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Congestion pricing

Congestion pricing or congestion charges is a system of surcharging users of a transport network in periods of peak demand to reduce traffic congestion. Examples include road pricing, and higher peak charges for utilities, public transport and slots in canals and airports. This variable pricing strategy regulates demand, making it possible to manage congestion without increasing supply. At the same time, users will be forced to pay for the negative externalities they create, making them conscious of the costs they impose upon each other when consuming during the peak demand, and more aware of their impact on the environment.

The application on urban roads is limited to a small number of cities, including London, Stockholm, Singapore and Milan, as well as a few smaller towns. Four general types of systems are in use; a cordon area around a city center, with charges for passing the cordon line; area wide congestion pricing, which charges for being inside an area; a city center toll ring, with toll collection surrounding the city; and corridor or single facility congestion pricing, where access to a lane or a facility is priced.

Implementation of congestion pricing has reduced congestion in urban areas, but has also sparked criticism and public discontent. Critics maintain that congestion pricing is not equitable, places an economic burden on neighboring communities, has a negative effect on retail businesses and on economic activity in general, and is just another tax.

Description

Congestion pricing is a concept from market economics regarding the use of pricing mechanisms to charge the users of public goods for the negative externalities generated by the peak demand in excess of available supply. Its economic rationale is that, at a price of zero, demand exceeds supply, causing a shortage, and that the shortage should be corrected by charging the equilibrium price rather than shifting it down by increasing the supply. Usually this means increasing prices during certain periods of time or at the places where congestion occurs; or introducing a new usage tax or charge when peak demand exceeds available supply in the case of a tax-funded public good provided free at the point of usage.

According to the economic theory behind congestion pricing, the objective of this policy is the use of the price mechanism to make users more aware of the costs that they impose upon one another when consuming during the peak demand, and that they should pay for the additional congestion they create, thus encouraging the redistribution of the demand in space or in time, or shifting it to the consumption of a substitute public good; for example, switching from private transport to public transport.

This pricing mechanism has been used in several public utilities and public services for pricing higher fees during congested periods, as a means to better manage the demand for the service, and whether to avoid expensive new investments just to satisfy peak demand, or because is not economically or financially feasible to provide additional capacity to the service. Congestion pricing has been widely used by telephone and electric utilities, metros, railways and autobus services, and has been proposed for charging internet access. It also has been extensively studied and advocated by mainstream transport economists for ports, waterways, airports and road pricing, though actual implementation is rather limited due to the controversial issues subject to debate regarding this policy, particularly for urban roads, such as undesirable distribution effects, the disposition of the revenues raised, and the social and political acceptability of the congestion charge.

Congestion pricing is one of a number of alternative demand side (as opposed to supply side) strategies offered by economists to address traffic congestion. Congestion is considered a negative externality by economists. An externality occurs when a transaction causes costs or benefits to third party, often, although not necessarily, from the use of a public good. For example, manufacturing or transportation cause air pollution imposing costs on others when making use of public air. Congestion pricing is an efficiency pricing strategy that requires the users to pay more for that public good, thus increasing the welfare gain or net benefit for society.

Nobel-laureate William Vickrey is considered one of the fathers of congestion pricing, as he first proposed it for the New York City Subway system in 1952. In the road transportation arena these theories were extended by Maurice Allais, Gabriel Roth who was instrumental in the first designs and upon whose World Bank recommendation the first system was put in place in Singapore, and Reuben Smeed, the deputy director of the Transport and Road Research Laboratory whose ideas presented in his report to the British government were rejected by successive governments since the 1960s.

The transport economics rationale for implementing congestion pricing on roads, described as "one policy response to the problem of congestion", was summarized in a testimony to the United States Congress Joint Economic Committee in 2003: "congestion is considered to arise from the mispricing of a good; namely, highway capacity at a specific place and time. The quantity supplied (measured in lane-miles) is less than the quantity demanded at what is essentially a price of zero. If a good or service is provided free of charge, people tend to demand more of it - and use it more wastefully - than they would if they had to pay a price that reflected its cost. Hence, congestion pricing is premised on a basic economic concept: charge a price in order to allocate a scarce resource to its most valuable use, as evidenced by users' willingness to pay for the resource".

