billion ECU in order to prevent all accidents in the 
Union from occurring. 
Not all of these costs, however, are external. It is estimated that of a total cost of 2.5% of 
GDP, external costs amount to some 1.5% (see Annex 7). The method of evaluating the cost 
of accidents, in particular the use of the "willingness to pay" approach as the costing 
mechanism for human value, can render an order of magnitude difference in accident costings. 
Although there is a general tendency to rely more on this approach, Member States still use 
strongly varying methods. As discussed in Chapter 2, the willingness to pay approach is 
generally to be preferred to other methods as it provides a more comprehensive measurement 
of all the costs. The gradual move towards a more comprehensive costing of accidents, 
demonstrates how large the bill of accidents is and justifies a strengthening of policy action. 
The Commission is convinced that the true costing of road accidents will prompt: 
i) the authorities to allocate resources to minimise road safety risk taking such as providing 
extra enforcement of safety laws, enhanced infrastructure, better maintained roads; 
ii) the auto industry to market even safer cars both for those inside and outside the car. A 
car crash safety rating would be to the industry's, insurance companies and individual's 
best interest; 
iii) increased chance of a common position by Member Sates to legislation aimed at 
improving safety, it being judged as cost effective on a similar basis. 
iv) safer driving. 
Measured as lost future income less private consumption. 
22 
S»4 Possible economic instruments to bring costs closer to users 
Taking account of differences in risks between different users, vehicle types and roads with 
different traffic safety performance will help to ensure that charges are brought closer to costs 
at the level of the individual who makes the transport decisions. ~~ 
More careful driving can be secured by, for example, a differentiation of the insurance 
premium with a greater bonus for safe driving. Vehicles with higher total safety, to the 
passengers as well as the unprotected users outside the vehicle, should be rewarded with lower 
rates. Driving on roads with higher safety standard, such as highways with segregated lanes, 
should in principle ensure a lower rate then on the rest of the road network. 
Among the potential economic instruments mentioned in the discussion are adjustments to 
existing fuel excise duties, purchase taxes and annual circulation taxes. However, the use of 
these economic instruments to exert a positive influence on road safety have important 
shortcomings; the fuel tax, although more or less distance related, can not take into account 
the difference in risk between users and vehicles or networks; the purchase -tax and the 
circulation tax can, albeit with difficulty, be differentiated according to the vehicle's and, 
possibly, the owner's risk characteristic but will not be distance related or related to the 
network. The inverse is true of road tolls. 
This discussion shows that efficient instruments to internalise the external costs of road 
accidents should aim at reducing risk taking in the broadest sense of the word and should, 
therefore, be introduced at the level of the individual motorist. This suggests that one should 
seriously review the possibility of using existing insurance systems and ensure that the 
premiums, both in level and in structure, reflect risk to society as a whole. The use of 
insurance premiums has the additional advantage of relying on an existing instrument. 
5.5 Road Accident Insurances in the Union 
Pricing and compensation practices vary widely from one country to another and often depend 
on the basis of cover. Civil liability cover exists in all countries, at least for damages in the 
case of personal injury: the insurance company takes the place of the policyholder who is 
responsible for an accident in order to compensate non-responsible third parties. 
Most European insurance companies have adopted either bonus systems or bonus/malus 
systems. These systems either grant a reduction in premium to drivers who have caused no 
accidents or provide both for reductions in premium for an absence of accidents and 
penalisation of drivers who cause accidents. 
The principle of how liability is funded, and how the driving public as opposed to society 
in general bears the cost, differs between the Member States. Indeed, consideration has been 
given to the introduction of a "pain and suffering" scale to be adopted throughout Europe and 
that all countries produce guidelines for judges to follow when assessing levels of personal 
injury awards. Differences exist with respect to the type of victim receiving compensation and 
the limits of cover : 
i) The type of victims receiving compensation varies : in some countries only victims who 
are not at fault receive compensation by cover which calls into question the driver's 
liability. In other countries third party cover may extend under certain conditions to 
victims, even when drivers are not at fault. However, in no country are the drivers of 
vehicles who are entirely responsible for accidents ever compensated by civil liability 
cover; 
23 
ii) The limits of cover vary considerably: in some countries they do not extend to full 
compensation of loss suffered by victims and allow little or nothing for non-material 
injury (e.g. mental distress in the event of a fatality, temporary loss of use of vehicle, 
etc.). Limits of cover and compensation for injury or loss still vary significantly across 
the Union. Within the European Union, these limits are the subject of a Directive2 which 
will progressively align all EC States to certain minima. 
In the Union, social protection systems in different Member States treat accident costs in 
different ways: 
i) There are some countries, such as Sweden, whose social security scheme covers all road 
accidents in the framework of health insurance, no claim being possible against the 
insurance company. Medical, pharmaceutical and hospitalisation costs are all met by 
State institutions; 
ii) In countries such as Belgium, France or Germany, social bodies may claim against the 
insurance company of the driver who caused the accident. The insurance companies civil 
liability costs become much higher as a result of this. Economic harm is no longer 
financially assessed by the State body but is fixed by normal judicial practice. 
This discussion shows that premiums paid by individual motorists do not accurately reflect 
the full underlying cost. First, a large part of the cost is paid by society as a whole (e.g. via 
general taxation or social security charges) implying that, in total, road users do not pay for 
all accident costs. Secondly, risk based or "true pricing" pricing governs one part of the 
premium and inter-generational cross-subsidisation (from older and female drivers to young 
male motorists) another part. Consequently, the current rate is not based upon a true 
evaluation of an individual's risk and charges, therefore, do not correspond to the likely 
(statistical) risk at the level of individual road users (mismatch). If one accepts the principle 
that the "polluter pays" in proportion to the pollution he/she generates, the driver too should 
pay something in proportion to the full risk he creates. 
5.6 Towards fair and efficient pricing for accidents 
The current policy towards insurance in the Union is based on the necessary improvement of 
the Single Market. If it was decided that more progress should be made on cost intemalisation 
through the insurance system, then this policy would need expansion. 
The basic principle of such an approach would be to ensure that the insurance liability covers 
the whole accident cost and that the premium is differentiated as much as possible: 
i) This approach would imply withdrawing the "road accident subsidy" that is currently 
paid by governments and societies and leaving the true and total costs to be borne by 
the driving public; 
ii) The cost of insurance should ideally vary with risk. Assessment of a driver's attitude 
towards risk taking could include historical evidence such as:-
Articles of Directive 84/5 
24 
Rewarding responsible behaviour through driving offence registrations or, proof 
that driving behaviour is better than average, ie. by assessing acquired ability to 
drive in a safer manner, eg. advanced testing is to be encouraged; 
A scale of charges by offence, perhaps automatically linked to the driving licence 
point system, could be an equitable way of targeting the higher risk taker rather 
than only relying on a blanket charge for high risk groups such as young male 
drivers. 
This approach would give consumers an incentive to buy safer cars, drive more safely, drive 
less, use safer roads, switch to other modes, where appropriate, or car pool. It would, 
therefore, leave it to individual users to decide how to reduce accident risk in a way that they 
deem fit. 
There are, however, a number of possible problems that would have to be solved before such 
a system could be introduced. For example, in this system the young inexperienced driver, 
particularly male driver, would, at present risk rates, incur the bulk of the higher-eosts, whilst 
the experienced older driver would receive a rebate (the differential risk for young drivers is 
currently between 2 and 4 times that of a comparable adult reference group). Such a structure 
could cause an increase in the number of young people driving uninsured and exacerbate 
under-claiming/non reporting of accidents. Enforcement and training will be the key to 
ensuring that an insurance based intemalisation works effectively. 
Whatever approach is chosen, it is clear that it must respect the efficient functioning of the 
internal market in insurance services. 
5*7 Policy conclusions 
• The Commission will promote harmonisation of the recording and assessment of traffic 
accident statistics at the most thorough level throughout the Union. 
The Commission should encourage the willingness-to-pay principle as costing 
mechanism for traffic injury accidents. 
• Insurance premiums are the most direct and focused method for targeting the driver in 
proportion to the risks involved. The Commission will analyse the potential of this 
instrument and whether Community action is needed. 
There is significant scope for harmonising the practices and criterion for settlement. The 
Commission will convene a working party to consider the possibility of establishing a 
pain and suffering scale when assessing levels of personal injury awards and the 
provision of compensation for bodily injury. 
• Publicising the relative safety performance of cars through either analysis of their 
occurrence and performance in road accidents or through crash simulation studies has 
proved to be successful in influencing buying decisions and so reducing the user's risk. 
Relative safety evaluation of passenger cars should be encouraged at EU level. By 
giving sufficient incentives to reduce risk, cost targeting should give added incentive 
for buying safer cars. 
25 
6. Air Pollution from Transport 
6.1 Emissions from transport: levels and trends 
In most Member States of the European Union the major share of carbon monoxide (CO) and 
oxides of nitrogen (NOx) emissions come from transport (around 69% and 63%, 
respectively). This sector also contributes a substantial share (around 30%) of non-methane 
volatile organic compounds1 and a minor share (1%) of sulphur dioxide (S02) emissions. 
Secondary pollutants are formed as a result of complex chemical reactions that the primary 
pollutants undergo in the atmosphere. The main secondary pollutants attributable to transport 
activity are nitrogen dioxide (N02) and ground-level ozone. Oxides of sulphur and nitrogen 
also contribute to acidification. Other air pollutants of concern come from fuel substances 
such as lead and benzene in gasoline, are directly emitted from diesel vehicles such as 
particulate matter, or are linked to fuel consumption such as emissions of carbon dioxide. 
It has to be pointed out that there is a significant variation in the share of transport in total 
emissions across the Union. For example, in Greece only 26.9% of total NOx emissions are 
from transport, whereas this share is 52.9% in Portugal and 68.7% in France. The lion's 
share of these emissions is from road transport. Although emissions depend heavily on 
technology and vary according to a number of parameters, road transport emissions per 
passenger or tonne-kilometre of freight are often a multiple of emissions from other modes, 
even for modern cars and trucks (Table 6.1). By vehicle type, cars are responsible for the 
large majority of emissions of CO and VOCs, while heavy goods vehicles are responsible 
for a substantial share of NOx emissions and the majority share of S02 emissions. 
Table 6.1 : Specific Emissions by mode 
CAR 
A | B | C AIRCRAFT 
A | B | C TRAIN 
A | B | C2 WATERWAYS 
A | B | C 
Passenger transport (grammes per passenger km) 
co2 
CO 
NO, 
CxHy 
so2 
Aer1 180 
11 
2.1 
2.3 3.1 
1.4 
0.75 126.4 
1.038 
1.367 
0.168 
0.084 
0.046 160 
0.28 
0.71 
0.31 0.13 
0.88 
0.043 210.0 
1.266 
0.588 
0.198 
0.078 
0.028 78 
0.13 
0.46 
0.30 48.7 
0.008 
0.120 
0.003 
0.209 
0.074 
Freight transport (grammes per tonne km) 
co2 
CO 
NO, 
C,Hy 
so2 
Aer1 207 
2.40 
3.60 
1.10 2.10 
1.85 
0.92 
0.04 1160 
1.40 
5.30 
0.80 41 
0.05 
0.20 
0.08 0.6 
0.40 
0.02 
0.08 0.20 
0.58 
0.08 
0.04 
Source : OECD (1994) and AECMA (1994) 
1 Aerosols A = Germany; B = Switzerland; C = Belgium 
2 Corresponding figures for high speed trains are 28.9, 
0.005, 0.071, 0.002, 0.124 and 0.044 respectively 
Transport-related air pollution has traditionally been addressed in Europe with regulations on 
fuel quality, emission standards and vehicle inspection and maintenance programmes (see 6.3). 
The main ingredient of VOC is hydrocarbons (HC). The lightest hydrocarbon, methane (CH4), is often 
excluded from regulation and for that reason data is sometimes compiled as non-methane VOC, 
NMVOC. 
26 
Overall, these regulations have succeeded in reducing emissions per vehicle-kilometre by some 
90% compared to 1970. As a result, transport-related emissions of carbon monoxide, volatile 
organic compounds and oxides of nitrogen show a downward trend, while lead emissions from 
gasoline are gradually being phased out. For example, NOx and VOC emissions are expected 
to go down by 38 and 54 over the period 1990-2010. But total emissions ~of other air 
pollutants continue rising due to the growth in motorization and transport demand. This is 
the case of particulates and carbon dioxide. 
6.2 The costs of air pollution 
Transport-related air pollution can have local, regional, or global impact. Local air pollution 
has impacts on health (e.g., respiratory diseases) and causes material damage to buildings and 
vegetation. Local air pollution is caused by primary pollutants, S02, lead and particulates. 
Regional impacts derive from acidification and ground level ozone. Global impacts are related 
to the progressive accumulation of greenhouse gases and their role in the gradual warming of 
the earth's atmosphere. Transport sources are major contributors to the so-called "greenhouse 
effect" principally through emissions of C02 and CFCs2, but also through emissions of other 
air pollutants. Besides their impacts on local air pollution, VOCs and NOx emissions 
contribute to ozone formation and indirectly to global warming. NOx and VOC emissions are 
both a local problem and, through chemical reactions, an important contributor to regional 
air pollution. Lead and particulates are very local problems. 
The air pollution externality from transport originates from the environmental impacts caused 
by the emissions of air pollutants. If these emissions were harmless to public health, 
buildings or vegetation, there would not be an externality. However, people's continued 
exposure to high-level concentrations of local air pollutants, for example, can result in severe 
health damage, including respiratory diseases, cancer and premature deaths. A recent OECD 
survey puts the external costs of (local and regional) air pollution from transport at roughly 
0.4% of GNP. This estimate excludes cost estimates for greenhouse gases from transport. 
Clearly, the figure of 0.4 % of GNP is an average figure which varies across countries and 
cities depending on the age and composition of the vehicle fleet, climatic conditions, 
population exposure, etc. Moreover, preliminary results of ongoing research point to the 
possibility that the above-mentioned average cost figure underestimates the costs of air 
pollution by several orders of magnitude, by not fully taking account of public health effects. 
In particular, emerging evidence suggests that the health effects of particulate matter have 
been significantly underestimated until now. 
&3 The current policy approach: scope and limits of regulation 
The costs per gramme of emissions do not normally depend on the mode from which it was 
emitted. In this case, charges to bring these costs closer to users should, therefore, not 
discriminate across modes. However, given the dominant share of road transport in total, 
policies should be developed with a certain urgency for this mode. Other modes should, 
however, not be overlooked, especially when they make an important contribution to total 
emissions. For example, emissions of NOx and S02 from maritime transport in the North East 
Atlantic are of the same magnitude as total emissions in France. The levels for the English 
Channel and the Southern North sea are approximately comparable to the national emissions 
levels for Denmark. It was found, for example, in an environmental assessment of the 
Ôresund bridge that, although road traffic will increase, emissions of NOx and S02 will be 
reduced by 5 to 15% due to a reduction in ferry traffic (which uses high sulphur diesel oil and 
has no catalytic converters) after the opening of the bridge. 
2 CFC = Chlorofluorocarbons, emitted from the airconditioning of vehicles 
27 
6.3.1 The current policy approach 
The control of transport-related air pollution in the EU has largely followed a regulatory 
approach aimed at bringing down emissions through product standards and rules to reach air 
quality standards3. Limit values for tailpipe emissions from gasoline and diesel cars, as well 
as heavy and light duty vehicles, were introduced in the early 1970's. According to the current 
fiscal incentives framework existing in "emissions" directives, Member States may grant fiscal 
incentives for vehicles complying with the limit values set by the directive before these 
become mandatory, in order to encourage their earlier application. The fiscal incentives 
framework aims, on the one hand, at accelerating the early application of strict limit values 
and, on the other hand, at avoiding any risk of disrupting the proper functioning of the 
Internal Market. 
