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Getting the Prices Right: Policy for More Sustainable Fuel Taxation for

Road Transport in Australia

Submission by the Bus Industry Confederationto the Commonwealth Fuel Tax Inquiry.

October, 2001

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Contents

Executive Summary 4

BIC 4EXTERNAL COSTS 4ROAD COSTS AND INFRASTRUCTURE 5AIR POLLUTION 6CLIMATE CHANGE 8NOISE 10ACCIDENTS 11INTERNALISING EXTERNAL COSTS 12

1. Context 16

1.1 INQUIRY TERMS OF REFERENCE 161.2 THE BUS INDUSTRY CONFEDERATION 161.3 BUS TRAVEL AND FUEL USE IN AUSTRALIA 181.4 SCOPE OF SUBMISSION 19

2. The External Impacts of Road Transport 21

2.1 THE CONCEPT OF EXTERNALITIES 212.2 EXTERNAL BENEFITS? 222.3 CRITERIA FOR SELECTING POLICY INSTRUMENTS 232.4 VALUATION OF EXTERNAL COSTS 25

3. Road Costs and Congestion Costs 26

3.1 TYPES OF COSTS 263.2 PAYGO (THE NRTC APPROACH) 273.3 THE MEYRICK APPROACH 283.4 CONGESTION 303.5 CONCLUSIONS ON ROAD COSTS AND CONGESTION 30

4. Air Pollution 35

4.1 CONTEXT 354.2 THE CHOICE OF POLLUTANTS AND IMPACTS 354.3 QUANTIFICATION AND VALUATION METHODOLOGY 364.4 QUANTIFYING AND VALUING EFFECTS 384.5 EMISSIONS 424.6 EXAMING AIR POLLUTION EFFECTS AND CHARGES 444.7 ALTERNATIVE FUELLED VEHICLES 51

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5. Climate Change 53

5.1 CONTEXT 535.2 EMISSIONS 535.3 PUTTING A COST ON GREENHOUSE GAS EMISSIONS 545.4 CHARGES PER LITRE 575.5 CONCLUSIONS ON CLIMATE CHANGE 61

6. Noise 63

6.1 BACKGROUND 636.2 QUANTIFICATION AND VALUATION 636.3 EXAMINING NOISE EFFECTS AND CHARGES 67

7. Accidents 69

7.1 ACCIDENT COSTS 697.2 POLICY INSTRUMENTS 71

8. Internalising the External Costs of Road Transport 73

8.1 OUR FINDINGS ON EXTERNAL COSTS 738.2 THE ECMT VIEW ON INTERNALISATION 748.3 INFRASTRUCTURE AND CONGESTION 748.4 AIR POLLUTION 758.5 CLIMATE CHANGE 778.6 NOISE 788.7 ACCIDENTS 798.8 BROAD MAGNITUDES 798.9 MARGINAL COSTS 808.10 BUDGET NEUTRALITY AND OTHER CONSTRAINTS 828.11 PRICING AND OTHER INCENTIVES FOR BEHAVIOUR CHANGE 828.12 EXCISE OR A ROAD CHARGE? 848.13 DAFGS/ENERGY GRANTS CREDITS 85

References 86

Attachment A: Fuel Taxation and the 2000 Olympics 89

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Executive Summary

BIC

The Bus Industry Confederation (BIC) is Australia’s peak organisation representing theinterests of the bus industry, encompassing bus operators, suppliers and associatedbusinesses. Its members carry about one billion passengers annually in Australia.

BIC has recently prepared a National Policy Statement, which argues that Australia’spresent personal travel systems need to change if they are to be sustainable long term.The central message of the Policy Statement is that Australia needs to build a publictransport culture if it is to develop more sustainable land transport systems.

BIC’s interest in making this submission is to see progress made in placing taxation(excise) on fuels used in transport, especially road transport, on a more logical economicand environmental basis. BIC believes this requires fuel taxation (or excise) regimesbeing replaced by fuel charging regimes that are formulated taking into account theexternal costs associated with use of different fuels in road transport.

External Costs

Economic theory recognises that, in a market economy, the existence of external costsand benefits creates a situation where the market decisions of individual consumers andproducers no longer add up to an outcome that provides maximum benefits to society.Market pricing on the basis of social costs, not private (or internal) costs, is a requisite formarket systems to produce efficient resource allocation outcomes.

The generally accepted means of bringing external costs and benefits to account is viagovernment intervention. In the transport sector, this is usually achieved by “commandand control” regulatory measures, such as vehicle standards (e.g. to deal with safetyconcerns and vehicle emission performance) and fuel standards (e.g. for emissionperformance). Pricing measures are gaining increased acceptance, especially in Europe.

The main transport external costs are the use-related costs of road damage, congestion,accidents and environmental damage, especially air pollution, noise and climate change(greenhouse gas emissions) and the major origin of these costs is road use. External costsassociated with upstream impacts from use of transport facilities (e.g. emissions fromrefining of the fuels used in transport) also need to be recognised, which is done throughlife cycle analysis.

The idea that there might be external benefits (positive externalities) from transport isgenerally discounted in reviews of externalities. The appropriate way to treat macro-economic impacts, that are suggestive of external benefits, is suggested by ECMT (1998,p. 21):

Because almost all external benefits are eventually processed by markets, no allowanceshould be made for them in the use of infrastructure. All benefits should, nevertheless, be

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accounted for in social cost-benefit analyses, such as those undertaken to determinewhether to build new infrastructure.

If external costs are to be internalised, there is a need for a means of valuing these costs.Choice of different valuation methods typically leads to different values. BIC believesthat, because it best reflects the individual preferences value judgement that underliesmost market operations and social cost-benefit analysis, values derived from thewillingness to pay approach should be used as far as possible in valuing external impactsof road transport.

Road Costs and Infrastructure

The current Australian set of road user charges (notionally) levy heavy vehicles a chargeof 20c/L for road use, plus annual registration fees that vary broadly with axleconfiguration. BIC accepts these charges, set through the National Road TransportCommission, as a reasonable starting point for charging for road use, at least for the nextfew years. The charges are cost-recovery charges, rather than charges to achieve themost efficient use of the existing road infrastructure. However, the work undertaken forthis submission suggests that the major policy directions needed to improve cost recoverywill also be important for improving the efficiency of resource use in road transport.

BIC believes that the charging system should be broadened into a more complete system.In particular, light vehicles should be brought into the charging net, attention should befocused on how to deal with congestion costs and all heavy vehicles should be expectedto pay their way, not just classes of vehicles.

A back-of-the-envelope calculation suggests that, within the NRTC charging framework,a fuel charge for light vehicles to recover infrastructure costs would be about 7.8c/L forpassenger cars and 12.6c/L for light commercial vehicles. These figures assume thatregistration revenue remains a relevant contribution to meeting some of the costsattributed to those light vehicles.

At the same time as light vehicles are added to the charging system, the NRTC shouldfocus on ways to refine the existing charging system for heavy vehicles. In particular,there should be a move away from charges based on averaging of distances and loadsacross vehicle classes to charges that more accurately reflect specific masses and traveldistances. This will help to correct some current anomalies with the NRTC’s chargingsystem, by bringing it closer to a marginal cost basis.

Congestion costs vary by time and place and are ideally suited to a charging system thatrecognises these temporal and spatial variations. However, because of the sheer scale ofcongestion costs (BTE estimates congestion costs are already at about $12-13 billion andwill reach $30 billion by 2015), to ignore them completely is not conducive to efficientresource allocation. This urban economic waste demands attention.

What is needed in the medium term is development of a general road pricing system thatbetter reflects the key cost-causal factors for road damage and congestion. In such asystem, the number of kilometres driven on each road type would be measured and a

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tariff per kilometre would be applied, differing by road type, vehicle type (where, forexample, factors such as vehicle weight and number of axles can be brought in) anddegree of congestion. A first step on this path may be the implementation of urban roadpricing systems in the largest cities, focusing on charging for use of the most congestedparts of the network via electronic metering.

BIC proposes that the Australian Transport Council (ATC) should direct the NRTCto investigate and report, by the end of 2002, on the most appropriate developmentpath for general road pricing systems in Australia. Congestion charging optionsshould be dealt with in this work, as one element in a more general road pricingsystem, which could replace the current NRTC system in the medium term. The ATC should also direct the NRTC to report on implementation of a mass-distance based charging system for heavy vehicles, to replace the current NRTCcharging system.

Until such time as congestion charging system can be developed and implemented,governmental support for urban public transport operation is a useful way to deal withcongestion costs.

BIC proposes that the Commonwealth Government show a lead in tackling theurban economic waste associated with road congestion by providing specific roadfunding for a program of public transport on-road priority. An annual program of$100 million nationally is proposed for a five year period, funded by a charge ofabout 1c/L on fuel consumed in capital cities.

At present, some heavy vehicles use fuels that are excise exempt. The logic ofinternalising external costs says that this exemption should disappear. Road use chargesshould be paid by all vehicles that use roads, in proportion to their estimated damagecosts. If particular fuels deliver additional benefits, these should be specifically identifiedand valued.

BIC proposes that all vehicles of a given type should be required to pay anappropriate road use charge that reflects the road damage attributable to their roaduse. This will bring light vehicles and excise-exempt vehicles into the charging net.

Air Pollution

Studies of air pollution episodes have shown that very high levels of ambient air pollutionare associated with strong increases in adverse health effects. Recent studies also revealsmaller increases in adverse health effects at the current levels of ambient air pollutiontypically present in urban areas.

It is now widely accepted that transport related emissions are associated with short-termhealth effects at the concentrations found in most cities. There is also a broad consensusthat the effects of these pollutants on health can be quantified using exposure-responserelationships based on epidemiological studies that link pollution concentrations or

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increments to levels of health effects. These health effects are usually valued usingwillingness to pay (WTP) estimates.

The results presented in this submission are based on values derived from a ‘bottom-up’approach, using the results of the European Commission’s ExternE project. This takesaccount of the effects of speed, location and technology, and allows a picture to be builtof the environmental costs of different vehicles, travelling on different roads, in differentlocations. It provides the necessary information to look at the environmental costs of thetransport sector at a high level of detail, examining the importance of differenttechnologies and fuels. This level of information is essential in examining fair andefficient transport pricing policies.

Within BIC’s submission it has not been possible to undertake separate analysis for therange of sites and locations needed to develop original Australian cost estimates. Insteadwe have drawn on very extensive analysis of different transport systems in Europe, andtransferred these values to Australia, taking into account local conditions, using unitpollution factors (costs per tonne) that are matched as far as possible to the Australiancontext.

BIC estimates that air pollution from motor vehicles in Australia costs about $4.3billion annually. These costs represent externalities and it would be appropriatethat they be levied on road users as charges, to make users more accountable for theimplications of their travel choices.

To fully capture air pollution effects would necessitate a complicated charging system,involving (for example) area access charging with differentials set on the basis of vehicletype/Euro standard, together with differing fuel charges dependent on emissionperformance. A more simplified approach along similar lines may be easier toimplement in the short term.

Vehicle emission standards and fuel quality standards are, and will remain, the majormeans of tackling air pollution, with in-service requirements also expected to play a rolein future. Pricing mechanisms can play a complementary role of ensuring that residualdamages costs are taken into account by road users and in influencing choices towardscleaner technologies.

BIC proposes that the Commonwealth Government should:• set an air pollution charge as part of the fuel price, with the charge being set to

reflect the latest emission control technology that is in widespread use (Euro 2);• base this fuel charge on the estimated external costs for each respective fuel in a

vehicle of this technology (with higher charges on any fuels with poorer emissionperformance and lower charges on cleaner fuels, reflecting fuel environmentalperformance);

• set the charge at a level that will be exceeded by the external costs of mostvehicle use, which we suggest should be a level that would apply in most smallercities and towns in Australia. Rural areas will be over-charged. A rebate onrural fuel sales could be used to offset this overcharging;

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• provide newer heavy duty (Euro 3) vehicles that meet tighter emission standardswith a registration discount reflecting their better emission performance. BICbelieves that this discount should be about $300 per annum for buses. Thisrebate would need to be paid to the States for them to pass on in lowerregistration charges. It should last for five years, then all external costs shouldbe re-assessed;

• provide a scrappage subsidy to accelerate the introduction of newer heavy dutyvehicles for urban operation. The subsidy should be set at $2000 per vehicle forpre-Euro 1 buses, the incentive to last for 5 years;

• after 5 years time, increase registration charges by $400 per year for Euro 0 orolder buses operating in larger urban areas and announce the intention toimpose this change well in advance.

BIC proposes that the base air pollution charge for 50 ppm sulfur diesel should beset at about 7c/L, with higher charges for diesel with a higher sulfur content, inaccord with the charging differentials included in Measures for a BetterEnvironment. Rural fuel use should be rebated this charge.

BIC has not estimated relevant registration discounts/penalties or scrappage subsidies fortrucks but the data developed for this presentation allows such estimates to be prepared.

The internalisation discussed above only deals with costs that apply in smaller urbanareas/cities. The air pollution costs from road transport will be higher in the largestcities. Systems for dealing with urban charging, and other policy measures, are brieflydiscussed in Chapter 3 of this submission. BIC emphasises that increases in buspatronage have the potential to reduce urban air pollution by avoiding additional car trips.This is especially important in congested urban areas (providing a “triple benefit” byreducing congestion costs, air pollution costs and greenhouse gas emissions). Theseprospective benefits should be recognized through pricing signals to users.

BIC believes there is a very strong argument for exempting urban public transportvehicles from any fuel charges that are levied on account of air pollution damage, asthese vehicles can generate benefits through ‘avoiding’ emissions from private caruse.

Climate Change

The effects of global climate change from greenhouse gas emissions are diverse andpotentially very large. They are likely to have very large economic costs, both fromadaptation (e.g. coastal protection costs) as well as damages to health and theenvironment.

Transport accounts for 16.1% of total national net greenhouse gas emissions in Australia,with road transport representing 90.2% of transport emissions (or 14.5% of total nationalemissions). Cars alone contribute 9.1% of national emissions. Road transport emissions

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in 1999 were 21.5% higher than in 1990. The road transport sector must thus be amajor focus of efforts to contain greenhouse gas emissions.

Australia’s bus industry is concerned about climate change and has made a majorcommitment to reducing greenhouse gas emissions.

The externalities of greenhouse gas emissions are ideally suited to recovery through fueltaxes (charges), as emissions are directly related to the energy and carbon content ofdifferent fuels. The most appropriate instrument is a carbon tax, rather than an energytax, as the former can be set to match the carbon emissions from combustion of a litre offuel.

The submission argues that, based on several pieces of evidence, a value of $A40/tonneappears to be the current optimal level for carbon taxation. It is stressed this value is onlyrelevant for the short-term; costs will increase dramatically in future years. The use ofthe value of A$40/tCO2 can be combined with emission rates to estimate relevant externalcosts per km. Converting these values to fuel volume gives a relevant charge level(carbon tax) of 10.7c/L of diesel, based on tailpipe emissions. This value is the sameirrespective of the type of vehicle using the fuel (with the exception of small fluctuationsfrom combustion efficiency).

BIC proposes that a ‘carbon tax’ be levied on road transport fuels to encourageimprovements in energy efficiency and reduce greenhouse gas emissions from fueluse. All fuels (conventional and alternative fuels) should be subject to duty levels seton the basis of carbon emitted.

It is argued by some that this should only happen in transport when it is also done in othersectors. BIC believes that there is a strong case for the transport sector to be at the frontline for a carbon tax, because of the significance of the sector as a source of greenhousegas emissions and the growth rate of sectoral emissions.

Introduction of the carbon tax (and other environmental damage charges asproposed in this submission) should be complemented by removal of the currentexcise on fuel, to contribute to revenue neutrality while providing improvedresource allocation signals to road users.

On the basis of relevant marginal damage costs, the best estimate of the appropriatecharge level is 10.7c/L for diesel (set on a value of $A40/tCO2). The relevant valuefor petrol is 9.1c/L, with 6c/L for LPG and 10.7c/kg for CNG. These values areapplicable for all vehicles in all areas.

Biofuels should not be subject to this charge level. However, for all fuels, someconsideration of upstream emissions needs to be included. Differences between fuelscould be passed on through charge differentials (based on the net greenhouse gasdifferences between fuels). This would have very little effect for most fuels, but wouldincrease the relevant charge level for biofuels.

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Until such time as a general system of carbon taxes is in place, biofuels should besubject to a charge level of about 5c/L on account of upstream greenhouse gasemissions, subject to confirmation by the CSIRO study on emission performance.

BIC notes that increases in bus patronage have the potential to reduce transport sectorgreenhouse gas emissions, while also contributing to lower air pollution levels andreduced congestion costs in urban areas. This needs to be recognised through betterpricing signals to users.

BIC concludes that public transport vehicles (buses) should be exempt from theproposed carbon charge, as a means of encouraging increased use.

The bus industry will continue to seek reductions in its own greenhouse gas emissions.The number of operators who have committed to the Greenhouse Challenge will beincreased and the industry will continue to promote programs to improve fuel efficiencyand otherwise reduce greenhouse gas emissions.

At the national level, the annual 16.5 billion litres of petrol and 6.4 billion litres of dieselconsumed would have an estimated damage cost of $A1.5 billion and $A0.7 billion(based on end-use emissions), totalling $A2.2 billion/year. The additional consumptionof CNG/LPG (1.9 billion litres) would increase this value slightly to around $A2.35billion.

Noise

Transport noise is a major nuisance and is widely recognised as a disbenefit affectingdaily life. It is estimated that nearly 40% of Australia’s population is exposed toundesirable traffic noise and a further 10% to excessive traffic noise (NRTC, 2001).Noise may also lead to a number of health impacts, through a variety of direct andindirect effects, although there is considerable debate on the reliability of the evidence. Transport noise arises from tyre contact and from vehicle engines, though there may alsobe noise from auxiliary systems such as compression brakes, refrigeration and from otherintermittent sources (e.g. loads) for heavy vehicles. At low speeds, engine and drive-trainnoise are dominant. At higher speeds (e.g. above 45 kph), tyre/road contact noisebecomes dominant and differences between engine noise are less important. There is insufficient information to compile a detailed updated value for Australian noiseamenity effects. To do so would require noise levels by road type, e.g. noise maps.However, it is possible to derive an approximate split by road vehicle type based on theestimates of unit values in the literature. Values have been calculated using the marginalcost estimates from Delucchi and Hsu (1998) based on the central, low and high valuesreported. This assumes that unit values are transferable (clearly a significantassumption). No damage has been attributed to non-urban areas and this willunderestimate noise damages slightly.

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While these figures include a very large number of assumptions, they indicate thatpotential noise costs might be between $A0.6 and $A1.9 billion/year. This indicates acentral estimate of around $A1.2 billion, with an average cost of about 7 cents/litre forurban vehicle use, with higher costs for heavy vehicles and lower costs for cars. Furtherwork is needed to investigate the reliability of these numbers. Setting relevant charges for noise is the most challenging task of all the externalitiesexamined. Fuel use has very little relevance to noise burdens, other than as a generalrepresentation of usage. To properly account for noise levels, a detailed electroniccharging system based on km travelled, by area, by time, and adjusted for vehicle typewould be needed. In the absence of such systems, most countries have adopted a command and controlapproach to noise. In areas where noise is being tackled (e.g. in Europe through the ECnoise directive), the focus has been on identifying the most cost-effective options fornoise reduction. This is thought to be the most efficient way to target noise problemareas.

BIC concludes that the average noise costs from urban road traffic are about 7c/L offuel consumed in urban road use. Costs from rural road use are minimal.BIC proposes that further research be undertaken on noise costs from road trafficand on the most cost-effective means of reducing these costs, in preparation for theimplementation of a targeted program to combat vehicular noise.

Accidents The Bureau of Transport Economics (2000) has estimated that road crashes cost Australia$15 billion in 1996. The estimate values fatalities on the human capital approach, atabout $1 million per life lost. If a willingness to pay basis had been used with a(conservative) WTP value of $2 million, the total cost would have increased to $19billion, according to BTE. If this was updated to 2000 values, the total would be about$21 billion. This is the total cost figure that BIC has used, although we believe that a stillhigher cost is appropriate, because $2 million is a very low WTP value by internationalstandards. Meyrick’s (1994) work and other work of which BIC is aware on accident costs suggeststhat the external cost component is about 20-35% of total costs. If a 25% figure isapplied to the estimate of $21 billion, a cost of about $5 billion results. BIC believes that road users should meet the costs of road safety measures that are due totheir road use. This could be achieved by:

• increasing the liability of a person causing an accident for the costs associated withthe accident;

• improving the structure of relevant insurances so that they are more closely linked tothe degree of accident risk; and,

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• developing a system of general road pricing, that would enable charges for road useto differentiate between roads on the basis of their safety performance. This is amatter for the future. In the meantime, if externality charges were to replace fuelexcise (as BIC believes they should), some inclusion within fuel charges of anallowance for the cost of accident reduction measures would be a move in the rightdirection. Such revenues could be designated (hypothecated) for road safetyinitiatives (e.g. blackspot programs).

