Communication from the Commission to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions - Strategy for the internalisation of external costs {SEC(2008) 2207} {SEC(2008) 2208} {SEC(2008) 2209}
Date: 2008-07-08
Institutions: European Commission
Subjects: charges for use of infrastructure, common price policy, common transport policy, fixing of prices, transport price

EN 

EN 

   EN 

 
 
COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 8.7.2008 
COM(2008) 435 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE ECONOMIC AND SOCIAL COMMITTEE 
AND THE COMMITTEE OF THE REGIONS 

Strategy for the internalisation of external costs 

{SEC(2008) 2207} 
{SEC(2008) 2208} 
{SEC(2008) 2209} 

EN 

   EN 

 
 
 
  
 
COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE ECONOMIC AND SOCIAL COMMITTEE 
AND THE COMMITTEE OF THE REGIONS 

Strategy for the internalisation of external costs 

1. 

INTRODUCTION: TOWARDS SUSTAINABLE TRANSPORT 

The  internalisation  of  external  costs  is  part  of  a  package  of  initiatives  intended  to  make 
transport  more  sustainable.  Today,  it  is  vital  for  the  transport  sector  to  contribute  to  the 
Commission’s key priorities of sustainable development and maintaining competitiveness in 
Europe. 

In 2006, the legislature asked the Commission to draw up “a generally applicable, transparent 
and comprehensible model” for the assessment of external costs.  

“No  later  than  10  June  2008,  the  Commission  shall  present,  after  examining  all  options 
including  environment,  noise,  congestion  and  health-related  costs,  a  generally  applicable, 
transparent and comprehensible model for the assessment of all external costs to serve as the 
basis for future calculations of infrastructure charges. This model shall be accompanied by 
an  impact  analysis  of  the  internalisation  of  external  costs  for  all  modes  of  transport  and  a 
strategy for a stepwise implementation of the model for all modes of transport. 

The report and the model shall be accompanied, if appropriate, by proposals to the European 
Parliament and the Council for further revision of this Directive” (Directive 2006/38/EC). 

This  kind  of  project  is  nothing  new.  For  a  number  of  years,  the  European  Commission  has 
been highlighting the need for a transport pricing system that is more efficient and more 
accurately reflects the true costs involved1. Transport generates negative externalities that 
involve a cost to society and the economy. By internalising those external costs, the intention 
is to give the right price signal, so that users will bear the costs they create and will thus have 
an incentive to change their behaviour in order to reduce those costs. 

The  European  Union  must  take  action.  The  impact  assessment2  indicates  that,  if  nothing  is 
done in the next few years, the environmental costs (air pollution, CO2 emissions) could reach 
€210 billion by 2020. Individuals and businesses w ould also face congestion on more than a 
quarter of Europe’s roads.  

1 

2 

The  fact  that  only  some  of  the  costs  arising  from  the  use  of  transport  infrastructure  are  passed  on  to 
users and, in particular, the uneven distribution of that burden were discussed in the Commission’s 1995 
Green  Paper  Towards  fair  and  efficient  pricing  in  transport,  its  1998  White  Paper  Fair  payment  for 
infrastructure use: A phased approach to a common transport infrastructure charging framework in the 
EU  and  its  White  Paper  European  Transport  Policy  for  2010:  time  to  decide,  which  was  adopted  in 
September  2001.  The  subject  was  raised  again  during  the  mid-term  review  of  European  Transport 
Policy for 2010: time to decide, which took place in 2006. It was then that the Commission undertook 
to propose a methodology for infrastructure charging based on the Road Charging Directive. 
Impact assessment on the internalisation of external costs (SEC(2008) 2208). 

EN 

2 

   EN 

 
                                                 
2. 

WHAT WE EXPECT FROM INTERNALISATION: MORE INTELLIGENT PRICES 

2.1. 