In addition, fuel standards limit the sulphur content of diesel, the maximum amount of lead 
in petrol as well as the benzene content. Vehicle inspection and maintenance programmes have 
been introduced at the EU level to ensure compliance with existing emission standards. A 
differential between leaded and unleaded gasoline excise rates has been introduced in the 
Community's mineral oil excise system. The share of unleaded petrol has risen from less than 
1% in 1986 to some 53% in 1993. 
Finally, the Commission has recently set up a series of R&D Task Forces to better focus the 
Community's R&D programmes by gearing them to users needs and, thereby, also reinforcing 
industrial competitiveness. The "Car of tomorrow" Task Force is of particular importance in 
this respect as it will focus on ultra low or even zero-emission vehicles. 
&3»2 Limits of the current policy approach: Differentiated causes and effects of air 
pollution across Europe 
The nature and causes of air pollution differ, sometimes considerably, across the regions and 
cities of Europe. This variation is very important in the case of regional air pollution (e.g. 
acid rain) and local air pollution in urban areas. Regional air pollution differs considerably 
across Europe and the damage costs of acidification are much higher in northern and Central 
Europe than in southern Europe. 
Regarding local air pollution, the differences are also widespread. The Hague, for example, 
suffers more from summer ozone than from high N02 concentration while the opposite is true 
in Milan. Lead in gasoline, has practically disappeared due to the high turnover rate of the 
vehicle fleet and the early use of relatively strongly differentiated taxes in Denmark, Austria, 
Finland, and Sweden while it is still highly consumed in Portugal and Spain (70%- 80%leaded 
petrol). The average age of the vehicle fleet also differs considerably across Europe along 
with the composition of the urban vehicle fleet in terms of private/public transport vehicles 
as well as in terms of gasoline and diesel vehicles. 
This high degree of variation suggests that the implementation of European wide measures 
alone is not very cost-effective, because these can not take account of differences in the 
Union. For example, recent analysis by the Commission services indicates that the reductions 
in urban NOx emissions from transport that are necessary to reach ambient air quality targets 
in 2010 in cities like London, Lyon and The Hague will fall short of reaching the same targets 
in cities with very severe transport-related air pollution, like Athens, Madrid or Milan. 
Air pollution from gasoline cars;70/220/EEC OJ L76, 6.4.1970, major amend. 91/441/EEC OJ L 242 
30.8.91 and last amend. 94/12/EC OJ L 100 19.4.94; limits of pollutants from diesel engines; OJ L 
190 20.8.72 last amend. OJ L 238 15.8.89 resp. 88/77/EEC OJ L 36, 9.2.1988 last amend. 91/542/EEC 
OJ L 295, 25.10.91 . 
28 
Moreover, a European-wide use of best available technology to address the problems of cities 
like Athens, Madrid and Milan will fall short of solving their urban NOx problem, whilst it 
would impose additional compliance costs in cities like London, Lyon and The Hague. 
However, for internal market reasons, it is obvious that product standards for vehicles should 
be set at the European level. Clearly, in determining these standards, account should be taken 
of the costs of reaching air quality objectives to all citizens in the Community and the 
potential contribution from all instruments should be analysed. 
Given the strong variation of problems across the Union, it seems clear that economic 
instruments have a key role to play in a broad strategy that provides the necessary flexibility 
to accommodate the significant differentiation found in the Union. 
6.4 Reducing emissions from transport: leverage points 
The amounts and proportions of air pollutants emitted from an engine depend on a large 
number of factors, including the design and size of the engine, the characteristics of the fuel, 
and the conditions in which the vehicle is used: how the vehicle is driven, its age, and its state 
of maintenance. A diesel engine, for example, produces much less CO and VOC than a 
gasoline engine, but it produces more emissions of PM4 and NOx. A well maintained and 
tuned-up engine emits less pollution per unit of travel than a poorly maintained vehicle. New 
vehicle technology has a very strong potential to bring down emissions. But, of course, 
emissions depend on real driving conditions. Therefore, in-use compliance testing is 
important as it guarantees the continued effectiveness of exhaust emission systems. Annex 8 
lists the relevant "points of leverage" for reducing emissions from vehicles. 
An efficient policy approach would rely heavily on low cost options and aim at equalising the 
incremental costs of each individual leverage point, thereby arriving at an optimal mix. In this 
situation changes in the intensity at which individual instruments are used are no longer 
attractive. Charges that are directly based on emissions would, hence, in principle be a 
particularly attractive policy instrument, since they would give citizens and businesses an 
incentive to select the least cost mix of response options. 
Ongoing studies suggest that the costs of technical improvements to both vehicles and fuels 
are relatively low compared to the total cost of pollution to society. Further R&D work in 
this area, for example in the context of the Task Forces "Car of tomorrow" and 
"Intermodality", is thus particularly promising. 
6.5 Economic instruments as a complement to the existing regulatory approach 
Although direct emission charging is currently not possible because of very high transaction 
costs, Member States have in the past years experimented with a variety of economic 
instruments to complement the existing regulatory approach. 
Sweden, for example, has long recognized the advantages of using market-based incentives 
as an environmental policy tool (see box 6.1). Other examples are vehicle or sales taxes based 
on engine powers (found in a variety of countries) or on emission standards (Finland, 
Sweden). In the past, several Member States (Austria, Finland, Greece, Netherlands and 
Germany) introduced temporary tax reductions to promote the introduction of cars with 
catalytic converters in the vehicle fleet. 
Particulate matter 
29 
Further progress towards bringing air pollution costs closer to users 
Many alternatives have been proposed during the last years to internalise the environmental 
costs of transport; from the implementation of advanced emission fees based on actual 
emissions to adjustments of the level of the existing fuel, vehicle or purchase taxes to take 
into account an approximation of the emissions. Tradeable permits have been discussed as a 
means to set the levels, even road pricing and scrapping fees have been examined as possible 
measures. Clearly, the closer the charge is to actual emissions, the more efficient it will be 
in "tapping" all the different sources of emission reduction. However, implementation 
decisions will have to be based on a trade-off between an instrument's link to emissions and 
its implementation costs. In addition to emission fees, which, however, require advanced 
metering technology, the following instruments could be considered:-
i) Different approximations of the actual emissions based on distance driven and emission 
per kilometre for each vehicle type can be developed. In practice this could consist of 
modifying existing annual vehicle taxes to include environmental charges. In the 
somewhat longer run, it could be seen to what extent a kilometre based element in these 
charges could be introduced, either through annual checks (e.g. at the inspection and 
maintenance control) or through an electronic device. Such systems would in addition 
give vehicle owners incentives to reduce fees by maintaining the car properly, or by 
driving less. Obviously, implementation and enforcement issues would have to be 
analysed carefully. 
ii) The option of increasing fuel taxes is often promoted as an effective solution, because of 
the direct relationship between fuel consumed and distance travelled, as well as its low 
administrative costs. However, the relation between fuel consumption and emissions is 
generally weak (with the exception of C02), as a result of which increased fuel prices do 
not trigger a number of the highly effective response options (in particular emission 
controls) listed in Annex 8. Moreover, increases in fuel efficiency generally imply a cost. 
They are, therefore, likely to be neither an effective nor a cost-effective way of reducing 
emissions (other than C02) from transport. This is confirmed by the simulations presented 
in Annex 9 which show that the cost-effectiveness of emission based circulation taxes is 
much higher, especially if they are kilometre based. 
However, differential fuel taxes can be used to promote the consumption of cleaner fuels. 
The difference should be based on an approximation of the actual emissions and the same 
value per unit emission should be used for all fuels. Examples are the differential 
taxation of leaded and unleaded gasoline, fuel price surcharges based on the 
sulphur/heavy oil content of diesel, or lower taxes on clean fuels such as, for example, 
compressed natural gas. 
iii) The tax differential in favour of diesel fuel which is found in most Member States should 
also be re-considered in light of its potential environmental impact. For example, this tax 
differential in favour of diesel in Europe has contributed to the growth of a significant 
market for diesel-powered passenger cars. The advantages of diesel engines regarding CO 
and HC emissions is substantially offset by the diffusion of three-way catalytic 
converters. Moreover, poorly adjusted diesel engines are an important source of black 
smoke and fine particulates. In addition, C02 emissions from motor vehicles are directly 
proportional to the amount of fuel consumed and its carbon content. While diesel engines 
are more fuel efficient than gasoline engines, diesel has a higher carbon content per litre 
than gasoline. The conclusion is that tax differentials in favour of diesel cannot be 
justified on environmental grounds. Clearly, other factors that could possibly justify this 
differential, have also to be taken into account in the final assessment. 
30 
iv) Older vehicles are responsible for a disproportionate share of air pollutant emissions. 
Vehicle scrappage programs intend to eliminate the most polluting units of the vehicle 
fleet by means of inducing their destruction and/or replacement with less polluting units. 
A carefully designed early retirement programme, targeted at cities or regional areas that 
are out of compliance with air quality standards, could potentially achieve environmental 
benefits at costs equal to or lower than those of other emission-reduction options. These 
programs can also achieve gasoline savings as a byproduct. Such an early retirement 
programme involves equity issues and should, therefore, be based on non-mandatory 
participation brought about by incentives and economic instruments. Experience in some 
Member States shows that incentives directed towards new and cleaner cars through 
differentiated purchase/registration taxes can also be an efficient means to reach 
environmental goals. The incentive is more perceptible for the user and could therefore 
have a relatively large impact. 
v) Similarly, it could be seen to what extent charges in other modes can be made to reflect 
environmental costs. Track charges in rail and landing charges in aviation could be 
differentiated on this basis. The variation in environmental costs across the Union should 
ideally be reflected. An additional point that should be reviewed in this context is the 
tax exemption for aviation fuels which could lead to a distortion in transport choices. 
6'6 Policy conclusions 
The intemalisation of air pollution costs presents a major opportunity for bolstering the 
Community's air quality policy. A rebalancing of the mix between regulatory instruments, 
which will continue to be necessary for the efficient functioning of the internal market and 
the protection of public health, and economic instruments, which are required to ensure cost-
effectiveness and for dealing with the wide variation of air quality problems across the Union, 
could increase the environmental effectiveness of the policy, whilst reducing its costs. 
Emission fees are, in principle, the most attractive instruments to internalise the costs of air 
pollution in the transport sector. Direct emission metering and charging in accordance with 
regional differences in environmental costs is currently not feasible because implementation 
is prohibitively expensive. However, this is not a reason to refrain from action as there are 
a number of attractive instruments allowing a sufficiently high degree of differentiation to be 
achieved, which can be introduced at short notice. 
Instruments which should be examined more closely include; 
- adjustment of the relation between taxation on gasoline and diesel fuel to better 
represent each fuel type's environmental performance; 
- differentiated fuel taxes reflecting differences in fuel qualities; 
- differentiated vehicle taxes in accordance with the environmental performance of the 
vehicle; 
- differentiated track charges (rail) and landing charges (aviation); 
- a kilometre tax based on a vehicle's environmental characteristics. 
- differentiated user charges and road tolls according to the environmental performance 
of vehicles, possibly to be defined by a common environmental classification. 
31 
Some of these measures would require changes in existing Community legislation (e.g. a 
kilometre tax for Heavy Goods Vehicles) whilst others could be introduced by Member States 
without any Community action. However, a broad consensus at Community level on the 
pricing instruments to be implemented by Member States is desirable, in order to ensure that 
these dovetail into an overall policy strategy and are duly taken into account in the definition 
of regulatory measures (e.g. vehicle standards) which, for Internal Market reasons, are decided 
at the Community level. 
BOX 6.1 : The Swedish experience with market-based incentives to curb 
air pollution from transport 
Differential fuel taxes 
In order to facilitate the introduction of so-called reformulated gasoline, which contains less 
carcinogenic substances, sulphur etc, and makes the catalytic converter function more 
efficiently, an additional tax differentiation was introduced in 1994. The difference in taxation 
between the two grades of unleaded gasoline is only 0.06 SEK (0.006 ECU) per litre, but this 
difference has been large enough for the reformulated fuel to entirely replace the_ standard 
quality (Annex 1). 
Tax on diesel fuel for vehicles has been differentiated, based on environmental characteristics 
such as content of sulphur and carcinogenic compounds, since 1991. The cleanest fuel, class I, 
has a tax advantage of 0.47 SEK (0.05 ECU) per litre compared to standard fuel, and contains 
only 0.001% sulphur compared to the standard of 0.2%. Virtually 100% of the diesel sold for 
vehicle use now consists of class I (Annex 1). 
Differential vehicle taxes 
In order to stimulate the sales of vehicles with lower emissions, tax differentials exist for cars 
and light and heavy trucks. The vehicles are classified in three environmental classes, with class 
III representing the basic requirements, identical to current EU norms. Class II represents a 
stricter norm, usually equivalent to the future EU norm, while Class I represents even stricter 
standards. Originally the sales tax was differentiated, but now the differentiation is put on the 
annual vehicle tax for the first five years of the life time of the vehicle. The classification 
system is often used in the marketing of vehicles, and has probably affected the type of vehicles 
sold in the Swedish market. Class I cars have a small percentage of the market, Class II have 
33% and the rest are Class III cars. 
Environmental tax on domestic flights 
In 1989 a tax on emissions of HC and NOx from domestic flights was introduced. The tax is 12 
SEK (1.4 ECU) per kilogram of HC and NOx emissions. It is difficult to precisely gauge the 
effects of the tax but it arguably induced an early change of combustion chambers in a large 
number of high emitting engines. This reduced the cost for the domestic aviation company from 
60 MSEK at the introduction of the tax to 45 MSEK after the more environmental friendly 
engines where installed. 
Car scrapping charge 
In 1975 a charge of 250 SEK was introduced on the sales of new cars: The objective was the 
prevention of waste from abandoned cars. Revenues were used to pay a premium of 300 SEK 
to those who received a scrap certificate from an authorized scrap firm. When the system was 
introduced, the ratio of scrapped cars to new cars increased. In 1988 the charge was increased 
to 300 SEK and the premium to 500 SEK; in 1992 a further increase of the charge to 850 SEK 
took place together with the introduction of a differentiated scrapping premium, which was 
higher for cars which had passed a safety control within the last 14 months. 
Clearly, the development of market based incentives has to respect the Treaty and should not 
obviate the efficient functioning of the Internal Market. Given their effectiveness, the 
development of a Community framework might be needed. 
32 
7. NOISE 
7.1 Introduction 
Many Europeans consider noise caused by traffic, industrial and recreational activities as their 
main local environmental problem especially in urban and mountain areas; The increasing 
number of complaints from the public about noise, especially since the mid 1980s (up 66% 
for example in England and Wales (CEST 1993)), is evidence of growing public concern. 
Traffic noise disturbs more people than any other noise source and the continuing growth in 
traffic volume in all modes, and its increased spread over space and time, is offsetting the 
impact of the policy measures implemented to date to address the problem. 
Studies carried out recently have estimated that over 20% (close on 80 million people) of the 
Union's population are exposed to day-time transport noise above acceptable levels (above 
65 dB(A)). An additional 170 million citizens are exposed to noise levels which cause serious 
annoyance (as defined by WHO - between 55-65 dB(A)). Road transport noise is the dominant 
source - 19%) of the Union's population is exposed to unacceptable levels of road traffic noise. 
As for rail only 1.7% of the population and air transport a further 1% of the population are 
exposed to these high levels. Data for expressed annoyance are insufficient. National surveys 
do not always use the same wordings of questions to enable assessment of the way in which 
noise is perceived (disturbed, annoyed or affected). Comparable data is only available for 
four countries - D, F, GB, NL. This shows that road traffic appears to annoy between 20 and 
25% of the population and railway noise between 2 and 4% (INRETS 1994). 
