Internalisation of external transport costs

The internalisation of external costs forms part of a package of initiatives aimed at making transport more sustainable. It consists of including external transport costs (pollution, noise, congestion, etc.) in the price paid by the user, so as to encourage them to change their behaviour.

ACT

Communication from the Commission to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions of 8 July 2008 “Strategy for the internalisation of external costs” [COM(2008) 435 final – Not published in the Official Journal].

SUMMARY

Transport users have to pay the costs 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. Transport users also generate external costs, negative externalities (delays as a result of congestion, health problems caused by noise and air pollution, greenhouse gas emissions, etc.), which they do not bear directly and which have a cost to society as a whole. The sum of the private and external costs of transport gives its social cost.

Internalisation involves reflecting the external costs in the price of transport. However, only a price based on the total social costs will take account of the services used and the consumption of resources. The aim is to make users more aware of the costs they generate and to encourage them to change their behaviour in order to reduce them.

Instruments

The main economic instruments for internalising external costs are taxation, tolls and CO2 emissions trading. However, each external cost has specific characteristics which require the use of appropriate instruments. Some external costs relate to the use of infrastructure, vary according to time and place and are highly localised (congestion, noise, accidents and pollution). This justifies the use of differentiated charging which takes these variations into account. Other external costs, such as climate change, are global and a result of energy consumption. It is therefore more appropriate to use an instrument directly linked to that consumption, such as a fuel tax.

The Commission points out that ensuring that the internal market continues to function properly, a basic principle of the European Union (EU), is essential. Consequently, it must avoid overcharging as this could hamper freedom of movement. Fragmentation of the market must also be avoided. Setting common principles for all Member States, together with a monitoring system, should prevent any discrimination and ensure market transparency.

General principles for internalisation

The accepted general principle for the internalisation of external transport costs is “social marginal cost charging”. According to this approach, transport prices should correspond to the additional short-term cost generated by one extra person using the infrastructure. Charging based on the additional costs imposed on society would 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. The Commission proposes common principles and a common methodology for calculating the external costs of congestion, air pollution, noise and climate change.

As it would be difficult for one internalisation mechanism to be applicable to all forms of transport, the Commission anticipates that the same principle will be applied using different instruments.

Road haulage sector

The Commission proposes revising the “Eurovignette” Directive (see related acts) in order to enable internalisation of external costs. Furthermore, the Commission will propose an Intelligent Transport System Action Plan aimed at increasing the use of technology. Finally, the Commission is to adopt Decisions to implement interoperability of electronic toll systems, as provided for in Directive 2004/52/EC.

Urban mobility

Following the debate launched by the publication of the Green Paper on urban transport, the Commission will start to implement actions on sustainable urban mobility.

Passenger cars

A proposal on passenger car related taxes is under discussion. In particular, it provides for the restructuring of existing taxes in order to take CO2 emissions into account.

Rail transport

Directive 2001/14/EC already allows internalisation of external costs, under certain conditions. Moreover, the Commission has published a Communication on noise reduction measures (see related acts).

Air transport

The Commission put forward a proposal to include CO2 emissions from the aviation sector in the European Emissions Trading System (ETS) and is drawing up another proposal aimed at reducing nitrogen oxide (NOx) emissions. Finally, as part of the “airport package”, the Commission put forward a Directive on airport charges, which could include differentiated charging on the basis of environmental damage.

Maritime transport and inland waterways

The Commission may put forward a proposal to include the maritime sector in the ETS. With regard to inland waterways, the Commission points out that the internalisation of external costs could revitalise inland waterway transport, given the energy efficiency of this mode of transport.

Use of revenue

The Commission points out that there is a considerable need for funding to make transport sustainable (research, innovation, infrastructure, development of public transport, etc.). It believes that revenue generated by internalisation should be earmarked for the transport sector and the reduction of external costs.

RELATED ACTS

Communication from the Commission to the European Parliament and the Council of 8 July 2008 on “Greening Transport ” [COM(2008) 433 final – Not published in the Official Journal].

Communication from the Commission to the European Parliament and the Council of 8 July 2008 on “Rail noise abatement measures addressing the existing fleet” [COM(2008) 432 final – Not published in the Official Journal]. As part of measures to tackle noise pollution, the Commission is putting forward a proposal to launch a programme to reduce noise pollution generated by freight trains. In order to encourage railway undertakings to proceed with retrofitting wagons, the Commission considers putting in place noise-differentiated track access charges, in particular. In the course of the recast of Directive 2001/14/EC, the Commission will propose legal requirements for the implementation of such charges, following the principle that infrastructure charges can take account of the cost of the environmental impact of train operations.

Proposal for a Directive of the European Parliament and of the Council of 8 July 2008 amending Directive 1999/62/EC on the charging of heavy goods vehicles for the use of certain infrastructures [COM(2008) 436 final – Not published in the Official Journal]. The revision of the "Eurovignette" Directive should enable Member States to internalise costs related to pollution and congestion caused by heavy goods (external costs). They will also be able to integrate an amount which reflects the cost of air and noise pollution caused by traffic and the cost of congestion imposed upon other vehicles into tolls levied on heavy goods vehicles. The amounts will vary depending on the Euro emission category, the distance travelled, the location and time of use of roads. Member States must use the revenue gained in this way on projects related to developing sustainable transport. The charge must be collected through electronic systems which do not create hindrance to the free flow of traffic or local nuisance at tollbooths. Moreover, the scope of the Directive is intended to extend beyond the trans-European transport network.

Last updated: 23.10.2008