In recent years, pricing policy has been seen as a central means of controlling transport demand, congestion and environmental impacts. Under market conditions, pricing has to be based on 'marginal social costs' to achieve economic efficiency (i.e. costs that take into account congestion, accidents, noise and emissions). However, charges and taxes for transport have traditionally had little connection to costs, instead being part of broader fiscal policies such as raising revenue. This gap is particularly evident in urban road transport, where prices typically do not vary to reflect concentrations of traffic in time and space and the associated costs. However, making the change to cost-based pricing faces many barriers: legal and institutional issues, public acceptance, and the limitations of current technology.
The aims of AFFORD were to define practical measures to implement marginal cost pricing for transport in cities, to assess the potential problems and to provide policy guidelines for introducing such measures.
The project evaluated 'first-best' and 'second-best' policy packages based on marginal cost pricing, rather than assessing individual pricing measures. Results from modelling in four European cities (Athens, Edinburgh, Helsinki and Oslo) suggested that such packages give rise to substantial welfare benefits for the urban population. Annual gains typically vary between 100 and 400 Euros per capita, depending on the city context and measures applied. A major part of this gain may result from the effective use of the revenues, for instance allowing a reduction in labour taxes. (The benefits are therefore quite sensitive to the value or 'shadow price' attributed to helping a government meet budget constraints without the need for distortionary taxation elsewhere in the economy).
The equity effects of pricing were estimated to be moderate (negative or positive). Environmental benefits constitute a significant part of the welfare gain, ranging between 15 and 95% depending on the city. Reductions in trips by private car range between 5 and 30%. Overall, accessibility is reduced, particularly for car users. However, if revenues are used to subsidise public transport services, then accessibility may even be increased for most of the population.
Case studies and surveys in five cities indicated that the legal and institutional frameworks required to implement marginal cost-based pricing for urban transport have, so far, not been put in place. For example, these are different to the frameworks needed for road pricing on inter-urban motorways.
Surveys of public, political and business acceptability of pricing were carried out in several cities. These showed a high awareness of the underlying pollution, congestion and parking problems, but relatively little knowledge of pricing instruments. In general, pricing was perceived to be effective, but likely to lead to disadvantages to stakeholders. The majority of motorists did not accept the proposed packages of pricing measures.
The dependence of the welfare benefits of pricing and on how the revenue is used, implies that urban transport pricing is a general policy issue that goes beyond the local policy level, and also beyond the transport sector. AFFORD concluded that the introduction of marginal cost-based pricing will require the creation of supporting institutions and laws, and the removal of inconsistencies in national-level policies. For example, strong institutions are needed with the powers to control multi-modal transport pricing across urban regions, rather than trying to construct complex relationships across multiple local authorities.
Successful pricing will also need effective communication to overcome public opposition. Marginal cost pricing, especially prior to implementation, will be regarded with a lot of scepticism and even hostility. It may be politically vital to redistribute a significant majority of revenues to the local or regional population that pays, whether or not the funds are used for transport.