Taking into account the costs generated by transport 

Transport users have to pay costs that are directly related to the use of their mode of transport 
(fuel, insurance, etc.). Such costs are considered private in the sense that they are paid directly 
by the user. However, transport users also generate negative externalities that involve a cost to 
society, such as delays to other drivers as a result of congestion, health problems caused by 
noise  and  air  pollution  and,  in  the  longer  term,  the  effects  of  greenhouse  gas  emissions  on 
climate change, but users do not bear those costs directly (external costs). Such costs are real, 
even  if  they  do  not  always  have  an  explicit  market  value:  expenditure  on  police  and 
infrastructure management, hospital charges, public health spending and loss of quality of life. 
They  are  generally  borne  by  the  State  and  its  citizens.  The  sum  of  the  private  and  external 
costs of transport gives its social cost. Only a price based on the total social costs generated 
by the transport user will help give the right price signal and take account of the services used 
and the consumption of scarce resources.  

However,  for  that  price  signal  to  be  effective,  the  transport  user  must  be  price  sensitive. 
Sometimes this is not possible for specific reasons, such as the lack of credible alternatives, 
insufficient competition with regard to a particular mode of transport, insufficient incentive to 
innovate and switch to clean vehicles, etc.  Internalisation is  a  necessary step in itself, but it 
must be accompanied by other measures intended to create greater elasticity of demand, i.e. 
greater sensitivity to price variations, to make the supply of certain services more attractive or 
to speed up technological innovation. In order to reduce the external costs, we therefore need 
a strategy that includes various other elements in addition to internalisation, elements such as 
providing 
innovation,  competition  policy, 
legislation and setting standards. 

infrastructure,  encouraging 

technological 

2.2. 

Choosing the right economic instrument for each external cost 

In practice, the main economic instruments for internalising external costs are taxation, tolls 
(or user charges) and, in certain circumstances3, emissions trading. They are already applied 
to  varying  extents  depending  on  the  mode  of  transport  and  the  costs  involved.  The  impact 
assessment  on  the  internalisation  of  external  costs4  examines  the  existing  situation  for  each 
mode of transport with regard to tolls, taxation and emission rights.  

Each  external  cost  has  specific  characteristics  which  require  the  use  of  the  appropriate 
instruments. Some external costs relate to the use of infrastructure and vary according to time 
and place. This is the case for congestion, air pollution, noise and accidents, all of which are 
highly  localised  and  vary  depending  on  the  time,  place  and  type  of  network.  The  use  of 
differentiated  charging  is  the  best  way  of  taking  those  variations  into  account.  Why  should 
users  have  to  pay  the  same  regardless  of  whether  they  travel  at  peak  times  or  at  the 
recommended  times,  take  congested  routes  or  find  an  alternative  way  of  getting  to  their 

3 

4 

Under  Directive  2003/87/EC,  Member  States  are  to  allocate  at  least  90%  of  CO2  allowances  free  of 
charge. For emissions permits to internalise external costs, the granting authorities must sell them at a 
price that is, for example, equal to those external costs. In January 2008, the Commission put forward a 
proposal  (COM(2008) 16)  to  set  up  an  auction  system  that  would  make  it  possible  to  reflect  the 
“polluter  pays”  principle.  The  system  is  to  be  introduced  gradually,  and  at  least  two  thirds  of  all 
allowances are expected to be sold by auction by 2013. 
SEC(2008) 2208. 

EN 

3 

   EN 

 
                                                 
destination? And why should a “clean” vehicle incur the same charge as a noisier vehicle that 
produces more pollution?  

Climate  change,  on  the  other  hand,  has  no  such  local  dimension.  Emissions  of  greenhouse 
gases in general and CO2 in particular do not vary according to time or place but are linked to 
fuel  consumption.  It  is  therefore  not  necessary  to  apply  differentiated  charges.  Rather,  it 
would be more appropriate to use an instrument directly linked to that consumption, such as a 
fuel tax or even a CO2 emissions trading system.  

2.3. 