If the three approaches are used and external costs start of the order of $5 billion, thenperhaps $1.5 billion could be recovered via an accident charge levied through fuel costs.This could be partly directed to road works, policing costs and related public measures toimprove road safety, such as driver education and awareness campaigns, although BIChas not sought to specifically cost these programs and, therefore, does not propose thelinkage. SMVU data suggests that a fuel charge of about 6c/L would be sufficient toraise this amount.

BIC has re-analysed some of the BTE (2000) accident data that allocates costs toparticular vehicle types (e.g. fatalities; vehicle damage). Using a conservative WTPvalue of $2 million per life lost, a revenue target of $1.5 billion and differing fuelconsumption rates by vehicle type from the Survey of Motor Vehicle Use, an indicativefuel charge of about 8c/L for petrol and 4c/L for diesel results. As with the noise costscalculated in Chapter 6, these figures involve substantial approximation.

BIC proposes that a fuel charge of 4c/L on diesel and 8c/L on petrol be imposed torecover part of the external costs of road accidents. BIC also proposes that theAustralian Transport Council initiate measures to increase the liability of thosecausing accidents for associated accident costs and to more closely align transportaccident insurances with relevant risk factors.BIC further proposes that BTE extend its recent accident cost research to produceexternal cost estimates by vehicle type, as a precursor to specific user charges.

One advantage of imposing this charge on fuel is that there is a link to distance travelled,which is one of the risk factors in road accidents. The charge does not seek to recover allthe external costs of road accidents, leaving the majority to be internalised by improvedinsurance arrangements and by changing the liability attached to road accidents toincrease responsibility to the person(s) causing the accident.

Internalising External Costs

Table 8.1 sets out summary measures of the external costs of road transport identified inthis report, in round terms. If one were pursuing a total cost recovery approach, thesum to be sought would be about $17.5 billion (with congestion costs being treated asinternal costs). If congestion costs were added, the total would be about $30 billion.Congestion costs are relevant to the efficiency of resource use in the road transport sectorbut not to overall sectoral cost-recovery.

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One can dispute the accuracy of particular figures in Table 8.1 but the overall message isclear. Table 8.1 strongly suggests that road users fall well short of meeting all theirexternal costs. The preceding sections of this summary have set out most of BIC’sproposals for internalising relevant costs, encompassing road expenditure, congestion, airpollution, climate change, noise and accidents.

Table 8.1: Total External Costs of Road Transport and Road-Related Revenues

Cost/Revenue Item Approximate Total Cost ($billion)COSTSRoad expenditure (source: NRTC)Congestion (source: BTE)Air pollution (source: BIC estimates)Climate change (source: BIC estimates)Noise (source: BIC estimates)Accidents (source: BIC estimates)TOTAL

REVENUESCommonwealth excise (source: Inquiry)Less Diesel Fuel Rebate (source: Inquiry)Less DAFGS (source: Inquiry)Registration feesTOTAL

4.6(12.8)

4.32.41.25

17.5(30.3)

12-2

-0.72.2

11.5

Source: BIC estimates.

Table 8.2 summarises BIC’s estimates of external costs for a range of common vehicletypes at Euro 2 standard (older vehicles would have higher air pollution costs, forexample). BIC emphasises again that these external cost estimates exclude congestioncosts for urban traffic. They are the costs we estimate are required for cost-recovery formajor vehicle types in urban and rural operation. The range of air pollution costestimates represents the variation from small to large urban areas.

Table 8.2: Proposed Fuel Based Externality Charges for a Range ofRoad Transport Vehicles (c/L; CNG = c/kg))

Cost Cars (petrol) Artic. Truck Buses #Component Urban Rural Urban Rural Urban Rural Urban CNGInfrastructure 8 8 20 20 20 20 16Congestion 0 0 0 0 0 0 0Air pollution 2 - 10 0 7 - 31 0 6 - 24 0 5 - 10Climate change 9 9 11 11 11 11 11Noise 7 0 7 0 7 0 7Accidents 8 8 4 4 4 4 4Total 34 - 42 25 49 - 73 35 48 - 66 # 35 # 43 – 48 c/kgNote: # BIC argues that buses should be exempt from air pollution, climate change and noise charges.Source: BIC estimates.

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Table 8.2, and the analysis in this report, suggests that, in addition to road users as awhole not meeting the full external costs of their road use:

• the current fuel excise is probably about right as a charge for internalising the externalcosts of urban road use by cars (ignoring congestion costs) but is too high in relationto rural road use by cars;

• the external costs of urban road use by heavy vehicles are higher than the currentexcise rate but rural external costs for these vehicles are probably similar to currentexcise rates.

To improve the cost-recovery rate from road transport in Australia, there areseveral key directions that need to be pursued (in addition to those proposed aboveby BIC):• charges for road use by urban trucks should increase;• charges for road use by rural cars and light vehicles should decrease;• encouragement should be given to use of urban public transport, as a means of

targeting (in particular) reduced congestion, improved air quality and lowergreenhouse gas emissions.

An indicative assessment of the marginal external costs of car use has also beenundertaken, which has also suggested some directions for improving the efficiency ofresource use in Australian road transport. From that analysis:

BIC concludes that measures to reduce urban congestion should be a high priority,towards improving the efficiency of resource use in urban road transport.Upgrading public transport can play a significant role in this regard. Lowering thetax level on rural car use again appears desirable, from an efficiency perspective.

In relation to urban buses, BIC has proposed exemptions from the proposed air pollutioncharge and carbon charge. To achieve early benefits from this proposal:

BIC proposes that buses in metropolitan areas should be given access to the DAFGSand its successor Energy Grants (Credits) program. This will assist in reducingtotal greenhouse gas and air pollution emissions from land transport.

The submission looks at its proposals in the light of the constraints imposed in theInquiry’s Terms of Reference. Given the extent of under-recovery of external costs ofroad transport, BIC considers that the constraint of no long term increase in real effectivediesel or petrol prices is not tenable: it will perpetuate economic waste and environmentaldegradation. We have formulated our proposals seeking to minimise the increases in realcharges (taxes) that we believe are needed, within a context of budget neutrality.

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Achieving Commonwealth budget neutrality, while improving road transportresource allocation efficiency and the sustainability of road transport systems, thusrequires, in particular:• raising an additional $100 million for funding on-road priority programs for

road-based public transport, through an urban fuel charge on car and truck use,above the current excise level;

• raising about $30 million p.a. to give urban buses access to DAFGS and itssuccessor Energy Grants (Credits) program;

• raising perhaps $10 million p.a. for registration rebates for the latest technologyheavy vehicles and scrappage subsidies for Pre-Euro 1 heavy vehicles;

• further increasing the fuel charges raised from urban heavy vehicles; and,• lowering the fuel charges on rural car use below the current excise rate.

BIC believes that a switch from excise to externalities as the basis forCommonwealth fuel charging, with some additional fixed charges and relatedmeasures, is desirable, even in a situation of budget neutrality.

BIC believes that those operators who are currently receiving benefits under theDAFGS program should continue to receive those benefits at the current rate, forthe time that was envisaged when they became entitled to the benefit. Futurerelative charges on all fuels under such programs should be based on their relativeenvironmental performance, including with respect to noise.

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1. Context

1.1 Inquiry Terms of Reference

The Australian Government has announced the establishment of a Fuel Taxation Inquiry,to examine the structure of fuel taxation in Australia. The Inquiry’s Terms of Referencespecify three key tasks, as outlined in the Issues Paper (18 August, 2001, p. 3):

1. to examine the total existing structure of Commonwealth and State fuel taxationand related rebates, subsidies and grants, including the proposed Energy Grants(Credits) Scheme;

2. to report on the implications of the existing arrangements for:- the economy, environment, the interplay between petroleum taxation and

petroleum pricing, cost structures and marketing arrangements;- options available to government to reduce or eliminate any adverse effects

of existing arrangements and to improve relevant administrationarrangements; and,

3. in making any recommendations, the Inquiry is:- bound by Government commitments to maintain the benefits of current

fuel rebates, subsidies and grants; not to consider long term real increasesin the effective level of diesel or petrol taxes; by the Government’s wish toachieve overall budget neutrality; and,

- to have regard to impacts on various sectors of the Australian community.

The Terms of Reference specify that the Inquiry (inter alia) “…will report on: (4a) theeffects on the efficient allocation of resources…; environmental outcomes…; (4c) theoptions available to reduce or eliminate any adverse effects (related to the above)…”.They also specify that the inquiry “…should have regard to the impact of existingarrangements and proposed changes on: …(5d) externalities associated with transport;(5e) The use of fuels that would deliver better air quality and contribute to greenhouseobjectives…”

1.2 The Bus Industry Confederation

The Bus Industry Confederation (BIC) is Australia’s peak organisation representing theinterests of the bus industry, encompassing bus operators, suppliers and associatedbusinesses. Its members carry about one billion passengers annually in Australia. BIC isrecognised as a leading proponent of growth in travel by public transport, as an effectiveway to reduce the economic, social and environmental costs associated with excessiveuse of the private car for personal and business travel.

BIC has recently prepared a National Policy Statement, which argues that Australia’spresent personal travel systems need to change if they are to be sustainable long term.The Policy Statement argues that Australians are becoming increasingly concerned about:

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• air pollution in our cities;

• problems of climate change associated with increasing greenhouse gas emissions;

• increases in the numbers of people killed on our roads;

• the economic waste associated with congestion costs; and,

• the problems of transport disadvantage faced by those with little or no access to aprivate car in a car-dependent society.

The Policy Statement then sets out BIC’s views on the most appropriate policies forimproving the sustainability of personal travel in Australia, in terms of:

• improved access and mobility;

• enhanced safety;

• better environmental outcomes; and,

• increased efficiency.

The central message of the Policy Statement is that Australia needs to build a publictransport culture if it is to develop more sustainable land transport systems. Policiesto this end are presented in the Statement. The present submission supports thosepolicies.

Fuel taxation plays an important role in influencing transport choices, at two levels.First, it influences choices that individuals make when choosing between private andpublic transport for personal travel (and influences choices which firms make for freighttransport), through the contribution that fuel taxes make to the total generalised travelcosts by respective modes. Second, it influences the choices that service providers makebetween alternative possible fuels for their vehicles, with consequential impacts in areassuch as air quality and greenhouse gas emissions. BIC is interested in both these mattersand will deal with both in this submission.

Fuel taxation is particularly important in the search for more sustainable land transportsystems, for two related reasons:

• first, fuel taxation is mainly raised from road transport, which is the major form ofland transport about which there are sustainability concerns; and,

• second, fuel taxes or charges form the most practical current policy instruments onwhich to build a system for internalising the external costs associated with roadtransport.

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BIC thus believes that the Fuel Tax Inquiry can play a major role in contributing todevelopment of more sustainable transport systems for Australia.

1.3 Bus Travel and Fuel Use in Australia1

The most recent ABS Survey of Motor Vehicle Use (ABS 2001) indicates that, in 2000:

• there were 55,400 buses in Australia;

• they travelled 1754 million vehicle kilometres, 1% of total kilometres travelled by allmotor vehicles in Australia in that year;

• the average bus travelled 31,700 kms a year, a little over twice the average distancetravelled by all motor vehicles;

• a total of 457 million litres of fuel was consumed by buses, or 2% of all fuelconsumed by motor vehicles in the year; and,

• average fuel consumption by buses was 26.0L/100 kms, almost twice the rate for allmotor vehicles of 13.8L/100 kms.

Figure 1.1 shows the distribution of bus fuel use between the major types of fuel, dieselaccounting for well over 90% of total fuel use. If an excise rate of 38c/l is applied to thebus petrol and diesel consumption levels estimated in the SMVU, total excise of about$170 million from bus use is implied. However, the eligibility of some buses for theDiesel and Alternative Fuels Grant would lower this total level of excise collection frombuses2. Total Australian excise collections in 2001-02 from petrol and diesel areestimated at $12 billion in the Commonwealth Budget (Inquiry Issues paper, Table 5.3).

1 The ABS Survey of Motor Vehicle Use defines a bus as a motor vehicle constructed for the carriage ofpassengers. All motor vehicles with ten or more seats, including the driver’s seat, are included. Theindustry definition usually begins at 12 seats plus the driver. The data presented in this section is derivedfrom the ABS SMVU and thus uses the 10 seats cut-off.2 In broad terms, buses travelling outside the major metropolitan areas are eligible for DAFGS. Only petroland diesel use has been included in the estimate of $170 million excise collection from buses, since CNG isexcise exempt and other alternative fuels are used in only minor quantities by buses.

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Source: Derived from data in ABS (2001).

1.4 Scope of Submission

BIC’s interest in making this submission is to see progress made in placing taxation(excise) on fuels used in transport, especially road transport, on a more logical economicand environmental basis. Data in the Issues Paper (e.g. p.22) emphasises that excise onroad transport is by far the major major revenue source for fuel taxation in Australia.

More specifically, BIC believes that fuel taxation regimes should be replaced by fuelcharging regimes that are formulated taking into account the external costsassociated with use of different fuels in road transport. The Issues Paper touches onthe matter of external costs at many places, such as on pages 8-9 when it notes:

The market should also ensure that prices charged for goods and services reflect theirvalue to consumers… The Inquiry welcomes comments on the extent to which thecommunity considers that fuel taxes are an appropriate mechanism to address thespillover costs of fuel use, or whether these costs should be addressed by other policyinstruments.

The submission analyses a range of external impacts of road transport and placesmonetary values on these impacts, to express them as economic impacts. To do this, itdraws on the latest international research, which has been assembled for the submissionby BIC consultants, AEA Technology Environment plc, from the UK. AEA Technologyhas completed many studies on the costs (particularly economic and environmental) offuel cycles, both in transport and in electricity generation and use, for the EuropeanCommission and for individual EU governments, such as the British Government.

Chapter 2 of the submission identifies the main external impacts (costs and benefits)associated with road transport and summarises the economic arguments supportinginternalising such external costs/benefits, such that consumers take them into account in

Fig. 1.1: Fuel Use by Australian Buses, 2000

Diesel (93%)

Petrol (5%)

LPG/CNG/Dual Fuel (2%)

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some way in making purchasing choices. It also presents criteria that can be used tochoose between alternative policy instruments to internalise external costs.

Chapter 3 begins discussion of specific external impacts of road transport, focusing onroad damage and congestion costs. Chapter 4 deals with air pollution and 5 considersgreenhouse gas emissions and climate change. Noise costs are considered in chapter 6and accident costs in chapter 7.

Having reviewed and analysed this range of external impacts, the submission moves inchapter 8 to bringing the impacts together, to identify the magnitude of the task involvedin internalisation. It proposes ways of internalising the external impacts, highlighting therole that fuel taxation (excise) might play. More specifically, the submission argues forspecific environmental damage charges to replace excise, where specific damagecosts are identifiable and reasonably measurable in money terms. It also deals withissues such as budget neutrality.

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2. The External Impacts of Road Transport

2.1 The Concept of Externalities

The European Commission’s Green paper (COM(95)691), Towards Fair and EfficientPricing in Transport: Policy Options for Internalising the External Costs of Transport inthe European Union, describes “transport externalities” as follows (p.4):

Transport externalities refer to a situation in which a transport user either does not payfor the full costs (e.g. including the environmental, congestion or accident costs) ofhis/her transport activity or does not receive the full benefits from it.

Externalities typically arise when the well-being of an individual or group is affected bythe activities of others who ignore this “spillover” when taking their decisions. If atransport user pays a cost, it is an internal cost. If a third party incurs the cost, it is anexternal cost. The sum of internal (or private) and external costs is known as “socialcosts”.

Economic theory recognises that, in a market economy, the existence of external costsand benefits creates a situation where the market decisions of individual consumers andproducers no longer add up to an outcome that provides maximum benefits to society.Market pricing on the basis of social costs, not private (or internal) costs, is a requisite formarket systems to produce efficient resource allocation outcomes.

The economic decision rule for welfare maximisation from consumption of particulargoods/services is to set output levels at the point where the marginal social costs3 andmarginal private benefits from the good/service under consideration are equal (assumingtotal net benefits are positive). Failure to price resources at their marginal social costsresults in waste, characterised in transport (for example) by traffic congestion and airpollution.

The generally accepted means of bringing external costs and benefits to account is viagovernment intervention. In the transport sector, this is usually achieved by “commandand control” regulatory measures, such as vehicle standards (e.g. to deal with safetyconcerns and vehicle emission performance) and fuel standards (e.g. for emissionperformance). Pricing measures are gaining increased acceptance in places such asEurope, for reasons such as of their capacity to be more finely tuned.

Pricing approaches generally seek to internalise external costs by ensuring that eachtransport user pays the full social (i.e. private, environmental and other) costs associatedwith each individual trip and therefore has an incentive to reduce the underlying problemthat is causing the external costs. This requires means of identifying and measuring theimpact of the costs in question.

3 Marginal social costs are the additional costs, private and external, of providing one extra unit of a goodor service.

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On the basis of a large number of studies around the world, the main transport externalcosts are the use-related costs of road damage, congestion, accidents and environmentaldamage, especially air pollution, noise and climate change (greenhouse gas emissions)and the major origin of these costs is road use. The existence of external costs associatedwith the provision of transport infrastructure also needs to be recognised but is normallyexcluded from detailed analysis of transport externalities on the grounds that these arematters to be dealt with and minimised in detailed project design. External costsassociated with upstream impacts from use of transport facilities (e.g. emissions fromrefining of the fuels used in transport) also need to be recognised, which is done throughlife cycle analysis.

There are also external costs associated with use of fixed track public transport (i.e. tramsand trains). In particular, greenhouse gas emissions associated with upstream electricitygeneration for these modes needs to be recognised. Trams also contribute to trafficcongestion when sharing arterial roads with other traffic. Accidents and noise also haveexternal cost dimensions for trams and trains. However, trams are only a significanttransport mode in Melbourne and trains only play a minor transport role compared toroad traffic, for both person and freight movement. BIC’s view is that the most urgentrequirement is to sort out externalities in the road transport sector, where the majorproblems exist. This submission thus concentrates on road transport, which includesbuses, as well as cars and trucks.

2.2 External Benefits?

The idea that there might be external benefits (positive externalities) from transport,benefits that justify government intervention, is generally discounted in reviews ofexternalities. For example, the European Conference of Ministers of Transport (ECMT,1998) has acknowledged that transport generates large external benefits but that most ofthese are eventually captured by market processes, either directly (e.g. time savings) orindirectly (e.g. regional development impacts).

Some macro-economic analyses of major road upgrading projects have indicated thatuser benefits are an insufficient indicator of total economic benefits from the upgrading.For example, the Scoresby Transport Corridor Environmental Effects Statementestimated direct user benefits from the project, including benefits projected to accrue tobusiness. These business benefits were then fed into the National Institute of Economicand Industry Research’s IMP model, as input cost savings, with consequential benefits togrowth in GDP being estimated. The resulting macro-economic benefits were estimatedby NIEIR to be of the order of 2.5 times the value of the direct business benefits, inpresent value terms (Sinclair Knight Merz et. al, June 1998, Section 9.4).

The appropriate way to treat the macro-economic impacts in question is suggested byECMT (1998, p. 21):

Because almost all external benefits are eventually processed by markets, no allowanceshould be made for them in the use of infrastructure. All benefits should, nevertheless, beaccounted for in social cost-benefit analyses, such as those undertaken to determinewhether to build new infrastructure.

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This submission, therefore, does not dwell any longer on external benefits from roadtransport, believing them to be not relevant to questions about the appropriate prices tooptimise use of resources in road transport.

This leads to an important distinction: between decisions whether to build or expandinfrastructure and decisions about pricing to achieve the maximum value from use ofexisting infrastructure. Social cost-benefit analysis is an appropriate tool to use forassessing build/expand questions on infrastructure. Marginal costs (including externalcosts) and benefits are relevant to the question of pricing of existing infrastructure (e.g. tomaximise the benefits from the use thereof). Chapter 3 deals briefly with the funding(financial) problem that arises when marginal cost pricing does not generate sufficientrevenue to fully recover the costs of infrastructure provision.

