The case of an urban toll
NOTICE: Emissions pricing and congestion pricing have a lot in common. The economics of both are simple. And the policy of the two is a mess.
Like carbon pricing, congestion pricing just makes sense. About 90% of economists surveyed approved carbon pricing and congestion – ten years ago. And the case of the two has not weakened over time.
Political problems in both cases risk undermining the systems.
So far, New Zealand does not have a congestion charging system to reduce traffic, but the Transport Select Committee has considered a proposal for a congestion charge in Auckland.
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Auckland’s proposed congestion pricing system includes travel discounts for commuters with community service cards, among other measures intended to mitigate the effects on fairness. High prices are seen as a problem.
New Zealand’s Emissions Trading System (ETS) imposes a cost on non-agricultural greenhouse gas emissions. Fear of letting carbon prices go up has led to a host of proposed regulatory interventions that increase the cost of achieving net zero without reducing net emissions.
Bans on industrial fossil fuel heating, import bans on gasoline vehicles and bans on new domestic gas connections cannot reduce net emissions. They only translate into carbon credits available for someone else to buy instead. The price of emission credits in the ETS is then lower, but the cost of reaching net zero is higher.
In both cases, a price distortion and an increase in overall costs are proposed to avoid a visible increase in costs for the poorest households.
But careful use of the revenues collected by the two systems could solve the political problems that each face, while ensuring the smooth functioning of both systems.
The government should not interfere with pricing to address fairness issues. The principle is so fundamental that it forms the core of welfare economics at the university level.
The first fundamental theorem of welfare economics shows that when markets work well, prices lead to efficient outcomes. Efficiency here just means that no one can be improved without hurting someone else even more.
But there are many effective potential results.
The Second Fundamental Theorem says that if your view of fairness prefers one effective outcome over another, the government just needs to provide the right kind of redistribution – finding the least bad ways to get money from those who have it. more towards those who have less.
Doing this well solves the fairness problem without breaking the pricing system. This is important because while many potential results are effective, many more are not. Putting an inch on prices, for the sake of fairness, risks making everyone worse. And there are much better alternatives.
Congestion pricing and carbon pricing both raise money. Auckland’s proposed congestion tax would tax commuters at peak times. The government would collect the resulting revenue. The government sells emission credits in the ETS, also generating revenue.
If the government could simply set congestion charges that let traffic flow and let rising carbon prices with a falling ETS cap do the heavy lifting towards net zero, revenues from both regimes could help improve the tax system. .
Most taxes cause distortions. Rather, congestion and carbon charges eliminate the distortions. These would be base broadening measures that could reduce some worse taxes while leaving room for additional spending.
In the real world, the fear that poorer households will experience high carbon loads or congestion means that politics is getting in the way. The equity issues are real, although in the case of congestion tolls they are a bit more questionable.
But there is a better solution than interfering with ETS or distorting congestion prices.
In both cases, the income received could finance a dividend that would be returned to households.
The 2021 budget announced the confinement of public revenue from the ETS from next year, rather than continuing to allocate it to general revenue. Although the government has not announced what it will do with these revenues, it could provide every household with a carbon dividend.
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Transport Minister Michael Wood speaks at the release of the Ministry of Transport Green Paper.
Dividend payouts would end up being progressive, as the richest spend more on everything and the carbon is in everything. Higher ETS prices would then mean a higher carbon dividend.
Likewise, congestion toll revenues, net of the amount required to operate the system, could be reimbursed to households. There are many different ways to design this type of system. Dividend payments could be higher for families with community service cards. As long as the program doesn’t pay people more if they drive more during rush hour, it will alleviate fairness issues without breaking the system.
The carbon and congestion dividends would reverse the policy of rising carbon charges and congestion. Rather than provoking political pressure that risks breaking systems, rising prices would help integrate the two.
Carbon congestion and pricing policies must not break either system. But in order to solve the political problem, one has to use the revenues with caution.
Dr Eric Crampton is Chief Economist at The New Zealand Initiative.