Ensuring that the internal market continues to function properly 

Safeguarding  the  internal  market  is  one  of  the  European  Union’s  basic  principles.  We  must 
therefore avoid overcharging, as this could hamper freedom of movement and, because of its 
effect on through traffic, would be detrimental to other regions. Consequently, the principles 
governing  internalisation  must  be  laid  down  at  European  level  in  order  to  prevent 
fragmentation of the market. At the same time, the local character of some external costs must 
be  recognised,  and  it  is  important  to  strike  the  right  balance  between  a  Community-level 
approach and a more local approach. 

Setting  common  principles  for  all  Member  States  should  prevent  any  discrimination  and 
ensure market transparency. The proposed common methodology will ensure that charges are 
not disproportionate to the existing external costs. Lastly, setting up a monitoring system will 
make the process clear and effective for all concerned.  

3. 

GENERAL  PRINCIPLES  FOR  THE  INTERNALISATION  OF  EXTERNAL  COSTS:  SOCIAL 
MARGINAL COST CHARGING 

Giving  transport  users  the  right  signals  involves  setting  prices  that  do  not  lead  to 
overexploitation  of  resources,  but  do  not  damage  the  transport  sector,  or  ultimately  the 
economy,  either.  According  to  economics  literature,  “social  marginal  cost  charging” 
achieves  that  balance.  It  is  therefore  being  proposed  as  the  general  principle  for 
internalisation. 

According  to  this  approach,  transport  prices  should  correspond  to  the  additional  short-term 
cost created by one extra person using the infrastructure. In theory, this additional cost should 
include  the  costs  to  the  user  and  the  external  costs.  Social  marginal  cost  charging  would 
therefore lead to efficient use of the existing infrastructure. Furthermore, as users would pay 
for the additional costs they generate for society, it would also help ensure fair treatment of 
both transport users and non-users and would create a direct link between the use of shared 
resources  and  payment  on  the  basis  of  the  “polluter  pays”  and  “user  pays”  principles.  This 
approach is only possible if the “polluter” does not benefit from any compensation that would 
cancel out the possible effects of internalisation.  

Nevertheless, marginal costs vary according to time and place and, in practice, it is difficult to 
judge their exact level. A certain degree of simplification is therefore inevitable. In general, 
the marginal costs can be said to correspond to the average of the variable costs.  

In  some  cases,  the  marginal  cost  approach  may  have  certain  limitations.  It  does  not 
necessarily make it possible to include infrastructure costs, as is the case where fixed costs are 
high or traffic density is low. If necessary, it may be combined with other approaches to make 
sure that infrastructure is funded according to the “user pays” principle and external costs are 

EN 

4 

   EN 

 
internalised  according  to  the  “polluter  pays”  principle.  This  could  also  help  ensure  fair 
treatment  for  transport  users  and  society  as  a  whole.  Furthermore,  for  some  costs,  such  as 
those relating to noise, the method for estimating the marginal costs is very complex, and a 
pragmatic approach based on the average cost may be more feasible (see technical annex5).  

The  technical  annex  contains  a  proposal  to  create  a  common  framework  for  calculating  the 
external costs of congestion, air pollution, noise and climate change by establishing common 
principles  and  a  common  methodology.  Accidents  are  not  explicitly  dealt  with  in  this 
document  (see  Figure  2  in  the  technical  annex).  The  external  costs  of  accidents  should  be 
internalised  using  mechanisms  that  are  capable  of  taking  high-risk  behaviour  (speed, 
drink-driving)  into  account  and  giving  people  an  incentive  to  change  that  behaviour. 
Insurance  premiums  already  meet  this  requirement  by  taking  the  driver’s  risk  profile  into 
account, for example through the bonus/malus system, but premiums are based on the cost of 
the  damage,  which  does  not  usually  cover  all  the  costs  involved.  Although  the  consultation 
process  showed  that  there  is  support  for  passing  costs  on  through  insurance  premiums,  any 
such initiative would have to take account of the existing differences between Member States 
and would need more in-depth analysis, particularly with regard to issues such as subsidiarity. 
At present, this process is not sufficiently advanced to be able to put forward a proposal for an 
initiative at European level.  