2.3 Criteria for Selecting Policy Instruments

There will usually be a choice of possible policy instruments available with which to seekto internalise the external costs of road transport. Figure 2.1 summarises a range of suchinstruments, as presented by ECMT (1998).

BIC believes the following criteria are relevant to choosing between availablealternatives:

• effectiveness in improving the efficiency of resource allocation;

• low costs of administration;

• high levels of compliance;

• distributional equity (or fairness), among social groups and between parts of thecountry;

• transparency;

• synergy with existing instruments and continuity with existing frameworks;

• legal compatibility;

• political acceptability;

• able to be implemented within a reasonable time frame.

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Figure 2.1: Typology of instruments for internalising external effects

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2.4 Valuation of External Costs

If external costs are to be brought into the decision calculus in transport resourceallocation, how should these costs be valued? ECMT (1998, pp. 49-50) summarises thefour main methods that have been used4:

• the revealed preference approach, which is based on willingness to pay (WTP) and istherefore consistent with the fundamental value judgement that underlies most socialcost-benefit analysis. This approach infers values for environmental goods (forexample) from observed or stated behaviour of individuals with respect to the goodsin question;

• the resource approach, which values externalities from replacement or repair costsafter damage has occurred;

• the avoidance cost approach, which values a cost at the cost of the actions needed toprevent the cost arising (e.g. the cost of reaching a given CO2 reduction target overtime); and,

• the risk approach, which uses the cost of risk management strategies as a proxy forexternal costs.

Choice of different valuation methods typically leads to different values. BIC believesthat, because it reflects the individual preferences value judgement better than thealternative approaches, values derived from the willingness to pay approach should beused as far as possible in valuing external impacts of road transport5.

4 ECMT (1998), Annex A, presents a detailed outline of the four approaches with relevant examples.

5 Techniques like social cost benefit analysis are firmly grounded in this value judgement, as pointed out byNash, Pearce and Stanley (1974).

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3. Road Costs and Congestion Costs

3.1 Types of Costs

Whereas many areas of public infrastructure provision have been privatised in recentyears (e.g. electricity, gas, telecommunications, ports, rail and tram services in Victoria),roads remain largely (though not entirely) a matter for public sector provision andmanagement. If resource allocation efficiency is to be achieved, however, the way roaduse is priced and the way decisions about infrastructure provision are made are importantquestions. The absence of specific road user charges for particular trips means that roadcosts are essentially external costs. Identifying and charging for such road costs isperhaps the most direct cost of road use that requires attention in considering externalitycharging.

Road costs are normally categorised into two main types:

• capital costs = the cost for provision of assets (infrastructure), such as roads. Forcapital costs it is important to distinguish between annual expenditure on roads andannual capital cost, which is a measure of the annual consumption of the asset base,including a return on that asset base. The capital cost approach is preferred inprinciple, as a measure of the opportunity cost of the resources involved;

• operating and maintenance costs = costs incurred each year to sustain the value ofthe asset base, such as periodical maintenance expenditures on roads. Some of thesecosts vary with traffic volumes, others may depend more on such things as weatherconditions.

Congestion costs are also frequently noted as a road cost, being essentially a costassociated with excessive road use relative to capacity, such that the marginal privatebenefits from road use are less than the marginal social costs. Congestion costs for roadtraffic are measured as the increase in the total amount of road user costs as an additionaluser joins the traffic stream. These costs are internal to road users as a group but externalto the individual road user.

There are several major ways in which these types of costs have been taken into account,or could be taken into account, in deriving charges for road use. A 1980 AustralianDepartment of Transport workshop on Transport Pricing and Cost Recovery summarisedpricing guidelines for infrastructure such as roads as follows (DOT 1980, p. 151)6:

1. Prices should not fall below marginal cost levels, and should equal those cost levelsunless the second or third principles below indicate otherwise.

2. When there is a shortage of capacity (e.g. at times of peak demand) prices should beraised to higher levels to clear markets.

6 Department of Transport (1980), Transport Pricing and Cost Recovery Seminar, Papers and Proceedings,Canberra, 17-18 July, 1979, AGPS.

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3. To the extent that prices determined by the first two principles do not generateenough revenue to meet the cost recovery target, discriminatory pricing should beemployed – with higher charges for those users who are least deterred by a higherprice.

These points start with the principle (1) for efficient resource allocation, that pricesshould equal marginal costs. However, there are two concepts of marginal costs intransport:

1. short run marginal cost is the social cost of an additional trip at the current level ofinfrastructure provision. This concept is most relevant to the question of obtainingthe most efficient use of existing infrastructure. Congestion costs are relevant tothese costs;

2. long run marginal cost is the cost of an additional trip, allowing for infrastructureprovision to be optimally adjusted to the level of demand (which is usually calculatedin an averaged manner, allowing for lumpiness in infrastructure supply). Thisconcept is most relevant to questions of infrastructure capacity over time.

The marginal cost pricing perspective is concerned with the economic efficiency ofresource use. The full cost recovery perspective has a more financial focus and hasrelevance to comparisons with other sectors, where full cost recovery is usually a pre-condition for survival! Two-part tariffs are a common response to reconciling theconflicting pressures of marginal social cost pricing (for efficient resource allocation) andfully allocated cost pricing (for full cost recovery), if MSC pricing does not generateenough revenue for full cost recovery (as indicated in pricing principle 3 above).

In a two-part tariff, a variable component may be used to approximate marginal costs anda fixed component to achieve a target level of cost recovery. In the road transport sector,the variable component may be a fuel charge and the fixed component an annualregistration charge. From an economic perspective, a fixed tariff is inferior to the kind ofprice discrimination indicated in pricing principle 3 above, although practicalityfrequently leads to the simpler fixed part approach.

The following sections of the report present a summary of the way some pricing/costingstudies of the Australian road transport sector have gone about putting magnitudes onsome of these cost concepts.

3.2 PAYGO (The NRTC Approach)

With respect to the issue of capital costs, valuing the asset base tied up in roads is acomplex task. This complexity has led many analysts to prefer the much simpler annualexpenditure approach to costing road infrastructure (see, for example, ECMT 1998, p.219).

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In Australia, the annual expenditure (or Pay As You GO) approach has been used by theNational Road Transport Commission for setting charges for road use by heavy vehicles(above 4.5 tonnes GVM). The NRTC’s heavy vehicle charging determinations arederived using an expenditure allocation process that depends on road expenditure, roaduse and various expenditure allocation parameters. Different measures of road use areused to allocate (13) different types of road expenditure between vehicle types,depending on what drives the expenditure level for each type of road work. The Commission uses a two-part charging structure:

• a road use charge is estimated, being that level of fuel excise per litre that willachieve full cost recovery for the lighter of the heavy vehicles, when those vehiclesalso pay a fixed (registration) charge that is about equal to that paid by vehicles withGVM just under 4.5 tonnes (light vehicles). The Commission’s initial determinationin 1992 set this road use charge at 18c/L of diesel (being a component of the fuelexcise rate, notionally charged for road use), which was increased to 20c/L in 1999;

• a fixed charge (registration) to achieve full cost recovery for the heavier vehicles, thecharge being largely a function of axle configuration.

In estimating its charges for 1999, the Commission excluded local road expenditure thatwas regarded as being for local access purposes only7. The total allocated roadexpenditure was $4.57 billion, of which $1.39 billion was allocated to heavy vehicles and$3.18 billion to light vehicles. Within the $1.39 billion allocated to heavy vehicles, $1.18billion was regarded as separable (attributable to specific classes of heavy vehicles) and$210 million was non-separable (not attributable to specific classes of heavy vehicles).Around 70% of total costs of $4.57 billion were allocated to light vehicles, with only15% of this varying with road use. Thus, $2.5 billion of the $3.18 billion allocated tolight vehicles was seen as non-separable.

The costs the Commission regards as separable might perhaps be thought of as a roughestimate of long run marginal costs with respect to classes of vehicles, although they arenot specifically estimated as such. Instead, they are a derivation from a causal analysis ofthe drivers of particular categories of road expenditure. The non-separables, which areabout two-thirds of total costs, are the residual amount that needs to be met to achievefull cost recovery.

3.3 The Meyrick Approach

Steve Meyrick, in work with John Cox for the Business Council of Australia, was criticalof the PAYGO approach, for two main reasons (Meyrick 1994, p. 244):

• first, from a resource allocation perspective, the PAYGO target is meaningless,bearing no consistent or predictable relationship to either the resources that have beenconsumed in providing the current stock of road track or those that will be required to

7 NRTC (1999), Updating Heavy Vehicle Charges: Regulatory Impact Statement, November. See,especially, Table 1.2

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provide an efficient network for the future. It cannot therefore provide useful pricesignals for demand management; and,

• second, as a pure cost recovery tool, it places no pressure on road authorities toimprove productivity or investment planning. All expenditure is recovered,irrespective of its economic merit.

As noted previously, however, the annual expenditure or PAYGO approach is inwidespread use because it is easy to understand and applies at least a minimum offinancial discipline in cost recovery.

As an alternative approach, Meyrick (1994) pursues a short run marginal costingapproach to charging for road use, using NRTC data to derive a rough estimate of theshort run marginal costs associated with Australian road use (i.e. short run road damagecosts). He estimated these costs at about $700 million, or about half the amount theCommission estimated as separable costs.

Meyrick then estimated congestion costs at $4.9 billion. Adding this to his estimate ofshort run road damage costs gave potential revenue from a short run marginal cost roadpricing scheme of about $5.6 million, more than sufficient to fully recover roadexpenditures (i.e. in excess of the PAYGO total). While full cost recovery of annual roadexpenditure was not the aim of his analysis, he showed that a short run marginal costpricing system, that included congestion pricing, would probably generate enoughrevenue to fully recover annual road expenditures. It would do this with about 85% ofrevenue needs being raised via congestion charges (levied on a vkt basis) and 15% bymarginal road damage charges.

Meyrick estimated that recovering these costs would require a 25c/L levy for petrol and a15.5c/L levy on diesel, in conjunction with specific annual charges, if nationally uniformcharges were to be adopted. The petrol levy was based on fully recovering the portion ofthe congestion charge and short run maintenance costs that were attributed to lightvehicles, while the diesel levy was to do the same for heavy vehicles.

The charges noted above would more than fully recover the annual expenditure level onroads in Australia. Meyrick also undertook an analysis in which short run marginal costsand congestion costs were recovered but only to the level of road expenditure current atthe time. That analysis led to an implied petrol levy of 20.5c/L and diesel levy of13.5c/L. This can be compared with the NRTC (notional) road use charge at the time of18c/L for diesel (and no notional charge for petrol because light vehicles are outside theNRTC’s charging brief).

By focussing on short run marginal costs, including congestion costs and bringing lightvehicles into the charging calculus, the Meyrick analysis had the effect of lowering boththe diesel levy and fixed charges for heavy vehicles compared to the NRTC’s analysis.Light vehicles pick up a significant share of the total costs because of the use of vehiclekilometres of travel as the means of attributing congestion costs. Passenger car unitkilometres (PCU kms) would have attributed a larger proportion to heavy vehicles than

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vkt but the general direction of the outcome is unlikely to have been different (i.e.lowering the costs attributed to heavy vehicles compared to the NRTC analysis).

3.4 Congestion

Meyrick’s analysis includes estimates of congestion costs8. Total congestion costs wereestimated at $4.9b and the analysis suggests that the optimal externality charge for urbanroad congestion in 1992 would have been about 7.6c/km, levied on all urban road use(with differing amounts for different vehicles, perhaps based on their passenger car unitequivalences). This optimal externality charge is estimated based on the differencebetween the marginal social cost per kilometre of travel and the cost actually incurred bythe individual road user: it is thus the “external” component of congestion costs, from theperspective of the individual user. A charge at this level applied in a city like Melbourneor Sydney would have raised about $2 billion, which is about the same order as otherswere estimating for total congestion costs in these cities at the time.

Stanley and Ogden (1993), in an unpublished consulting report for Vicroads, usedVicRoads traffic models to estimate congestion costs in different parts of Melbourne.This modeling produced estimates that ranged from zero in the off-peak in fringe areas towell over $1/km in the more congested parts of the city at peak times, with an “average”marginal congestion cost of 5.9c/km across Melbourne as a whole.

BTCE (1996) 9also modeled peak period congestion in Melbourne. That work suggestedthat an economically efficient charge would be about $1.26 per kilometre travelled inparts of the central area, falling to less than 13c/km only 9 kms from the CBD. A peakhour trip from Frankston to the CBD would have incurred congestion charges of about$5. The BTCE work found that peak congestion charges in Sydney would have beenabout 75c/km but high charges would have applied over a wider inner area than inMelbourne. More recently, the BTE has estimated total congestion costs in Australia at$12.8 billion.

3.5 Conclusions on Road Costs and Congestion

The current Australian set of road user charges (notionally) levy heavy vehicles a chargeof 20c/L for road use, plus annual registration fees that vary broadly with axleconfiguration, to improve the alignment of charges with road damage by vehicle class.While it is generally acknowledged that fuel consumption is not perfectly related tomarginal infrastructure costs, Meyrick (1994) argues that there is not much to be gainedin a resource allocation efficiency sense by playing with the overall NRTC’s charges,such as to bring them more into line with charges based on (say) short run marginal costs.This type of approach has been supported by the European Conference of Ministers of

8 Our submission resists the temptation to include the standard economists’ diagrammatic exposition ofcongestion costs, believing that the Inquiry is already quite familiar with this exposition.9 BTCE (1996), Traffic Congestion and Road User Charges in Australian Cities, Report 92, AGPS,Canberra.

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Transport (ECMT, 1994, p. 85) as a practical way forward in the absence of more finelytuned policy instruments.

The NRTC charging system has taken years to achieve acceptance and, while it is notperfect, it is widely accepted as a fair means of distributing the costs of road worksattributable to heavy vehicles. Fuel costs have some relationship to the road damagecosts of heavy vehicles and fixed charges are used to improve the degree of cost recoveryby individual vehicle classes in the NRTC charging system. That system does tend toundercharge the heavier vehicles that travel longer distances and overcharge lightervehicles travelling shorter distances but the system has gained some degree of credibilityand acceptance, which makes it a practical base from which to move for the next fewyears, at least. The NRTC charges are cost-recovery charges, rather than charges to achieve the mostefficient use of the existing road infrastructure. However, the work undertaken for thissubmission suggests that the major policy directions needed to improve cost recovery willalso be important for improving the efficiency of resource use in road transport.

If one accepts the NRTC approach as a reasonable starting point, at least for the next fewyears, this should be broadened into a more complete charging system. In particular,light vehicles should be brought into the charging net, attention should be focused onhow to deal with congestion costs and all heavy vehicles should be expected to pay theirway, not just classes of vehicles.

Meyrick’s analysis suggests that, based on short run marginal cost pricing, fuel chargesfor infrastructure cost-recovery from light vehicles would be low but congestion chargeswould be substantial. A back-of-the-envelope calculation suggests that, within thePAYGO cost-recovery framework, a fuel charge for light vehicles to recoverinfrastructure costs would be about 7.8c/L for passenger cars and 12.6c/L for lightcommercial vehicles. These figures assume that registration revenue remains a relevantcontribution to meeting some of the PAYGO costs attributed to light vehicles. Thecalculated fuel charges are the outcome of the following calculation:

NRTC costs allocated to cars = $2597 million; $648m to light commercials (ref NRTC1999, Table 1.5)Vehicle kms = 134,261 mkms cars; 24,958 mkms light commercials (SMVU)Numbers = 9.724 m cars; 1.676 light commercials (SMVU)Fuel consumed by cars (1998) = 15,825mL; light commercials = 3283mL (SMVU)Assume $140 registration fees/vehicle = $1361m from cars; $235 m from lightcommercialsLeaves $1236 million to be recovered from cars; $413m from light commercialsAt the fuel economy rate implied by the SMVU figures, this equates to a fuel charge of7.8c/L for cars; 12.6c/L for light commercials.

At the same time as light vehicles are added to the charging system, the NRTC shouldfocus on ways to refine the existing charging system for heavy vehicles. In particular,there should be a move away from charges based on averaging of distances and loadsacross vehicle classes to charges that more accurately reflect specific masses and travel

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distances. This will help to correct some current anomalies with the NRTC’s chargingsystem, by bringing it closer to a marginal cost basis. The PAYGO system was initiallyintended to be used by the Commission only until such times as a more refined systemcould be developed. Now is the time to develop and deliver the improved system.

Congestion costs vary by time and place and are ideally suited to a charging system thatrecognises these temporal and spatial variations. However, because of the sheer scale ofcongestion costs (BTE estimates congestion costs are already at about $12-13 billion andwill reach $30 billion by 2015), to ignore them completely is not conducive to efficientresource allocation. This urban economic waste demands attention.

The UK is moving towards implementation of congestion charging systems. Thelegislative base has been put in place, in Part III of the Transport Act, for local authoritiesto implement a charging scheme. Several towns/cities are moving in this direction (e.g.London, Nottingham, Bristol).

Technologies are available to facilitate implementation of congestion pricing systems.Politics remains the key hurdle. It seems generally agreed that if the revenue raised fromcongestion charging is used to partly improve road conditions (e.g. selectively upgradecapacity), partly lower other charges on road users (e.g. registration charges), partlyencourage use of cleaner modes and partly reduce specific environmental damage of roadtransport, the prospects for successful introduction will be enhanced.

Australia has not had the period of analysis and discussion that Europe has put intocongestion charging. This is a particularly emotive issue. It has been advocated since theearly 1960s as a desirable direction for road pricing, from a resource allocationperspective, but little has been delivered. Australia needs to begin serious discussion ofthe best ways to reflect congestion costs in travel decision frameworks, so that travellerscan make travel choices that are less wasteful. However, congestion pricing should becouched within an improved general road pricing setting, given the increasing availabilityof the technologies to implement such a system.

What is needed in the medium term is development of a general road pricing system thatbetter reflects the key cost-causal factors for road damage and congestion. In such asystem, the number of kilometres driven on each road type would be registered and atariff per kilometre would be applied, differing by road type, vehicle type (where, forexample, heavy vehicle road damage factors such as vehicle weight and number of axlescan be brought in) and degree of congestion. A first step on this path may be theimplementation of urban road pricing systems in the largest cities, focusing on chargingfor use of the most congested parts of the network via electronic metering. TheAustralian Transport Council should report on development of such options.

BIC proposes the Australian Transport Council should direct the NRTC toinvestigate and report on the most appropriate development path for general roadpricing systems in Australia, by the end of 2002. Congestion charging optionsshould be dealt with in this work, as one element in a more general road pricingsystem, which could replace the NRTC system in the medium term.

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The ATC should also direct the NRTC to report on implementation of a mass-distance based charging system for heavy vehicles, to replace the current NRTCcharging system.

Until such time as a congestion charging system can be developed and implemented,governmental support for urban public transport operation is a useful second best way topartially deal with congestion costs. By attracting people out of their cars, publictransport reduces congestion costs. By way of example, Melbourne buses carry about 93million passengers annually, at a net cost to the State Government of about $240 million.This is a “subsidy” of about $2.60 per trip. Most bus travel is in the peak, so congestioncost savings alone could possibly justify all of this “subsidy” value (e.g. assuming, say a5 km trip length, which is about the average for Melbourne, and congestion costs of about50c/km).

Box 3.1 presents an example of how investment in improved road-based urban publictransport can produce benefits well in excess of the costs involved. The example hasrecently been prepared by Booz Allen & Hamilton (2001) for the Victorian Departmentof Infrastructure. Congestion costs savings are an important part of these benefits. Theoverall benefits flow from improved service levels and better on-road operation of buses,the latter resulting from priority road access treatments.

The 2000 Sydney Olympic Games provided compelling evidence of the congestion reliefand environmental benefits that can be delivered by well patronised public transportservices. Attachment A to this submission provides some discussion of this point.

BIC proposes that the Commonwealth Government show a lead in tackling theeconomic waste associated with road congestion by providing specific road fundingfor a program of public transport on-road priority. An annual program of $100million nationally is proposed for a five year period, funded by a charge of about1c/L on fuel consumed in capital cities.

At present, some heavy vehicles use fuels that are excise exempt. The logic ofinternalising external costs says that this exemption should disappear. Road use chargesshould be paid by all vehicles that use roads, in proportion to their estimated damagecosts. If particular fuels deliver additional benefits, these should be specifically identifiedand valued.

BIC proposes that all vehicles of a given type should be required to pay anappropriate road use charge that reflects the road damage attributable to their roaduse. This will bring light vehicles and excise-exempt vehicles into the charging net.