Data over the past 15 years do not show any significant improvement in exposure to traffic 
noise. Although exposure levels remained fairly stable at the beginning of the 1980s and 
action on "black spots" over 70dB(A) has been successful, increases in the 55-65 dB(A) range 
occurred by the end of the decade in many Western European countries, apparently as a result 
of fast growing road traffic (INRETS 1994). The data show that the numbers of those acutely 
exposed are decreasing but the overall problem is getting worse. In many urban areas, traffic 
noise peaks are not increasing but the period of high noise exposure is becoming longer. 
7.-2 Existing legislation has only been a mixed success 
European Community legislation governing the emissions of noise from vehicles has been in 
existence for over twenty five years for passenger cars and heavy vehicles and, for fifteen 
years for two-wheeled vehicles. Since the implementation of the first directives, the current 
regulations have achieved a reduction in specific noise levels of 60% for motorcycles, 85% 
for passenger cars and over 90% for heavy lorries. This legislation is amongst the most 
stringent in the world. However, the reduction in actual road traffic noise levels has been 
much less: only 1-2 dB(A). The reasons for this low level of effectiveness have been 
identified as: the increase in road traffic, a worsening of traffic fluidity and, in general, traffic 
conditions and a lower threshold to achievable noise reductions caused by the interaction of 
tyre and road noise (Sandberg 1993). Other disadvantages of relying solely on regulations are 
the fact that the test procedure (ISO R 362) does not realistically reflect driving conditions 
and that, without a regular inspection procedure to ensure maintenance of the acoustical design 
features, the noise levels may increase over time. For example tampering with the exhaust 
silencers on motorcycles can increase noise levels by 10 dB(A). European Union goals, as 
set out in the Fifth Environmental Action Programme, up to the year 2000 are that exposure 
of the population to night-time levels in excess of 65 dB(A) should be phased out and to 
ensure that, at no point in time, a level of 85 dB(A) should be exceeded. The aim is to further 
ensure that the proportion of the population exposed to levels between 55 and 65 dB(A) and 
to levels below 55 dB(A) should not increase. 
33 
The future impact of legislation limiting vehicle noise emissions on overall noise levels is 
likely to remain limited and effective noise abatement action will require increased recourse 
to other instruments such as land-use planning and economic instruments in combination with 
stricter standards. In order to put greater emphasis on the polluter-pays principle, economic 
instruments in particular should have a greater role. ~" 
7.5 The costs of the transport noise problem 
An overview of studies produced in 1993 (Quinet 1993) found that the estimated costs of 
noise pollution vary between 0.1% and 2% of GDP. Generally studies based on the avoidance 
cost approach give low values for noise costs - below 0.1% of GDP, while studies using the 
willingness to pay approach give higher values; partly because they are carried out in 
countries with a high per capita income. Most in line with the principle in this paper is the 
willingness-to-pay method (see Annex 2). 
7.4 Economic instruments 
The use of economic instruments for noise abatement from transport, especially from road 
transport, is not widespread in Europe although the OECD in its report "Fighting noise in the 
1990s" (OECD 1991) concluded that economic incentives for noise reduction have shown 
their effectiveness in relation to road vehicles in the few cases where they have been used. 
Noise charges - except in the field of aircraft noise - have been used even less than incentives 
and, where used, have generally been set too low to encourage noise reduction. Their main 
function has been to raise funds for noise control measures such as the insulation of buildings. 
The impact of landing charges1 for aircraft to reduce noise remains unclear. The OECD's 
1990 evaluation argued that the efficiency had been low and did not influence the airlines 
choice of aircraft, whereas a report on the situation in Germany (Walter et al 1993) pointed 
to considerable success. 
The possibilities for taxing noisy vehicles include: a tax on new vehicles dependent on their 
noise category (which may depend on noise emission and type of use/average annual mileage) 
or an annual tax dependent on noise category. Such a tax may be used in conjunction with 
in-service checks that a vehicle is still within its designated noise category (this would also 
open the possibility of operators being able to reduce their annual tax by fitting noise 
suppression equipment). A third possibility is a charge on noisy vehicles when they are used 
in an environmentally sensitive area. 
Noise taxes paid by manufacturers have the advantage of encouraging them to produce quieter 
vehicles. However, if users pay, they have an incentive to reduce noise by maintaining the 
vehicle, fitting better noise suppression equipment, and using the vehicle less (assuming that 
the taxes are made dependent on in-service noise and distance travelled). For example, 
Austria is planning to introduce a road user charge that differentiates according to the noise 
(and also emissions) of vehicles in 1996. 
A consequence of road pricing should be optimal use of the road network and this may lead 
to both increases (e.g. if speeds increase) and decreases in noise nuisance. However inclusion 
of a noise cost element in the charge should be an incentive to reduce noise on these routes. 
1 Summary of different economic instruments drawn from an INRETS (1994) study done for the 
Commission. 
34 
Incentives in the form of grants to purchase low noise goods vehicles have been in operation 
in Germany and the Netherlands. For a period of approximately ten years in the Netherlands, 
operators of heavy goods vehicles were offered a two tier subsidy if they purchased and used 
vehicles fitted with "hush kits". Subsidy levels were 7.5% and 5% for noise reductions of 
6dB(A) and 3dB(A) respectively. The costs of the quietening measures were borne by the 
operators. The programme, now abolished, resulted in specified lower noise levels and more 
than 60% of the lorries now in use in the Netherlands have noise levels 5dB(A) below current 
minimum standards. Similar schemes exist in Germany. Although of limited scope, this type 
of initiative is likely to become more widespread in the future and could be extended to 
include incentives for tyres and road surfaces producing lower noise: the tyre-road noise 
problem will have to become an important part of abatement policy in the future. 
Instead of subsidising a reduction in pollution, compensation could be given to those it affects. 
Compensation for house price depreciation caused by noise or other environmental impacts 
is a well established policy. An important aspect of compensation is that, in some 
circumstances, the polluter, or the authority making decisions about pollution, may have to 
pay the compensation themselves. This is particularly so in the planning of new railways, 
airports and roads where projected compensation payments may be an incentive to the 
promoting authority to reduce or mitigate environmental impacts. 
7.5 Policy conclusions 
Economic incentives in the form of charges or subsidies have been used for both aircraft and 
road vehicles. Evidence suggests that some reductions in noise levels have been achieved. 
The further, or future, development of incentive schemes for road vehicles based on annual 
taxes or road pricing can be a way forward to the extent that it is effective. For railways, 
track charges could be modulated according to train characteristics and regional and local 
conditions. 
The Commission services are currently considering the environmental issue within the wider 
context of airport charges. A Consultation Paper has been presented outlining a common 
framework for airport charges within the European Union. The paper rests on the three key 
principles of cost-relatedness, non-discrimination and transparency. In order to ensure the 
intemalisation of external costs, such as noise and congestion, the possibility of differentiating 
the charges has been included in the paper and this matter will also be considered in the 
context of the overall review of vehicle taxation being undertaken by the Commission. 
The Commission has also decided to prepare a Communication on noise policy for adoption 
in 1996, which will aim to draw up an action plan on noise abatement. The communication 
will contain : a brief review of the noise situation in the Community; an analyses of 
Community and national abatement measures taken to date and; noise quality criteria already 
applied. This will be followed by discussions on ways of ensuring that the public is informed 
of the noise situation, of appropriate harmonised noise exposure indices and the costs and 
benefits of different actions to reduce noise levels. It will also include a discussion on tasks 
for the different actors (Community, national and local). 
35 
8. TRANSPORT EXTERNALITIES: COSTS AND POLICY OPTIONS 
This chapter summarises the available evidence on external costs and draws some preliminary 
conclusions with respect to their size, distribution across modes and other characteristics (8.1). 
It subsequently proposes general principles for complementing the existing policy approach 
with instruments aimed at internalising external costs (8.2). Finally, a short overview is 
provided of concrete steps that can be taken in the short/medium run to make the transition 
towards a system of fair and efficient transport pricing. 
S.l Summary of the available evidence on external costs 
Although cost estimates vary according to local circumstances and evaluation methods used, 
it nevertheless seems useful to gain an impression of the overall size of external costs and 
their breakdown across modes. Table 8.1 presents the results of a review of the existing 
literature carried out for the Commission. Annex 10 contains an overview of a recent study 
which also covers air transport and shipping. The results of these studies illustrate that: 
• External costs of transport are large, even if congestion costs are not taken into account. 
The most important problems exist in Road and Air-transport, although also in Rail and 
Shipping externalities occur. The share of road transport in total costs is over 90% and 
costs per passenger and vehicle kilometre are an order of magnitude more important than 
in rail and shipping. 
• Ignoring congestion, accidents and air pollution are the single most important 
externalities. 
• External costs from road transport are significantly larger than the excess of transport 
taxes over infrastructure costs (estimated at some 65 BECU; see Chapter 4). 
Given the dominant share of road transport in total passenger and goods transport, it is useful 
to further differentiate the results for road transport. Table 8.2 provides some further 
information on the breakdown across different types of road users and locations of the 
external costs for road transport in France. The qualitative pattern is very similar to that found 
in Table 8.1 and in other reports. 
Table 8.1: External cost of transport (ECU/1000 per passenger km & per tonne km) - excluding congestion 
Accidents 
Noise 
Air pollution 
& climate 
Total 
% Road 
Pass. 
18 
2.5 
15 
35.5 Freight 
13 
3.2 
17 
33.2 Rail 
Pass. 
3 
2.5 
2.5 
8.0 Freight 
2 
1.8 
1.5 
5.3 
Total External Costs (BECU p/a) 
118.4 
77% 32.1 
21% 1-9 
1% 1.6 
1% Total 
154 
100% 
Source : Commission Services (1994) 
36 
Table 8.2 : Road Taxation and External Costs, France 1991 (bn FF) 
Urban Traffic 
- Tax revenue 
- Road expenditure 
- Balance of tax 
revenue and road 
expenditure 
- Noise 
- Pollution 
- Greenhouse effect 
- Accidents 
- Congestion(a) 
- Total external costs 
- Balance: public 
expenditure/revenue 
minus external costs 
Balance/km (cnts) 
Rural Traffic 
- Tax revenue 
- Road expenditure 
- Balance of tax 
revenue and road 
expenditure 
- Noise 
- Pollution 
- Greenhouse effect 
- Accidents 
- Congestion00 
- Total external costs 
- Balance: public 
expenditure/revenue 
minus external costs 
Balance/km (cnts) 
Balance/km 
(centimes) 
All Traffic Two 
Wheelers 
1.5 
1.3 
0.2 
0.7 
2 
0.1 
4.7 
0 
7.5 
-7.3 
-73 
1.6 
0.9 
0.7 
0 
0.3 
0.1 
2.4 
2.8 
-2.1 
-30 
-55 Cars 
P1 
37.5 
20.3 
17.2 
5.4 
7.7 
2.9 
11.8 
9.5 
37.2 
-20.0 
-23 
54 
23 
31 
1.0 
1.4 
3.2 
12.2 
17.8 
13.2 
+9 
-3 D2 
5.1 
5.8 
-0.7 
1.5 
2 
0.7 
3.4 
2.8 
10.1 
-11.4 
-46 
11.8. 
10 
1.8 
0.4 
0.3 
1.4 
5.3 
7.4 
-5.6 
-9 
-19 Light Vans 
P' 
4.6 
3.6 
1.0 
0.8 
0.3 
0.4 
0.2 
1.9 
4.6 
-3.6 
-30 
3.6 
2.3 
1.3 
0.1 
0.1 
0.3 
0.4 
0.9 
0.4 
+3 
-13 D1 
5.5 
8.0 
-2.5 
1.5 
2.3 
1.2 
0.5 
4.1 
9.6 
-12.1 
-47 
3.8 
3.5 
0.3 
0.1 
0.1 
0.6 
0.6 
1.4 
-1.1 
-6 
-29 Trucks 
2.1 
4.7 
-2.6 
0.4 
1.4 
0.4 
0.3 
0.7 
3.3 
-5.9 
-292 
22.5 
19.8 
2.7 
0.4 
3.1 
2.5 
2.7 
8.7 
-6.0 
-25 
-46 Buses 
0.7 
0.5 
0.2 
0.1 
0.6 
0.1 
0.1 
0 
0.9 
-0.7~~ 
-108 
2.9 
1-7 
1.2 
0 
0.3 
0.2 
0.2 
0.7 
+0.4 
+18 
-9 Total 
57 
44.2 
12.8 
10.4 
17.3 
5.7 
21.0 
19 
73.5 
-60.7 
-
100.2 
61.2 
39 
2.0 
5.6 
8.3 
23.8 
39.7 
-0.7 
-
-
Source : ECMT/OECD (1995) excluding congestion imposed on other motorists 
Petrol 
Diesel 
Further conclusions that can be drawn on the basis of this and similar information are: 
• In passenger transport cars and motorcycles have the highest external costs (buses have 
high external costs per vehicle kilometre, but low costs per passenger kilometre -
provided they have reasonable occupancy rates). 
• Urban traffic has very high external costs, whereas costs in rural traffic are relatively 
low. If the balance between infrastructure costs and taxes is taken into account for rural 
traffic, then transport prices would seem approximately in line with full costs. 
Motorcycles and trucks are exceptions to this rule. 
37 
• In a number of Member States, diesel fuelled cars and light vans pay significantly less 
tax than gasoline powered vehicles as a result of which the balance between taxes and 
social costs is worse than in the case of gasoline cars. 
• The difference in external costs between urban and rural areas underlines the~împortance 
of differentiation. This is also borne out by the strong differences in environmental and 
noise characteristics across different classes of vehicles (see Chapters 6 and 7). 
As discussed in Chapter 4, there are important infrastructure cost recovery issues to be 
addressed in all modes. The balance of evidence available suggests that, whilst in some 
Member States private motorists seem to be subsidising road costs caused by heavy goods 
vehicles, road as a whole more than pays for its infrastructure costs (also see Annex 5). In rail 
and inland waterways cost recovery ratios are much lower, but this seems to be partly related 
to measurement issues, the joint use of infrastructure for a variety of objectives (inland 
waterways) and public service obligations (rail). 
Although the precise estimates of external costs are uncertain this should not be-taken as a 
reason for inaction: the direction and the order of magnitude of the required changes is often 
known. A policy of gradually phasing in instruments and raising the intemalisation charges 
over time as more information becomes available is to be preferred to inaction. Such an 
approach should be combined with efforts to improve and harmonise estimates of external 
costs, across modes, vehicle technologies, countries, regions and in time. 
8.2 Cost intemalisation as an essential component of a transport strategy 
In the past, Community and Member State transport policies have relied heavily on mandating 
technical change and imposing standards to reduce externalities. Whilst some important 
successes have been achieved in this way, a number of problems have deteriorated. Moreover, 
even in cases where progress was made through this approach, transport users have never been 
directly charged for remaining costs. They have, therefore, not had an incentive to further 
reduce these externalities by looking for additional ways to further bring down external costs. 
This situation also implies a distortion of competition between modes and operators as the 
degree to which external costs are paid for differs across the Union. 
The current policy approach relies largely on regulation and operates essentially on a 
problem-by-problem basis. It, therefore, has considerable difficulty with taking interactions 
between externalities into account and in reconciling trade-offs. Finding an appropriate 
balance between different problems would be greatly facilitated if a cost could be attached to 
the different externalities and it could be left to individual transport users to decide on the best 
ways of simultaneously dealing with a variety of problems. Therefore, progress on 
cost-internalisation could allow the construction of a more consistent policy framework for 
dealing with a large number of inter-related transport problems. It would also imply a 
rebalancing of the current policy mix and constitute an important complement to existing 
regulatory policies, the development of an inter-modal infrastructure network, Research and 
Development Programmes and policies to complete the internal market in rail and inland 
waterways. Without full recovery of social costs in every mode the intermodal policy strategy 
of the Community could well fail as the conditions of competition would not be equitable 
across the Union. 
