It’s a truth universally acknowledged that private cars are massively subsidised. Indeed, cars are an object lesson in the consequences of under-pricing.
Because we don’t take account of the social costs of driving when we get behind the wheel, we drive too often, too far and in vehicles that are too large. Our cities sprawl, our roads are choked by congestion and public transport languishes for want of passengers.
All that’s pretty familiar stuff, yet despite the central role under-priced travel plays in shaping our cities, it’s astonishing how difficult it is to find reliable and objective data on the level of subsidy for cars.
The Bureau of Infrastructure, Transport and Regional Economics (BITRE) published figures last year showing expenditure on roads by all levels of government in 2008-09 was $15.8 billion. Revenue from charges and taxes levied on motorists (excluding GST) was $15.6 billion in the same year.
However this doesn’t take account of social costs. The topic appears to be so under-studied that the Victorian Competition and Efficiency Commission (VCEC) identified only one set of numbers in its 2006 report on traffic congestion. Those weren’t prepared by a technical expert but came from a submission made to VCEC by an advocacy group, the Public Transport Users Association (PTUA).
The PTUA says motorists cost the Australian community $42 billion annually in cash outlays and negative externalities. However they only pay $27 billion in taxes and charges, therefore requiring a net subsidy of $15 billion.
The PTUA counts costs like road construction, the value of land used by roads, traffic accidents, tax concessions for cars, pollution and emissions. On the payments side, the calculation counts fuel excise, GST, registration, insurance and tolls.
Unfortunately the PTUA provides little explanation for the assumptions used in its submission. VCEC makes it clear it has misgivings about the methodology adopted. I’m in any event a little cautious about the calculations of activist organisations of all colours.
Another source of data is a more recent study by one of Australia’s leading transport researchers, Dr Garry Glazebrook, from Sydney’s University of Technology, published in 2009. Although he doesn’t account for payments made by motorists, his work is especially valuable because he estimates the private and social cost of travel by both car and public transport.
His calculation of the private costs of car travel (in Sydney) comprises the cost of purchase plus running costs, including fuel, registration, insurance, servicing, tolls and paid parking. The external or social costs include traffic congestion, accidents, emissions, pollution, noise and unpaid parking.
He treats fares as a private cost of train and bus travel. He estimates the external costs from emissions and traffic congestion imposed by these modes (he says buses account for 10-15% of traffic congestion in Sydney), but the big social costs of public transport come from financial subsidies paid by the State Government to keep fares down.
As the exhibit shows, Dr Glazebrook finds the private costs of car travel are much higher than those of public transport, indicating travellers are prepared to pay a lot for the benefits of private transport.
More interestingly, he finds the social cost of all three modes – i.e. the sum of subsidies and negative externalities – is essentially the same at around $0.38 per passenger kilometre.
So cars are subsidised as much as public transport. There’s an important difference though, which explains why one subsidy gets more attention from governments than the other.
The subsidy for public transport is mostly a financial cost – it is funded direct from the current budget. Hence governments worry about it because they have to find the funds in the current term.
The subsidy for cars, however, is mostly an economic cost. The cost of externalities like congestion, pollution and emissions are diffuse and are mostly borne by the community at large. Even where these costs impact the budget – e.g. higher health costs from pollution – they mostly manifest years down the track and hence are of little interest to the current government.
Because they’re not paid out in cash at the time of the journey (like fares are), it’s hard for both politicians and the public to see the real costs cars impose on the community. Governments are accordingly less responsive to the need to take action.
In the past it could be argued there were practical difficulties to making motorists pay their real costs. However recent technological advances, especially in computing and communications, mean the failure to take action is now due more to political contraints than technical ones.
Dr Glazebrook ignores the taxes and charges drivers currently pay. That’s arguable in the case of the fuel excise because it’s the largest payment made by motorists and directly influences their perceived cost of travel. However it only adds around $0.04 per (vehicle) kilometre to the cost of driving – that’s modest in the context of a social cost of $0.38 per passenger kilometre.
So yes, we should reduce the level of subsidy for car travel. The politics of change however would be truly horrendous. For example, fully recovering that $0.38 per passenger kilometre social cost would theoretically require the price of petrol to rise by roughly $3.45 per litre. It wouldn’t need to be that big in practice because motorists would inevitably find ways to adapt – for example by shifting to vastly more fuel-efficient cars – but it would nevertheless be very painful.
A large increase in the cost of driving would inevitably drive up demand for public transport (in fact it’s an essential condition – whether the increase is in cash or time – to achieve significant increases in public transport’s share of travel). Finding ways of funding large-scale public transport improvements would be an extremely important goal for policy.