The slow road from rhetoric to reform: an analysis of road pricing policy in Australia

Economic Papers (Economic Society of Australia), March, 2004 by Richard Denniss, Clive Hamilton

This paper examines existing taxes, charges and related incentives that encourage either environmental protection or degradation in the road transport sector. Recent road transport policy initiatives are also analysed to determine their likely impact on overall car use and passenger car emissions. The paper concludes that economic theory has not influenced changes in transport policy in Australia in recent years.

Keywords: Environment, Road pricing policy, Taxation

JEL Codes: H3, Q2

1 Introduction

The structure of the tax system can play an important role in either promoting or discouraging sustainable road use patterns. If resources are to be used efficiently and the natural environment protected, an important first step is to ensure that the tax system does not provide either incentives to conduct environmentally damaging activities or disincentives to act in ways beneficial to the environment.

There is a large body of research on the desirability of 'green taxes' and effective natural resource pricing (BTCE, 1992; Levin, 1993; Gabbitas and Eldridge, 1998; Hamilton et al., 2000; Laird et al., 2001). In recent times, both the OECD and the IMF have signalled their support for the use of taxes and other economic instruments to improve environmental outcomes (OECD, 1992; OECD, 1995; Norregaard and Reppelin-Hill, 2000; Norregaard and Reppelin-Hill, 2001; World Bank, 1999; World Bank, 2000a; World Bank, 2000b). This paper examines existing taxes, charges and related incentives that encourage either environmental protection or degradation in the road transport sector. Recent road transport policy initiatives are also analysed to determine their likely impact on overall car use and passenger car emissions. The paper concludes that economic theory has not influenced changes in transport policy in Australia in recent years.

2 The Role of Economic Instruments

Market forces will generate efficient outcomes only when market conditions approximate the conditions of the competitive market model. A number of important environmental problems arise from simple market failures such as the existence of externalities, public goods and imperfect information. While policies can be designed to overcome these market failures, other environmental problems are caused by direct policy failure, such as granting of subsidies to activities that do harm to the natural environment.

There is a large body of research on the desirability of green taxes and effective natural resource pricing (for an overview see Hamilton, Schlegelmilch, Hoerner and Milne, 2000). In recent times, the OECD has signalled its support for the use of taxes and other economic instruments to improve environmental outcomes, as has the IMF. The IMF has published a large number of reports concerned with the desirability of relying on green taxes and other economic instruments to protect the environment (see Norregaard and Reppelin-Hill, 2000; Norregaard and Reppelin-Hill, 2001), as has the World Bank (see World Bank, 1999; 2000a; 2000b).

While taxes are an important source of revenue for governments, it is their capacity to influence the relative prices of different goods and services that makes them useful in increasing sustainability and improving allocative efficiency. That is, in a market system it is the relative prices that are used to signal relative scarcity to consumers. Market prices will perform the signalling function poorly when externalities are present.

It is important to stress that the reliance on taxes is by its very design not a 'win-win' approach to environmental reform. Some producers will face higher costs or consumers will pay higher prices after the introduction of a tax designed to overcome the existence of market failures. The existence of a small, well-defined, group of people who will lose out following the introduction of a particular reform is likely to result in opposition. As the beneficiaries of reform are likely to be more diffuse it is unlikely that supporters will be as vocal. The political difficulties of implementing reforms will be discussed below.

3 The Size of the Problem

A complete list of environmental pollutants from transport related emissions, along with a summary of their environmental impacts, can be found in BTCE (1995). Major environmental impacts include:

* air pollution, including emissions of carbon monoxide, nitrogen oxide and particulate pollution;

* greenhouse gas emissions;

* noise pollution;

* habitat and wildlife destruction; and

* water pollution and the cost of marine accidents.

A large body of research into the extent of some of the externalities that should be priced into the transport market has been conducted both in Australia and internationally (see for example Cobb, 1998; Inter-State Commission, 1990; BTCE, 1992; BTCE, 1996a; BTCE, 1996b; OECD, 1992).

Hamilton and Denniss (2000a) estimated the dollar values of some of the damage associated with transportation. Drawing on a range of Australian studies they arrived at the following estimates for the year 2000.