Clearly, the precise balance between regulation and economic instruments has to be reviewed 
carefully on a case-by-case basis within the context of an overall policy strategy. This requires 
further anarysis and a careful preparation of policies over time. A number of principles which 
could underpin a pricing policy are set out in Box 8.1. These principles aim at enhancing both 
the efficiency and the fairness of pricing in transport. 
38 
Various studies suggest that moving towards efficient and equitable pricing on the basis of 
the above principles is likely to generate significant benefits, because the approach would be 
highly effective in reducing the underlying external costs. Box 8.2 reports on a study that was 
carried out for the city of Brussels (1 million inhabitants) which suggests that.such a pricing 
approach would improve welfare by some 150 MECU annually. ~~ 
Box 8.1 : Fair and efficient pricing : The principles 
The aim of an intemalisation strategy is to increase both the fairness and the efficiency, 
in the broadest sense, of the European transport system. The objective of the policy is 
to ensure that prices reflect costs so that businesses and citizens base their decisions on 
the right price signals. For some users this will mean higher prices, for others lower. 
If the policy is successful and transport users adapt their behaviour and technology, then 
the revenues from the system could diminish as the externalities decrease in the future. 
The principles of such a strategy can be summarised as follows : — 
• Charges should be linked as closely as possible to the underlyng costs. This will 
enhance both the equity and the cost-effectiveness of the system. The more 
charges are linked to costs, the larger the reduction in externalities and the 
improvement in welfare will be; 
• Charges should, hence, be highly differentiated and behavioural adjustment to 
reduce externalities has to be rewarded in the form of lower charges. Of course, 
the degree of differentiation should take account of transaction costs and the need 
to safeguard transparency; 
• The price structure should be clear to the transport user. The publication of 
detailed accounts of the social costs and charges of the transport system is to be 
encouraged; 
• Charging should be non-discriminatory across modes and nationals of different 
Member States and revenues should flow to authorities in countries where the 
costs are factually caused (principle of territoriality); 
• In all modes, transport prices of individual journeys should be better aligned with 
the total costs of these journeys to society (i.e. including accident, environment, 
noise, infrastructure and congestion costs); 
• The full infrastructure costs of all infrastructure networks should be recovered 
from transport users in the long run, unless infrastructure has been constructed for 
other policy reasons. This implies that an additional charge might have to be paid 
if charges based on the marginal infrastructure and congestion cost do not cover 
total infrastructure cost; 
• Imposing additional charges for simple revenue raising purposes (i.e. over and 
above what is needed for cost intemalisation) is likely to lead to distortions, both 
in the economy as a whole and in the transport system. These costs should be 
compared with alternative ways of raising revenues. 
39 
Box 8.2 : Fair and efficient transport pricing in Brussels 
The benefits of fair and efficient transport pricing can be illustrated by a study funded by the 
Community's Fourth Framework R&D Programme which has analysed the consequences of 
internalising the external costs of transport for a number of European cities. This box reports on 
the results for the city of Brussels. 
Average peak travel speeds in Brussels are forecast to go down from 38 km/hour in 1991 to 23 
km/hour in 2005 if no further policy action is taken. Although improved vehicle technology will 
bring down pollution, emissions would still entail significant costs. The same is true of 
accidents. 
The introduction of an efficient pricing strategy that brings costs closer to users would have a 
significant impact on the underlying transport problems. This policy would lead to a large 
reduction in peak car traffic (-21.8%) and a sizeable increase in peak use of public 
transportation (19.5%). Air pollution problems would be cut by some 50%. Annual benefits 
would be in the order of 150 MECU. 
The policy would comprise electronic road pricing and emission fees. These instruments might 
not be fully available in 2005. However, Graph B.8.1 shows that relying on more conventional 
instruments could also lead to sizeable benefits. 
Graph B.8,1 : Alternative instruments for internalising the external costs in 
Brussels - Benefits as a percentage of full cost intemalisation case 
I 1 = Subsidies to clean cars 
I 2 s Increased subsidies to 
public transport 
|3S Fuel tax (other taxes-
abolished) 
E3 4= Peak toll on commuters 
| 5 = Peak otVon toll on all road 
users (othertaxes abolished) 
EU 6 = Full cost intemalisation 
Of course, the results from this study are -rough approximations on the basis of available 
knowledge regarding costs and behavioural responses to prices. They should not be interpreted 
too literally. But the message arising from this and similar studies is clear: progress towards fair 
and efficient pricing can generate significant benefits. 
Table B.8.1 : External costs in Brussels, 2005 (million ECU per day) 
No Additional Policies Fair and Efficient Pricing 
Noise 0.131 0.126 
Accidents 0.964 0.789 
Pollution 0.196 0.094 
Travel Speeds (km/h) 23 38 
Soufce : Oehelen and Proost (1995) 
40 
Equity considerations 
It is sometimes argued that cost intemalisation in transport will have negative equity 
implications: the poor will be hit hardest. ". 
spending on private transport as a,% 
of total household expenditure by 
income category 
2nd 
.Quartile 3rd 
Quartile 4th 
Quartile Whilst it cannot be ruled out that 
some people on lower revenue will 
pay relatively high charges, it can 
easily be shown that, in general, this 
is untrue. Graph 8.1 shows that in the 
Union spending on private transport 
(i.e. car ownership and use) rises 
strongly with income: in some 
countries the richest 25% spend twice 
as high a share of their income on this 
service as the poorest 25%. To the 
extent that cost intemalisation will 
raise the prices of car use - which will 
not always be the case - the rich will, 
on balance, be harder hit than the 
poor. This notwithstanding, an 
increase can cause relatively more 
hardship for people on low incomes. This general finding does, therefore, not imply that cost 
intemalisation will never have adverse impacts on low income households and studies have 
identified possible cases (in particular, it should be avoided that cases of "mobility exclusion" 
arise). Clearly, the design of any cost-internalisation strategy will have to take full account 
of its impact on different groups of consumers and the possible need for additional policies, 
possibly to be financed out of revenues raised, has to be carefully investigated (see Annex 3). D 
E 
F 
IRL 
IT 
NL 
Graph 8.1 
Competitiveness and Employment 
On average, transport costs only account for 2.8% of final product prices in the Union of 
which a third (1%) relates to road transport. For most industrial branches, transport costs 
represent 1-4% of the sales values (see Graph 8.2). In general transport costs decrease as the 
value of products increase : there is a strong inverse relation between transport costs as a % 
of total sales value and the value per Kg of individual products. Highest costs are found 
when products with low value-added are traded over long distances (e.g. intercontinental 
trade). For example, transport costs as a percentage of total sales value can be as high as 18% 
for cast iron in intercontinental trade. In such cases, maritime transport costs and port charges 
are relatively important. However, even in intercontinental transport costs can be quite low: 
for example, the transport costs of a T-shirt sold in Germany made from Pakistani cotton, 
spun in Tunisia and sewn in Morocco amount to only 2.7% of the sales price. Moreover, in 
intra-European trade, transport costs are generally quite low, even for agricultural products 
which have a relatively low value per Kg of product (around 5% of the total value). 
41 
Transport costs are only a part of the total logistical costs, which also comprise inventory 
management and other stock related costs. In fact, industries are increasingly using new 
production methods such as just-in-time to reduce inventory costs. These methods are heavily 
based on reliable transport operations and have made European industry vulnerable to 
transport inefficiencies and congestion. The benefits and costs of efficient transport pricing 
will, however, differ across industry and, therefore, the impacts on individual branches should 
be studied when devising policies in this area. The Commission will launch a study into this 
matter (see Annex 11). 
Transport costs in selected industrial branches 
Graph 8.2 
Source : Eurostat Input/Output Tables 
On the whole, progress towards fair and efficient pricing is likely to significantly strengthen 
the competitiveness of European industry. Reducing congestion, air pollution and accidents 
implies that the associated costs which are currently borne by the European economy as a 
whole are reduced. For example, curbing congestion will reduce the time losses incurred by 
businesses and consumers. Knocking off only a fraction of the current congestion costs -
estimated at 120 BECU - would already imply significant benefits. Efficient production 
planning and inventory management is crucial for modern economies and requires reliable 
deliveries. A reduction in accidents leads to lower health care costs which translate into lower 
social charges. Bringing down air pollution will also reduce health bills and, in addition, 
increase agricultural productivity (e.g. reduced acidification and ozone concentrations). 
Efficient and fair pricing implies that revenues from charges will fall in line with the 
reductions in underlying transport problems. The previous chapters have highlighted a variety 
of efficient instruments that can be introduced through adjusting the structure of taxation 
systems without increasing the overall level. Higher taxation levels are, in any event, not an 
objective of the proposed approach. Moreover, where higher charges might occur, revenues 
could be returned to the economy through reductions in other taxes and charges. In line with 
the analysis presented in the White Paper on Growth, Competitiveness and Employment, 
reductions in social security charges - in particular those on low skilled labour - would seem 
highly promising and could lead to significant benefits in terms of increased employment. 
8.3 Phasing in of policy instruments: priorities 
Whilst all modes should be charged equally in relation to the external costs they generate, the 
cost estimates presented in this paper suggest that, without overlooking other modes, road 
transport should be prioritised in the development of policies. These policies should, as much 
as possible, take account of the variation in externalities across vehicle type, time and space. 
42 
In devising an intemalisation strategy a distinction has to be made between what is desirable 
in the long run and achievable in the more immediate future. However, the selection of 
instruments to be introduced in the early phases of this approach should clearly take account 
of the desired long term development. Table 8.3 presents possible instruments"for internalising 
a variety of external costs, in road and in other modes. The long term policy" instruments 
represent potentially attractive options because they can be highly differentiated. They are, 
however, currently not operational and their implementation costs would have to be verified 
before any decision is made. 
The principle of linking charges closely to costs and underlying transport choices would 
ideally require the introduction of new instruments that can differentiate very accurately. 
Significant technical progress is being made in this respect. A status report on electronic 
tolling systems, which in the long run would provide efficient tools for charging for 
infrastructure and congestion costs, is provided in Annex 4. The latest systems can fully 
respect the privacy of private motorists (by relying on smart card technologies). For other 
externalities a smart "black box" (or "green-box") which could register the relevant 
determinants (e.g. mileages, vehicle characteristics, emissions) would be a particularly efficient 
tool to determine the "intemalisation charge" since it would allow to differentiate charges 
according to actual costs. Such instruments are under development for other purposes (e.g. 
"fleet management"), but clearly more research would be needed to develop appropriate 
equipment meeting technical, transport and other requirements. Also, the link with electronic 
road tolling systems would have to be investigated. Provided the operational costs are within 
reasonable limits, this would thus be an attractive long term solution. 
The introduction of more differentiation in existing annual vehicle and fuel taxes to take 
account of air pollution and, possibly, noise costs would seem a promising option in road 
transport that could be phased-in in the near future. A revision of the levels of these charges 
should also be envisaged, but care has to be taken that "clean" vehicles are not penalised. 
Therefore, increases in the average level of charges should preferably only be introduced, 
whilst simultaneously introducing more differentiation. Again, these issues can be considered 
in the context of the current review of vehicle taxation. At the same time location specific 
tolls - preferably electronic - could be used for transport corridors with particularly high 
infrastructure, congestion or air pollution costs. Such systems are already operational and 
could provide a useful transition to more advanced systems of electronic road pricing. In view 
of the forecast, strong increase in congestion action should not be put off. 
Accident related external costs could be internalised without major technological change by 
means of a risk related insurance system that would cover the full social costs. However, as 
indicated in Chapter 5, there are still a number of important points to be resolved before 
concrete steps in this direction can be taken. Moreover, this should not detract from the need 
to make parallel progress on other fronts such as vehicle safety legislation, training, rules on 
drinking and driving etc. In addition, the labelling of vehicles on the basis of their safety 
performance and the publication of this information would be a useful complementary 
measure to both approaches. 
Whereas electronic tolling systems are already operational and are likely to be phased in on 
a larger scale as of the beginning of the next century, it is clear that a significant time will 
elapse until the whole network is covered (maybe around 2015). This suggests that serious 
thought should be given to intermediate solutions. For heavy goods vehicles, the introduction 
of a kilometre tax could be a promising option for bridging the gap between the existing 
system of charging and a more refined long term system. A kilometre tax can accurately take 
account of vehicle characteristics which determine noise, emissions and road damage and is, 
moreover, mileage based. 
43 
Although present systems cannot differentiate across time and space, a kilometre tax based 
on an electronic odometer or, coupled with the electronic tachograph, represents a significant 
improvement over existing systems. If the costs of an electronic version - currently estimated 
at some 300 ECU - could come down, then the introduction of these systems in private cars 
could also be contemplated. The technical devices used to implement a kilometre tax could 
evolve over time until they coincide with future electronic road pricing black box instruments. 
Similarly, it should be seen to what extent existing charges in other modes could be 
modulated in line with differences in external costs and aligned with external cost levels, if 
need be. For example, individual train journeys could be taxed according to the type of rolling 
stock used, the particular route chosen (important for noise and emissions). Although 
complicated aspects of extra-Community competition play a role in aviation and maritime 
shipping, landing charges and port charges could be varied according to the same principle1. 
Table 8.3 : Possible Policy instruments for efficient and equitable pricing 
Infrastructure 
Costs & 
Congestion 
Accidents 
Air Pollution 
& Noise Short/Medium Term 
Road 
- more differentiation 
according to use 
and damage in 
existing charging 
systems 
- kilometre tax for 
HGV (axle based) 
- tolls 
- progress in gearing in 
the desired long term 
- labelling 
- for cars : emission 
(and possibly 
mileage) dependent 
annual taxes 
- for HGVs : 
surcharges on 
kilometre tax 
- differentiated 
excises according to 
environmental 
characteristics of 
fuel 
- C02 tax for global 
warming - identical 
across modes Other Modes 
- infrastructure use 
related charges 
surance systems to 
structure 
- introduction of 
emission based 
charges e.g. 
landing charges in 
aviation based on 
noise emissions Long Term 
Road 
- electronic road 
pricing for 
congestion and 
infrastructure 
costs Other Modes 
- track charges and 
other 
infrastructure-use 
related charges 
- insurance systems covering full social 
costs and differentiating according to risk 
(e.g. bonus/malus) 
- fees based on actual emissions/noise with 
differentiated costs according to 
geographical conditions (and, possibly, 
time of day) 
An example of this approach is the introduction of differentiated port charges for segregated ballast 
tankers - which are safer and more environmentally friendly; See EC 2978/94 OJ L319) 
44 
It is sometimes argued that an increase in fuel prices is an efficient way of internalising 
external costs. Whilst it is certainly easy to implement and fuel use is related to mileage, there 
are major disadvantages which suggest that, except for addressing the risks of global climate 
change, this might not be an attractive option: fuel use correlates poorly with accident risks, 
air pollution and congestion and various studies reported in this paper have shown that the 
reduction in underlying problems following the introduction of higher fuel prices is likely to 
be limited. Moreover, higher fuel prices only very partially reward "responsible behaviour" 
and could hit rural transport - which already seems to be paying its way - relatively hard. 
Therefore, equity, efficiency and implementation costs - as well as the role fuel taxes play in 
raising government revenues - will all have to be taken into account in making decisions on 
this issue. 
Finally, a review of existing transport taxes and tax exemptions would be desirable to 
determine whether current rules fully contribute to the creation of equitable conditions of 
competition within and across modes in the Internal Transport Market. 
45 
9. THE COMMUNITY DIMENSION 
9.1 When and why is EC intervention needed? 
In view of the location-specific nature of many transport externalities, policy action is often 
best taken at the national or even local level. This applies to local traffic policies, regional and 
urban infrastructures and a host of complementary policies. Community action has 
nevertheless to be considered in four circumstances: cross-border externalities; effects on the 
Internal Market; the possibility of economies of scale and; policy spill-overs. 
