By Honorary Professorial Fellow Gordon Noble

A flexible petrol levy that rises and falls with global petrol prices, is a better way to address congestion than the cost reflective road pricing model proposed by the Harper Competition Review.

Image source: commons.wikimedia.org/wiki/File:Petrol_pump_mp3h0354.jpg

According to the Competition Policy Review new technology provides an opportunity to introduce cost reflective road pricing. The Review states:

More effective institutional arrangements are needed to promote efficient investment in and usage of roads, and to put road transport on a similar footing with other infrastructure sectors. Lack of proper road pricing leads to inefficient road investment and distorts choices between transport modes, particularly between road and rail freight.

The advent of new technology presents opportunities to improve the efficiency of road transport in ways that were unattainable two decades ago. Road user charges linked to road construction, maintenance and safety should make road investment decisions more responsive to the needs and preferences of road users. As in other network sectors, where pricing is introduced, it should be overseen by an independent regulator.

Cost reflective road pricing would essentially involve different charges for different roads, with the potential to even charge different prices at different times.

The core rational behind cost reflective road pricing is that if a person is charged to drive on a particular road at a particular time they will assess whether the fee they are being charged is worth it. From an economic perspective those who have lower value uses, would shift their behaviour and travel at different times.

In economic terms the problem with cost reflective road pricing is the inelasticity of demand.

As a concrete example consider an employee who must arrive at their job at 8.00am. If they are late they will receive a warning and potentially dismissal. Theory would suggest that this employee would shift their behaviour, by perhaps taking public transport to their job. But the reality of where many jobs are located in Australia’s congested cities of Melbourne and Sydney, and increasingly Brisbane, is that public transport does not offer a realistic alternative at peak times. The problem is that with the exception of CBD based employment, jobs are distributed across the city. And it is the employer, not the employee, who has power over starting and finishing times.

Those employees that are employed with fixed working hours will simply absorb any road pricing increases on their particular transport route. Pricing will therefore not impact congestion.

Cost reflective pricing may result in some individuals shifting their behaviour, but before we race to implement technology that will not be costless we need to understand where the burden of pricing would fall.

The problem with cost reflective road pricing is that it does not take account of the structure of cities, nor of the individual circumstances of road users. It does not take into account the way the control of employment exercised by employees.

There is an alternative that can provide the funding to address congestion.

My suggestion is to establish an infrastructure levy on petrol prices that would vary according to global petrol prices.

Now is the perfect time to introduce such a levy, which would be in addition to existing petrol taxes.

According to investment analysts, oil has been hoarded around the world in empty tankers and we are now close to the point where all available storage facilities have been used. Once this point is reached there are predictions that the price of oil will fall again.

The problem with volatile oil prices is that they send exactly the wrong signals at the wrong times. If we believe that congestion can be addressed through pricing mechanisms, and we believe that the economic benefits of introducing cost reflective road pricing are worth it, then it would also make sense to regulate the current oil price volatility.

One of the challenges that governments have in building new infrastructure, whether rail or road, is how to fund them. One option is to introduce a new infrastructure levy on petrol prices.

If we want to send a price signal re congestion through pricing then it makes sense for the government to collect any windfall from reduced prices.

If, and when oil prices increase then the levy should be automatically reduced, which would result in a steady price at the petrol pump. Given the significant benefit to consumers from the recent falls in petrol prices, it is arguable that a levy price could be set at a rate that is modestly above the existing global oil price.

In terms of administration, establishing a flexible industry levy would not require a new regulator or the use of technology on every road and every car. It would simply require a piece of legislation mandating the collection of the levy at the wholesale point of production or import.

The flexible petrol levy would go straight into a national infrastructure fund that would provide the Federal Government with an additional bucket to fund projects aimed at reducing congestion.

Congestion in Australia is largely the product of the design of our cities, which were designed in an era of low petrol prices when the invention of the motor vehicle enabled urban sprawl. We have now reached the limits of sprawl, but we have not developed the efficient public transport systems that we commonly see in Europe.

Turning Sydney or Melbourne’s public transport system into something that compares to London or Paris may be decades away. The key will be finding the money for the necessary infrastructure investment, some of which may not be able to be financed by the private sector, would nevertheless have significant productivity benefits.

With global oil prices on the tip of another fall there has never been a better opportunity to capture funding in a way that doesn’t hurt consumers.

Image credit: Rama. Media released under the terms of the Cc-by-sa-2.0.fr and CeCILL licences.