Urban roads

For the broader concept on roads charges see road pricing.

Practical implementation of road congestion charges is found almost exclusively in urban areas, because traffic congestion is common in and around city centers. Autoroute A1 in Northern France is one of the few cases of congestion pricing implemented outside of urban areas. This is a expressway connecting Paris to Lille, and since 1992 congestion prices are applied during weekends with the objective of spreading demand on the trip back to Paris on Sunday afternoons and evenings. As congestion pricing has been increasing worldwide, the schemes implemented have been classified in four different types: cordon area around a city center; area wide congestion pricing; city center toll ring; and corridor or single facility congestion pricing.

Cordon area and area wide

Cordon area congestion pricing is a fee or tax paid by users to enter a restricted area, usually within a city center, as part of a demand management strategy to relieve traffic congestion within that area. The economic rationale for this pricing scheme is based on the externalities or social costs of road transport, such as air pollution, noise, traffic accidents, environmental and urban deterioration, and the extra costs and delays imposed by traffic congestion upon other drivers when additional users enter a congested road.

The first implementation of such a scheme was Singapore's Area Licensing Scheme in 1975, together with a comprehensive package of road pricing measures, stringent car ownership rules and improvements in mass transit. Thanks to technological advances in electronic toll collection, electronic detection, and video surveillance technology, charging congestion prices has become easier. Singapore upgraded its system in 1998, and similar pricing schemes were implemented in Rome in 2001, London in 2003 with extensions in 2007; Stockholm in 2006, as seven month trial, and then on a permanent basis. In January 2008 Milan initiated a one-year trial with exemptions for low-polluting cars; on the first day of the scheme, traffic was estimated to be 40 percent lower than normal.

Although there has not yet been a comprehensive study, initial reports from the cities that have implemented congestion pricing schemes show traffic volume reductions from 10% to 30%, as well as reduced air pollution. Also, all cities report public controversy before and after implementation, making political feasibility a critical issue.

Singapore and Stockholm charge the congestion fee every time a user crosses the cordon area, while London charges a daily fee for any vehicle driving in a public road within the congestion charge zone, regardless of how many times the user crosses the cordon. Stockholm has put a cap on the maximum daily tax, while in Singapore the charge is based on a pay-as-you-use principle, and rates are set based on traffic conditions at the pricing points, and reviewed on a quarterly basis. Through this policy, the Land Transport Authority (LTA) reports that the electronic road pricing "has been effective in maintaining an optimal speed range of 45 to 65 km/h for expressways and 20 to 30 km/h for arterial roads".

Developments

In an effort to improve the pricing mechanism, and, to introduce real-time variable pricing, Singapore’s LTA together with IBM, ran a pilot from December 2006 to April 2007, with a traffic estimation and prediction tool (TrEPS), which uses historical traffic data and real-time feeds with flow conditions from several sources, in order to predict the levels of congestion up to an hour in advance. By accurately estimating prevailing and emerging traffic conditions, this technology is expected to allow variable pricing, together with improved overall traffic management, including the provision of information in advance to alert drivers about conditions ahead, and the prices being charged at that moment.

A proposal by former Mayor of London Ken Livingstone would have resulted in a new pricing structure based on potential CO2 emission rates by October 2008. The goal was that vehicles with the very lowest CO2 emission rates will be exempted, and those with higher emission rates will pay a new higher charge of , with the rest paying the same charge they pay today. However, the current Mayor of London, Boris Johnson, announced at the beginning of his administration that he would reform the congestion charge, and he also wanted to facilitate the payment of the charge by allowing it on a monthly basis. Mayor Johnson announced on July 2008 that the new CO2 charging structure will no longer be implemented. Among other reasons, he said the environmental charge would encourage travel by thousands of smaller vehicles for free, resulting in increase congestion and pollution. He also discarded plans for extending the charge zone to the suburbs, and announced he will review the western extension implemented in 2007, based on a public consultation planned for September 2008.