It is intuitively clear that the level of government responsible for the area affected by a certain 
problem is often likely to be best suited to deal with it. In a similar vein, the Community is 
likely to be the most appropriate level for policy action whenever a problem involves 
significant cross-border effects between a large number of Member States. On the other hand, 
where there are local externalities of significantly varying importance across the EU territory, 
the a priori case for Community intervention is fairly weak. The Internal Market adds another 
dimension to the problem. Even if a certain problem is local, there may be a justification for 
Community involvement, if solutions are likely to comprise product standards for tradable 
goods or could potentially affect the efficient functioning of the internal market. The former 
reason explains why tailpipe emission standards for cars have traditionally been set at the 
Community level. This latter reason seems relevant for the case of road pricing equipment. 
Thirdly, if there are significant economies of scale from a joint policy, this could also 
constitute a justification for a Community role. Joint R&D is a case in point and the transport 
and technology research in the Fourth Framework Programme, as well as the recently 
introduced R&D Task Forces - notably the Car of Tomorrow and Intermodality - should be 
seen in this perspective. This programme should also provide tools and a possible accounting 
framework to evaluate the impact of policy measures on external costs. 
Finally, in cases of policy spill-overs, Community policies often already exist with respect to 
instruments which could potentially be used for intemalisation strategies at the national or 
local level. This suggests that a certain agreement on broad principles of a policy approach 
is needed at the Community level. For example, common rules exist on minimum levels of 
annual circulation taxes, mineral oil excises and maximum rates of user charges in road 
haulage. In addition, the existing legislation lays down principles for toll rates. These rules, 
which have been introduced in order to promote equitable conditions of competition in the 
internal market, obviously constrain Member States in their freedom of fixing rates. Moreover, 
given cross border shopping for fuel in large parts of the Community, Member States have 
only limited possibilities to increase rates much beyond those in neighbouring countries. 
Therefore, if it was felt that increases in fuel prices were an efficient tool for cost 
intemalisation, then some action at the Community level would be needed. 
Similarly, the discussion on limiting air emissions from vehicles in Chapter 6 has shown that 
different combinations of economic instruments and standards are possible. Standards are set 
at the Community level, whereas most economic instruments would be introduced at the 
Member State level. It is, therefore, essential to carefully coordinate the overall policy 
strategy. This implies that in many cases broad agreement on principles will have to be 
arrived at between Member States, before an efficient policy at both Member State and 
Community level can be formulated. 
46 
Table 9.1 : Upcoming EU policy initiatives relevant to making more progress on cost intemalisation in 
transport 
TIMING ^ DOCUMENT RELEVANCE 
1995 - Communication on C02 emissions from cars - C02 
- Launch of studies (see annex 3) - General 
First half - Communication on the Auto/Oil Programme - Air pollution from motor vehicles 
of 1996 and concomitant proposals on vehicle (excl. C02) 
standards etc. 
- Revision of Directive 93/89/EC ("Eurovignette - Pricing in road haulage 
Directive") 
- Environmental Framework for Transport - Environmental pollution frorn road 
transport 
- Airport charges - Pricing in aviation 
- Railway track charges and finance - Pricing in rail 
Second - Corridor studies on selected number of TENs - Infrastructure ~~ 
half of corridors 
1996 - First results on a Strategic Environmental and - Infrastructure 
Economic assessment of the TENs network 
- Review of existing Community legislation on - Removal of objectives to cost 
pricing in transport intemalisation 
- Revision of minimum excise rates of mineral - Pricing in road transport 
oils 
- Re-examination of State Aid Rules and - Road, rail, inland waterways and 
preferential tax treatment in inland transport combined transport 
- Communication on noise - Noise from transport 
- Comprehensive review of vehicle related - Pricing in transport/internal market 
taxation 
- Review of aircraft fuel exemption - Pricing in aviation 
- Elaboration of accounting frameworks for the - Valuation of external costs 
external costs of transport 
- Standards for Road Pricing and Route - Pricing in road transport 
1997 (and Guidance Equipment (?) 
beyond) - White Paper on further progress towards fair - Pricing in all modes of transport 
and efficient pricing in transport 
- Proposal on pricing in road haulage (1998) - Pricing in road haulage 
The analysis in the second part of this paper - Chapters 4-7 - shows that this generally applies 
to policies which could be developed to cover infrastructure and congestion costs, to reduce 
air pollution and noise and to curb accidents. The introduction of economic instruments as 
complements - and in certain cases - substitutes for direct regulation, thus necessitates, a wide 
ranging discussion that this Green Paper aims at triggering off. 
9.2 Next steps 
Progress towards fair and efficient pricing will bolster the Community's intermodal transport 
policy which aims to unlock the full potential of all transport modes. It will thus be an 
important complement to policies to strengthen combined transport - such as the PACT 
programme (Pilot Actions for Combined Transport), the Citizens' Network, as well as, the 
activities of the Research Task Force "Intermodality". Moreover, progress towards fair and 
efficient pricing should also further the introduction of public-private-partnerships, which 
should assist in speeding up the completion of TENs projects and is an important objective 
of the Community's policy for growth, competitiveness and employment. 
47 
Progress on pricing is thus urgently needed and the discussion above implies that both 
Member States and the Community have an important role to play. It is also clear that 
progress will have to be gradual and that a step-by-step approach is needed as more 
information becomes available and as technology develops. 
Equally, it is important to ensure that future Community legislation does not obviate but, 
where appropriate, stimulate the introduction of cost intemalisation policies. This is why the 
Commission intends to launch a review of possible obstacles in existing Community 
legislation and encourages Member States to embark on a similar exercise. 
Table 9.1 contains a non-exhaustive list of upcoming Commission proposals that are of direct 
relevance in this context. The Commission intends to carefully review the possibility and 
usefulness of introducing elements of a fair and efficient pricing strategy in these proposals. 
Clearly, this exercise will take full account of the need to ensure the efficient functioning of 
the internal market and of the imperative to arrive at a balanced and complementary set of 
measures, including regulation, where needed. In addition to these initiatives the Commission 
will launch a number of studies that are listed in Annex 11. These studies aim a^generating 
better information, both on the nature and the size of external costs in particular circumstances 
and possible policy instruments that can be used to target the underlying problem. The results 
of these studies will be used in drawing up the proposals mentioned in Table 9.1. 
As can be seen from Table 9.1, the Commission intends, in keeping with the findings of this 
Green Paper, to initially concentrate on road transport. A series of policy initiatives falling 
under the so-called Auto-Oil programme will be of major importance in reducing air 
emissions from road transport. Moreover, following the annulment by the European Court of 
Justice of the Eurovignette directive (93/89/EC) which lays down common rules for taxes and 
charges in Road Haulage, the Commission will make a proposal for a revision early in 1996. 
The system that will be proposed, is intended to run for a limited number of years and it will 
be seen to what extent a closer linking of charges with costs at the level of the individual 
transport operator can be introduced. In the course of 1998 the Commission will make a 
follow up proposal on rules for a new system, that will take account of technical progress. 
The Commission's second review of the minimum rates for excise duties on mineral oils 
(92/82/EEC) is due to be carried out in 1996. Also, a comprehensive review of vehicle 
taxation will be undertaken in the course of 1996. This review could provide a basis for 
drawing up a Community framework aimed at bolstering the efficient functioning of the 
internal market as well as furthering cost intemalisation policies. In view of the need to ensure 
compatible technical system for road pricing equipment across the Union, the Commission is 
currently considering the usefulness of making proposals on interoperability of such equipment 
in 1996. 
Table 9.1 shows that there are also possibilities to make more progress in other modes - new 
initiatives for rail and airport charging will be launched in 1996. The Commission will also 
review tax exemptions for aircraft fuels. Finally, the Commission is in the process of 
undertaking an environmental review of a number of infrastructure corridors as a run up to 
a more comprehensive strategic assessment of the economic and environmental consequences 
of the Trans European Transport Network. Progress on better measuring external costs will 
obviously be of significant importance to the success of this exercise. 
48 
10. FINAL POINTS 
Transport policy is at the cross-roads. Whilst the fundamental importance of transport to 
modern societies and economies is generally recognised, concern about increasing congestion, 
environmental consequences and accidents is mounting. There is a growing realisation that, 
on current policies alone, transport trends are unsustainable. Without substantial change - in 
the levels and priorities of investment in systems and means of transport and changes in the 
use of different modes - increasing delays and costs are guaranteed. This insight has triggered 
a review of transport policies in many Member States and countless individuals and 
institutions, among which the European Parliament and the Economic and Social Committee, 
have called for a debate on this matter at the European level. 
The outlines of a more comprehensive policy response to this situation are gradually becoming 
clear. Responsible infrastructure investments aimed at removing bottlenecks and linking 
individual modes into an intermodal system are an important ingredient. So are the efforts to 
complete the internal market in those modes of transport that are generally environmentally 
friendly and where there is spare capacity. Here increased competition should lead to 
increased competitiveness with respect to road transport. Joint R&D efforts are another 
ingredient to further the introduction of efficient and safe technologies. 
This Green Paper looks at pricing. Transport policies have in the past largely focused on 
direct regulation. Whilst rules have brought significant improvements in some areas, they have 
not been able to unlock the full potential of response options that can be triggered through 
price signals. Price based policies give citizens and businesses incentives to find solutions to 
problems. The Community's objective of ensuring sustainable transport requires that prices 
reflect underlying scarcities, because otherwise these scarcities will not sufficiently be taken 
into account. Decisions made by individuals with respect to their choice of mode, their 
location and investments are based on prices. So prices have to be right in order to get 
transport right. 
The evidence presented in this paper suggests that in transport - as a general rule - the relation 
between prices and costs is weak at the level of individual transport users. Some costs -
related to infrastructure, environmental pollution, noise, accidents and congestion - are only 
partly covered or not at all. Some transport users seem to pay too much, others too little. This 
situation is both unfair and inefficient. 
The question is, therefore, how progress towards fair and efficient pricing can contribute to 
solving some of the underlying problems by giving transport users incentives to adjust their 
behaviour. The aim of such a policy would obviously not be to raise taxes, but to use charges 
to curb congestion, accidents and pollution. If this policy is successful it will improve the 
competitiveness of the European economy by reducing the wastage of scarce resources, that 
currently occurs, at the tune of some 120 BECU per annum in congestion costs alone. 
Various key characteristics of an efficient and fair pricing system emerge from this paper. In 
principle, prices paid for individual journeys should be better aligned with the costs of these 
journeys. As costs differ across time, space and modes, this implies a need for differentiation. 
The objective of this policy would be to relate charges to all costs society and other users are 
confronted with. Transparency is important and, ideally, accounts should be published 
identifying the relation between charges and costs. 
This paper puts questions and suggests policy options, but does not contain definitive answers. 
It does, however, suggest that priority should be given to road transport and that concrete 
progress in tackling environmental problems and, more particularly, covering infrastructure 
and congestion costs in the near future is feasible. 
49 
Given the vital importance of transport to our economies and societies, the Commission 
believes that a debate on transport pricing is essential. Whatever the form of decisions, the 
transport system will clearly need time to adjust: location decisions have long lasting 
implications, technologies to meet customer requirements have to be developed over time and 
road vehicle stocks can only be replaced in a decade or so. It is precisely for this~reason that, 
as businesses, people and governments are beginning to plan for the next century, a clear and 
urgent signal must be given that prices paid by individual transport users will have to more 
accurately reflect the full costs of transport, both in level and in structure. A wide and 
thorough discussion and consultation on how this principle can be implemented in practice 
is therefore urgently needed. 
The Commission invites all interested parties, Member States of the European Union and the 
European Economic Area, states applying for membership to the European Union, the 
Council, the European Parliament, the Economic and Social Committee and the Committee 
of the Regions to comment on this Green Paper. It intends to carefully review submissions 
and to take these into account in the development of future initiatives in this field. 
Observations on this document should be submitted to: 
The European Commission 
Directorate-General for Transport 
"Green Paper on Fair and Efficient Pricing" 
200 Rue de la Loi 
B 1049 Brussels 
Belgium 
50 
REFERENCES 
AECMA (1994), "The Aerospace Industry and the Environment", May. 
CEST (1993), "The Future of Transport Noise Agenda in the UK", The UK Environmental Foresight Project, 
Volume 4, 1993 (Keith Mason for the Centre for Exploitation of Science and Technology) 
ECAC (1995), "Assessing ATM performance : a basis for instituional options", May 1995. 
ECMT/OECD (1994), "Internalising the social costs of transport", ECMT, Paris 1994. 
ECMT/OECD(1995), "Evaluation of the external costs of road transport and the consequences of internalising them 
- French transport case study", Paris 1995. 
European Comission DG VII (1994), "Comparative evaluation of a number of recent studies (undertaken on behalf 
of various bodies) on "transport external costs and their intemalisation", suggestions on the most 
appropriate methods for the intemalisation", Brussels 1994. 
European Commission DG II (1995), " A Welfare Cost Assessment of Various Measures to. Reduce Pollutant 
Emissions from Passenger Road Vehicles for the Year 2010, Doc H/576/95, Brussels. 
Finnish National Road Administration (1992), "Pricing and Congestion: Economic Principles Relevant to Pricing 
Roads", Helsinki 1992. 
Goodwin, P.B.(1992), "A review of new demand elasticities with special reference to short and long run effects of 
price changes", Journal of Transport Economics and Policy, 26, 155-170. 
Gramlich (1994), Infrastructure Investment: A Review Essay Journal of Economic Literature, XXXII, 1176-1196 
Hau, T.D. (1992), Economic Fundaments of Road pricing: A Diagrammatic Analysis, World Bank Policy Research 
Working Paper Series, WPS No. 1070, The World Bank, Washington, D.C. 
Hoornaert, L. (1992), The use of taxation as a policy instrument aimed at limiting the Community's C02 emissions: 
practical dimensions of implementation, in European Commission (1992), The economics of limiting C02 
emissions, European Economy, Special edition Nol, Brussels, pp. 63-90. 
INFRAS/IWW (1995), "External effects of Transport", Zurich/Karlsruhe 1994. 
INRETS (1994), "Study related to the preparation of a Communication on a future noise policy", Institut National 
de Recherche sur les Transports et leur Sécurité, 1994. 
Instituut voor Onderzoek van Overheidsuitgaven (1994), "Externe kosten van het personverkeer", Den Haag 1994. 
Jansson, J.O., Wall, R.(1994) "Bensinskattefôrândringarnas effekter", ESO-rapport, Ds 1994:55, Stockholm 1994. 
Johansson, B; Mattson, L.-G.(1995), "Road Pricing: Theory, Empirical Assessment and Policy", Kluwer Academic 
Press 1995. 
Kageson, P.(1993), "Getting the prices right",European Federation for Transport and Environment, Stockholm 1993. 
Lindberg, G.(1994), "Traffic Charges - The Swedish Experience to get the prices right", Borlange 1994. 
National Research Council (1994),"Curbing Gridlock, Peak Period Fees To Relieve Traffic Congestion", Special 
Reports 242, Washington, D.C. 1994. 
Newbery, D.M. (1988), "Road user charges in Britain", Economic Journal (Conference Papers) 90, 161-176. 
Newbery, D.M. (1995), "Reforming Road Taxation", The Automobile Association. Hampshire 1995. 
Oates,W.(1994), "The Economics of the Environment", Edgar Elgar, Cambridge 1994. 
Ochelen, S. and Proost, S. (1995), "Alternative transport pricing policies for Brussels in 2005, Leuven University. 
