The London Congestion Charge Zone
The London Congestion Charge Zone

The Chair of Infrastructure Victoria, Jim Miller, put forward a strong case for congestion charging in The Age yesterday (Melbourne needs a user-pays scheme to beat traffic congestion – weirdly, Fairfax appears to have pulled it). I agree with most of what he says, but he doesn’t say much about one of the key objections; those least able to afford the charge would pay a higher proportion of their income to drive in congested conditions than those on higher incomes.

Traffic congestion is a way of rationing use of road space. But it’s an inefficient way to manage demand and leads to the never-ending demand for the construction of new motorways. Congestion charging is a better way; it would provide many benefits, like avoiding or deferring the need for new motorways and making public transport more competitive with cars. It’s a failure of management that demand isn’t rationed in line with available capacity.

But enthusiasm for the benefits must be tempered with an appreciation of the vertical equity effects; it’s especially important because many progressives have trouble with the idea of congestion charging for this reason. I’ve written about this before so it’s worthwhile revisiting that discussion in view of the current strong interest in charging for road space (see Is congestion pricing just too unfair? and Are equity concerns with congestion charging a deal breaker?). Here are some points to consider:

  • Travellers already face the same fares for trains, buses and trams irrespective of their income. All consumers already pay the same tariff for other essential services like water and power, irrespective of their income. There are innumerable government regulations that impose costs on citizens but don’t differentiate by income e.g. speeding fines, passport fees.
  • As with public transport concession fares and the Gillard government’s carbon tax, financial compensation can be provided for lower income motorists to offset the additional cost of charging. As a guide, note that the Grattan Institute calculated the poorest 20% of households could be directly compensated for indexation of the fuel excise if around 10% of the additional revenue raised were returned to them through the tax-transfer system (see What’s going on with indexation of the fuel excise?).
  • Congestion charging provides greater horizontal equity; those who cause the congestion pay for it. There are travellers at all income levels who make high-value trips from time to time (e.g. running late for child care pickup) and would appreciate the option of faster travel in uncongested conditions.
  • Travellers who don’t think their intended trip is worth the cost can in many cases shift their journey to off-peak periods when either the charge doesn’t apply or it’s much lower. Mr Miller says Infrastructure Victoria’s research shows that one in five car trips during the morning peak are not related to work or study.
  • When congestion charging is implemented as a city centre cordon as it is in London and Stockholm, travellers have the option of taking public transport instead of paying the charge. Radial public transport systems, even those in Australian cities, provide good services to the city centre.
  • With a whole-of-state implementation, the charge could be designed to replace existing standing costs like registration and fuel excise. These are not levied proportionally to income at present; nor does the registration fee reflect differences in kilometres of road use. Limiting aggregate revenue to existing streams is now pretty much the standard proposition for road pricing (see Is it time to get serious about road pricing?). 
  • Revenue over and above that used for compensation and/or to replace existing taxation streams, if any, could be applied to improving alternative forms of travel e.g. public transport, cycling. Users of road-based public transport like buses would benefit from faster and more reliable travel.

It’s bizarre that we have a flat charging structure for trains and electricity with concessions for eligible users, yet many oppose charging motorists for the use of road space. We wouldn’t stand for squandering other scarce resources like power or water, so we shouldn’t tolerate it with road space or parking either. That’s the logic of pricing carbon.

The most important point though is public policy shouldn’t be made based on evaluating the equity effects of a specific charge or tax in isolation. That’s what happened with restoration of indexation of the fuel excise; it led to the ridiculous situation where the Greens and Labor were effectively arguing for a reduction in the real price of petrol. The sensible approach is to evaluate equity outcomes at the level of the entire tax and transfer system.

Politicians don’t care about that of course so it’s imperative progressives take a more reasoned approach to congestion charging. There’s a contradiction in opposing new motorways while simultaneously failing to get serious about reducing the demand for them.