Time for roads to become part of the market economy

Politicians across the political spectrum are committed to cutting back carbon emissions to limit the damage of climate change. Today, the biggest area of disagreement is on how best to do it. Is it through markets or central planning?

The EU auctions off tradable permits to emit. In theory, this should allow market forces to find the most efficient way to cut back on pollution. In reality, few sectors are covered by the European Trading System. In most sectors, reducing emissions is up to each member state. The problem is that in sectors outside the scheme member states swap market forces for direct intervention.

Take my home country of Denmark for example. According to a newly released report, 38% of emission in non-ETS sectors in Denmark comes from transportation. Half of the emissions from transportation comes from passenger cars. It makes sense then to see cars a good starting point if we want to lower emission in the non-ETS sectors.

Besides polluting, cars are also noisy, cause congestion and wear and tear the roads. These are all negative externalities or, in other words, costs experienced by third parties. Externalities aren’t included in the price of consumption, so in order to have the consumer and producer take these into account and help limit the external costs encountered by third parties, countries try to put a price on the externality in one way or another. The principle being that you should pay for the cost you cause the rest of society. For example, in a world where externalities aren’t priced, the costs of driving are higher for the society than it is for the motorist. In other words, the motorist have no incentive to take the societal cost into account.

Neoliberals believe, rightly, that taxes shouldn't push morality. They shouldn't distort behaviour into what some think is arbitrarily right Instead, choices should be left to consumers provided they pay the full costs.

Denmark’s approach doesn’t take account of the actions of users but hits all purchasers straight away with high taxes–assuming negative behaviour later down the line. Danes pay a 150% registration tax of their cars and not less than three years ago, they were taxed at 180%. On top of that, there’s a six-monthly ownership tax of between roughly £55 and £2000 and of course VAT of 25%. Unsurprisingly, according to the report published by the Danish Economic Council, taxes on cars are too high. In fact, their calculations show that the taxation of petrol, diesel and electric cars are 120%, 70% and 50% percent higher than the external costs - shocker!

Taxes on passenger cars are therefore concentrated around the purchase and ownership of a car, which in itself doesn’t constitute a negative externality, and not around the externalities they produce. The taxes should therefore shifted to be as close to the source of the externality as possible. Since getting or owning a car is in itself not contributing to pollution or congestion, but the use of your car in peak hours on busy roads is, road pricing is preferable. With road pricing and taxes on fuel motorists can make an enlightened decision based on all the available information about the societal costs. Some will be willing to pay the price while others will find different alternatives. User fees will help cover the costs of maintenance and infrastructure.

As it stands, the focus is not on internalising the externalities. Instead, it has become a question of ideology and being able to say that the Liberal government actually got through with liberal policies instead of handling the real problems. They’ve ended up lowering one tax only to raise another (as it was done last time when the registration tax was lowered). Taxes should have a purpose, to reduce the external costs imposed on society, this approach doesn’t solve that.

Road prices would make people aware of the costs they impose on others. They would then use roads more efficiently. Finding just the right price is difficult, however. The congestion charge in London, for example, was way too low and the price uniform, which meant motorists weren’t nudged towards off-peak hours and routes. A more ideal road pricing scheme would look similar to that of Singapore where they differentiate between time and place. GPS technology, proliferation of smartphones and apps are making it easier and easier to solve the cost issue of road pricing.

There is a pressing need to find a better way of funding roads and cutting emissions. As electric cars become commonplace, fuel duty receipts will shrink. The case for scrapping taxes on purchase and ownership, cutting taxes on fuel and instating road pricing will become irresistible.

We've come a long way from the days of pure socialism on parts of the continent, when prices were ignored in favour of ideology. Yet some hangovers remain. It’s been proven time after time that prices are the best way of allocating scarce resources. When a resource is free to use, it becomes overused because the consumer has no incentive to economise. It’s therefore high time roads become a part of the market economy as well.