34

Box 3.1: Benefits of Upgraded Urban Bus Services – Dandenong Case Study

Booz Allen & Hamilton (BAH) has just completed a Bus Improvement Strategy – Stage 1, for theVictorian Department of Infrastructure. The study set out to identify ways to cost-effectivelydouble bus patronage within 3-5 years, mainly through redesigning route structures, increasingservice levels, providing on-road operating priority and improving passenger information andmarketing. A Dandenong case study has suggested that providing a service with 20 minuteheadways from 5.00am to midnight and with a moderate degree of bus priority treatment would:

• increase patronage from 5.3 million passengers a year to 11.7 million;• require $2 million in capital expenditure for bus priority treatments (at $20,000 average cost

per intersection treatment to give bus priority);• require an increase in annual operating support from $7.2 million to $14.7 million; and,• produce a benefit cost-ratio of 2.17, including congestion cost savings.

BAH did not attempt to impute any economic value to the reduction in greenhouse gas emissions,air pollution or noise associated with diverting people from cars to buses, although somecongestion cost savings were estimated. If greenhouse gas and air pollution savings are valuedalong the lines suggested in the next two chapters of this submission, additional benefits of about$2 million would be derived.

A second analysis, with a substantially upgraded program of bus priority treatments, increased theoverall benefit-cost ratio to 2.55. The analysis is supportive of providing buses with priority roadaccess as a means of combating congestion, as well as reducing other external costs of urban roaduse.Based on these Dandenong results, a $100 million national program to improve bus priority canbe concluded to deliver substantial economic and environmental benefits well in excess of costs.

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4. Air Pollution

4.1 Context

Studies of air pollution episodes have shown that very high levels of ambient air pollutionare associated with strong increases in adverse health effects. Recent studies also revealsmaller increases in adverse health effects at the current levels of ambient air pollutiontypically present in urban areas. These health effects include a range of endpoints, suchas premature mortality (deaths brought forward), respiratory and cardio-vascular hospitaladmissions, and possibly exacerbation of asthma, other respiratory symptoms and loss oflung function. The evidence for these effects is strongest for the pollutants PM10 , SO2 andozone and the relationships are widely accepted as causal. Recent studies also suggestthat long-term exposure to these pollutants, especially particles, may also damage healthand that these effects may be substantially greater than the acute effects described above.

At the national level, these health effects are important. It is estimated some 2,400people die each year in Australia from air pollution, and some 10-15% of the populationdisplay respiratory symptoms (NEPC, 1998). These health impacts have major economiccosts, estimated at around $A18 billion/year10. BIC notes, however, that the air pollutioncosts attributable to motor vehicle use can be expected to fall in coming years, as tighteremission standards and lower diesel sulfur levels come into use, under the Federal 1999Measures for Better Environment package and as in-service emission requirements aretightened in coming years.

Air pollution also impacts on other receptors. The effects of atmospheric pollutants onbuildings provide some of the clearest examples of air pollution damage, throughbuilding soiling and material erosion. Soiling results from the deposition of particles onexternal surfaces and leads to dis-colouration of stone and other materials. Surfaceerosion occurs as a result of SO2 and acidic deposition, especially for stone, but also forother materials as well. Ozone is also known to damage polymeric materials such asplastics and rubbers.

Air pollution also can impact on natural and semi-natural ecosystems. Ozone can haveharmful effects on many plants at the concentrations commonly found and can lead toreduced crop yields. Impacts on ecosystems ranging from forests to freshwater are alsowell documented, with acidity, nutrient supply (nitrogen deposition) and ozone playing arole in these impacts. Air pollution also has effects on visibility and, through this, onamenity.

4.2 The Choice of Pollutants and Impacts

It is now widely accepted that transport related emissions are associated with short-termhealth effects at the concentrations found in most cities. There is also a broad consensus 10 Although this estimate in NEPC (1998) is partly due to the use of a high value for loss of life, at$A7million.

36

that the effects of these pollutants on health can be quantified using exposure-responserelationships, based on epidemiological studies that link pollution concentrations orincrements to levels of health effects.

A number of studies present recommended sets of exposure-response (E-R) functions forquantification of health effects from transport (e.g. the UK Department of Health’sCOMEAP group, the EC’s ExternE Study, the French-Swiss study, WHO guidance, USEPA reviews). In all cases, there is a considerable overlap in the impacts identified, theassociated E-R functions proposed, and the conventions used in health impact estimation(though some differences do also exist). These health effects are usually valued usingwillingness to pay (WTP) estimates.

It is likely that steps to increase this consistency will be put in place, under the auspicesof the World Health Organisation, in coming years. In this submission, we have used theapproach recommended in the ExternE project (EC, 2000) for a number of reasons.Firstly, the project, which began in 1991, has drawn on evidence from the US andEurope, and considers quantification and valuation. Secondly, the project is ongoing, andso has benefited from constant updates throughout this period, both with respect tostudies assessed and the changes in the scientific consensus (for impacts and valuation).Finally, the ExternE values have been widely used by policy makers in cost-benefitanalysis and internalisation strategies across Europe. The approach is, therefore, alreadybeing applied elsewhere in a context that is relevant for this review. A summary of thepollutants and impacts considered are presented in Table 4.1, along with a discussion ofthe health endpoints quantified in this submission.

4.3 Quantification and Valuation Methodology

A large number of studies have quantified and valued the environmental costs oftransport in the US and Europe. Many of these have used a ‘top-down’ approach, basedaround national level data. These studies provide an important starting point for theanalysis here. However, there are theoretical and practical issues that are important forthe transport sector, which necessitate a different, more detailed, approach.

Firstly, the environmental costs of the same vehicle can vary on different roads due to thevariation in emissions with speed. It is therefore necessary to take account of the speedsof vehicles on different types of road. The second, and more important issue, concernsthe location of emissions. Local impacts are important for transport as emissions arereleased at ground level, often in areas of high population density. The implications ofthis are clear. A much greater level of geographical resolution (below national level) isrequired to accurately assess transport externalities. The difference in location can leadto order of magnitude differences, as shown in Figure 4.1, for reasons such as localpopulation density and numbers.

Finally, many studies quantify the ‘average’ fleet emissions for particular vehicles.However, this fails to recognise that major improvements have occurred in vehicleemissions technology over recent years. Technology can play a major role indetermining environmental costs and different vehicles (of different ages) need to bequantified separately.

37

Table 4.1: The Health and Non-Heath Impacts of Different Pollutants.

Pollutant Health Effects Non-Health EffectsPM10/PM2.5

Substantial epidemiological evidence of adverse acute healtheffects of particulate air pollution in Europe and US; and strong,but much less widespread, epidemiological evidence of chronichealth effects including life expectancy (US only). Quantification for acute mortality (deaths brought forward),chronic mortality (life expectancy), a number of acute morbidity(from respiratory hospital admissions through to minor restrictedactivity days) and chronic morbidity impacts. Valuation based onwillingness to pay. Mortality based on Value of Statistical Life(A$5M) but adjusted to reflect years of life lost.

Dominant cause ofbuilding soiling.

Reduces visual range(visibility).

SO2 European results have established an association of SO2 withacute mortality, and probably with hospital admissions.However, evidence from epidemiological studies carried out inthe USA is less convincing.

SO2 leads to formation of secondary particles over regional range.

Quantification of acute mortality (deaths brought forward), andRHA from SO2. Quantification of sulphates assuming similar toPM10/PM2.5.

Material damage (SO2 and 2ndary pollutants)

Effects on crop yield.Ecosystem damage SO2

and 2ndary pollutantsincluding acidification(though potential benefitsthrough fertilisation).

Sulphates reduces visualrange (visibility).

CO Sever health effects at high levels. Relatively littleepidemiological evidence concerning ambient CO, but a numberof (well-conducted) studies that report positive associations.Quantification of acute hospital admissions (congestive heartfailure). Other studies including associations with mortalitycurrently discounted because of the problems separating CO fromother components of the air pollution mixture, though informationon CO is accumulating and may change in future.

-

NO2 Effects at very high concentrations.

Some studies report ambient NO2 effects, however, consensus thatNO2 not causal, but acting as a surrogate for mixture (e.g. effectsdisappear when correct for particles). Possible relationship forrespiratory hospital admissions. Direct effects not quantified.

NOx leads to formation of secondary particles over regionalrange. NOx is an ozone pre-cursor. Quantification of nitratesassuming similar to PM10/PM2.5. Quantification of ozone.

Ecosystem damagethrough 2ndary pollutantsincluding N deposition(eutrophication) andacidification (thoughpotential benefits throughfertilisation).

Ozone pre-cursor.

Reduces visual range(visibility).

NmVOC Ozone pre-cursor. Quantification of ozone. Ozone pre-cursor

Ozone Strong evidence of a relationship of between ambient ozone andacute mortality and hospital admissions. Quantification.

Damage to materials(paints, polymers andrubbers). Effects on cropyield.

Benzene Possible carcinogen. Mortality. -

PAHs Possible carcinogen. Mortality. -

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0

0.2

0.4

0.6

0.8

1

Paris

Athen

s

Lond

on

Bruss

els

Thess

alonik

i

Stuttg

art

Helsink

i

Rural

Belgium

Rural

UK

Rural

Greec

e

Rural

Finlan

d

Co

st p

er

ton

ne

of

PM

2.5

(re

lati

ve

to P

aris

)

Figure 4.1: Relative Damage per Tonne of PM2.5 in Different European Urban and Rural Locations

The results presented in this submission are based on values derived from a ‘bottom-up’approach, using the results of the EC’s ExternE project (European Commission 1995,1998, 2000). This takes account of the effects of speed, location and technology, andallows a picture to be built of the environmental costs of different vehicles, travelling ondifferent roads, in different locations. It provides the necessary information to look at theenvironmental costs of the transport sector at a high level of detail, examining theimportance of different technologies and fuels. This level of information is essential inexamining fair and efficient transport pricing policies.

4.4 Quantifying and Valuing Effects

The method used to quantify and value health effects follows a logical series of steps:

• quantify the emissions from the pollutant source;

• assess the resulting air pollution concentrations in the surrounding area from theseemissions (for example with air pollution dispersion models);

• assess the population weighted pollution increases;

• use exposure-response functions that link population weighted pollution incrementsto health endpoints; and,

• value these endpoints using economic-based estimates.

These steps are shown in Figure 4.2.

39

EMISSIONS

e.g. tonnes of SO2

DISPERSION

Increase in ambient concentrations e.g. local and regional ppb SO2

IMPACT

Using exposure-response curves, e.g. change in crop yield per ppb

together with geographical databases of receptors (e.g. people, crops, buildings)

COST

IMPACT

CONCENTRATION

Damage costs (e.g. market price)Willingness to Pay

Figure 4.2: The Bottom-up Approach.

This can be a time consuming process, though integrated computer models (e.g. theExternE Transport model) now exist which significantly reduce analysis time. Withinthis study it has not been possible to undertake separate analysis for the range of sites andlocations needed to develop original Australian cost estimates. Instead we have drawn onvery extensive analysis of different transport systems in Europe, and transferred thesevalues to Australia, taking into account local conditions, using unit pollution factors(costs per tonne) that are matched to the Australian context (see Box 4.1).

The detailed analysis across Europe has revealed a very large range of values, shown inTable 4.2. The range reflects the two extremes: remote rural locations at the lower endand the centres of major capitals (London, Athens, Paris), which can have populationdensities of 10,000 people/km2, at the upper end. Recent Australian unit values areshown in the table. The European pollution values are dominated by NOx and PMemissions. They are similar to the Australian values, except for a much higher value forparticulates, especially in urban areas.

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Box 4.1: Adjusting the ValuesThe approach taken here has been to transfer values from the detailed evaluations undertaken in Europe(from the ExternE study) and apply them to Australia, taking account of specific local parameters. Giventhe large numbers of different transport systems investigated within the ExternE project (almost 50 sites)this is an acceptable approach. However, there are a number of local specific parameters that are importantfor transferability. These are:• issues with transferring the results of dispersion modelling in Europe to Australia (so as to take account

of background concentrations of pollutants at local and regional levels, local specific pollutionchemistry, local meteorology);

• issues with transferring receptor data, e.g. population number and density;• issues with transferring health impacts (e.g. due to differences in age profile, health status, mortality

rates, asthma levels, etc);• issues with transferring economic values (Value of Statistical life, PPP, etc.);

The single most important aspect is population (and population density), given the differences betweenEurope and Australia. Firstly, Australian population numbers are low (about 20 million vs. hundreds ofmillions). Secondly the distribution of people (shown below) is different, as people are highly concentratedin coastal cities (around 83% of Australia's population lives within 50 kilometres of the coastline). Outsidethese areas, the population density is extremely low. The prediction of secondary pollution, notably ozoneand secondary species is also important (the dispersion of non-reactive local pollutants less so).

41

42

To select relevant unit pollution values for use in Australia, the population density and numbers fordifferent areas have been assessed using GIS systems and matched to similar profiles for Europe.

Table 4.2: Unit Pollution Values in Use in Australia and Europe.

Range of European Values$A/tonne 1

Recent Australian values$A/tonne 2

Particles 7,000 – 1,200,000 17,600CO 0 – 12 12NOx 700 – 15,000 1,385THC 500 – 3,000 1,440SO2 100 – 30,000

1 Source. The ExternE Transport Project. Range based on analysis of around 50 sites across Europe.2 Source. CSIRO, Australian Alternative Fuels. Full Report. The source of values is quoted by CSIRO asbeing from NSW EPA, as used for the economic weightings used for the Australian Design Rules forVehicle Emissions and the Fuel Quality Standard Bill (2000).

4.5 Emissions

The emissions from buses and heavy goods vehicles in the Australian fleet will vary withspeed, technology and fuel. The effects of cleaner vehicles and cleaner fuels aresignificant. There have been very large reductions for all pollutants from the introductionof modern vehicles in the fleet (i.e. with Euro standards). The introduction of lowersulfur diesel will also lead to major emissions reductions for PM10 and SO2 (with somereductions for NOx also). The benefits of technology and fuel can be seen in Figure 4.3,which presents the results from recent bus test cycle results undertaken by BIC for thepurposes of this submission.

0

5

10

15

20

Euro 0 Euro 2 Euro 3

gNO

x/km

1200 ppm S

500 ppm S

50 ppm S

0.0

0.1

0.2

0.3

0.4

0.5

Euro 0 Euro 2 Euro 3

gPM

/km

1200 ppm S

500 ppm S

50 ppm S

Figure 4.3: Improvements in Bus Emissions with Technology and Fuel Standards –Bus Industry Confederation 2001 Australian Test Results

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The BIC testing did not include vehicles using particulate traps. However, the use ofsuch technology for buses reduces emissions of these pollutants significantly. Datasupplied by Scania from recent emission tests suggests reductions of particulates of up toan order of magnitude for a Euro III bus. The use of this technology requires low sulfurfuel, but offers the potential to reduce particulate levels down to similar levels to CNGand LPG vehicles. More discussion of the emissions from alternative fuel vehicles, andthe emissions benefits these fuels offer, is presented in Box 4.2.

Box 4.2: Alternative Fuels

Considerably less data are available on the emissions from alternative fuel vehicles than on emissions fromdiesel vehicles. Tail-pipe emissions for buses from the Stage 1 report on alternative fuels (CSIRO, 2000)are presented below. Dedicated LPG and CNG heavy vehicles have lower NOx and PM10 emissions thandiesel, though for CNG there is a penalty from higher hydrocarbon emissions. Lower benefits have beenreported elsewhere for converted or bi-fuel vehicles, (as opposed to the dedicated vehicles presentedbelow), though these vehicles still have major benefits over diesel. The draft full report (CSIRO, 2001)presents updated values for bio-diesel buses and these newer values are included below. Bio-diesel hasslight higher NOx emissions and similar particulate emission to low sulfur diesel.

0

5

10

15

20

25

Diesel LSD ULSD LPG CNG BioEthanol(95%)

Bio-diesel(100%)

gNO

x/k

m

0

1

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3

4

5

6

Diesel LSD ULSD LPG CNG BioEthanol(95%)

Bio-diesel(100%)

gnm

VO

C/k

m

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0

0.1

0.2

0.3

0.4

0.5

0.6

Diesel LSD ULSD LPG CNG BioEthanol(95%)

Bio-diesel(100%)

gPM

/km

Figure 4.4: Tail-pipe emissions (g/km) for buses (CSIRO, 2001).

When evaluating the emissions from different fuels, it is important to consider allemissions across the fuel and vehicle life-cycle (i.e. from ‘well to wheel’). However,there is one very important factor when evaluating upstream emissions. These emissionsshould not be treated in the same way to end-use emissions. The key issue is thelocation of emissions. End-use emissions are released at ground level, often in urbanareas, where population densities are very high. In contrast, upstream emissions are oftenreleased from tall stacks in remote areas, or for the majority of crude extractionemissions, from offshore fields. Emissions from such locations will clearly not havelocal air quality effects and should not be treated additively to tail-pipe emissions (notethis is not the case, however, for greenhouse gas emissions). Within this submission,these upstream effects have not been quantified and included in the results. This mayslightly underestimate total costs, as a proportion of upstream emissions will be releasedclose to urban areas, e.g. from refineries.

4.6 Examing Air Pollution Effects and Charges

Previous Australian studies have indicated that national level health damages fromtransport could be important. The Victoria EPA study (1994) estimated health-relatedimpacts from motor vehicles at $A26-45 million/year ($A1992) in Melbourne, based onestimated cancer effects. The Inter-State Commission (1990) had previously estimatedair pollution costs from motor vehicles at $A786 million/year for Australia.

More recently, the total health costs from air pollution in Australia have been estimated ataround $A18 billion/year (NEPC, 1998). The breakdown of these values is shown inTable 4.3.

Table 4.3: Estimated Health Damages from Air Pollution in Australia.

Pollutant Cases Value % of EmissionsTransportRelated

CO 50,000 people at 1 day each $6 million ~ 70 – 90 % incities

NO2 10-15% population - respiratory symptoms $5 million ~ 70 - 80% in

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citiesO3 10 deaths per year $810 million NOx ~ 70 - 80%

ROCs ~40 – 50%

PM 2400 deaths per year $17.2 billion ~ 10 – 30% incities

Hydrocarbons 1250 – 1785 deaths per year Not quantified. ~40 – 50 %

Source: NEPC (1988).

There are a few methodological issues with these studies. Earlier studies (i.e. pre-1995)do not adequately reflect the importance of particulate pollution and underestimate healthimpacts. Later studies (1995 –1998) account for particulates, but tend to assign highvalues to ‘acute mortality effects’, based on a full value of statistical life (e.g. usingvalues of $5-7 million per mortality case). More recent international studies have tendedto attach much lower monetary values to these acute deaths, recognising that the periodof life lost is usually short (e.g. 6 months), that many of the individuals affected aresenior, that a number of causal agents have led to the susceptibility of the individual to air

pollution effects (i.e. air pollution is not the main causal factor) and that the quality of lifeof the individuals affected is often low. However, balanced against this drop in values ismore recent evidence implicating particulate pollution in chronic mortality (i.e. inreducing life expectancy).

These issues have been addressed in providing the values in this submission. The Valueof Statistical Life (VoSL) has been taken as the starting point ($A5.7 million has beenused, being about in the middle of the values used in overseas studies) for the analysisand converted into a Value per Life Year Lost, to allow valuation of deaths broughtforward (acute mortality) and life expectance (chronic mortality). The relevant valuesused were $A92,000 for acute deaths (assuming 6 months of life are lost on average) and$A185,000 per year of life lost for chronic effects. The unit values derived for Australiawere multiplied by average fleet emissions, with diesel values taken from AustralianDiesel Fleet Characteristics. Emissions Projection Update (Cox 2001), and multipliedagain by estimates of the Australian fleet km by area, from the Survey of Motor VehicleUse (ABS 2001). The resulting estimates of national air pollution damages from motorvehicles are shown are Table 4.4.

Table 4.4: Estimated Air Pollution Costs from Road Transport in Australia

$A Million/yearVehicle Capital City Other Urban Other Areas TotalCars 1,173 174 0 1,347Motorcycles 675 145 0 820LDVs 47 11 0 58Rigids 1,173 156 0 1,328Artics 282 60 0 342Buses 354 69 0 424

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Total 3,704 614 0 4,318Source: BIC estimates.

The values are heavily weighted towards large cities, because most vehicle km are withinthese areas (100 billion vehicle km of the Australian total of 180 billion vehicle km,according to the SMVU) and because most of the population is within these areas.

In contrast with greenhouse gas emissions, the national level damages from air pollutionwill fall in future years as stricter emission legislation comes into force, and as turnoverof the vehicle fleet leads to retirement of older, more polluting, vehicles.