OECD (1990), "Guidelines for the Application of Economic Instruments in Environmental Policy", OECD, Paris 
1990 
OECD (1991), "Fighting Noise in the 1990s", OECD, Paris 1991 
Oum, T.H., Waters, W.G. and Young, J.-S. (1992), "Concepts of price elasticities of transport demand and recent 
empirical evidence", Journal of Transport Economics and policy, 26, 139 -154. 
Quinet (1994), The Social Costs of Transport: Evaluation and Links with Intemalisation Policies, in ECMT/OECD 
(1995). 
Sandberg, U. (1993), "Action Plan against exterior tyre/road noise". Proceedings of Inter-Noise 93, vol.2, Leuven, 
Belgium 1993. 
Small, K.A., Winston, CM., and Evans, C.A.(1989), "Road Work: A New Highway Pricing and Investment 
Policy", The Brookings Institute, Washington. 
The Ministry of Transport and Communication (1992), Sweden, "Traffic Charges on Socio-Economic Conditions", 
Stockholm 1992. 
von Meier (1994), "Europe's Environment 1993 - Noise Pollution", 1994 (prepared for Europe's Environment - the 
Dobris Assessment, European Environment Agency 1995) 
Walter et al (1993) "External Benefits of Transport?" ECOPLAN and T&E, 1993 
Walters, A.A. (1968), "The Economics of Road User Charges", World Bank Occasional Papers No 5, John Hopkins 
University Press, Baltimore 1968. 
Winston, C. (1985), "Conceptual developments in the economics of transportation: an interpretive survey", Journal 
of Economic Littérature, 23, 57-94. 
^A 
Annex 
Green Paper Towards Fair and Efficient Pricing In 
Transport 
fi 
Annex 1 : Effectiveness of price based policies in transport 
Summary : The effectiveness of economic instruments depends on the reaction of people (citizens and 
businesses) to price changes. These behavioural changes can be measured by so-called price elasticities, 
which indicate the percentage change in transport volumes, following a 1% change in prices. 
Substitution elasticities measure the percentage change in the relative volumes of two transport 
categories (eg diesel and petrol) following a 1% change in relative prices (eg diesel and petrol price). 
The basic price elasticities of interest for a discussion on behavioural change in road use as a result 
of a price based policy are substitution elasticities between different type of vehicles/fuels and own 
price elasticities. Elasticities with respect to fuel prices and tolls (eg road pricing) refer to changes in 
only part of the costs of transport and are therefore generally smaller than own price elasticities. 
Finally, substitution elasticities with respect to other modes are also of relevance. 
Recent evidence on elasticities in transport suggests a much higher sensitivity towards price changes 
than what was previously thought. "In reality, competition between modes, routes or firms gives rise 
to a wide range of price elasticities, generally much more elastic than conventional wisdom would 
suggest. "(Oum 1992). 
The substitution elasticity between similar products can be almost infinite, as the example of fuel 
qualities suggests below. A minor price difference can generate major changes in consumption patterns. 
Total cost elasticities, which are relevant for evaluating the effects of road pricing, are generally 
estimated at approximately -1.0 with significant differences according to trip purpose, payment methods 
etc. Finally, the evidence on the cross-elasticity of public transport fare changes on car use suggests 
a low elasticity (not larger than 0.1). It should, however, be pointed out that this is largely due to the 
fact that the share of public transport in total mobility is relatively small (some 15%),- implying that 
large percentage increases in public transportation are needed to decrease car use by 1%. 
The conclusion to be drawn is clear: price elasticities in transport are sufficiently large for 
making price based strategies highly effective, especially if they induce differentiation. 
Price differentiation and behavioural reactions: Substitution elasticities between vehicles/fuels which 
differ only in respect of environmental characteristics are generally very high: i.e. small charges in 
prices of dirty vehicles/fuels can lead to very strong increases in the market share of clean 
vehicles/fuels. There is abundant evidence on this matter from real life experiences such as the price 
differential between different fuel qualities. The intuition underlying this result is clear: if the only 
difference between two products is their "environmental" performance, then people will be very 
sensitive to price differences. 
Figures A.l and A.2 show substitution towards cleaner fuel due to tax differentiation in Sweden as 
reported in Chapter 6, Box 6.1. The tax differentiation for diesel fuel was introduced in 1991, increased 
in 1992 and 1993, and abolished for all non-transport sectors in mid 1994 : the effects of price changes 
can easily be seen in the market reactions. The tax reduction of 0.03 ECU/L for Class II (relatively 
clean) and 0.05 ECU/L for Class I (very clean) led to a price differentiation compared to the standard 
fuel of-4.3% (Class II) and -7.6% (Class I) in November 1995. Of the diesel fuel used in transport 
(66% of total consumption) almost 100% is of environmental class I or II. Tax differentiation between 
leaded and unleaded fuels has been in use since 1986. From 1994 unleaded petrol has been 
differentiated into Environmental Class II (very clean) and Class III (clean) with a differentness in 
taxation equivalent to less then 1% of the total price. Since its introduction in, 1994, the tax 
differentiation has completely forced both leaded and Class III fuel out of the market. 
Fig A.l Substitution in the Swedish Diesel market 1992 - 1995 
non-transport 
transport Standard 
Fig A.2 Substitution in the Swedish Petrol market 1986 - 1985 
100% 
95:2 95:3 
Similar effects can be recalled regarding substitution between vehicle types. Generally, the smaller the 
differences between vehicle categories, the larger the substitution elasticities. Econometric evidence 
suggests that for most classifications of vehicle categories these elasticities are well above 1 in the long 
run. This can also be observed when comparing the market share of different size categories in the 
vehicle fleet with the differences in taxation levels across the fleet: the relatively small share of cars 
with large motor content in Italy is strongly related to the relatively very high taxes on these vehicles. 
Fuel price elasticities: For car use, all available evidence suggests an increasing elasticity over time. 
The long term elasticity is in the order of twice as high as the short non-elasticity. An increase in the 
fuel price of 10%> will, after a couple of years, reduce traffic by 3%. A comprehensive summary of 
fuel price elasticities (Goodwin 1992) suggests that traffic volume elasticities with respect to fuel prices 
are -0.16 in the short run and -0.33 in the long run. 
The short run elasticity on fuel consumption is most probably around -0.30 and, in the long run, around 
-0.70. The changed fuel consumption can be divided into the effect on traffic and increased fuel 
efficiency of the vehicle fleet. Elasticities of fleet size and type with respect to fuel cost seems to have 
a central value around -0.2. The evidence above suggests that there are behavioural adaption, both in 
short and long run, that effect fuel consumption more than traffic when the fuel price is changed. An 
example of the dynamic effects of an increased fuel price can be illustrated with the following 
summary of elasticities (Jansson) 
Tab. A.l Fuel price elasticities in short and long run. 
Car ownership 
Trip length 
Vehicle kilometre 
Fuel consump. per vehicle 
Total fuel consumption Month 
0.00 
-0.10 
-0.10 
-0.10 
-0.20 Year 
-0.05 
-0.15 
-0.20 
-0.10 
-0.30 5th Year 
-QJ0 
-0.20 
-0.30 
-0.40 
-0.70 
An important implication of these results is that changes in fuel prices are much more effective 
in reducing fuel use than in curbing congestion. 
Road pricing: The fuel cost is only a small proportion of the users total transport cost; in transport the 
idea of generalised cost is used to describe the user's total costs, mainly vehicle operating costs 
including fuel cost and time cost. The fuel cost can be estimated at around 25% of the user's total cost 
which means that the elasticity based on total cost should be much higher. The elasticity^ depends on 
the time period, trip purpose, method of charging, the absolute level of price change and the income 
level. When analysing the different trip purposes, it is generally found that, the elasticity is lowest for 
business trips, higher for commuting to work and highest for shopping and leisure trips. Empirical 
evidence from toll-roads suggest that elasticity of around -1.0 seems to be a reasonable central estimate. 
From a Norwegian study (Tretwik, T. "Inferring variations in value of time from toll route diversion 
behaviour", TRR 1395, 1993) some conclusion can be drawn on toll elasticities in Norway. The 
frequent traveller has a high elasticity, -0.87 for daily travellers and -0.77 for weekly travellers, 
compared to the casual traveller, -0.3. The method of payment has a large influence on the elasticity, 
users with a "card ticket" have half the elasticity of the users paying for cash. Finally the elasticity can 
be divided between trip purpose, commuting -1.1, business -0.6 and other trips -1.2. The average toll 
elasticity seems to be around -0.8 in the study. 
The importance of the price structure has been emphasised in a study for the planned Stockholm road 
pricing scheme and Ring road investment package. The construction of the ring road is estimated to 
reduce traffic in central Stockholm by some 17%. If a toll ring is placed immediately inside the Ring 
road (Fl) then traffic will decrease by an additional 10%. A larger reduction can be achieved if a 
charge is included for driving between districts within the Stockholm area (F2). If also the ring road 
is included in the pricing structure the cost to the road users will increase while the traffic would only 
diminish slightly (F3)>. If the toll ring is placed outside the ring road, the same amount of money can 
be raised but the traffic reduction would be less. Collecting the fees on only the new road sections (F5) 
would increase rather than reduce the traffic. A doubling of the toll charge would increase the traffic 
reduction by 30 - 40%. Finally, a more differentiated pricing system is estimated to reduce traffic by 
the same amount as the double toll, while the revenues, and the cost to the road users, will be reduced 
by 50% (Johansson, B. and Mattson, L-G 1995). 
Tab. A.l. Estimated effect of different pricing schemes in Stockholm 
Pricing Scheme 
Fl 
F2 
F3 
F4 
F5 Traffic volume 
- 25% 
- 35% 
- 35% 
- 25% 
- 7% Toll revenues 
(thSEK/ hour) 
200 
250 
350 
350 
100 Pricing Scheme 
F2 Double 
F3 Double 
F4 Double 
F6 Traffic volume 
- 45% 
- 45% 
- 35% 
- 40% Toll revenues 
(thSEK/ hour) 
450 
600 
600 
300 
111 
Annex 2 : The monetary valuation of external costs 
In order to implement policy initiatives aimed at the intemalisation of the external costs of transport 
it is necessary to assign a monetary value to such external costs. A number of different evaluation 
methods have been used in the past, providing a range of empirical estimates concerning-the external 
costs of transport. It may therefore be useful to briefly discuss the main options and their respective 
advantages and disadvantages. 
The starting point for a discussion on valuation has to be a definition of what is understood by 
"economic value". In a market economy, we tend to value goods and services according to their 
market value. Thus, the value of a car, for example, is the price one has to pay for purchasing it (cr 
how much one receives on selling it). This market price reflects what consumers (or producers) are 
willing to pay, i.e. "what it is worth to them". Observing market prices is therefore a very convenient 
way to determine the economic value. However, there are rarely markets for cleaner air or a reduction 
in noise levels. This is what makes the monetary valuation of external costs so difficult. It is exactly 
because external costs are not properly reflected in market prices that we have difficulties in identifying 
their size in monetary terms. 
Economists have developed and widely used a number of different approaches to overcome this 
problem of a lack of observable market transactions. In doing so, they tried, either to infer information 
from existing markets and transfer it to the externality in question or, to rely on alternative methods 
for directly identifying peoples' preferences. The main methods applied to the measurement of the 
external costs of transport in the literature can be summarised as follows. 
Damage function/dose-response approach: With this method, no attempt is made to directly measure 
peoples' preferences. Instead, a "dose-response" relationship is taken as the basis and a relationship 
is established, based on scientific knowledge, between the observable environmental pressure (e.g. 
particulate emissions or noise) and the observable impact (e.g. in terms of increased morbidity or 
mortality). It is only with respect to the latter that a monetary valuation is attempted. This method 
is appealing due to its reliance on established scientific knowledge. However, the monetary valuation 
is limited to the costs that are visible in the market (hospital costs, labour productivity, etc.). Thus, 
this approach has the important disadvantage of being unable to provide an answer on the question of 
how much people would be willing to spend in order to reduce the risk of damage in the case of 
scientific uncertainty (precautionary approach). In practice, a damage function approach can therefore 
often be expected to underestimate the welfare costs of a given externality. On the other hand, it may 
be particularly suitable in cases where people are unaware of a certain dose-response relationship and 
would therefore probably not have well established preferences. 
Avoidance costs approach: This frequently used technique takes the costs of measures to reduce 
transport externalities as an approximation for the value of the externality. The logic behind this 
approach is that, in a Parliamentary democracy, people express their preferences not only on the 
market, but also during elections. Thus, if a tighter environmental norm has been adopted, this reflects 
the fact that, via their elected représentatives, the electorate has expressed its preferences. 
The main advantage of this approach is that avoidance costs are comparatively easy to establish, as the 
costs of end-of-pipe technologies (like catalytic converters) or other defensive expenditure (e.g. double 
glazing for sound-proofing) are usually well known. The main disadvantages of this approach are 
twofold. Firstly, and most importantly, there is the risk of a circular reasoning when one would like 
to establish policy priorities in the first place. In fact, one cannot undertake an ex ante cost/benefit 
analysis of alternative policy proposals if the benefits can only be inferred ex post after the political 
decision has been taken. Secondly, due to the characteristics of the political processes in a democratic 
system, not only will there be a time lag between a change in people's preferences and a change in 
political decisions, but the political process will normally only capture preferences in an aggregate way 
("more environmental quality" rather than "reduction in particulate emissions by 40%"). 
IV 
Hedonic pricing approaches: This approach looks for a market on which goods or factors of 
production are traded and observes how environmental attributes affect the market prices (so-called 
surrogate markets). The most frequent forms of hedonic pricing use observed property values (e.g. 
house prices) or wage rates for estimating the monetary value of external costs. Thismethod has often, 
been applied to estimate the costs of traffic noise, the underlying logic being straightforward. As 
people prefer not to live near a noisy road or airport, house prices tend to be somewhat lower than they 
would have been in the same location without the noise. The comparison of house prices between a 
location with noise and one with otherwise identical or at least similar characteristics but without noise 
therefore provides an implicit valuation of the economic costs of noise. Clearly, the hedonic price 
method can only reveal the costs of impacts people are aware of. Moreover, it assumes the existence 
of smooth, continuous trade-off possibilities among all characteristics. These and other reasons would 
suggest that hedonic pricing will often tend to underestimate the size of the external costs in question. 
There are other measures (such as the travel cost method) which adopt a methodology similar to 
hedonic pricing, but are less applicable to the specific problem of transport-related externalities. 
Contingent valuation/stated preferences approach: Conceptually, this approach is the closest to what, 
from the economic point of view, one would ideally like to have - namely an expression of preferences 
in monetary terms on a market. In a nutshell, this method usually relies on interviews or written 
questionnaires for quantifying how much citizens feel their well-being is being reduced by exposure 
to a given amount of externality. In such comprehensive willingness-to-pay (WTP) studies, individuals 
would be asked how much they would be willing to pay in order to no longer be the victim of a 
certain level of externality (e.g. traffic noise). Analogously, in or willingness-to-accept (WTA) studies, 
people are asked how much financial compensation they would require due to a deterioration in their 
environment in order to be as well off as before. Both approaches do not necessarily arrive at the 
same monetary value. Which of the two methods should be applied in a particular case largely 
depends on the role of existing property rights in the case of the problem being studied. If one 
considers that people have the right to a clean, quiet and safe environment, then it would be 
appropriate to compensate those being affected by a deterioration in the quality of the environment 
resulting from the behaviour of others. In this case, willingness-to-accept would be the more 
appropriate approach. If, on the other hand, the environment is already damaged and the policy 
question is by how much the pressure on the environment should be reduced, willingness-to-pay seems 
to be the more adequate methodology. One important point to keep in mind is that willingness-to-pay 
depends on ability-to-pay (e.g. income), which is less so in the case of willingness-to-accept. 
The choice of the method of valuation can have a significant impact on the results in terms of the size 
of the monetary value. Generally speaking, contingent valuation/stated preferences studies tend to 
arrive at higher monetary values for external costs than alternative approaches. This is due to the fact 
that many more components of the economic value are included than for the case of other methods. 