"Old town" centers

Around Europe several small cities, such as Durham, England; Znojmo, Czech Republic; Riga, Latvia; and Valletta, Malta, have implemented congestion pricing to reduce traffic crowding, parking problems and pollution, particularly during the peak tourism season.

Durham introduced charges in October 2002, reducing vehicle traffic by 85% after a year; prior to this 3,000 daily vehicles had shared the streets with 17,000 pedestrians. Valletta has reduced daily vehicles entering the city from 10,000 to 7,900; making 400 readily available parking places in the center. There has been a 60% drop in car stays by non-residents of more than eight hours, but there has been a marked increase of 34% in non-residential cars visiting the city for an hour or less.

Rejected proposals

Hong Kong conducted a pilot test on an electronic congestion pricing system between 1983 to 1985 with positive results. However, public opposition against this policy stalled its permanent implementation. In 2002 Edinburgh, United Kingdom, initiated a implementation process; a referendum was conducted in 2005,with a majority of 74.4% rejecting the proposal. Councils from across the West Midlands in the United Kingdom, including Birmingham and Coventry, rejected the idea of imposing congestion pricing schemes on the area in 2008, despite promises from central government of transport project funding in exchange for the implementation of a road pricing pilot scheme.

In 2007, New York City in the United States shelved a proposal for a three-year pilot program for implementation in Manhattan,, and a new proposition was denied in 2008, with a potential federal grants of USD 354 million being reallocated to other cities.

Current proposals

Greater Manchester, United Kingdom, is considering a scheme with two cordons, one covering the main urban core of the Greater Manchester Urban Area and another covering the Manchester City Centre. The measure is supported by the government, but three local authorities have rejected it (Bury, Trafford and Stockport); the support of two-thirds of Manchester's 10 local councils is needed for it to be implemented. A comprehensive transport investment package for Manchester, which still includes the congestion pricing element, is to be released for further public consultation.

San Francisco, United States started studies in 2006 aimed at introducing congestion pricing, with promises of a federal grant if introduced; the charge would be combined with other traffic reduction implementations, allowing money to be raised for public transit.

In August 2007, the United States Department of Transportation selected five metropolitan areas to initiate congestion pricing demonstration projects under the Urban Partnerships Congestion Initiative, for US$ 1 billion of federal funding. The five current projects under this initiative are; Golden Gate Bridge in San Francisco, State Road 520 serving downtown Seattle and communities to its east, Interstate 95 between Miami and Ft. Lauderdale, Interstate 35 West serving downtown Minneapolis, and a variable rate parking meter system in Chicago, which replaced New York City after it left the program in 2008.

Urban corridors and toll rings

Congestion pricing has also been implemented in urban freeways. Between 2004 and 2005, Santiago de Chile implemented the first 100% non-stop urban toll for concessioned freeways passing through a downtown area, charging by the distance traveled. Congestion pricing is now used during rush hours in order to maintain reasonable speeds within the city's core, thus keeping a minimum level of service for their customers.

Norway pioneered with implementation of electronic urban tolling in the main corridors of Norway's three major cities: Bergen (1986), Oslo (1990), and Trondheim (1991). Though initially intended only to raised revenues to finance road infrastructure, the urban toll ring at Oslo created an unintended congestion pricing effect, as traffic decreased around 5%. Also the Trondheim Toll Scheme has congestion pricing effects, as charges vary by time of the day. Norwegian authorities have been considering the use of congestion charges, as the legal basis were approved by Parliament in 2001. As of February 2008 the regulations on Road Pricing have however not come into force.