4. 

STRATEGY FOR INTERNALISING EXTERNAL COSTS FOR ALL MODES OF TRANSPORT  

Even if it is possible to establish a general principle for internalisation (social marginal cost 
charging)  and  a  methodology  for  quantifying  externalities,  it  is  difficult  to  imagine  an 
internalisation  mechanism  that  would  be  generally  applicable  to  all  forms  of  transport,  as 
these  involve  different  technologies,  different  numbers  of  operators,  existing  legal  and 
regulatory frameworks, etc. The same principle should be applied using different instruments.  

The  EU  is  not  starting  from  scratch.  It  has  already  adopted  measures  to  enable  the 
internalisation  of  external  costs  and  to  help  reduce  negative  externalities.  Harmonisation  of 
energy taxation in 2003 was an important step forward. It is scheduled for review in 2008, and 
the intention is to give greater consideration to CO2 emissions. The recent proposal to include 
the aviation industry in the emissions trading system by 2011 is another crucial stage in the 
transport sector’s contribution to combating climate change.  

Based on the results of the impact assessment, it will be possible to adapt the overall strategy 
to the characteristics of each mode of transport and thus take another step forward.  

4.1.  Making internalisation possible in the road haulage sector 

The road haulage sector accounts for three quarters of freight transport, and internalising the 
external  costs  could  help  cut  the  cost  to  the  environment  by  some  €1  billion  in  comparison 
with the reference scenario in which no action is taken. Moreover, reducing congestion also 
reduces the time spent in traffic jams and could help make value-added chains more efficient. 
The Commission is therefore proposing to make it possible to internalise some of the external 
costs in the road haulage sector.  

5 

SEC(2008) 2207. 

EN 

5 

   EN 

 
                                                 
4.1.1.  “Green" and “intelligent” charges: revision of Directive 1999/62/EC (June 2008) 

The 1999 Directive on the charging of heavy goods vehicles precludes incorporating any of 
the external costs when calculating tolls. It was amended in 2006 to allow different tariffs to 
be applied depending on vehicles’ environmental characteristics. However, with the exception 
of mountainous regions, and then only in certain circumstances, toll revenues may not exceed 
infrastructure  costs.  This  is  the  case  even  in  more  congested  regions  or  regions  with  higher 
levels of pollution.  

The  impact  assessment  looked  at  various  ways  of  internalising  external  costs.  The  results 
show to what extent charges for air pollution, noise pollution and congestion would contribute 
to  reducing  external  costs  without  having  a  disproportionately  negative  impact  on  the 
economy. Time savings as a result of reduced congestion would make a positive contribution 
towards improving economic efficiency and significantly reducing CO2 emissions.  

The  Commission  is  therefore  proposing  to  revise  Directive  1999/62/EC  in  order  to  allow 
charges to include external costs. The revision process will focus primarily on the following 
areas: (1) taking account of the external costs of air pollution, noise pollution and congestion, 
(2)  setting  up  Community  coordination  mechanisms  with  a  common  methodology  and 
ceilings for the calculation of charges and (3) allocating revenue to the transport sector. This 
approach is backed up by the results of the public consultation. To be effective, tolls should 
vary  depending  on  the  vehicle  concerned,  the  type  of  route  and  the  time.  Furthermore, 
payments should be made via electronic toll systems in order to prevent tailbacks at the toll 
booths. 

4.1.2.  Promoting internalisation through the use of technology (autumn 2008)  

The Intelligent Transport System Action Plan, to be proposed in autumn 2008, is intended to 
increase  the  use  of  technology.  The  Commission  is  to  adopt  Decisions  to  implement 
interoperability  of  electronic  toll  systems,  as  provided  for  in  Directive  2004/52/EC,  thus 
ensuring full interoperability of electronic toll systems within three years of the adoption of 
Decisions relating to the definition of the European Electronic Toll Service.  

4.2. 