This can best be explained with the help of an example. Most countries use monetary values for a 
statistical life in order to economically evaluate traffic safety measures. However, the official valuation 
varies significantly between countries. It is interesting to see that those countries where the economic 
valuation adopts a comprehensive willingness-to-pay approach including, for example, the pain and 
suffering of relatives, tend to use monetary values that are more than twice those of countries that limit 
their approach to easily measurable items like physical damage and value of the production lost. In 
fact, countries relying on the willingness-to-pay approach value a fatal traffic accident on average at 
around 1.3 million ECU. If there were something like a "market for traffic safety", the "market price" 
would most likely be close to this comprehensive value, i.e. including quality of life aspects. 
One of the disadvantages of willingness-to-pay or willingness-to-accept studies is that, due to the 
necessary field work, they tend to be comparatively more costly to undertake than studies based on 
other valuation methods. Attempts are therefore often made to transfer benefit estimates from one 
study or location to another. Furthermore, the interviews/questionnaires have to be carefully designed 
in order to minimise strategic answering behaviour and other differences between stated and "true" 
preferences. 
Despite these and other shortcomings, contingent valuation is, from the economic point of view, often 
likely to be the most desirable method for valuing external costs or benefits due to its 
comprehensiveness and direct, preference-based approach. It is also likely to be the only approach that 
could, in principle, allow the value people attach to the mere existence of rare environmental assets 
or to the option of using such assets in the future to be measured in monetary terms. Us validity is 
by now generally accepted (see the conclusions of an expert panel of eminent economists recently set 
up by the US National Oceanic and Atmospheric Administration, NOAA) and guidelines for its use 
have been established. 
VI 
Annex 3 : Criteria for selecting policy instruments to curb transport externalities 
Effectiveness : It is clear that any policy instrument should reach its intended objective of reducing 
a specific transport externality. There can be significant differences in the degree-of certainty with 
which alternative instruments are likely to reach their target. It has to be. emphasized,-however, that 
a high degree of effectiveness in precisely reaching a target is not always an asset. In particular, when 
there is a high degree of uncertainty concerning the actual costs of reaching the target, effective 
instruments will increase the economic penalty of not having chosen the right target. In such a 
situation, it may be preferable to choose an approach that puts more emphasis on keeping the costs of 
the policy under control than on precisely reaching the target. 
The Principle of Welfare Costs 
The principle of welfare costs is fairly straightforward. Individual citizens feel that the 
more they can live according to their individual preferences, the larger is their well-being. 
Whenever the Government overrules these preferences (for example by introducing traffic 
bans) this represents a "cost" in terms of well-being to the individual (which has of course 
to be compared to the benefits of this policy intervention, e.g. in terms of reduced 
accidents). This cost can be measured in monetary terms by the monetary compensation 
an individual would require in order to feel as well-off as before the government 
intervention; the concept of welfare costs is the basis of the use of the willingness-to-pay 
approaches discussed in section 2.4. 
Cost-effectiveness : Cost-effectiveness is a key criterion which suggests selecting an instrument that 
is able to reach a predefined target at least cost. In this context, it is crucial to have a comprehensive 
notion of "costs". Often, costs are understood to be merely the costs of technologies (e.g. a catalytic 
converter). It should be clear, though, that there are many policies where the technology costs only 
represent a small or even negligible part of the true costs to society. This means that the only 
economically valid cost concept is total welfare costs (see box above). It goes without saying that this 
comprehensive cost concept also includes administrative and transaction costs. In particular the latter 
can be quite important. It is this welfare cost that is the true economic cost of a policy intervention. 
Static and Dynamic Cost Effectiveness 
The difference between static and dynamic cost effectiveness can easily be illustrated for the 
case of product standards. Assume, for example, that the government introduces emission 
standards for car engines and power stations. Static cost-effectiveness would in this case 
require the additional cost of saving one unit of emissions from a more environmental friendly 
power station is equal to the cost of saving this unit emission from a more environmental 
friendly car. Dynamic cost-effectiveness requires that this is not only the case at the point in 
time when the product standards are decided upon, but during the entire period that the 
standards are binding. This would imply among other things that both standards are 
permanently adapted to technical progress. It is clear that, in the case of the example chosen, 
neither static nor dynamic cost-effectiveness is likely to be given. It is precisely one of the key 
advantages of market-based policy instruments that they are more likely to guarantee static and 
dynamic cost-effectiveness. 
Transparency : Externalities seem to be one of the most important areas where governmental 
interventions are justified and strongly needed to achieve an efficient economy. To assure that the 
interventions are justified, understood and accepted it is important that the necessary interventions are 
transparent. Simple instruments should be favoured as much as possible. 
vu 
Distributional equity : Considerations of fairness should play a major role in devising efficient and 
equitable policies. It should be avoided that those who are least able to shoulder the consequences of 
a policy are hit hardest. However, sometimes, distributional effects are misused in the public policy 
debate. For example, equity considerations need not be an argument against introducing cost-effective 
policies, but rather suggest that additional measures should be introduced. This is because-the efficiency 
gains from choosing a cost-effective instrument over an inefficient instrument can be used to 
compensate those who are faced with an unfair burden due to the policy and still make society as a 
whole better off. For example, if it were found that a certain policy had especially adverse impacts 
on poor households, then compensation could be found through lower income taxes or housing 
subsidies. If it were very difficult to devise sufficient additional measures, then, of course, the 
formulation of the transport policy itself could be modified to reduce negative distributional impacts. 
Moreover, any assessment of the distributional incidence of policies should also take account of the 
distribution of the overall benefits of a policy. It is indeed often the poor who suffer particularly from 
the external costs of transport (bad air quality, ncise etc.). 
Subsidiarity : It is only common sense to require that, in the Union, each level of government should 
deal with those issues it is most qualified to deal with. Put differently, legal competencies should only 
be allocated to a "higher" level of government, if it is better suited to solve the problems than the lower 
level authorities. In the European Union, this principle (subsidiarity) is enshrined in the Treaty (Art. 
3b). It is important to stress that in all cases the need for Community intervention has to be 
convincingly demonstrated, rather than merely claimed. 
Spill-overs/secondary benefits : Any policy intervention to correct a specific transport externality is 
likely to impact also on other externalities or policies. These so-called spill-overs can be either positive 
or negative. The catalytic converter, for example, significantly reduces conventional vehicle emissions, 
but also raises carbon dioxide emissions. On the other hand, carbon taxes not only reduce C02 
emissions, but simultaneously also reduce conventional emissions. It is clear that such linkages have 
to be included in the evaluation of alternative policies. 
VIII 
Annex 4 : Electronic fee collection systems 
Many European countries are considering the use of Electronic Fee Collection (EFC) for the payment 
of transport services. The main focus of the new technology is on Road Tolling, but there is also 
interest in urban road pricing (congestion charging), public transport and other related services. 
Introduction on existing toll roads (basically, single lane introduction): EFC is currently feasible and 
operational in Europe under certain conditions. Specific lanes at existing Motorway Toll Stations have 
been designated for automatic (non-stop) payment by vehicles fitted with the necessary electronic 
equipment. Vehicle speeds are limited by the physical restrictions of the entry lane to ensure sufficient 
time for the electronic transaction. Systems can be designed to stop vehicles at the toll station if the 
transaction fails for any reason. 
Multi-lane EFC introduction: Several European countries are interested in using EFC technology to 
implement tolling on existing roads without toll barriers. This means that the equipment is required to 
be able to handle high speeds and multi-lane operation. Multi-lane operation means that no restrictions 
are placed on the position of vehicles at toll stations. While the tolling transaction has been 
demonstrated to work under these circumstances, there are still technical problems to be overcome 
before fully automatic high speed tolling systems are available for widespread commercial use. There 
are no such systems operating in Europe at present. It is therefore difficult to estimate their costs for 
the moment. 
Technologies being proposed for EFC: There are three main technologies being proposed for EFC : 
Microwave, Infrared and GSM/GPS. Microwaves and Infrared technologies are similar. Both 
technologies have been included in the German and UK tolling trials. Microwaves are electromagnetic 
waves with wavelengths in the range lmm-lm, corresponding to frequencies of 0.3-100Ghz. A 5.8Ghz 
standard has been proposed for roadside-vehicle microwave transmission and most European systems 
are being designed to this standard. It is expected that systems in the future will be developed to use 
new standards based on 63Ghz. Microwaves will penetrate non-metallic and non-transparent materials, 
including accumulated dirt and snow to a depth of 1-1 Ocm. Infrared uses higher frequencies than 
microwave. It is more susceptible to absorbtion in bad weather and the penetration is generally less 
than 1cm. However, it may be cheaper to implement. 
The third technology being proposed for use in EFC is GSM/GPS. GSM is the European cellular 
telephone system and GPS is Global Positional System. Such systems work without the need for road-
based infrastructure. Vehicles establish their location by means of the GPS. Positional accuracy to 
within 100m is straightforward and would probably be sufficient, although further refinement down 
to 10 metres is possible at additional cost. The higher specification systems are referred to as 
Differential GPS (DGPS). The on-board equipment would need to include a simple digital map to 
determine whether the vehicle was in a tolled zone. Information would be stored within the vehicle and 
transmitted by GSM when convenient for processing centrally. This technology is highly flexible and 
could apply to both inter-urban and urban situations, or even a system based on mileage travelled, such 
as that proposed for Switzerland. However, existing operators are concerned about the potential loss 
of revenue through failures and the difficulty of enforcement without roadside infrastructure. The cost 
structure of GSM/GPS systems is quite different from all the other systems and will need to be 
demonstrated in practice to show that such systems are cost effective. 
Exception handling: The technical problems focus on the exception handling. The detection 
(localisation) and identification of vehicles which do not complete the tolling transaction successfully 
is still difficult. There is a consensus on the use of video cameras for exception handling, but the 
identification of number plates is not yet reliable. 
IX 
Vehicle Classification: Related to this is the issue of automatic vehicle classification. Tolls are 
invariably related to vehicle characteristics and operators are, therefore, required to check that the 
declared vehicle characteristics are accurate. This is straightforward if the toll stations are staffed and 
manual checks are possible. For this reason, traditional toll operators tend ta rely on physical 
characteristics - eg height, length and number of axles. These can also be measured automatically at 
the toll station using sensors under the road or mounted on the toll station. 
Most multi-lane high speed toll systems are based on gantries over the road. It is impossible to measure 
and confirm physical characteristics in these circumstances. This raises the need for other means of 
checking the classification. One possibility is a fixed electronic tag containing fixed vehicle 
characteristics which could be interrogated remotely for enforcement purposes. If such tags were to be 
used, the vehicle characteristics could be extended to include more than the visual characteristics, such 
as axle loading and fuel type. Extending this further, it might at some stage be possible to include 
dynamic parameters, such as the actual weight. Although it would be desirable to be able to measure 
emissions dynamically, it is unlikely that this will be feasible in the foreseeable future. There is no 
agreed vehicle classification system within Europe. 
Transaction processing: One of the main problems associated with the roadside-vehicle link is the short 
time available to complete the transaction. The bandwidth currently available (10MHz) at 5.8Ghz is 
considered too narrow to be capable of ensuring complete accuracy in busy multilane situations. Some 
compromises are necessary and central account processing is particularly difficult within a single 
transaction. However, a possible extension of the currently available bandwidth of 10MHz should not 
be excluded. If such an extension were to be established, it would remove some of the basic technical 
design limitations important for the development of multi-lane EFCs. 
Legal and institutional problems: Countries who wish to introduce tolling on existing toll-free roads 
will face legal and institutional problems. The technical difficulties associated with the equipment and 
its introduction make the prospect far from straightforward. The considerable uncertainties surrounding 
the introduction of EFC and consequential risks to industry make this area particularly difficult to 
predict. 
Problems related to financial institutions: Financial institutions are rapidly exploiting technologies for 
electronic payment. The contractual arrangements for the payment and distribution of revenues between 
operators will depend greatly on the role which the financial institutions establish for electronic money. 
Enforcement across internal European borders: At present it is not necessary to enforce payment of 
tolls across European borders. However, EFC systems will introduce the requirement to do this and 
there will be resulting requirements for agreements to ensure that the systems will work in a European 
context. Technical standards for European electronic number plates would be required, if these were 
to be used for automatic enforcement. 
Interoperability: The key issue, either raising or exacerbating the above mentioned problem areas, is 
the need to ensure the interoperability of multi-lane EFC systems for motorway tolling planned for 
introduction in different EU countries. Interoperability is a fundamental requirement on which R&D 
work is focusing, through a number of projects (CARD-ME, MOVE-IT, VASCO etc) at European level 
included in the 3rd and 4th Research Framework Programme. The development of road pricing 
(congestion pricing) EFC systems for use in urban situations is seen as a second priority (subordinate) 
activity in view of the fact that interoperability between such systems and EFC motorway tolling 
systems is certainly highly desirable, but can only come after the problem of interoperability among 
motorway tolling systems across the EU has been successfully resolved. 
Annex 5 : Road expenditure, taxation and damage costs 
Table 5.1 : Expenditure on roads and Revenue from vehicle and fuel taxes and tolls (MECU) 
MEMBER STATE 
Belgium 
Denmark 
Germany 
Greece 
Spain 
France 
Ireland 
Italy 
Luxembourg 
Netherlands 
Austria 
Portugal 
Finland 
Sweden 
United Kingdom EXPENDITURE 
ON ROADS 
1 290 (1994) 
806 (1989) 
15 000 (1994) 
423 (1988) 
3 380 (1989) 
11441 (1986) 
406 (1989) 
-
143 (1988) 
2 953 (1989) 
1 374 (1994) 
749 (1989) 
8 298 (1994) REVENUE FROM 
GOODS TRANSPORT 
vehicle, fuel taxes and 
tolls 
691 (1994) 
183 (1990) 
9 577 (1994) 
-
1 613 (1989) 
5 475* (1989) 
210 (1988) 
-
-
582 (1989) 
843 (1994) 
39 (1987) 
3 482 (1994) TOTAL TRANSPORT 
REVENUE 
vehicle, fuel 
taxes and tolls 
3 916 (1994) 
1 434 (1990) 
38 304 (1994) 
1 331 (1989) 
4 824 (1989) 
18 642 (1989) 
953 (1988) 
-
146 (1989) 
3 417 (1989) 
3 506 (1994) 
902 (1989) 
23 152 (1994) 
Source: Information supplied by Member States directly to the Commission. 
If it is assumed that the expenditure and tax figures in Table 5.1 are stable over time, then total 
road expenditure in the early nineties in EU-13 (the Union excluding Italy, Finland and Sweden) 
can be estimated at some 1.0% of GDP and total tax revenues from road users at approximately 
2.0% of GDP. 
If these percentages also hold for Italy, Finland and Sweden, then the excess of road taxation over 
infrastructure expenditure can be roughly put at some 65 BECU for the Union as a whole. 
xi 
Table 5.2 : Calculation of relative damage factors 
Based on standard axle load of currently used vehicles and vehicle combinations of 10 tonnes. 
Weight distribution over the axles is according to the limits of Directive 85/3/EC (as amended) and 
under the assumption of an ideal distribution. In reality, loading will be less ideal, overloaded 
axles will occur and damage will be greater. 