47

BIC concludes that air pollution from motor vehicle use in Australia costs about$4.3 billion annually, or more. These costs represent externalities and it would beappropriate that they be levied on road users as charges, to make them moreaccountable for the implications of their travel choices.

However, in order to select the relevant mechanisms for internalising air pollutiondamages, it is important to discuss the importance of different potential factors –technology, fuel, and location.

An indication of how these parameters affect damage costs per km and per litre is shownin Figure 4.5, with emissions from some urban buses from BIC’s emission tests. Thefigure takes the emission data from Figure 4.3 and applies unit economic valuesappropriate for a smaller Australian urban area, to produce (conservative) estimates of theeconomic damage costs per kilometre and per litre of fuel. The values vary with bothtechnology (Euro emission standard) and with fuel sulfur level.

Fig. 4.5: Variation in Urban Air Pollution Costs From a Diesel Bus With ChangingVehicle Technology and Fuel Sulfur Level, Used in a Small City

0

1

2

3

4

5

6

7

1200 ppm S 500 ppm S 50 ppm S

cen

ts p

er k

m

Euro 0

Euro 2

Euro 3

0

2

4

6

8

10

12

14

16

1200 ppm S 500 ppm S 50 ppm S

cen

ts p

er li

tre

Euro 0

Euro 2

Euro 3

Source: BIC estimates.

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Unlike climate change, the air pollution damage costs (in cents per litre) varysignificantly with vehicle type and fuel. There are lower costs for lower sulfur fuels,largely because of the benefits they have in reducing particulate emissions. There arealso lower costs for more modern Euro vehicles (tighter emission standards). In bothcases, these unit benefits are greatest in the largest urban areas.

Differences will occur within any one area because of speeds. This is particularlyimportant for congested areas. At low speeds, emissions from all vehicles increasedramatically and the damage costs per km rise.

The data in Figure 4.5 shows that marginal damage costs do not follow fuel usage alone.In looking to internalise the social damages from air pollution, a mechanism isneeded that addresses the performance of individual vehicles and their use, split bygeographical area. Inevitably a single mechanism, such as fuel tax, is too crude toadequately reflect both performance and usage.

To fully capture air pollution effects would necessitate a complicated system, involving(for example) area access charging with differentials set on the basis of vehicle type/Eurostandard, together with differing fuel charges dependent on emission performance. Amore simplified approach along similar lines may be easier to implement in the shortterm.

BIC proposes that the Commonwealth Government should:• set an air pollution charge as part of the fuel price, with the charge being set to

reflect the latest emission control technology that is in widespread use (Euro 2);• base this fuel charge on the estimated external costs for each respective fuel in a

vehicle of this technology (with higher charges on any fuels with poorer emissionperformance and lower charges on cleaner fuels, reflecting fuel environmentalperformance);

• set the charge at a level that will be exceeded by the external costs of mostvehicle use, which we suggest should be a level that would apply in most smallercities and towns in Australia. Rural areas will be over-charged. A rebate onrural fuel sales could be used to offset this excess charge;

• provide newer heavy duty (Euro 3) vehicles that meet tighter emission standardswith a registration discount reflecting their better emission performance. BICbelieves that this discount should be about $300 per annum for buses. Thisrebate would need to be paid to the States for them to pass on in lowerregistration charges. It should last for five years, then all external costs shouldbe re-assessed;

• provide a scrappage subsidy to accelerate the introduction of newer heavy dutyvehicles for urban operation. The subsidy should be set at $2000 per vehicle forpre-Euro 1 buses, the incentive to last for 5 years;

• after 5 years time, increase registration charges by $400 per year for Euro 0 orolder buses operating in larger urban areas and announce the intention toimpose this change well in advance.

49

BIC has not estimated relevant registration discounts/penalties or scrappage subsidies fortrucks but the data developed for this presentation allows such estimates to be prepared.

BIC considered making allowance for variations in emissions as between differentvehicle types (because of differing emission standards) through varying fuel charges.This would have the advantage of tying the incentive/penalty to distance travelled andhence to emissions. However, there is no necessary link between a specific vehicle andthe fuel quality it may use (with some exceptions). Also, BIC is concerned aboutpossibly creating a major administrative burden to put in place an audit trail with a fuel-based means of allowing for changes in vehicle technology. Thediscounts/incentives/penalties levied through changes in registration fees have thedisadvantages of introducing assumptions about average usage rates and of introducing aneed for flows of funds between governments, because fuel and registration accrue todifferent governments. However, these concerns are seen as less than the prospectiveadministrative difficulty of trying to link fuels with vehicles, to get a stronger usagealignment.

The approach proposed above does not deal fully with the external costs of air pollutionin the larger cities, where the air pollution issues are most marked. In time, this mightbest be handled through a general road pricing system, varying charges by time and placeof road use. In the shorter term, traffic management measures can be used to smoothtraffic flow, as a means of lowering emissions, and travellers can be encouraged to switchto cleaner modes, such as public transport.

If there are serious air quality concerns in particular locations, ultra low sulfur diesel andalternative fuels could be mandated for earlier introduction for city use. This is a matterfor the individual States and cities to deal with, rather than for the Fuel Tax Inquiry.

The way the values set out in the BIC proposals above have been derived can beillustrated for diesel buses (as an example).

Step 1: Set the fuel air pollution externality charge (cents/litre) at a level that willadequately internalise the air pollution costs of most travel, based on emissionperformance from current technology. This implies the value be set at a level that isappropriate to a smaller urban area and that a rebate will be needed for rural use. Euro 2should be the appropriate emission technology standard, as most current new buses areEuro 2 or 311. Table 4.5 suggests that a fuel charge of 7.5c/L should apply to 500ppmsulfur diesel and 7.2c/L to 50ppm diesel. Diesel with 1200pm sulfur fuel would incur acharge of 9.6c/L. The difference in external (air pollution) costs between a Euro 0 bususing 1200 ppm diesel and a Euro 3 bus using 50 ppm fuel without a particle filter isabout 10c/L. This would be a wider difference with a filter added to the Euro 3 vehicle.

Table 4.5: Air Pollution Costs From Bus Use in a Small City 11 It could be suggested that externality charges should be set at a level based on the most polluting vehicle,with rebates for all cleaner vehicles. BIC believes that this approach would impose a higher administrativeburden, in comparison with the approach proposed.

50

Technology Cents/km cents/litre1200 ppm S 500 ppm S 50 ppm S 1200 ppm S 500 ppm S 50 ppm S

Euro 0 6.4 4.6 4.4 14.7 11.4 10.5Euro 2 4.0 3.1 2.9 9.6 7.5 7.2Euro 3 2.8 2.1 1.9 6.6 5.4 4.9Source: BIC estimates.

BIC notes that the Federal Measures for Better Environment package is introducingincentives for 50 ppm sulfur diesel. The diesel excise for fuel with more than 50ppmsulfur is to increase above the base rate by 1c/L from 1 January 2003 and 2c/L from 1January 2004. The external cost estimates presented in Table 4.5 suggest that thisincentive is in the right ball-park.

BIC proposes that the base air pollution charge for 50 ppm sulfur diesel should beset at about 7c/L, with higher charges for diesel with a higher sulfur content, inaccord with the charging differentials included in Measures for a BetterEnvironment. Rural fuel use should be rebated this charge.

Step 2: Set the annual fixed charge (registration fees) to reward cleaner vehicles (urbanareas only). Table 4.6 suggests that an urban Euro 3 bus creates about $300 less airpollution damage annually than a Euro 2 bus. BIC believes that this should be rewardedthrough a reduction of $300 in registration fees for Euro 3 buses.

Table 4.6: Variations in Urban Bus Fixed Charges with Emission Technology

500 ppm S 50 ppm SEuro 0 470 408Euro 2 0 0Euro 3 -294 -298

Source: BIC estimates.

Table 4.6 also shows that older technologies are associated with higher environmentaldamage costs, Euro 0 buses causing air pollution costs more than $400 above those ofEuro 2 buses (with 500 or 50 ppm sulfur diesel fuel). In time these older buses will bephased out of urban operation. The community would be better off to the tune of at least$400 per year if this phasing out was accelerated, based on damage costs for smallerurban areas. Damage costs would be higher in the largest cities, as would the benefits ofEuro 3 operation. BIC believes there is a good case for government providing economicsupport for faster renewal of urban bus fleets, through scrappage subsidies or otherincentives for these vehicles to switch to markets where air quality is not of concern.

The internalisation discussed above only deals with costs that apply in smaller urbanareas/cities. The air pollution costs from road transport will be higher in the largestcities. Systems for dealing with urban charging, and other policy measures, were brieflydiscussed in Chapter 3 of this submission. BIC emphasises that increases in bus

51

patronage have the potential to reduce urban air pollution by avoiding additional car trips.This is especially important in congested urban areas (providing a “triple benefit” byreducing congestion costs, air pollution costs and greenhouse gas emissions). Theseprospective benefits should be recognised through pricing signals to users.

BIC believes there is a very strong argument for exempting urban public transportvehicles from any fuel charges that are levied on account of air pollution damage, asthese vehicles can generate benefits through ‘avoiding’ emissions from private caruse.

The use of higher fuel taxes for private vehicles over public transport is justified. Thiswill have some effect in reducing overall demand and will provide a stimulus for publictransport. Initial numbers for petrol cars indicate an air pollution externality cost of about6-19c/L, for small and very large urban areas respectively.

4.7 Alternative Fuelled Vehicles

Similar analysis can be undertaken for alternative fuelled vehicles. Figure 4.6 shows airpollution costs for a sample of buses, based on the CSIRO emission factors presentedpreviously and applying unit damage costs appropriate to a small city. The Figure alsoincludes an estimate for a city diesel bus (10ppm sulfur diesel) using a particulate trap(CRT), these figures being based on European emission test data from the UK CleanerVehicles Task Force, 2000.

Fig. 4.6: Air Pollution Damage Costs for a Number of Buses

0

5

10

15

20

25

30

35

Diesel LSD ULSD ULSD +CRT

LPG CNG BioEthanol(95%)

Bio-diesel(100%)

cent

s/km

Capital (central)

Large urban

Small urban

Source: CSIRO emissions data and BIC unit cost estimates. BIC estimates for ULSD with a particulate trap.

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The Figure shows that a Euro 2 diesel bus (using what BIC assumes to be 2000 ppmsulfur diesel) produces air pollution costs of 6–29 c/km, depending on the urban area size(from a small urban area to the central area of a large metropolitan city12). Low sulfurdiesel reduces these costs to 5–15 c/km, and ultra low sulfur diesel to 4–12 c/km. CNGdamage costs are estimated at about 2.5 - 5c/km for the range of area sizes. This gives abenefit of 5-25c/km over 2000 ppm diesel, the higher value being associated with thecentral urban areas of large capitals. However, the benefits of CNG are significantly lesswith low sulfur diesel and ultra-low sulfur diesel, and CNG has similar air pollutiondamage costs to a bus running on ‘city diesel’ with a particulate trap. These figure castdoubt on the advantage given to gas under DAFGS, relative to cleaner diesels (used inmodern buses) but not relative to 1200 ppm diesel (or older buses).

The data provide a strong case for making access to benefits under DAFGS andsuccessor programs dependent on emission performance of different fuels if realenvironmental gains are to be achieved.

Bioethanol produces higher air pollution costs than CNG but similar costs to ULSD.Ventura bus company in Melbourne is currently operating two such vehicles on urbanroute service work. Bio-diesel produces high air pollution costs, because of highparticulate emissions. LPG has the lowest air pollution costs per kilometre of all thosefuels shown in the figure. The relative performance of the fuels is similar to previousstudies in Europe, though the values will need to be revised and the conclusions reviewedwhen the updated CSIRO results become available.

12 Figure 4.6, based on BIC’s emissions tests, suggested lower costs per kilometre for diesel in a Euro 2vehicle (about 4c/km). BIC’s figures are from a small sample size and using diesel with 1200 ppm sulfur,not 2000 ppm as used in the UK Milbrooke trials that CSIRO seems to be citing for diesel.

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5. Climate Change

5.1 Context

The effects of global climate change from greenhouse gas emissions (GHGs) are diverseand potentially very large. They are likely to have very large economic costs, both fromadaptation (e.g. coastal protection costs) as well as damages to health and theenvironment.

Carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O) are the main emissions ofconcern from transport fuel production and use. The impacts of these emissions areindependent of location, and so a tonne of CO2 released from upstream fuel refineryprocessing can be treated in an identical manner to a tonne of CO2 released from a vehiclein an urban area.

The 1999 Australian National Greenhouse Gas Inventory estimated Australia’sgreenhouse gas emissions at 458.2 million tonnes13. Transport accounted for 16.1% oftotal national net emissions, with road transport representing 90.2% of transportemissions (or 14.5% of total national emissions). Cars alone contribute 9.1% of nationalemissions.

Road transport emissions in 1999 were 21.5% higher than in 1990. The fuel used bycars increased by 14% between 1990 and 1999 and emissions increased even faster, by19.2%. Emissions from trucks and light commercial vehicles increased still faster, by27.1%. Emissions from buses increased more slowly than those from cars and trucks.

The Commonwealth Interdepartmental Greenhouse Projections Group projects thattransport sector greenhouse gas emissions will reach 150% of 1990 levels by 2010, evenafter implementation of a number of measures to reduce emissions14. The roadtransport sector must thus be a major focus of efforts to contain greenhouse gasemissions.

Australia’s bus industry is concerned about climate change and has made a majorcommitment to reducing greenhouse gas emissions. The Bus Industry Confederation hassigned up to the Greenhouse Challenge and a significant proportion of the Australian-based businesses that have signed individual agreements with the Commonwealth are busoperators.

5.2 Emissions

Greenhouse gas emissions from vehicles vary with speed (non-linearly). There are largedifferences in emissions between slow and fast moving traffic, with CO2 emissions beingsignificantly higher, per distance travelled, at low speeds. This has implications for urbantraffic congestion. 13 AGO, National Greenhouse Gas Inventory 1999, Fact Sheet 3 – Energy: Transport. 14 Commonwealth Interdepartmental Greenhouse Projections Group (2001), Draft Review of GreenhouseGas Projections for the Transport Sector: Consultation paper for Stakeholders, July.

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For buses, fuel efficiency and therefore CO2 emissions do not vary greatly between olderand more modern vehicles (e.g. different Euro standards). There are small efficiencyimprovements for modern vehicles, and also with the use of different diesel fuels. Theeffects of these two variables can be seen in Figure 5.1, which shows fuel consumption(test cycle data) for different Euro buses running on different sulfur content fuels in sometests conducted in September, 2001, by the Bus Industry Confederation for the purposesof this submission. The Euro 2 and 3 vehicles generally achieve better fuel economy thanthe Euro 0 vehicle and the 500 ppm and 50 ppm sulfur fuels give better economy than the1200 ppm fuel, particularly in the Euro 3 vehicle. Some Victoria operators of Euro 3buses report better fuel economy than is shown in the Figure (e.g. 37.5L/100 kms).

Figure 5.1. Fuel Consumption Rates for Diesel Buses WithDifferent Fuels and Technologies.

0

10

20

30

40

50

Euro 0 Euro 2 Euro 3

Fue

l con

sum

ptio

n (l

itre

s/10

0km

)

1200 ppm S

500 ppm S

50 ppm S

Source: (BIC Test cycle data on Australian Buses)

The end-use emissions of CO2 from alternative fuels are generally similar to those fromconventionally fuelled vehicles, even when emissions from upstream fuel extraction,processing and distribution are taken into account (see Box 5.1).

5.3 Putting a Cost on Greenhouse Gas Emissions

The externalities of greenhouse gas emissions are ideally suited to recovery through fueltaxes (charge), as emissions are directly related to the energy and carbon content ofdifferent fuels. The most appropriate instrument is a carbon tax, rather than an energytax, as the former can be set to match the carbon emissions from combustion of a litre offuel. However, debate exists on what the appropriate costs per tonne of carbon emittedshould be.

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The carbon tax should be set at the optimum level, which is the point, at any given time,when the marginal abatement cost and the marginal social damage (or benefit ofabatement) are equal. Expressed another way, the incremental social costs of additionalabatement (i.e. reducing emissions by one tonne) should be equal to the additional socialbenefits of avoided damage.

Box 5.1: Greenhouse Gas Emissions From Alternative Fuels

There is generally less information on the emissions from alternative fuel vehicles than on emissions frompetrol and diesel vehicles. The use of CNG and LPG fuels in heavy vehicles produces similar greenhousegas emissions to conventional diesel vehicles on a per kilometre basis (though alternative vehicles haveGHG benefits relative to petrol use in light vehicles). For heavy vehicles, although gaseous fuels have alower carbon content, fuel use (MJ/km) is increased for LPG and CNG vehicles (as engine efficiency is lowerfor spark ignition engines) and alternative vehicles have a weight penalty. The emissions test programmes inthe literature generally report that dedicated LPG and CNG heavy vehicles have similar emissions tomodern diesel vehicles, but that converted or bi-fuel alternative fuel vehicles often compare lessfavourably.

When comparing different fuels, emissions from upstream fuel extraction, processing and distributionshould also be taken into account, as well as tail-pipe emissions. Diesel and LPG have similar upstreamemissions. CNG has lower CO2 emissions due to the lower levels of processing required, though methaneemissions can offset these benefits, especially if gas is supplied from the low pressure network (e.g.residential). The overall emissions from different fuels (based on the CSIRO Stage 1 study, with bio-dieselvalues from the CSIRO draft full results) are shown below.

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0

500

1000

1500

2000

Diesel LSD ULSD LPG CNG Bioethanol(95%)

Biodiesel(soy)

Biodiesel(canola)

gCO

2equ

iv/k

m

Tailpipe

Upstream

Figure 5.2: Comparison of Life-Cycle Emissions from Alternative Fuel Buses

Figure 5.2 shows that differences in the greenhouse gas emissions from diesel andalternative fuels are low, with the exception of biofuels. Gaseous fuels only offer limitedgreenhouse gas benefits over diesel, even on a life-cycle basis.

A number of studies have quantified the likely future damage costs from climate change,and used these values to derive a marginal cost per tonne of carbon from marginalchanges in emission levels. These studies take the predicted changes in global meantemperature, precipitation and sea level rise and quantify the likely impacts of these

57

effects, along with impacts on human health, agriculture, water resources, andecosystems.

One of the more comprehensive studies (the ExternE study15) has estimated a centralvalue of around $A40/tCO2 for current emissions, with a central range of $A20 - 90/tCO2.This central value is also similar to recent estimates of the global marginal abatementcosts of meeting the Kyoto protocol. For example, recent analysis16 has indicated that themarginal abatement costs for the EU to meet the Kyoto targets is $A35-$70/tCO2.Finally, the value of $A40/tCO2 has been set as the buy-out price for the Australianrenewables obligation. A value of $A40 would thus appear to be the current optimallevel for carbon taxation, though it is stressed this value is only relevant for the short-term: the marginal damage costs and the marginal abatement costs will increasedramatically in future years. $A40 has thus been used in this submission.

The greenhouse values for methane and nitrous oxide emissions from the ExternE studyhave also been used (these values have been used in recent policy work in Europe andhave been applied here). These values are $A745/tonne for methane and $A17750 fornitrous oxide. Within the per kilometre costs for greenhouse emissions estimated in thissubmission, the total impact of these latter components is very small (being a maximumof about 0.5c/km for LPG and much less for CNG and diesel).

5.4 Charges per Litre

The use of the central value of A$40/tCO2 can be combined with emission rates to showthe relevant external costs per km. The relevant values, based on the bus emission testdata derived by BIC (Fig. 5.1) are shown in Figure 5.3 in cents per km. The costs forlarge articulated trucks will be similar. The values for cars will be lower, though thesedifferences will be removed when expressed in cents/litre of fuel.

Converting these values to fuel volume gives a relevant duty level (carbon tax) of 10.7c/Lof diesel, based on tailpipe emissions. This value is the same irrespective of the type ofvehicle using the fuel (with the exception of small fluctuations from combustionefficiency). Large differences do, however, result if different damage costs (in A$/tonnecarbon) are applied, illustrated in Figure 5.4. A lower and upper range (based on $A20and $A90) would give values of 5 – 24c/L.

15 European Commission (1999). ExternE Externalities of Energy. Volume 8. Global Warming. Publishedby the European Commission, EUR18836.16 “Economic Evaluation of Sectoral Emission Reduction Objectives for Climate Change”, Ecofys Energyand Environment, AEA Technology Environment, National Technical University of Athens (2001).Published by the European Commission, 2001.