Encouraging more sustainable car use (autumn 2008)  

Private  cars  should  not  be  left  out  of  this  initiative.  The  charging  principles  proposed  here 
could usefully be extended to private cars. For reasons of subsidiarity, Member States retain 
the freedom to choose whether to do so or not.  

The  Urban  Mobility  Action  Plan,  to  be  proposed  in  autumn  2008,  will  also  look  at  how  to 
improve mobility in urban centres and will consider the added value of Community action. It 
follows  a  wide-ranging  debate  initiated  by  the  publication  of  a  Green  Paper  on  urban 
transport6. Best practices with regard to charging will be identified by passing on the various 
experiences  gained  with  charging  systems  in  European  cities  and  setting  up  a  discussion 
platform.  Furthermore,  developing  harmonised  criteria  for  urban  traffic  restrictions  and 
the 
promoting 
internalisation of external costs in urban areas across Europe.  

interoperability  could  help  harmonise  strategies 

technological 

for 

6 

Green  Paper  Towards  a  new  culture 
http://ec.europa.eu/transport/clean/green_paper_urban_transport/index_en.htm). 

for  urban  mobility,  September  2007  (available  at 

EN 

6 

   EN 

 
                                                 
Lastly, a proposal7 on the taxation of private cars is currently under discussion in the Council. 
This proposal provides for the restructuring of existing taxes in order to take CO2 emissions 
into  account.  The  Commission’s  proposal  includes  three  key  measures:  abolishing  the 
registration  tax,  setting  up  a  system  for  refunding  it  and  restructuring  the  tax  base  for  the 
registration tax and the annual road tax to establish a full or partial link with CO2 emissions.  

4.3. 

Towards internalising external costs for other modes of transport 

The European Union should not stop there. Other modes of transport also have their part to 
play  in  improving  people’s  quality  of  life,  and  each  one  presents  specific  challenges:  noise 
pollution for rail transport, air pollution and climate change for maritime transport and noise 
pollution,  air  pollution  and  climate  change  for  air  transport.  Internalising  the  external  costs 
will  also  make  it  possible  to  use  the  most  suitable  instruments  to  encourage  users  to  adopt 
more sustainable behaviour.  

The impact assessment also looked at the various options for internalising external costs for 
these modes of transport. The policy options examined envisaged internalising environmental 
costs  (air  pollution  and  noise)  and  costs  linked  to  climate  change,  which  would  have  a 
positive effect on reducing negative externalities.  

4.3.1.  Rail transport (2008) 

Directive 2001/14/EC allows internalisation of external costs. However, if it would lead to an 
increase  in  the  revenue  accruing  to  the  infrastructure  manager,  the  Directive  allows 
internalisation  only  if  there  is  an  equivalent  increase  for  competing  modes  of  transport. 
Revising Directive 1999/62/EC will therefore make it possible to internalise external costs in 
the road transport sector, which is in competition with rail transport.  

Noise  pollution  remains  a  major  challenge  for  rail  transport.  When  it  publishes  this 
Communication,  the  Commission  will  also  publish  a  Communication  on  incentives  for 
reducing  noise  levels  and  may  propose  legislation  in  this  area  by  the  end  of  2008  when 
reviewing the first railway package. 

4.3.2.  Air transport (late 2008) 

Air  transport  is  already  making  a  contribution  to  this  programme.  As  emissions  from  air 
transport  are  increasing  particularly  rapidly,  the  Commission  put  forward  a  proposal  on 
20 December 2006 to include CO2 emissions from the aviation sector in the European Union 
Emissions Trading System (ETS). Consequently, from 2011 or 2012, aircraft operators will be 
required  to  surrender  allowances  to  cover  their  emissions  according  to  the  “polluter  pays” 
principle. The draft Directive applies not only to intra-Community flights but also to all other 
flights  arriving  at  or  departing  from  an  EU  airport.  It  caps  emissions  at  100%  of  the  levels 
obtained during the 2004-06 reference period. 