Single facilities

Other recent application of congestion pricing policies in the urban transportation context is to adopt an innovative tolling for a particular limited purpose. The first of this kind of specific schemes allowed users of low or single-occupancy vehicles to use a high-occupancy vehicle lanes (HOV) if they pay a toll. This scheme is known as high-occupancy toll (HOT) lanes, and it has been introduced mainly in the United States and Canada. The first practical implementations was California's private toll 91 Express Lanes, at Orange County in 1995, followed in 1996 by Interstate 15 in San Diego. There has been controversy over this concept, and HOT schemes have been called "Lexus" lanes, as critics see this new pricing scheme as a perk to the rich.

Concerns and criticisms

Both in the academic literature and in practice, the implementation of congestion pricing for urban road travel has raised several concerns, and has been subject of debate and controversy.

Measurement of effects

In a road network congestion can be considered a specific measure of the time delay in a journey or time lost through traffic jams. Delays can be caused by some combination of traffic density, road capacity, and the delaying effects of other road users and traffic management schemes such as traffic lights, junctions, and street works. This can be measured as the extra journey time needed to traverse a congested route when compared to the same route with no such interference. However, this technical definition of congestion as a measurement of delay can get confused and used interchangeably with traffic density in the public mind.

Thus some congestion charging schemes have been claimed a "success" because they have achieved a significant reduction in traffic volumes, even though there was little effect on actual journey times. These reduced traffic volumes may yield a reduction in the environmental impact of those vehicles, including emissions, noise, parking, and public transport benefits.

To measure the true effects of any traffic management scheme it is normally necessary to establish a baseline, or "do-minimum" case, which estimates the effects on the network without any changes other than normal trends and expected local changes. Notably this was not done for the London Congestion Charging Scheme, which has led to claims that it is not possible to determine the extent of the actual influence of the scheme. Regardless of the scheme's impact, in a retrospective analysis Transport for London estimated there would have already been a significant reduction in traffic as a consequence of parking policies and increased congestion due to traffic management and other interventions that had the effect of reducing highway capacity. In 2006, the last year before the zone was expanded, TfL observed that traffic flows were lower than in any recent year, while network traffic speeds were also lower than in any recent year. Others have noted that changes in fuel pricing and taxation may also have an effect on measurements of any congestion pricing scheme.

Academic debate and concerns

Even the transport economists who advocate congestion pricing have anticipated several practical limitations, concerns and controversial issues regarding the actual implementation of this policy. As summarized by Cervero:
"True social-cost pricing of metropolitan travel has proven to be a theoretical ideal that so far has eluded real-world implementation. The primary obstacle is that except for professors of transportation economics and a cadre of vocal environmentalists, few people are in favor of considerably higher charges for peak-period travel. Middle-class motorists often complain they already pay too much in gasoline taxes and registration fees to drive their cars, and that to pay more during congested periods would add insult to injury. In the United States, few politicians are willing to champion the cause of congestion pricing for fear of reprisal from their constituents. Critics also argue that charging more to drive is elitist policy, pricing the poor off of roads so that the wealthy can move about unencumbered. It is for all these reasons that peak-periord pricing remains a pipe dream in the minds of many."

Both Button and Small et. al, have identified the following issues:

  • The real-world demand functions for urban road travel are more complex than the theoretical functions used in transport economics analysis. Congestion pricing was developed as a first-best solution, based on the assumption that the optimal price of road space equals the marginal cost price if all other goods in the economy are also marginal cost priced. In the real world this is not true, thus, actual implementation of congestion pricing is just a proxy or second-best solution. Based on the economic principles behind congestion pricing, the optimal congestion charge should make up for the difference between the average cost paid by the driver and the marginal cost imposed on other drivers (such as extra delay) and on society as a whole (such as air pollution). The practical challenge of setting optimal link-based tolls is daunting given that neither the demand functions nor the link-specific speed-flow curves can be known precisely. Therefore, transport economists recognize that in practice setting the right price for the congestion charge becomes a trial and error experience.
  • Inequality issue: A main concern is the possibility of undesirable distribution repercussions because of the diversity of road users. The use of the tolled road depends on the user's level of income. Where some cannot afford to pay the congestion charge, then this policy is likely to privilege the middle-class and rich. The users who shift to some less-preferred alternative are also worst off. The less wealthy are the more likely to switch to public transit. Road space rationing, is another strategy generally viewed as more equitable than congestion pricing. However, high-income users can always avoid the travel restrictions by owning a second car and users with relatively inelastic demand (such as a worker who needs to transport tools to a job site) are relatively more impacted.
  • There are difficulties in deciding how to allocate the revenues raised. This is a controversial issue among scholars. The revenues can be used to improve public transport (as is the case in London), or to invest in new road infrastructure (as in Oslo). Some academics make the case that revenues should be disposed as a direct transfer payments to former road users. Congestion pricing is not intended to increase public revenues or to become just another tax, however this is precisely one of the main concerns of road users and taxpayers.

A more acceptable alternative to avoid inequality and revenue allocation issues, is to implement a rationing of peak period travel through mobility rights or revenue-neutral credit-based congestion pricing. This system would be similar to the existing emissions trading of carbon credit. Metropolitan area or city residents, or the taxpayers, would be issued mobility rights or congestion credits, and would have the option of using these for themselves, or trading or selling them to anyone willing to continue traveling by automobile beyond their personal quota. This trading system would allow direct benefits to be accrued by those users shifting to public transportation or by those reducing their peak-hour travel rather than the government.

Public controversy

Experience from the few cities where congestion pricing has been implemented shows that social and political acceptability is key. Public discontent with congestion pricing, or rejection of congestion pricing proposals, is due mainly to the inequality issues, the economic burden on neighboring communities, the effect on retail businesses and the economic activity in general, and the fears that the revenues will become just another tax.

Congestion pricing remains highly controversial with the public both before and after implementation. This has in part been resolved through referendums, such as after the seven-month trial period in Stockholm; however this creates a debate as to where the border line for the referendum should go, since it often is the people living outside the urban area who have to pay the tax, while the external benefit is granted those who live within the area. In Stockholm there was a majority in the referendum within the city border (where the votes counted), but not outside.

Some concerns have also been expressed regarding the effects of cordon area congestion pricing on economic activity and land use, as the benefits are usually evaluated from the urban transportation perspective only. However, congestion pricing schemes have been used with the main objective of improving urban quality and to preserve historical heritage in the small cities.

The effects on a charge on business have been disputed; reports have shops and businesses being heavily impacted by the cost of the charge, both in terms of lost sales and increased delivery costs in London, while others show that businesses were then supporting the charge six months after implementation. Reports show business activity within the charge zone had been higher in both productivity and profitability and that the charge had a "broadly neutral impact" on the London wide economy, while others claim an average drop in business of 25% following the 2007 extension.

Other criticism has been raised concerning the environmental effects on neighborhoods bordering the congestion zone, creating "parking lots" and add more traffic and pollution to those neighborhoods, and the imposition of a regressive tax on some commuters. Other opponents argue that the pricing could become a tax on middle- and lower-class residents, since those citizens would be affected the most financially. The installation of cameras for tracking purposes may also raise civil liberties concerns.

In New York advocate groups proposed alternate approaches, non-intrusive, low-cost (almost no cost) traffic mitigation measures as an alternative to the city's congestion pricing scheme that would also qualify for the federal grant. Other claim the charge would transfer a significant percentage of commuters will switch to public transportation, and most likely for all of their commute; thus cars would be taken off the road outside the Central Business District as well as within it.