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0

1

2

3

4

5

Euro 0 Euro 2 Euro 3

cent

s/km

1200 ppm S

500 ppm S

50 ppm S

Figure 5.3: Damage costs per km from tailpipe emissions from diesel buses.

0

5

10

15

20

25

30

0 20 40 60 80 100

A$ per tonne

cen

ts p

er li

tre

Central 10.7 cents/litre

Figure 5.4: Effects of Different Damage Costs (A$/tCO2) on the Relevant ChargeLevel per Litre of Diesel (End-use Emissions).

Relevant charges for other fuels (based on tailpipe emissions) would be 9.1c/L for petrol,approximately 6c/L for LPG and 10.7c/kg for CNG. On this basis, biofuels would attracta zero duty level, as their tailpipe CO2 emissions are ‘renewable’ in nature (biomassderived).

At the national level, the annual 16.5 billion litres of petrol and 6.4 billion litres of dieselconsumed would have an estimated damage cost of $A1.5 billion and $A0.7 billion(based on end-use emissions), totalling $A2.2 billion/year. The additional consumption

59

of CNG/LPG (1.9 billion litres) would increase this value slightly to around $A2.35billion.

However, in looking to provide an incentive to switch to lower carbon fuels, and toensure benefits at the tail-pipe are not offset by emissions in fuel extraction andproduction, life-cycle emissions should be considered (rather than just tail-pipeemissions). This is particularly important for capturing potential benefits of alternativefuels (see Box 5.2). The gaseous fuels (CNG and LPG) do not offer large benefits overdiesel, however, on a whole-of-life basis.

Box 5.2: Life Cycle Greenhouse Gas Emissions from Alternative Fuels

On a life-cycle basis, the differences between fuels, in carbon costs per km, are small. Figure 5.2shows the relevant $ values, using emission rates from the initial phase of the CSIRO study forthe Australian GHG Office and unit costs as presented in this submission. The only fuels withsignificant greenhouse gas benefits are biofuels.

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0

1

2

3

4

5

6

7

8

Diesel LSD ULSD LPG CNG Ethanol(95%)

Biodiesel(soy)

Biodiesel(canola)

cent

s/km

Tailpipe

Upstream

Figure 5.5: The greenhouse gas damages for different fuels

There are two main ways to address upstream emissions. The first would be to addupstream greenhouse gas emissions for each fuel, and increase the carbon tax (chargelevel) to take these into account. There are potential problems in this approach, as theincentive to reduce upstream emissions should really be targeted at the fuel producers

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(not the end-users). The alternative is to use the above mechanism based on end-useemissions, but reduce/increase the duty differential for alternative fuels that havelower/higher upstream emissions relative to diesel or petrol. The current evidence showsthat the difference between upstream emissions will be very small for the gaseous fuels(CNG and LPG) compared to diesel (note the relevant differential is the net difference inemissions per unit of fuel consumed). The main effect of adding upstream emissions is toincrease the duty level of biofuels to take account of their high GHG emissions fromproduction.

5.5 Conclusions on Climate Change

BIC proposes that a ‘carbon tax’ be levied on road transport fuels to encourageimprovements in energy efficiency and reduce greenhouse gas emissions from fueluse. All fuels (conventional and alternative fuels) should be subject to duty levels seton the basis of carbon emitted.

It is argued by some that this should only happen in transport when it is also done in othersectors. BIC believes that there is a strong case for the transport sector to be at the frontline for a carbon tax because of the significance of the sector as a source of greenhousegas emissions and the growth rate of sectoral emissions.

Introduction of the carbon tax should be complemented by removal of the currentexcise on fuel, to contribute to revenue neutrality while providing improvedresource allocation signals to road users.

On the basis of relevant marginal damage costs, the best estimate of the appropriatecharge level is 10.7c/L for diesel (set on a value of $A40/tCO2). The relevant valuefor petrol is 9.1c/L, with 6c/L for LPG and 10.7c/kg for CNG. These values areapplicable for all vehicles in all areas.

Biofuels should not be subject to this charge level. However, for all fuels, someconsideration of upstream emissions needs to be included. Differences between fuelscould be passed on through charge differentials (based on the net greenhouse gasdifferences between fuels). This would have very little effect for most fuels, but wouldincrease the relevant charge level for biofuels. The relevant emissions for upstreamemissions should be set using the findings from the phase 2 study of the CSIRO study forthe Australian Greenhouse Office.

Until such time as a general system of carbon taxes is in place, biofuels should besubject to a charge level of about 5c/L on account of upstream greenhouse gasemissions, subject to confirmation by the CSIRO study on emission performance.

BIC notes that increases in bus patronage have the potential to reduce transport sectorgreenhouse gas emissions, while also contributing to lower air pollution levels andreduced congestion costs in urban areas. This needs to be recognised through betterpricing signals to users.

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BIC concludes that public transport vehicles (buses) should be exempt from theproposed carbon charge, as a means of encouraging increased use.

This exemption would be based on prospective benefits through ‘avoiding’ greenhousegas emissions from private car use. Two examples illustrate this point:

• in rural areas, buses provide an efficient means to transport large numbers of people(e.g. school runs) and avoid larger numbers of vehicle trips by private cars;

• in metropolitan areas, buses offer a means to reduce congestion. Congestion stronglyincreases fuel consumption (vehicles travelling in congested areas can have doublethe greenhouse gas emissions of free flowing traffic). Increased levels of buspatronage offer a way to reduce the greenhouse gas emissions from urban transport,especially when that bus use is facilitated by on-road priority, as proposed in Chapter3. Fiscal incentives need to be provided to users when choosing between private andpublic transport in these areas and the exemption of carbon duty for public transportoperators would send the correct signal to transport users, as would fundingassistance for bus priority treatments.

While these exemptions will provide improved price signals for users, the bus industrywill continue to seek reductions in greenhouse gas emissions. The number of operatorswho have committed to the Greenhouse Challenge will be increased and the industry willcontinue to promote programs to improve fuel efficiency and otherwise reducegreenhouse gas emissions.

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6. Noise

6.1 Background Transport noise is a major nuisance and is widely recognised as a disbenefit affectingdaily life. It is estimated that nearly 40% of Australia’s population is exposed toundesirable traffic noise and a further 10% to excessive traffic noise (NRTC, 2001). Noise may also lead to a number of health impacts, through a variety of direct andindirect effects, although there is considerable debate on the reliability of the evidence. Transport noise arises from tyre contact and from vehicle engines, though there may alsobe noise from auxiliary systems such as compression brakes, refrigeration and from otherintermittent sources (e.g. loads) for heavy vehicles. At low speeds, engine and drive-trainnoise are dominant. This is important when considering the relative noise levels fromalternative fuel vehicles (a number of which have lower noise levels than conventionaldiesel engines). At higher speeds (e.g. above 45 kph), tyre/road contact noise becomesdominant and differences between engine noise are less important. The number of axlesand tyres in contact with the road and, importantly, the speed of the vehicle have largeeffects. The impact of noise depends on the number of people affected and the noise levels theyare exposed to. As with air pollution, population density is important, as this determinesexposure levels. Noise burdens are therefore usually higher in urban areas.

There are, however, a number of other issues that complicate the assessment of noiseburdens. Firstly, there is evidence for a noise threshold. This implies that low noiselevels have a negligible impact. Secondly, the noise burden is determined by theperception of individuals. There is a wide variation in people’s responses to certain noiselevels and noise sources; for example, certain types of noise are particularly annoying(e.g. night-time noise, intermittent noise, or vibration from heavier vehicles). Finally, thelogarithmic nature of noise complicates analysis of burdens. This means that themarginal noise effect of an additional vehicle on a road is determined by other trafficsources and by other non-traffic sources.

6.2 Quantification and Valuation

The basic measurement index for noise (sound) is the decibel (dB), a logarithmic quantityreflecting the nature of the human ear’s response to sound pressure. As well asresponding to sound in a logarithmic manner, the ear is also more sensitive at somefrequencies than at others. This frequency sensitivity is included by applying anappropriate frequency weighting to measurements and calculations, the most common ofthese being the “A weighting”, hence the use of “dB(A)”. Traditionally, noise impact inthe vicinity of transport sources has been assessed using methods based around theconcept of the Equivalent Continuous Sound Level (Leq). This technique for “energy-averaging” a fluctuating noise environment is defined as the steady noise level over a

64

defined period that contains the same acoustic energy as the fluctuating level over thatperiod. Most countries have standardised methods for predicting transport noise with distancefrom roads. These usually adjust for traffic flow, speed, proportion of heavy vehicles,road cover, and potential barriers between the road and receptor. For road transportnoise, the L10 18 hour metric is usually used (e.g. EPA, 1994). At the same time, a large number of studies have quantified the economic effects oftransport noise, through relationships that relate noise levels to property price or rentdifferentials (termed hedonic price studies). The information from these studies isusually expressed as a Noise Depreciation Sensitivity Index (NDSI) and usually reportedas a percentage reduction in property value for a 1dB increase in noise levels (measuredas daily equivalent noise levels (Leq)

17). Most estimates in the literature quote a NDSI ofbetween 0.2 and 1.5%, with most studies concentrated between 0.5 - 1%. These studiesdo not measure directly individual or household WTP to avoid noise exposure per unittime. The range of NDSI values is shown below.

Table 6.1: Estimates of Noise Sensitivity Depreciation Index in the Literature

Study Method Low (%) Medium(%)

High (%)

ECMT (1996) Hedonic pricing 0.91

Maddison et al. (1996) Review of literature 0.38 0.67 (mean) 1.30

Delucchi and Hsu (1998) Review of literature 0.2 0.85 1.5

Victorian EPA (1994) Review of literature 0.5 1.0

UK DETR (to be published 2001) Hedonic pricing 0.2

ITS (2001) Review of literature 0.2 0.4 0.6

Previous valuation work in Australia (Victorian EPA, 1994) used a range of 0.5% - 1%,with a threshold of 55 dB(A). This gave values of noise amenity costs for arterial roadsin Melbourne of $A43 million – $A86 million/year (1992 prices). At the national level,amenity costs of $A534 million/year (1989-90 prices) have been estimated for Australiaby the former Inter-State Commission, based on a similar approach (ISC 1990, 3

17 The Leq metric is generally used to quantify noise impacts, as this is consistent with the economicvaluation data. It is stressed that more complex indices are being considered in many OECD countries (e.g.European Draft Noise Directive) to account for the possibility of greater annoyance at different times of theday, particularly at night. In Europe it looks likely that an Lden indicator will be used where the 24 hourperiod is divided into a 12 hour day, a 4 hour evening and an 8 hour night. The Leq is calculated for eachperiod in terms of dB(A), but 5 dB(A) is added to the evening value and 10 dB(A) is added to the nightvalue). A specific Lnight metric is also being considered. The use of these weighted metrics will dramaticallychange the relative noise impacts for different vehicle types and time periods, for example it would attach agreater weighting to bus or freight movements at night. This will in turn affect the marginal noise costs ofdifferent vehicles.

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volumes). That assessment also estimated average noise costs for cars, medium trucksand heavy trucks in interstate/rural and urban settings, as illustrated in Table 6.2. Busnoise costs were estimated at 1.8c/km. Table 6.2: Estimated Vehicle Noise Costs for Australia, 1989-90.

Area of Use Automobiles (c/km)

Trucks < 15t (c/km)

Trucks > 15t (c/km)

Interstate/rural Urban

0.065 0.13

0.759 1.845

2.17 7.055

Source: ISC (1990), Volume 2, Table X.12. Given house price increases since these studies (e.g. the average house price inMelbourne has increased doubles from A$154,000 in 1992 to A$310,000 in 2001), andincreases in traffic levels, the value of $534 million is likely to be a considerableunderestimate. There is insufficient information to compile a detailed updated value for Australian noiseamenity effects. To do so would require noise levels by road type, e.g. noise maps.However, it is possible to derive an approximate split by road vehicle type based on theestimates of unit values in the literature. Values have been calculated using the marginalcost estimates from Delucchi and Hsu (1998) based on the central, low and high valuesreported. This assumes that unit values are transferable (clearly a significantassumption).18 No damage has been attributed to non-urban areas and this willunderestimate noise damages slightly; for example, 27% of noise costs estimated by ISC(1990) were not classified as urban. Table 6.3: Potential Urban Road Traffic Noise Damage Costs for Australia. Vehicle Capital City Other Urban Total

Low value High value Low value High value Low value High valueCars 330 1,072 72 234 402 1,306Motorcycles 4 20 2 8 6 28LDVs 48 157 17 57 65 214Rigids 75 140 17 31 92 171Artics 61 94 21 32 82 126Buses 16 25 5 8 21 33Total 534 1,508 134 370 668 1,878 Source: BIC estimates.

18 They also include very large assumptions regarding the marginal costs of damage. The table assumesthat the marginal noise cost is a fixed unit value, when in practice the marginal social costs of transport arehighly non-linear with a threshold.

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While these figures include a very large number of assumptions, Table 6.3 indicates thatpotential noise costs might be between $A0.6 and $A1.9 billion/year. This indicates acentral estimate of around $A1.2 billion, with an average cost of about 7c/L for urbanroad use (higher for trucks, lower for cars). These aggregate costs seem consistent withan estimate of $534million by the ISC (1990). Delucchi and Hsu (1998) present marginal noise cost estimates for a range of vehicletypes on urban roads in USA19. Updating their base case estimates for principal arterials,to express them in $A and express them in current values, produces numbers of thefollowing order:

• cars = 0.3c/km (or 2.5c/L);

• medium trucks = 1.8c/km (or 6.6c/L);

• heavy trucks = 5c/km (or 9.5c/L); and,

• buses = 1.8c/km (or 4.5c/L). These figures can be taken as no more than indicative but, given their scale, they doindicate the importance of further research on noise, particularly for heavy trucks.

Box 6.1: Noise From Alternative Fuelled Vehicles

A number of the alternative fuel vehicles have noise benefits over conventional vehicles. Naturalgas vehicles have significantly lower noise levels and less engine vibration. Tests in and outsideof vehicles indicate greater driver and pedestrian acceptance. For a heavy goods vehicle, thenoise from a conventional diesel vehicle and a CNG vehicle are 68dB and 60dB respectively.CNG vehicles are also some 6-7 dB(A) quieter at stationary idle. LPG vehicles also result inreduced sound emissions as compared to a conventional diesel vehicle. Sound levels recorded forLPG bus operation have been found to be at least 2-3 dB quieter than diesel operation. Thisrepresents a reduction of around 50% perceived noise levels.

Alternative vehicles, however, only offer noise benefits at low speeds. Above 45 kph, rollingnoise becomes the dominant noise source, and there is little difference in noise levels fromconventional or alternative vehicles. The greatest noise benefits for CNG or LPG vehicles are,therefore, for urban delivery and refuse collection (especially for night-time or early morningdeliveries) and for slower urban routes. Bus routes are a relevant application. BIC concludes thatthe noise benefits of alternative fuel vehicles should be taken into account in assessing therelative merits of such fuels compared to conventional fuels.

19 Because these are marginal costs, multiplying them by the total distance travelled by individual vehicleclasses, then summing, will not cover total estimated noise costs.

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6.3 Examining Noise Effects and Charges

It is clear that the noise burden of any vehicle will depend on the type of vehicle and thespeed it is travelling at. The corresponding impacts this noise has will depend on thelocation of travel, with the impact varying according to the local population exposed. Inthis regard, the application of charges for noise raises similar issues to air pollution.However, there are additional site and time-specific factors that influence noise levels,not least the importance of other vehicles in contributing to noise levels (non-linearity)and because of these factors, many of the issues relevant for congestion and charges arealso relevant for noise.

The very large number of parameters means that setting relevant charges for noise is themost challenging task of all the externalities examined. Fuel use has very little relevanceto noise burdens, other than as a general representation of usage. To properly account fornoise levels, a detailed electronic charging system based on km traveled, by area, by time,and adjusted for vehicle type would be needed.

In the absence of such systems, most countries have adopted a command and controlapproach to noise. In areas where noise is being tackled (e.g. in Europe through the ECnoise directive), the focus has been on identifying the most cost-effective options fornoise reduction. This is thought to be the most efficient way to target noise problemareas. Options being considered are shown in Table 6.4.

A number of these options might be encouraged through economic instruments. Forexample:

• lower sales tax or lower registration fees on low noise vehicles/alternative fuelvehicles. Fuel cost incentives are also relevant for alternative fuel vehicles, sincetheir use is mainly urban, where noise problems are concentrated;

• access charging for vehicles in urban areas (e.g. road pricing);

• scrappage subsidies for older, noisier vehicles;

• incentives to make urban public transport more attractive (e.g. FBT exemptions foremployer-provided public transport tickets; providing access to DAFGS/EnergyGrants (Credits) for urban buses).

The costs of any program to address noise could be recovered through a fuel charge. Forexample, based on estimated national urban damage, an average urban charge of about7c/L might seem appropriate. This would be too low for the noisier vehicles (e.g. trucksin stop start conditions) and too high for quieter vehicles (e.g. CNG delivery vehicles).

The funds from such a levy could be used to put in place a targeted and cost-effectiveprogram that reduces noise, e.g. requiring low noise surfaces on all urban roadresurfacing, programs to fit roadside noise barriers for problem road sections, etc. Fixed

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charge incentives for lower noise vehicles and rebates for public transport vehicles,especially those using alternative fuels, would be appropriate if this approach was taken.A nominal charge could be included in rural fuel costs, in recognition that there will besuch costs outside urban areas. However, BIC is not convinced that noise cost estimatesare sufficiently reliable at present for a robust charging program to be implemented.

BIC concludes that the average noise costs from urban road traffic are about 7c/L offuel consumed in urban road use. Costs from rural road use are minimal.BIC proposes that further research be undertaken on noise costs from road trafficand on the most cost-effective means of reducing these costs, in preparation for theimplementation of a targeted program to combat vehicular noise.

Table 6.4: Policy Options for Reducing Traffic Noise

Technical measures to reduce noise at source Quiet road surfaceLow noise tyresAlternative fuel vehiclesCar and engine design

Non-technical measures to reduce noise at source Vehicle emission standards Roadside inspection and maintenance programsParking control and workplace charging.Scrappage, purchase and retrofit incentivesTravel substitution methods (tele-working)Changes in driver behaviour (braking,acceleration, use of horn, etc)

Traffic management Speed limits and controlLow emission zones Road pricingPedestrianisationNew road infrastructure (e.g. bypasses)Road closure/restrictionsVehicle bansDelivery and pick-up restrictions (night)City logisticsTraffic calmingImproved public transportTraffic management to reduce numbers vehiclesTraffic management to improve traffic flowEmployee travel

Planning Land-use planning (distance road to buildings)Urban planning regulationsOrientation of buildings and façade designHome zones

Measures aimed at reducing noise propagation Cuttings and sidingsor noise at receptor Noise barriers

TunnelsDouble glazing (windows)

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7. Accidents

7.1 Accident Costs

ECMT (1998) summarises the main costs associated with transport accidents as follows :

• hospital and medical costs;

• lost production;

• material costs (e.g. vehicle repair);

• handling costs (e.g. police or fire services, legal administration);

• prevention costs (vehicle safety features, road design and surfacing, driver education,etc);

• non-material damage (personal distress of victims, relatives and friends);

• individual death and injury.

Some of these are costs with dealing with accidents after they have occurred, others arecosts incurred by way of accident prevention or reduction. The latter are essentially aform of internalisation of prospective future costs.

It is widely acknowledged that a substantial part of accident costs are currentlyinternalised, being directly or indirectly paid by those who cause the accidents. Variousforms of insurance deal in part or whole with many of these costs, from vehicle and thirdparty insurance to medical insurance. ISC (1990), for example, concluded that allAustralian accident costs in the mid-80s were already covered by road users as a group.

The Bureau of Transport Economics (2000) has estimated that road crashes cost Australia$15 billion in 1996. The composition of their estimates is shown in Figure 7.1. Theestimate values fatalities on the human capital approach, at about $1 million per life lost.It notes, however, that if a willingness to pay basis had been used and a WTP value of $2million had been used, the total cost would have increased to $19 billion, or more(depending on precisely what is covered by the willingness to pay measure). BICbelieves that the willingness to pay approach is conceptually consistent with theframework of social cost benefit analysis, based on individual preferences, and that thisshould approach should be used. $2 million is a very low estimate of WTP, such that $19billion can still be taken as a conservative estimate of accident costs20. If this wasupdated to 2000 values (but still using 1996 accident data), the total would be about $21billion. This is the figure that BIC has used, although BIC believes that a still higher total

20 The estimate of willingness to pay that underlies our estimates of air pollution impacts starts with a valueof $5.7 million (but cuts this back substantially to take account of the estimated period of life lost).