The  Commission  is  aware  that  the  aviation  industry’s  impact  on  climate  change  is  not  just 
limited to its CO2 emissions and has already announced that it intends to deal with emissions 
of  other  greenhouse  gases,  particularly  nitrogen  oxide  (NOx).  The  Commission  is  therefore 
drawing up another proposal, to be submitted by the end of 2008, with the aim of reducing 
NOx emissions.  

7 

Proposal for a Council Directive on passenger car related taxes (COM(2005) 261).  

EN 

7 

   EN 

 
                                                 
Lastly, on 24 January 2007, the Commission put forward a proposal for a Directive on airport 
charges.  Both  the  Council  and  the  Parliament  welcomed  the  proposal.  The  suggested 
amendments  relate  to  the  inclusion  of  differentiated  charging  on  the  basis  of  environmental 
damage. 

4.3.3.  Maritime transport (2009) 

Over the last few years, the growth of the maritime transport sector has led to an increase in 
its  CO2  emissions.  In  its  conclusions,  the  March  2007  European  Council  proposed  taking 
action to address emissions from international maritime transport. The Commission wishes to 
include  the  maritime  sector  in  the  post-2012  agreement  on  preventing  climate  change  and 
would  also  like  the  International  Maritime  Organisation  (IMO)  to  develop  a  series  of 
measures over the course of 2009 to reduce greenhouse gas emissions. However, if the IMO 
does  not  make  sufficient  progress,  the  Commission  will  suggest  taking  action  at  European 
level,  with  one  of  the  possible  options  being  to  include  the  maritime  sector  in  the 
EU Emissions Trading System. 

4.3.4. 

Inland waterways 

The  NAIADES  Communication  envisaged  internalising  external  costs  for  all  modes  of 
transport  by  2013.  It  pointed  out  that  this  could  revitalise  inland  waterway  transport  and 
would make it possible to fund infrastructure development projects in the sector. The impact 
assessment  shows  that  inland  waterways  would  benefit  from  this  kind  of  approach  and, 
depending on their  energy efficiency  in terms  of tonnes  per kilometre,  could benefit  from a 
true intermodal transport policy. 

4.4. 

Using the revenue generated by internalisation to make transport sustainable 

The use to which the revenue generated by internalisation is put should take account of the 
benefits  that  international  traffic  has  for  the  Community.  In  many  cases,  it  is  international 
traffic that generates the revenue. International road transport accounts for almost a quarter of 
all road transport in Europe, with that figure rising above 50% in seven Member States (and 
even reaching 74% in Belgium, 76% in Luxembourg and 85% in Estonia). If this revenue is 
not  earmarked  for  transport,  Member  States  might  use  the  revenue  generated  by 
internalisation to pursue their own interests without considering the advantages of sustainable 
mobility at Community level.  

To  make  transport  sustainable,  there  is  a  considerable  need  for  research,  innovation, 
investment in more environmentally friendly infrastructure, development of public transport, 
etc.  The  list  is  long  and  requires  sustained  effort  on  the  part  of  Member  States.  Moreover, 
substantial  funding  is  needed  in  order  to  develop  trans-European  networks,  in  particular  for 
those  projects  to  which  the  EU  has  given  priority.  The  revenue  generated  by  internalisation 
should also be earmarked for the transport sector and the reduction of external costs, always 
on the basis of cost-benefit studies or similar analyses which guarantee that the chosen uses 
maximise  the  net  benefits  to  society.  The  proposed  revision  of  Directive  1999/62/EC 
envisages just such an approach. 

EN 

8 

   EN 

 
5. 

NEXT STEPS  

The Commission is encouraging Member States to use the proposed common framework. A 
legislative  proposal  on  road  transport  is  being  put  forward  as  part  of  this  package  of 
initiatives.  

The Commission will carry out an evaluation of these measures in 2013 and draw up a report 
on  the  progress  made  towards  internalising  external  costs.  The  evaluation  of  external  costs 
will be updated to take account of research and scientific work in the field. If necessary and 
depending on how much progress has been made, other external costs such as those relating to 
biodiversity, nature and the countryside or land use may be included in the analysis. 

EN 

9 

   EN