On Transportation


Externalities—social costs and benefits

The then Bureau of Transport and Communication Economics (BTCE) in a 1996 report titled Transport and greenhouse—costs and options for reducing emissions, described greenhouse gas emissions as negative externalities of transport. Other examples of negative transport externalities are traffic congestion, car crashes and air pollution.

Negative externalities impose costs on society—for example, the cost of providing health care. It is sometimes assumed that the optimal outcome from society's perspective is to reduce the cost of externalities to zero. However, a situation of no externalities is undesirable because activities also generate social benefits. Few would argue that it would, for example, be desirable to ban cars in order to eliminate traffic congestion and air pollution because driving cars clearly provides social benefits. In theory, the socially 'optimal' level of an externality is where the additional costs to society (the marginal social cost) equals the additional benefit to society (the marginal social benefit). At any other point, society's welfare could be improved by increasing or reducing the level of the activity depending on the starting point. In the case of greenhouse gases, the theoretical optimal level is where the marginal abatement cost equals the marginal abatement benefit. In practice, it is very difficult if not impossible to determine what the optimal level is.

The Australian Government has introduced initiatives to help reduce greenhouse gas emissions from the transport sector.

Private transport

It is often claimed—usually by public transport advocates—that motorists do not pay the social costs of motoring. That is, while motorists pay for the private cost of running cars, they do not pay for the cost of air and noise pollution, congestion and so on. However, motorists contribute indirectly to the cost of externalities through taxes and charges. In this context, it is perhaps worth noting that motor vehicle taxes and charges exceed the amount of road-related expenditure. For example, in 2003–04, taxes and charges were 1.8 times road-related expenditure according to the Bureau of Infrastructure, Transport and Regional Economics (BITRE) information sheet Public road-related expenditure and revenue in Australia (2006 update).

There are numerous ways of reducing car externalities. They include fuel taxes, fuel standards, developing alternative fuels, and road-pricing. The BTCE examined 16 ways of reducing transport emissions and found that the largest potential reductions in emissions could be achieved by planting trees, a carbon tax on petrol, and the use of ethanol derived from wood. However the social cost of implementing these measures varied. The most effective 'no regrets' measures were urban road user charges, a carbon tax on petrol, reduced urban public transport fares, and urban commuter parking charges.

A 2002 BITRE report titled Greenhouse policy options for transport examined measures involving the transport sector with potential to reduce greenhouse gas emissions in terms of their economic, environmental and fiscal impacts based on international and Australian evidence. It found that measures such as road congestion pricing; conversion of some of the fixed costs of car use to variable costs; removal of parking-related distortions (e.g. regulations on the minimum number of spaces for new buildings and underpricing of employer-provided spaces); and reducing passenger motor vehicle tariffs to encourage uptake of newer, more fuel efficient cars, could improve economic efficiency while also reducing greenhouse gas emissions.

Public transport

It is argued that greater use of public transport would help reduce emissions. The NSW Enviromental Protection Authority's report State of the Environment 2003 did an analysis of data that supported this argument. It found that research based on 1990 data showed that, on average, motor vehicle energy efficiency is half that of buses and rail, and 2002 research by the Warren Centre showed that public transport was 2.7 times more efficient than cars across the whole day.

This raises the question of how large the substitution of public for private transport might be. While free public transport, for example, would reduce private car use, it would also increase demand for buses and trains both of which use fossil fuels (trains use diesel or electricity generated mostly from coal-fired power stations).

The BTCE simulated the consequences of reducing urban public transport fares by 20, 40, 60 and 80 per cent. The study found that if urban public transport fares were reduced to 80 per cent of normal levels, commuting travel by private cars would fall by about 12 per cent. Total emissions from all passenger transport in urban areas (private car and urban public transport) would be about only four per cent lower. Similarly, Professor David Hensher, Director of the Institute of Transport Studies at the University of Sydney, suggests that the energy savings from substituting public for private transport could be small.

Public transport is generally subsidised by taxpayers because it runs at a loss. The introduction of free public transport would therefore increase the public transport budget deficit. To remain within a given budget, the government would have to reduce expenditure elsewhere (health, education, etc). In the past, state governments have even increased public transport fares because the public transport deficit had become too large. In deciding whether to expand the network, state governments consider alternative uses of the funds, that is, they consider the 'opportunity costs' of expanding the network.

The problem is even if public transport were free, many commuters would not use it. In Victoria, it has been estimated that free public transport could increase patronage by up to 30 per cent. The idea was rejected by the Victorian Government because it was already spending more than $1 billion subsidising public transport.


The aviation industry has attracted attention for its contribution to greenhouse gases. Worldwide, aviation contributes less than two per cent of carbon dioxide emissions, although this is projected to rise to three per cent. In January 2008, BITRE provided an overview of the aviation industry and the environment which found that the industry faces many environmental challenges due both to its growing size and lack of alternative fuel sources.


11 September, 2009

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