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cost is appropriate, because $2 million is a very low estimate of relevant WTP byinternational standards.

Source: BTE (2000), Road Crash Costs in Australia, Report 102, Canberra.

Meyrick (1994) reviewed BTE and ARRB work on road crash costs and estimatedaccident costs of 5.3c/vkm for metropolitan road use and 4.7c/vkm for non-metropolitantravel (these are average costs not marginal costs). Following review of the componentsof these costs, Meyrick’s conclusion was that the external component of these accidentcosts was a total of $1.35 billion, or about 0.9c/vkm. He split this into external costs of0.047c/vkm for rural areas and 1.25c/vkm for metropolitan areas. These costs were basedon analysis that valued the loss of human life at about $750,000, using the human capitalapproach. Had a willingness to pay approach to valuing life been used, with values ofperhaps $2 million at the time, these costs would have been higher.

Meyrick’s work and some later work of which BIC is aware suggests that the externalcomponent is about 20-35% of total costs. If a 25% figure is applied to the BIC estimateof $21 billion, a cost of about $5 billion results. Spreading this across the total kilometrestraveled in Australia in 2000 produces an average cost of 2.8c/vkm. Being an averagecost, it is not ideal for use in marginal cost pricing. However, it does give a broadindication of the amount that might need to be recovered from road users as a group ifthey are to pay for the external costs associated with their travel, in total.

Fig. 7.1: Cost of Road Crashes by Cost Category, 1996

Travel delays10% Long term care

13%

Lost labour21%Vehicle repairs

26%

Quality of life12%

Insurance administration

6%

Legal 5%

Other7%

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7.2 Policy Instruments

ECMT (1998) groups the main policy instruments for dealing with road accidents intothree categories, all of which are directed at reducing the number of accidents, reducingcosts per accident (e.g. severity) and fully covering accident costs. The three are:

• road safety policy, which includes traffic management, vehicle safety standards anddriver education;

• vehicle insurance; and,

• financial incentives.

This submission is not the place to explore these areas in detail. However, BIC does notethat the progress that Australia has achieved over many years in lowering its road fatalityrate has apparently stopped in the past few years and fatalities are on the rise again. Thisunderlines the need for an increased policy priority to be attached to road safety. TheAustralian Transport Council has taken up this matter but it is too early yet to note anyimprovement.

BIC believes that road users should meet the costs of road safety measures that are due totheir road use. This could be achieved by:

• increasing the liability of a person causing an accident for the costs associated withthe accident, in relation (for example) to medical and public service costs and perhapssocial security costs – this would lead to an increase in insurance premiums but wouldcontain offsets elsewhere, since the aim would be to ensure that those associated withthe accidents meet more of the costs, rather than innocent third parties;

• improving the structure of relevant insurances so that they are more closely linked tothe degree of accident risk and contain more rewards for good performance. Thisapplies, for example, to compulsory third party insurances that do not vary withdriver performance history or vehicle use;

• developing a system of general road pricing, that would enable charges for road useto differentiate between roads on the basis of their safety performance. This is amatter for the future. In the meantime, some inclusion within fuel prices of anallowance for accident reduction measures could be appropriate. Such revenuescould be designated (hypothecated) for road safety initiatives (e.g. blackspotprograms).

If the three approaches are used and external costs start of the order of $5 billion, thenperhaps $1.5 billion could be recovered via an accident charge levied through fuel costs.This could be partly directed to road works, policing costs and related public measures toimprove road safety, such as driver education and awareness campaigns. SMVU datasuggests that a fuel charge of about 6c/L would be sufficient to raise this amount.

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BIC has re-analysed some of the BTE (2000) accident data that allocates costs toparticular vehicle types (e.g. fatalities; vehicle damage). Using a low WTP value of $2million per life lost, a revenue target of $1.5 billion and differing fuel consumption ratesby vehicle type from the Survey of Motor Vehicle Use, an indicative fuel charge of about8c/L for petrol and 4c/L for diesel results. As with the noise costs calculated in Chapter6, these figures involve substantial approximation.

BIC proposes that a fuel charge of 4c/L on diesel and 8c/L on petrol be imposed torecover part of the external costs of road accidents. BIC also proposes that theAustralian Transport Council initiate measures to increase the liability of thosecausing accidents for associated accident costs and to more closely align transportaccident insurances with relevant risk factors.BIC further proposes that BTE extend its recent accident cost research to produceexternal cost estimates by vehicle type, as a precursor to specific user charges.

One advantage of imposing this charge on fuel is that there is a link to distance traveled,which is one of the risk factors in road accidents. The charge does not seek to recover allthe external costs of road accidents, leaving the majority to be internalised by improvedinsurance arrangements and changing the liability attached to road accidents to attachincreased responsibility to the person(s) causing the accident.

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8. Internalising the External Costs of Road Transport

8.1 Our Findings on External Costs

Table 8.1 sets out summary measures of the external costs of road transport identified inthis report, in round terms. If one were pursuing a total cost recovery approach, thesum to be recovered would be about $17.5 billion (with congestion costs being treated asinternal costs). If congestion costs were added, the total would be about $30 billion.Congestion costs are relevant to the efficiency of resource use in the road transport sectorbut not to overall sectoral cost-recovery. Contributed revenues fall short of this $17.5billion by about $6 billion, or one-third.

Table 8.1: Total External Costs of Road Transport and Road-Related Revenues, for Cost-Recovery

Cost/Revenue Item Approximate Total Cost ($billion)COSTSRoad expenditure (source: NRTC)Congestion (source: BTE)Air pollution (source: BIC estimates)Climate change (source: BIC estimates)Noise (source: BIC estimates)Accidents (source: BIC estimates)TOTAL

REVENUESCommonwealth excise (source: Inquiry)Less Diesel Fuel Rebate (source: Inquiry)Less DAFGS (source: Inquiry)Registration feesTOTAL

4.6(12.8)

4.32.41.25

17.5(30.3)

12-2

-0.72.211.5

Source: BIC estimates.

One can dispute the accuracy of particular figures in Table 8.1 but the overall message isclear. Table 8.1 strongly suggests that road users fall well short of meeting all theirexternal costs, even if congestion costs are treated as internal costs. Infrastructurecosts are covered by a factor of more than two but the other external costs of roadtransport throw the sector into significant deficit in overall cost-recovery terms.

Even if congestion costs are treated as internal costs to road users (i.e. excluded from theoverall cost-recovery calculation), the waste associated with $13 billion in congestioncosts remains, with this cost increasing over time and expected to reach $30 billion by2015. Something needs to be done to rein in this level of urban economic waste.

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8.2 The ECMT View on Internalisation

The cost-revenue imbalance in Table 8.1 underlines the urgency of doing somethingto improve the pricing signals in the transport sector, to internalise external costs.In its comprehensive review of the external costs of transport, ECMT (1998) proposedvarious ways in which the identified external costs might best be internalised. Table 8.2summarises the conclusions of that report. BIC believes that this provides a usefulframework for considering options for Australia, with particular emphasis on the possiblerole of fuel taxation (or, more correctly, in the context of external costs, fuel charging).The remainder of this chapter summarises BIC’s views on the scale of external costs andthe most appropriate way to achieve internalisation in the medium and longer terms,drawing together material from chapters 3 to 7 and adding some integration.

Table 8.2: Policy Instruments for Internalising the External Costs of RoadTransport

External Cost Policy InstrumentsInfrastructure

Congestion

Accidents

Climate change

Air pollution

Noise nuisance

Use charges; fixed charges

Congestion charges (= specific urban usecharges); traffic management, inc. forpublic transport operation

Road safety policy (standards, trafficmanagement, education); risk-relatedinsurance premiums or charges (= specificuse charges)

Fuel charges (= specific use charges)

Standards (vehicles, fuel); specific urbanpolicy (e.g. parking policy, restrictedaccess); traffic management (e.g. speedlimits); use charges

Standards; specific urban policy; usecharges

Source: ECMT (1998), Table 12, p. 81.

8.3 Infrastructure and congestion

These costs vary, among other things, with road type and location, vehicle type (e.g.weight, axle configuration), distance driven and congestion level. An ideal policyinstrument would reflect all these cost drivers. General road pricing systems that canhandle most of these variables are not far away (e.g. an electronic road pricing system

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covering all roads). In the short to medium term, however, the present submissionproposes that infrastructure costs be handled by:

• broadening the NRTC’s charging framework to include light vehicles. Given thedifficulty of gaining acceptance of the national charging scheme for heavy vehicles,major departures from this scheme are probably ill-advised in the short to mediumterm, even though the focus is more on cost recovery than pricing to optimise theefficient use of resources. Under the NRTC’s charging framework, heavy vehiclesare “charged” 20c/L for their use of infrastructure. BIC believes that this road usecharge should be paid by all heavy vehicles using public roads (including vehiclesthat are currently excise exempt). The submission has suggested that light vehiclesshould be added to the NRTC’s PAYGO charging system, with the appropriate fuelcharge being about 7.8/L for cars and 12.6c/L for light commercial vehicles. Theresult would be a fuel levy that is specifically intended as a road use charge. Thisimmediately raises the question of hypothecation, which is beyond the Inquiry'sTerms of Reference but which, in BIC’s view, would be a desirable direction forimproving transparency in road charging and expenditure;

• congestion charging systems should be part of a major review of the possibledevelopment of a new general road pricing system for Australia, to be undertaken byNRTC under direction from the Australian Transport Council. The scale andexpected growth of congestion costs are such that they can no longer be ignored orconsigned to the realms of academic journals. However, the investigation of possiblenew options for road pricing should not be restricted to just congestion costs.Improved road pricing systems, including congestion charging, should be examinedby NRTC for ATC, by end-2002 (to ensure some urgency in the matter, given thescale of costs involved);

• BIC proposes that the Commonwealth Government show an early lead in tackling theeconomic waste associated with road congestion by providing specific road fundingfor a program of public transport on-road priority. An on-going program of $100million nationally is proposed, funded by a charge (of about 1c/L) on fuel consumedin capital cities;

• BIC also proposes that the ATC direct the NRTC to report on implementation of amass-distance charging system for heavy vehicles, to replace the current NRTCcharging system, as an early part in developing a more refined overall pricing system.

8.4 Air Pollution

Air pollution covers a number of environmental impacts of road transport. Thissubmission focuses on the human health effects from particulates and ground level ozone.In so doing, it has distinguished emission performance on several dimensions:

• urban versus rural areas, with rural areas experiencing only minimal air pollutioneffects;

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• fuel quality, with diesel emission performance varying with fuel sulfur content andalternative fuels generally (but not always) producing lower emissions than dieselsbut with little difference between the latest low emission diesel engines using ultralow sulfur diesel with particulate filters and alternative fuels such as CNG;

• vehicle emission standards, with earlier model vehicles producing higher emissions(emission standards and fuel standards are both important means of internalisingexternal costs of air pollution but they do not allow for differences in area of use).

Vehicle emission standards and fuel quality standards are, and will remain, the majormeans of tackling air pollution, with in-service requirements also expected to play a rolein future. Pricing mechanisms can play a complementary role of ensuring that residualdamages costs are taken into account by road users and in influencing choices towardscleaner technologies.

A general road pricing system would be a good way to internalise air pollution costs butsuch a system remains something for the future. Given present policy instruments, BICbelieves the most appropriate way to proceed is to:

• set an air pollution charge as part of the fuel price, with the charge being set to reflectthe latest emission control technology that is in widespread use (Euro 2);

• base this fuel charge on the estimated external costs for each respective fuel in avehicle of this technology (with higher charges on any fuels with poorer emissionperformance and lower charges on cleaner fuels);

• set the charge at a level that will be exceeded by the external costs of most vehicleuse, which we suggest should be a level that would apply in most smaller cities andtowns in Australia. This will be insufficient to cover the external costs in the largestcities but will be a start to internalising these costs. Additional measures will beneeded in the larger cities. Rural areas will be over-charged. A rebate on rural fuelsales could be used to offset this excess charge;

• provide newer heavy duty (Euro 3) vehicles that meet tighter emission standards witha registration discount reflecting their better emission performance. BIC estimatesthat this discount should be about $300 per annum for urban route buses. It shouldlast for 5 years;

• provide a scrappage subsidy to accelerate the introduction of newer heavy dutyvehicles for urban operation. BIC estimates the subsidy should be set at $2000 perbus for pre-Euro 1 buses, the incentive to last for 5 years;

• after 5 years time, increase registration charges by $400 per year for Euro 0 or olderbuses operating in larger urban areas, announcing this intention well in advance.

The approach proposed above does not deal with all of the external costs of air pollutionin the larger cities, where the air pollution issues are most marked. In time, this might

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best be handled through a general road pricing system, varying charges by time and placeof road use. In the shorter term, traffic management measures can be used to smoothtraffic flow as a means of lowering emissions and travellers can be encouraged to switchto cleaner modes, such as public transport. BIC, therefore, proposes that the air pollutioncharge not be applied to urban bus use until such time as a proper general pricing systemfor road use is in place.

If there are serious air quality concerns in particular locations, ultra low sulfur diesel andalternative fuels could be mandated for earlier introduction for city use. This is a matterfor the individual States and cities to deal with, rather than for the Fuel Tax Inquiry.

8.5 Climate Change

Fuel charges are an ideal mechanism with which to internalise the climate change costs ofroad transport, because of the direct link between fuel consumption and greenhouse gasemissions. Including a specific climate change charge within fuel prices will provide anincentive to users to think about means of achieving savings, such as technicalimprovements in fuel efficiency, changes in driving behaviour and changes in vehiculartrip making.

BIC proposes that a ‘carbon tax’ be levied on road transport fuels to encourageimprovements in energy efficiency and reduce greenhouse gas emissions from fuel use.All fuels (conventional and alternative fuels) should be subject to duty levels set on thebasis of carbon emitted.

On the basis of relevant marginal damage costs the best estimate of the appropriatecharge level is 10.7c/L for diesel (set on a value of $A40/tCO2). This value is similar tothe estimated abatement costs of greenhouse gas emissions reductions. The relevantvalue for petrol is 9.1c/L, with 6c/L for LPG and 10.7c/kg for CNG. These values areapplicable for all vehicles in all areas.

Until such time as a system of carbon taxes is in place, biofuels should be subject to acharge level of about 5c/L on account of upstream greenhouse gas emissions, subject toconfirmation by the CSIRO study on emission performance.

BIC also concludes that public transport vehicles (buses) should be exempt from thisproposed carbon duty, as a means of encouraging increased use. Buses have the capacityto reduce greenhouse gas emissions when occupancy levels are increased. Buses can alsoreduce urban congestion and air pollution costs by diverting people from private cars.Price encouragement, and other incentives such as improved service frequency andcoverage and increased operating priority, are needed to deliver changes in modal split inthis direction.

If the proposed exemption of urban buses from the suggested climate change levy(carbon tax) and from the suggested air pollution levy are taken together, they sum toabout 18c/L for urban operation for a Euro 2 diesel bus operating on 500ppm sulfurdiesel. This figure is very close to the size of the DAFGS grant available to buses above4.5 tonnes operating outside the major metropolitan areas. As an interim measure:

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BIC proposes that buses in metropolitan areas should be given access to the DAFGSand its successor Energy Grants (Credits) program. This will assist in reducingtotal greenhouse gas and air pollution emissions from land transport.

8.6 Noise

Road transport noise and its impact on people is affected by such factors as developmentpatterns, vehicle type, speed, driver behaviour, time of day, surroundings, road type andconstruction and traffic flow and intensity. Several measures are available, and are beingused, to deal with road transport noise. Such measures include road surfacing treatments,noise screens and traffic management measures to smooth traffic flow. Lowering speedlimits can also reduce noise levels. However, noise annoyance remains an issue ofcommunity concern. The NRTC has noted that Australia’s vehicle noise limits permitdouble the noise allowed by international standards and need to be upgraded.

The NRTC’s (2001) Discussion paper, A Review of the Noise Related Australian DesignRules and Engine Brake Noise, suggests that much of the future direction for noisereduction measures in Australia will be in the area of internalisation through tighter noisestandards. Improved enforcement should also be part of this process. BIC supports thisgeneral approach. Australian standards should be harmonised with those in Europe, as afirst step in a noise mitigation program. Dealing with engine brake regulations will beparticularly important, as will the problems caused by tyre noise.

The NRTC noise review process, working through the Motor Vehicle EnvironmentCommittee, is supported by BIC. We conclude that this process should be vigorouslypursued over the next year, with decisions made about whether there is a supportive rolefor pricing instruments as the current investigations provide clearer directions.

A good argument could be mounted that there will be a role to be played by pricinginstruments. For example, tyre noise will remain an issue in some operatingcircumstances, such that an externality charge might be worth considering. If leviedthrough fuel use, such a charge has some relationship to distance traveled but location oftravel and many other noise annoyance determinants are not encompassed. Given thatthe charge would be primarily urban, ways of excluding rural operation would be needed.Setting the charge at a low level and providing a rural offset could be considered.

Overall, BIC concludes that the average noise costs from urban road traffic are about7c/L of fuel consumed in urban road use. Costs from rural road use are minimal.BIC proposes that further research be undertaken on noise costs from road traffic and onthe most cost-effective means of reducing these costs, in preparation for theimplementation of a targeted program to combat vehicular noise.

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8.7 Accidents

BIC’s analysis of accidents has been rudimentary, compared to the assessment ofenvironmental impacts. However, based on that analysis BIC proposes that a fuel chargeof 4c/L on diesel and 8c/L on petrol be imposed to recover part of the external costs ofroad accidents. BIC also proposes that the Australian Transport Council initiatemeasures to increase the liability of those causing accidents for associated accident costsand to more closely align transport accident insurances with relevant risk factors.

8.8 Broad Magnitudes

This chapter has summarised BIC’s proposals for internalising the external costs of roadtransport. Table 8.2 summarises BIC’s estimates of these external costs for a range ofcommon vehicle types at Euro 2 standard (older vehicles would have higher air pollutioncosts, for example). Inevitably the process of measuring external costs involvesapproximation and averaging and the data depicted in Table 8.2 is subject to aconsiderable element of both. However, BIC believes that the estimates are sufficientlyrobust for general conclusions to be drawn. BIC emphasises again that these externalcost estimates exclude congestion costs for urban traffic. They are the costs we estimateare required for cost-recovery for major vehicle types in urban and rural operation. Therange of air pollution cost estimates represents the variation from small to large urbanareas.

Table 8.2: Proposed Fuel Based Externality Charges for a Range ofRoad Transport Vehicles (c/L; CNG = c/kg))

Cost Cars (petrol) Artic. Truck Buses #Component Urban Rural Urban Rural Urban Rural Urban CNGInfrastructure 8 8 20 20 20 20 16Congestion 0 0 0 0 0 0 0Air pollution 2 - 10 0 7 - 31 0 6 - 24 0 5 - 10Climate change 9 9 11 11 11 11 11Noise 7 0 7 0 7 0 7Accidents 8 8 4 4 4 4 4Total 34 - 42 25 49 - 73 35 48 - 66 # 35 # 43 – 48 c/kgNote: # BIC argues that buses should be exempt from air pollution, climate change and noise charges,because of their capacity to reduce costs of road use.Source: BIC estimates.

Table 8.2 and the analysis in this report, suggests that, in addition to road users as awhole not meeting the full external costs of their road use:

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• the current fuel excise is probably about right as a charge for internalising the costs ofurban road use by cars, ignoring congestion costs, but is too high in relation to ruralroad use by cars21;

• the external costs of urban road use by heavy vehicles are higher than the currentexcise rate but rural external costs for these vehicles are probably similar to currentexcise rates.

To improve the cost-recovery rate from road transport in Australia, there areseveral key directions that need to be pursued (in addition to those proposed aboveby BIC:• charges for road use by urban trucks should increase;• charges for road use by rural cars and light vehicles should decrease;• encouragement should be given to use of urban public transport, as a means of

targeting (in particular) reduced congestion, improved air quality and lowergreenhouse gas emissions.

8.9 Marginal Costs

The discussion of aggregate external costs and costs by major vehicle types has focusedon cost-recovery. As discussed in Chapter 3, this is different to externality costing tomaximise the efficiency of resource use. Given the existing infrastructure base, the latterrequires costing of short run marginal costs. The submission has not attempted to preparesuch an analysis on a comprehensive basis. However, some indicative calculations arepresented in relation to car travel, as an example.