Vehicle Type 
Two axle motor vehicle 
with three axle trailer 
(40t) 
Three axle motor vehicle 
with two axle trailer 
(double-drive axles) 
(40t) 
Three axle motor vehicle 
with three axle trailer 
(40t) 
Three axle motor vehicle 
with three axle trailer 
(44t) 
Road trains with four 
axles consisting of a two 
axle motor vehicle and a 
two axle trailer (36t) 
Two axle motor vehicle 
(18t) 
Three axle motor vehicle 
(25t) 
Three axle motor vehicle 
with air suspension (26t) 
Passenger car Damage 
factor per 
vehicle 
2.94 
2.75 
1.21 
2.08 
2.99 
1.70 
1.65 
1.99 
0.0001 Damage 
factor per 
10 tonne 
0.74 
0.69 
0.30 
0.47 
0.83 
0.94 
0.66 
0.76 
-
XII 
Annex 6 : Road accident statistics 
Selected Risk Values for the Year 1993 (with exception of footnotes (1), (2), (3) and (4)) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK n" Killed 
1660 
559 
9949 
2249 
6378 
9568 
431 
7110 
76 
1252 
1437 
2727 
484 
632 
3957 Killed per 
10' pass, 
kms 
18 
8 
12 
118 
27 
14 
-
10 
8 
21 
31 
8 
6 
6 Killed per 
GNP 
10 
5 
7 
37 
14 
9 
11 
8 
10 
5 
10 
37 
5 
3 
5 Killed 
per 10* 
ECU 
GNP per 
capita 
11 
6 
7 
37 
20 
10 
12 
8 
to 
5 
12 
44 
6 
4 
6 KILLED PER 100 000 POPULATION 
Total 
16.5 
10.8 
12.3 
20.4 
16.3 
16.6 
12.1 
12.6 
19.2 
8.2 
16.2 
32.9(1) 
9.6 
7.3 
6.8 0-14 years 
3.4 
3.6 
3.4 
3.8 
3.9 
3.7 
4.0 
2.3 
10.0 
3.2 
3.8 
9.5(1) 
3.1 
1.6 
2.5 15-24 
years 
31.4 
15.8 
26.9 
32.2 
25.3 
31.3 
20.3 
20.50 
43.7 
13.9 
32.8 
51.8(1) 
15.3 
10.6 
11.8 25-64 
years 
16.6 
8.8 
11.4 
20.6 
17.3 
16.9 
10.8 
10.9 
16.7 
6.5 
14.8 
32.8(1) 
8.7 
6.7 
5.9 65 years 
and more 
17.9 
21.2 
13.2 
26.0 
15.4 
18.7 
17.6 
15.7 
20.8 
16.0 
20.3 
39.0(1) 
17.0 
12.4 
10.8 OUTSIDE 
URBAN 
AREAS 
-
17.3 
-
-
-
-
13.2 
-
-
10.9 
30.7(3) 
-
13.0 
-
10.0(1) MOTOR 
WAYS 
9.4 
3.5 
6.4 
-
-
8.1 
-
11.9(2) 
-
3.1 
11.2 
39.3(4) 
1.7 
-
3.1 
Source : Statistics supplied by Member States for DG VII / ECMT/ UN 
(1) based on 1992 figures 
(3) based on 1988 figures (2) based on 1991 figures 
(4) based on 1989 figures 
Xlll 
Annex 7 : External accident costs 
Studies show that the transport user is "willing to pay" a higher cost to reduce the risk in traffic than 
the "hard" costs discussed in Chapter 5 (i.e. health care, lost consumption etc.). Some Member States 
have introduced a "risk value" component in the accident evaluations for cost-benefit assessments. 
Using these studies, we can conclude that road users could have a willingness to pay of over 100 
Billion ECU in order to reduce all the accidents in the Union during one year. Thus, taking into 
account the total costs associated with injury causing road accidents alone - ie. the costs of medical 
care, the individual's replacement and/or reintegration into society and the workplace, production 
losses, the valuation of risk reduction - society as whole seems to have a willingness-to-pay to reduce 
all the accidents in the Union of some 150 Billion ECU p.a. Fatalities constitute 36% of the total cost 
and severe injuries 45%. Not all of these costs are however external. 
It is not straightforward to determine which part of these costs are not taken into account by individual 
transport users (and are "external") and should, therefore, be imputed to them. Some costs of accidents 
- such as material damage - are paid through the insurance system, reflected in premiums and are 
therefore already internalised. 
At the same time it is clear that a significant part of the hard costs (i.e. lost production) are fully 
external. Studies also suggest that the accident costs of pedestrians and cyclists are mostly external. But 
determining which part of the "human grief costs of killed and injured motorists are external requires 
information on the extent to which increases in traffic levels raise accident risks. The stronger this 
relation is, the higher are the external costs, because making an additional trip would lead to a 
significant increase in accident rates for all other road users. In the absence of detailed studies on this 
matter, the external part could probably be put at, at least, half of the total "human value" costs. This 
would suggest an external cost of some 1.5% of GDP in the Union, given that total costs amount to 
some 2.5% of GDP. More research on this matter is, however, needed. 
xiv 
Annex 8 : Leverage points for reducing air pollutant emissions from road transport 
VEHICLE AND FUEL CHARACTERISTICS 
1. Fuel type 
2. Fuel efficiency 
(litres per 
kilometre) 
3. Emission controls 
(vehicle 
technology) 
4. Age Fuel quality influences the emission factors (grams/litre) of pollutants 
such as the lead or benzene content in gasoline or the sulphur content 
in diesel 
Lower fuel consumption per kilometre reduces global climate change 
directly. Diesel vehicles are more fuel efficient than gasoline vehicles 
but diesel fuel has a higher carbon content than gasoline. The impact of 
fuel efficiency per kilometre on other forms of pollution is unclear and 
probably very small 
Other things equal, vehicles equipped with emission controls (e.g. 
catalytic converter, particulates trap, exhaust gas recirculation) have 
substantially lower emission factors than vehicles without emission 
controls. 
Other things equal, older vehicles tend to have higher emission factors 
than new vehicles due to the normal deterioration of the engine and the 
emission controls 
VEHICLE OWNERSHIP AND USE 
5. Location 
6. Time of day 
7. Speed 
8. Load 
9. Average trip 
length and annual 
distance driven 
10. Size and 
composition of 
vehicle fleet 
11. Vehicle 
maintenance Pollution costs are higher in urban areas (including city access) because 
of the higher population density and exposure compared to non-urban 
(rural and intercity) areas. The exception are emissions which have the 
same potential impact irrespective of location (e.g. C02). 
Driving in peak-hour congested traffic increases the average emission 
factors of primary pollutants and C02. 
Improvements in speeds reduce emission factors of CO and VOCs but 
can increase the emission factors of NOx. 
Other things equal a vehicle with a higher load emits more pollutants 
per kilometre than a vehicle with less load. 
Cold-start emissions per kilometre are much higher than running or 
evaporative emissions and thus represent a large proportion of total 
emissions in short trips. Other things equal, 4 trips of 5 kms each 
produce higher emissions than 1 trip of 20 kms. Other things equal, 
the more distance a vehicle is driven the more pollution it generates. 
A smaller fleet will bring down emissions. A larger share of less 
polluting vehicles has the same effect. 
Other things equal, a well maintained vehicle with a tuned up engine 
pollutes less than a badly maintained vehicle or a vehicle with emission 
controls that have been tampered with. 
xv 
Annex 9 
Intemalisation applied to NOx Emissions from Cars. The cost-effectiveness-of different 
fiscal instruments _ 
A least-cost approach to reducing NOx emissions should explore as many leverage points as 
possible (see Annex 8). The results of a simulation exercise recently undertaken within the so-
called Auto Oil programme show that incentives which trigger changes in only a few of the 11 
channels listed in Annex 8 are systematically less cost-effective than those that trigger reactions 
in a larger number of factors. 
One of the most frequently cited options to reduce transport externalities is an increase in fuel 
excises. However, fuel excises only have a direct impact on the fuel efficiency of vehicles (which 
generally come at a cost) and, indirectly, reduce mileage. Fuel taxes are largely ineffective on the 
emission of NOx, because a vehicle's specific fuel consumption is more or less independent from 
its NOx emissions per kilometre. The reason why fuel taxes reduce conventional emissions 
slightly, is because they reduce driving. In terms of the list presented in Annex 8, the tax targets 
none of the factors directly, but has some effect on factors 2, 9 and 10. Overall, an increase in 
fuel taxes that reduces NOx emissions from vehicles by 1.5 percent, causes EU-wide welfare 
reductions of 25 billion ECU (in discounted costs over the period 2000-2010 and leaving aside 
benefits). 
A somewhat better instrument for NOx reduction is simply increasing existing annual circulation 
taxes. Its main effect is that it induces people that drive old and therefore often highly polluting 
cars to scrap these vehicles. This is, because compared to the low value of old cars the tax is 
proportionally higher than on new cars. Although the tax is a general tax, it therefore hits hardest 
the group of car owners most responsible for emissions. The tax therefore influences in a major 
fashion factor 4 of the list, with some minor impact on factor 10. As can be seen in the table, by 
increasing circulation taxes, a 3 times larger NOx emission reduction can be achieved at the same 
cost (Minus 4.9 percent for 25 b ECU). The problem of existing circulation taxes is that they do 
not encourage the purchase of cleaner cars. Basing the circulation tax on a vehicle's emission 
factors produces a quantum leap in the scheme's effectiveness, because it induces changes in 
technology (it becomes attractive for manufacturers to equip vehicles with anti-pollution 
equipment because demand for these vehicles increases), which in the case at hand, are relatively 
cheap. At a cost of 25 BECU, emission reductions of 21 percent can be achieved. 
Finally, emissions are obviously also a function of the annual mileage. A circulation tax that 
takes not only emission factors but also mileage into account, leaves people more choice in how 
they can reduce emissions. This system generates lower costs because the fee is tailored both to 
people who do not want to change their driving and buy cleaner cars and to those that want to 
keep a somewhat dirtier vehicle, but reduce their driving. Such a tax scheme lets people choose 
the optimal combination between factors 3, 4, 9, 10, and 11. Extending choice allows a 26 
percent emission reduction to be achieved at the same cost. Such a fee could be implemented, for 
example, within the framework of an annual inspection program that checks the vehicles 
emissions factors and registers the driven km from the mileometer. 
This tax can theoretically only be improved upon by a tax on actual emissions, which opens 
changes in the driving style and speed as further channels through which adjustments can take 
place, would make people demand low emission fuels, and change their travelling plans to avoid 
traffic jams, possibly avoiding also reduce driving in winter. An tax on actual emissions would 
add the missing factors 6 and 7 to the list of possibilities. The fees in the example were ranked 
such that the base for the tax increasingly approximates the externality (NOx emissions). With 
every step, consumers are given more options through which they can adapt to the tax incentive 
and pick the least cost combination. The example shows clearly that the efficiency loss of a bad 
proxy can be substantial. In our example, a fuel tax is a 17 times more expensive option than that 
of a circulation tax based on mileage and vehicle emission factors. 
xvi 
How much NOx emissions reduction can be "bought" for 25 billion ECU (in discounted costs over the 
period 2000-2010 - excluding the value of environmental benefits) 
Increase in fuel tax 
Increase in annual vehicle tax 
Restructuring of and increase in annual tax on 
circulation - depending on vehicle emission 
parameters 
Restructuring of and increase in annual tax on 
circulation - depending on vehicle emission 
parameters times actual mileage driven 
Source : Commission Services. Doc 11/576/95 
xvn 
Annex 10 : Estimates of external costs 
External Costs of Transport in EU-15(a) 1991 by Type of Effect (in 1000 million ECU/a) 
EFFECT 
Accidents 
Noise 
Air Pollution & 
Climate0" 
Total ROAD 
Cars 
106 
15 
44 
164 Buses 
4.2 
1.9 
3 
9.1 Motor 
Cycles 
16 
4.4 
0.9 
.21 Freight 
21 
12 
23 
56 RAIL 
Pass. 
0.5 
0.9 
1.4 
2.8 Freight 
0.2 
1.2 
0.5 
1.8 AVIATION 
Pass. 
* 
2.1 
10.3 
12 Freight 
* 
0.7 
3.3 
4.0 SHIP. 
Freight 
* 
* 
0.7 
0.7 TOTAL 
Pass. 
126 
24 
59 
209 Freight 
22 
14 
27 
63 
EFFECT 
Accidents 
Noise 
Air Pollution & 
Climate 
Total Cars' 
32.3 
4.5 
13.2 
50.1 Buses' 
9.4 
4.2 
6.8 
20.4 Freight2 
22.2 
12.7 
23.6 
58.4 Pass.1 
1.9 
3.1 
5 
10 Freight2 
0.9 
4.7 
1.8 
7.3 Pass.' 
* 
3.0 
14.8 
17.8 Freight2 
* 
16.5 
76.8 
93.2 Freight2 
* 
* 
6.1 
6.1 
Source : INFRASAWW (1995) 
* Statistics not available 
(a) Including Switzerland and Norway 
^ Including climate change 
1 ECU/1 OOOpkm 
2 ECU/tonne km 
xvni 
Annex 11 : List of studies to be launched. 
List of studies to be launched by the Commission to analyse issues discussed in this Green Paper : 
A review of possible obstacles towards a cost intemalisation policy in existing Community 
legislation 
Measuring road infrastructure capital and maintenance costs in the European Union: methodologies, 
evidence and cost allocation options. Including principles for detailed accounts on transport fiscality. 
Infrastructure cost imputation for inland waterway transport. 
Railway infrastructure : cost imputation and charging. 
An electronic kilometre charge for heavy goods vehicles. 
Potential for bringing accident cost closer to the individual through insurance premiums. 
Internalising external costs in transport : consequences for industry. 
In addition, many of the issues discussed in this Green Paper are already analysed in the EU's Fourth 
Framework Programme for Research and Development (notably the Joule, Environment and Transport 
Research Programmes). The results of this programme will be made available on completion of the 
individual research projects. The following work programme tasks in the Transport Research Programme 
are relevant to pricing:-
(a) Strategic Research Sector 
Economics of transport systems : 
Task 14: Methodologies for valuation of transport systems. (1st Call) 
Task 15: Pricing of transport systems (impacts of alternative pricing policies on transport demand 
and modal split). (1st Call) 
Task 16: Financing of infrastructure investments. (2nd Call) 
Task 17: Economic impact assessment of transport sector activities on Member States' economy. 
(1st Call) 
Developing intermodality : 
Task 20: Methodology for strategic multimodal/intermodal modelling. (1st Call) 
Task 21: Policy instruments for improved intermodality and optimum modal split. (1st Call) 
(b) Road transport sector 
Sustainable Mobility : 
Task 1: Assessment of the socio-economic and cultural factors affecting all types of road travel 
demand, travel behaviour, travel patterns and cost elasticities in different Member States. 
(1st Call) 
Task 2: Development of strategies designed to avoid the need for travel. (1st Call) 
Task 3: Development of assessment tools, to evaluate the effects of TDM. strategies on 
accessibility, economic conditions, and the environment. (1st Call) 
xix 
Task 7: 'Essential' road users: their definition, assessing their levels of demand, and devising 
appropriate measures to meet their needs. (1st Call) 
Pricing and Financing : 
Task 23 : Integrated policy survey and development of policy instruments for shifting private traffic 
to public transport. (1st Call) 
Task 24: Specification, demonstration and evaluation of integration of pricing measures (urban and 
suburban) to change modal split in urban areas, inc. the concept of congestion pricing 
and evaluation of the implication of different fee structures. (1st Call) 
Task 25: Study on financing schemes for Urban Transport Systems with emphasis on the relation 
between real costs and their actual financial treatment. (3rd Call,) 
Task 26: Development of a European guide (methodology) for the evaluation of real transport 
costs. (3rd Call) 
Task 27: Investigation of the opportunities for the private sector to contribute to the optimisation 
of the Urban Public Transport system. (2nd Call) 
xx 

ISSN 0254-1475 
COM(95) 691 final 
DOCUMENTS 
EN 07 
Catalogue number : CB-CO-95-774-EN-C 
ISBN 92-77-99209-3 
Office for Official Publications of the European Communities 
L~2985 Luxembourg