Waterways

Panama Canal Transit Booking System and Transit Slot Auction

The Panama Canal has a limited capacity determined by operational times and cycles of the existing locks and further constrained by the current trend towards larger (close to Panamax-sized) vessels transiting the canal which take more transit time within the locks and navigational channels, and the need for permanent periodical maintenance works due to the aging canal, which forces periodical shutdowns of this waterway. On the other hand, demand is growing due to the rapid growth of international trade. Also many users require a guarantee of certain level of service. Despite the gains which have been made in efficiency, the Panama Canal Authority (ACP) estimates that the canal will reach its maximum sustainable capacity between 2009 and 2012. The long-term solution for the congestion problems is the expansion of the canal through a third set of locks. Works started on 2007 and are planned to finish by 2014. The third set of locks will also allow for transit of larger Post-Panamax ships, with a higher cargo capacity.

Considering the high operational costs of the vessels (containerships have daily operational costs of approximately US$40,000), the long queues that occur during the high season (sometimes up to a seven-day delay), and the high value of the some of the cargo transported through the canal, the ACP implemented a congestion pricing scheme to allow a better management of the scarce capacity available and to increase the level of service offered to the shipping companies. The scheme gives users two choices: (1) transit by order of arrival on a first-come first-served bases, as the canal historically has operated; or (2) booked service for a fee—a congestion charge.

The booked service allows two options of fees. The Transit Booking System, available online, allowing customers who do not want to wait in queue to pay an additional 15% over the regular tolls, guaranteeing a specific day for transit and crossing the canal in 18 hours or less. ACP sells 24 of these daily slots up to 365 days in advance. The second choice is high priority transit. Since 2006, ACP has available a 25th slot, sold through the Transit Slot Auction to the highest bidder. The main customers of the Transit Booking System are cruise ships, containerships, vehicle carriers, and non-containerized cargo vessels.

The highest toll for high priority passage paid through the Transit Slot Auction was US$ 220,300 charged on a tanker, bypassing a 90-ship queue awaiting for the end of maintenance works on the Gatun locks, thus avoiding a 7-day delay. The normal fee would have been just US$13,430. The average regular toll is around US$ 54,000.

Airports

Many airports are facing extreme congestion, runway capacity being the scarcest resource. Congestion pricing schemes have been proposed to mitigate this problem, including slot auctions, such as with the Panama Canal, but implementation has been piecemeal. The first scheme was started in 1968 when higher landing fees for peak-hour use by aircraft with 25 seats or less at Newark, Kennedy, and LaGuardia airports in New York City. As a result of the higher charges, general aviation activity during peak periods decreased by 30%. These fees were applied until deregulation of the industry, but higher fees for general aviation were kept to discourage this type of operations at New York's busiest airports. In 1988 a higher landing fee for smaller aircraft at Boston’s Logan Airport was adopted; with much of the general aviation abandoned Logan for secondary airports. In both US cases the pricing scheme was challenged in court. In the case of Boston, the judge rule in favor of general aviation users due to lack of alternative airports. In the case of New York, the judge dismissed the case because "the fee was a justified means of relieving congestion".

Congestion pricing has also been implemented for scheduled airline services. The British Airports Authority (BAA) has been a pioneer in implementing congestion pricing for all types of commercial aviation. In 1972 implemented the first peak pricing policy, with surcharges varying depending on the season and time of the day, and by 1976 raised these peak charges. London-Heathrow had seven pricing structures between 1976 and 1984. In this case it was the US carriers that went to international arbitration in 1988 and won their case.

In 1991, the Athens Airport charged a 25% higher landing fee for those aircraft arriving between 11:00 and 17:00 during the high tourism season during summer. Hong Kong charges an additional flat fee to the basic weight charge. In 1991–92 peak pricing at London's main airports Heathrow, Gatwick and Stansted was implemented; airlines were charged different landing fees for peak and off-peak operations depending on the weight of aircraft. For example, in the case of a Boeing 757, the peak landing fee was about 2.5 times higher than the off-peak fee in all three airports. For a Boeing 747 the differential was even higher, as the old 747 carries a higher noise charge. Though related to runway congestion, the main objective of these peak charges at the major British airports was to raise revenue for investment.

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