The costs shown in Table 8.2 are average costs per litre. However, the costs for airpollution and climate change also happen to be marginal costs per litre (which equalaverage costs in this instance).

The marginal cost pricing (efficiency) perspective also places a value on the congestioncosts of road traffic, unlike the cost-recovery analysis of Tables 8.1 and 8.2. Asdiscussed in Chapter 3, congestion costs will range from zero in rural areas at most timesto costs exceeding $1/km in parts of the major cities at peak times. Stanley and Ogden(1993) estimated an “average” marginal congestion cost of 5.9c/km in Melbourne in1991. Meyrick (1994) estimated “average” marginal congestion costs at 6c/km.Updating these figures to current prices and recognising that costs for cars would be lessthan for larger vehicles would produce a current figure of perhaps 7c/km for cars, whichconverts to an externality cost of 60c/L for cars.

21 The figure suggests that urban car costs are a little under the current excise rates but, because of theconservative approach to costing congestion and air pollution, BIC concludes that the current excise rate isabout equal to the external costs of urban car use, or may be a little less than these costs.

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Noise costs are difficult to value in marginal cost terms. However, Delucchi and Hsu’s(1998) base case estimate for principal arterials was cited in Chapter 6 and an updatedestimate of 2.5c/L for cars was developed from that data.

Road damage costs are very low in marginal social cost terms for cars. Meyrick (1994)produced estimates of 2.5c/L for rural car use and 1.25c/L for urban car use. Evenallowing for inflation since that time, figures are unlikely to exceed 3c/L for rural car useand 2c/L for urban use.

Accident costs were estimated at about 8c/L in Table 8.2. These are not marginal costsbut average costs. The recent UK work on Surface Transport Costs and Charges(Sansom et. al. 2001) suggests that marginal accident costs exceed average costs, so thefigure in Table 8.2 can be taken as possibly underestimating marginal accident costs.However, there is likely to be a difference between urban and rural accident costs, whichBIC has not taken into account in Table 8.3

Table 8.3 sums up these marginal costs for cars. The costs for urban car use are far inexcess of marginal revenues from car use in urban areas but the reverse situation appliesfor rural use. The major reason for the revenue shortfall in urban areas is congestioncosts. If the efficiency of resource use is to be improved, tackling urban congestion costsis essential. Lowering the level of taxes on rural car use also emerges as a desirabledirection for policy, as it did in the cost recovery assessment. Ideally, this analysis wouldbe completed for all vehicle types.

BIC concludes that measures to reduce urban congestion should be a high priority,towards improving the efficiency of resource use in road transport. Publictransport can play a significant role in this regard. Lowering the tax level on ruralcar use also appears desirable from an efficiency perspective.

Table 8.3: Approximate Marginal Costs for Car Use (c/L)

Cost Item Urban RuralRoad damageCongestionAir pollutionClimate changeNoiseAccidentsTOTALS

260

2-10938

84-92

3minimalminimal

9minimal

820

Source: BIC estimates.

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8.10 Budget Neutrality and Other Constraints

One of the constraints given to the Inquiry has been the formulation of its proposals in asituation of overall budget neutrality. This is a significant constraint. A narrowinterpretation of this constraint would see it as meaning no change in overall revenues orexpenditures. A broader interpretation, one that provides more flexibility in pursuingpolicies for sustainable road transport, would encompass increases in expenditures beingexactly offset by increases in charges. BIC believes that the latter interpretation ispreferred since it will lead to a stronger reduction in the environmental damageassociated with road transport. However, this broader intrepretation runs counter to theInquiry’s other directive that it not consider any “… long term real increases in theeffective level of diesel or petrol taxes”.

Given the extent of under-recovery of external costs of road transport, BIC considers thatthe constraint of no long term increase in real effective diesel or petrol prices is nottenable: it will perpetuate economic waste and environmental degradation. We haveformulated our proposals seeking to minimise the increases in real charges (taxes) that webelieve are needed, within a context of budget neutrality. Our proposed increases need tobe regularly reviewed, as environmental damage levels change. In that sense they maybe argued to be not “long term real increases”.

8.11 Pricing and Other Incentives for Behaviour Change

It is widely understood that demand elasticities for road transport are generally low:demand is inelastic. Demand elasticities for urban public transport, for example, aretypically measured at about –0.3. This means that large changes in prices are needed toinduce significant changes in behaviour. Price is not a major influence on mode choicefor public transport. Reducing the external costs associated with urban road transport hasbeen shown by this submission to be a necessary direction for improved resourceallocation and for developing more sustainable transport systems. The most urgentrequirements identified in this report are doing something about urban congestion costsand air pollution, together with greenhouse gas emissions.

International experience clearly indicates that increasing the demand for urban publictransport, and reducing car use, requires22:

• increased public transport service frequency and coverage;

• improved reliability in operation, which means increased on-road priority for buses;

• improved passenger information and marketing; and,

• better connectivity between systems.

22 See, for example, Booz Allen & Hamilton’s (2001) study for the Victorian Department of Infrastructure.

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Price does not figure in the top influencers of mode choice. Rather than working onrelative prices, a preferred solution is working on service frequency and coverage and onservice reliablity. This means a need for increased funding, which is the reason why BIChas proposed a levy on urban road use, to raise about $100 million annually for aCommonwealth road-based public transport funding program. To accommodate thebudget neutrality constraint, this should be funded via an increase of about 1c/L in urbanfuel charges, dedicated to urban road-based public transport funding. To ensure that thisis not a “long term” increase, it should be limited to 5 years duration.

The Commonwealth should undertake this investment for several reasons:

• to demonstrate national leadership in reducing the large economic waste associatedwith urban road congestion (the Commonwealth has a long history of providingleadership in road funding assistance, such as its National Roads program). TheStates have responsibility for public transport service delivery but the Commonwealthcan provide leadership and support to public transport through associated roadfunding; and,

• because of the greenhouse benefits that will flow from the initiative, greenhouseprograms being primarily a Commonwealth responsibility.

The other major expenditure initiatives proposed in this submission have been: to giveurban buses access to DAFGS and its successor, the Energy Grants (Credits) program(estimated to cost about $30 million annually); and, to provide incentives to accelerateintroduction of low emission vehicles (through registration discounts and a scrappagesubsidy), likely to cost of the order of $10 million annually.

Achieving Commonwealth budget neutrality, while improving road transportresource allocation efficiency and the sustainability of road transport systems, thusrequires, in particular:• raising an additional $100 million for funding on-road priority programs for

road-based public transport, through an urban fuel charge on car and truck use,above the current excise level;

• raising about $30 million p.a. to give urban buses access to DAFGS and itssuccessor Energy Grants (Credits) program;

• raising perhaps $10 million p.a. for registration rebates for the latest technologyheavy vehicles and scrappage subsidies for Pre-Euro 1 heavy vehicles;

• further increasing the fuel charges raised from urban heavy vehicles; and,• lowering the fuel charges on rural car use below the current excise rate.

BIC defers to the Inquiry as to the most effective way to achieve this switch but believesthat the current measures that are being used to lower the cost of rural fuel might providea useful part of the solution. BIC also contends that the raising of urban fuel levies onheavy vehicles should exclude buses. Higher fuel levies on buses would have adeleterious impact on public transport use, with consequential increased car use,

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increased congestion, increased greenhouse gas emissions and increased urban airpollution – all these changes would be precisely the opposite of what is required!

8.12 Excise or a Road Charge?

BIC believes that a switch from excise to externalities as the basis forCommonwealth fuel charging, with some additional fixed charges and relatedmeasures, is desirable, even in a situation of budget neutrality.

It will result in some changes in relative prices that will provide better resource allocationsignals to road users, even though demand elasticities are typically low. These bettersignals will come through proposals like BIC’s suggestion that fuel charges should varywith the environmental performance of the fuel.

BIC believes all vehicles should pay a

• road damage charge,

• greenhouse charge and

• accident charge.

irrespective of where travel takes place. This could be called a road charge forconvenience. The charge should be set at about 26c/L for cars and for light commercialsand at about the current excise rate heavy duty diesel vehicles. An increase inregistration fees for light commercial vehicles would be needed to offset the fuel (road)charge being set at 26c/L for these vehicles (e.g. because their road damage costs areabout 4c/L higher than for cars).

Additional charges of about 13-14c/L would be needed for all urban vehicle use, toincorporate specific external costs of such use and pay for the proposed $100 millionroad-based public transport program and other minor initiatives (costed at about $40million extra annually). Further increases are then needed to meet the additional externalcosts of urban truck use, unless there are demonstrable external economic benefits fromsuch use.

BIC’s analysis suggests that rural car and light commercial vehicle users should probablypay about 12c/L less than at present in fuel charges. This needs to be recovered fromurban road users to maintain budget neutrality. BIC believes that this restructuringshould take place. Part of the increase should come from increased levies on urban truckuse but part could also be sought from car users in recognition of the magnitude ofcongestion costs. This switch may need to be phased in over a few years, to ease theburden.

BIC’s proposals will also mean some rebalancing of relative fuel costs, as fuel chargesare varied to better reflect the environmental performance of different fuels. Thisrebalancing will see a lower future advantage to alternative fuels as compared to cleaner

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diesel. This will have a positive budget impact, because the scale of incentive toalternative fuels, through programs like DAFGS and Energy Grants (Credits), can bereduced in line with the relative external costs of different fuels in use.

8.13 DAFGS/Energy Grants Credits

The analysis in chapters 3, 4 and 5 suggests that the air pollution and climate changeadvantage in alternative fuels is less than the benefit they receive under current exciseregimes/DAFGS. For example, the analysis indicates that CNG should have less than10c/L advantage over low and ultra low sulfur diesel, used in Euro 2, 3 or later heavyduty vehicles on grounds of environmental performance, with the differential being onlyminimal for city diesel used with a particulate trap. However, our analysis has alsosuggested that alternative fuel vehicles have noise benefits that have not been valued todate, particularly in low speed urban applications.

Alternative fuelled vehicles sometimes replace low emission diesel vehicles, over whichthey have a diminishing air pollution and climate change advantage. The area of urbanuse where alternative fuels may deserve to maintain their existing DAFGS advantage isprobably in stop-start operations, such as delivery vehicles, waste collection and possiblyin route bus operations, where noise benefits may be important. BIC re-iterates,however, that all vehicles should pay a road damage charge, including alternative fuelvehicles.

BIC believes that those operators who are currently receiving benefits under theDAFGS program should continue to receive those benefits at the current rate, forthe time that was envisaged when they became entitled to the benefit. Futurerelative charges on all fuels under such programs should be based on their relativeenvironmental performance, including with respect to noise.

On environmental, safety and congestion grounds, it can be strongly argued that urbantrucks should not be given access to these grants, unless significant external economicbenefits can be demonstrated. Providing the grant to rural trucks and buses implies thatthe value of the regional economic and social benefits from such traffic offsets anequivalent amount of environmental damage.

BIC has argued that all urban buses should have access to the DAFGS/Energy Grants(Credits) program. This entitlement would be in recognition of their capacity to reducecongestion costs, air pollution and noise costs, particularly as lower sulfur diesel fuelsbegin to penetrate the bus fleet. Providing this benefit would probably cost about $30million annually. The submission has already made this proposal in Section 8.5.

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References

Australian Bureau of Statistics (2001), Survey of Motor Vehicle Use, Cat. 9208.0, AGPS,Canberra.

Australian Greenhouse Office (2000), National Greenhouse Gas Inventory 1999, FactSheet 3 – Energy: Transport.

Booz, Allen & Hamilton (2001), Bus Improvement Strategy: Final Report, Reportprepared for the Victorian department of Infrastructure, Melbourne, August.

Bureau of Transport Economics (1996), Transport and Greenhouse: Costs and Optionsfor Reducing Emissions, Report 92, AGPS, Canberra.

Bureau of Transport Economics (2000), Urban Congestion – the Implications forGreenhouse Gas Emissions, Information Sheet 16, Canberra.

Bureau of Transport Economics (2000), Road Crash Costs in Australia, Report 102,Canberra.

Bus Industry Confederation (2001), National Policy Statement.

Commonwealth Fuel Tax Inquiry (2001), Fuel Taxation Inquiry Issues Paper.

Commonwealth Interdepartmental Greenhouse Projections Group (2001), Draft Reviewof Greenhouse Gas Projections for the Transport Sector: Consultation paper forStakeholders, July.

Cox, J (2001), Australian Diesel Fleet Characteristics. Emissions Projection Update,Report prepared for the National Road Transport Commission, June.

CSIRO (2001), Life Cycle Emissions Analysis of Alternative Fuels for Heavy Vehicles,Report prepared for the Australian Greenhouse Office.

Delucchi, M. and Hsu, Shi-ling, The External Damage Costs of Noise Emitted FromMotor Vehicles, Journal of Transport and Statistics, October, pp. 1-24

Department of Transport (1980), Transport Pricing and Cost Recovery Seminar, Papersand Proceedings, Canberra, 17-18 July, 1979, AGPS.

Environment Protection Authority (1994), Victorian Transport Externalities Study,Publication 415, May.

European Commission (1995), Towards Fair and Efficient Pricing in Transport: Policiesfor Internalising the External Costs of Transport in the European Union, COM (95) 691.

European Commission (1995), DGXII (JOULE Program), Externalities of Energy,ExternE Project Report No. 2, Methodology.

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European Commission (1998), DGXII, Externalities of Energy, ExternE Project ReportVol. 7, Methodology Update.

European Commission (1999). ExternE Externalities of Energy. Volume 8. GlobalWarming. Published by the European Commission, EUR18836.Ecofys Energy and Environment et. al. (2001), Economic Evaluation of SectoralEmission Reduction Objectives for Climate Change, Published by the EuropeanCommission..

European Commission (2000), External Costs of Energy Conversion – Improvement ofthe ExternE Methodology and Assessment of Energy-related Transport Externalities.Final publishable report of the ExternE Core/Transport project. Published by EC DEGResearch, 2000..

European Conference of Ministers of Transport (1998), Efficient Transport for Europe:Policies for Internalisation of External Costs.

Inter-State Commission (1990), Road Use Charges and Vehicle Registration: A NationalScheme (3 volumes), AGPS Canberra.

Maddison, D. et. al (1996), The True Costs of Road Transport, Blueprint 5, Earthscan,London.

Meyrick, S. (1994), Appendix, in Cox, J., Refocussing Road Reform, Report prepared forthe Business Council of Australia.

Nash, C.A., Pearce, D.W. and Stanley, J.K. (1974), Criteria for Project EvaluationTechniques, Journal of the American Institute of Planners.

National Environment Protection Council (1998), Ambient Air Quality. Final ImpactStatement for the Ambient Air Quality National Environment Protection Measure.

National Road Transport Commission (1999), Updating Heavy Vehicle Charges:Regulatory Impact Statement, November.

National Road Transport Commission (2001), A Review of the Noise Related AustralianDesign Rules and Engine Brake Noise, Discussion paper for Comment, April.

Sanson, T., Nash, C., Mackie, P., Shires, J and Watkiss, P. (2001), Surface TransportCosts and Charges: Great Britain 1998, Report by the Institute of Transport Studies,University of Leeds and AEA Technology Environment prepared for the Department ofTransport, Environment and the Regions, July.

Sinclair, Knight, Merz, et. al. (1998), Scoresby Transport Corridor Environmental EffectsStatement.

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Stanley, J. and Ogden, K. (1993), Congestion Pricing of Melbourne’s Roads,Unpublished report for VicRoads.

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Attachment A: Fuel Taxation and the 2000 Olympics

There are a number of factors which influence the use of public transport over the motorcar. The advantages of achieving a modal shift from the private car to public transport aresignificant, and include congestion, air quality, health, and financial benefits. The 2000Sydney Olympics demonstrated that taking affirmative action to restrict the use of the carin favour of public transport worked effectively. Reforms to fuel taxation and pricingoffers an opportunity to achieve modal shift towards public transport. Fuel pricing policyshould be used to capture the benefits of increasing public transport trips relative to thosetaken in private cars.

The following report is a summary of a report published by the Institute of TransportStudies, The University of Sydney (Hensher and Brewer, 2001).

The Sydney Olympics held in September 2000 provided an opportunity to monitor theplanning of transport provision for the world’s greatest sporting spectacular. Theestablishment of a knowledge base of behavioural intentions, leading up to such a majorevent, provides important information in understanding how best to manage (or copewith) the usual movement of commuters alongside additional flow of people associatedwith a major event. It is the behavioural outcome that provides a significant gauge of thevalue of marketing and promotional activity that sought to mediate commuters' intentionsand ultimately behaviour.

Sydney came into the Olympic games with a transport system that typifies many majormetropolitan hubs, plenty of traffic congestion in the peaks and shoulders on the roads, inpublic transport and at the airport. Spectators, athletes, officials and workers travelling toand from the main Games complex at Homebush Bay daily totalled in excess of 500,000with a further 100,000 requiring passage to Darling Harbour at the southern end of thecity and other venues located around the Sydney Area.

The transport system was expected to respond by ensuring that this record attendance wasduly delivered well in time to all events. How did it perform? On the Day of the OpeningCeremony, trains carried over 55,000 spectators up to 4pm (with the ceremony starting at7pm), and buses carried 15,000 (across 13 spectator routes). At the conclusion of theevening, over 90,000 spectators left Olympic Park by train with a further 24,500departing by bus. On the first full day of the Games (16th September) over 900 trainservices passed through Olympic Park station delivering 30,000 spectators by 10am,75,423 by mid-afternoon, with 23,602 by bus. Friday 22 September was the busiest daywith the commencement of Athletics and the continuation of all the other major sports atthe major Olympic venue (Figure 1). The movement of people to and from the OlympicsCentre throughout the day is shown in Figure 1. By 5pm 307,139 people had beentransported to the stadium 217,953 by train and 89,186 by bus. Around 6pm, queues fortrains from Central station in the city to Olympic Park, were up to 800 metres long withpassenger waiting times as long as 45 minutes. An additional 120,954 people left thestadium to travel back to the city.

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Figure 1. The Passenger loadings to Olympic Park on Friday 22nd September

The good news is that Sydney coped very well with the movement of passengers by busand train to/from major Games locations. The data system showed about 3.4 millionboardings per week in August 2000, with 3.2 million boardings per week during theOlympics. This adds up to more than 5.5 million which is the publicly released figure.

Travel times have never been as good as those experienced during the SydneyGames. Typically any trip time in the peak was halved: 60 minutes became 30, 10became 5. The National Roads and Motorists Association (NRMA) monitored a numberof key arterials and tollroads; M4/Parramatta Road, Victoria Road and CumberlandHighway, on five days (18/9,19/9,22/9, 25/9 and 26/9) (NRMA, 2000). The travel timesurvey was terminated well before the planned date because it was found that travel timesimproved substantially without exception, with free flow speeds almost always offered(see Table 1).

Table 1: Summary of the 1999 and 2000 average travel times for each of themonitored roads

Road/ Time (Minutes) AM 1999 2000

PM 1999 2000

M4/ Parramatta Road 64 33 56 33Victoria Road 57 28 45 35Cumberland Highway 80 57 - -

Public Transport Use 22 September

0

50000

100000

150000

200000

250000

300000

up to 7am up to 8am up to 9am up to 10am up to 11am up to noon up to 1pm up to 2pm up to 3pm up to 4pm

Time of Day

TrainBusTotal

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The M2 tollroad reported a 4.5% drop in revenue while the Eastern Distributor (linkingthe city to the airport and eastern suburbs) reported a 2% revenue drop. Examples in the1984 Los Angeles Olympics show that a 4% reduction in background car traffic wasenough to virtually eliminate congestion on the highways serving the Olympics. Duringthe 1992 Barcelona games a 15-20% reduction was actually achieved (Richmond, 1996),which shows that it is possible to change people�s behaviour (at least in the short term), ifthe alternatives offered are attractive enough.

So what is the verdict? A gold medal was the outcome. Sydney Games gave both thespectator and the commuter an augmented service, beyond their expectations, whichoptimised their Olympic experience. However, the reality of two weeks of commutingbliss is now but a dream. However, there are simply not enough incentives to learn fromthe experience beyond the Sydney Games. The physical capacity is proven, thebehavioural response is recorded and the city is well prepared for change, albeit shortterm.

References

Hensher, D.A and Brewer A.M, (2001), Going for Gold at the Sydney Olympics: How didTransport Perform?, Institute of Transport Studies, The University of Sydney, June.

NRMA (2000), Travel time monitoring of selective routes during the Olympics,Unpublished spreadsheet, November.

Richmond, J (1996), Transport for the Olympics, Making it Work: A First Forum,Institute of Transport Studies Forum, University Of Sydney, 5 November.

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