The Equity, Efficiency and Fiscal Impact of Carbon Taxes in Transport
Christian Steinsland, Institute of Transport Economics (TØI), Lasse Fridstrøm, Institute of Transport Economics (TØI), Harald Minken, Institute of Transport Economics (TØI)
Travel demand models reveal the equity effects of three climate policy measures: (i) higher toll rates and ferry fares, (ii) higher fuel tax, and (iii) abolishment of the commuter tax credit. The most efficient measures are also the most regressive.
State-of-the-art travel demand models for Norway have been run with the aim of revealing the equity effects of selected policy measures for greenhouse gas (GHG) abatement. The Oslo Intercity Regional Model was used to study trips shorter than 100 km one way in southeastern Norway, i. e. in and around the capital city of Oslo. The NTM6 model for domestic long distance travel was used to analyze trips longer than 70 km one way. Both of these are network models of travel demand, predicting trip frequency, destination choice, mode choice and route choice under user specified input assumptions.
The following three policy options have been studied:
1. Tripled toll rates and ferry fares everywhere in Norway
2. A NOK 0.20 (= € 0.024) per vehicle km road charge or higher fuel tax
3. Abolishment of the commuter tax credit
In 2014, the commuter tax credit applied to all workers travelling more than 10 000 km per annum between their home and their job, with a standard rate of NOK 1.50 (= € 0.18) per km, regardless of travel mode. Given a 28 per cent marginal income tax rate, the credit gave rise to a tax cut of NOK 0.42 per km travelled in excess of the annual 10 000 km threshold.
The three policy measures considered all result in emissions reductions between 80 and 120 000 tonnes of CO2 (tCO2) per annum within the area covered by the Oslo intercity model. This area comprises roughly 43 per cent of Norway’s five million population.
In the long distance travel market, part of the emissions reductions from automobiles will be counteracted by increased emissions from air travellers, as the air mode becomes more competitive vis-à-vis private cars. The net annual emissions reduction estimated is between 12 and 17 000 tCO2 for all three policy options.
Each option inflicts costs on the travellers, in the form of higher cash expenditure, increased travel time and/or foregone trips. We calculate these losses by means of standard cost-benefit methods.
The cost efficiency is found to vary greatly between the respective three policy measures. While the tripled toll rate and ferry fares option inflicts large welfare costs on society, the fuel tax increase and the revocation of the commuter tax credit are shown to have negative net economic costs, when due account is taken of external effects, including the prescribed 20 per cent incremental value assigned to public funds. These two measures are, in other words, socially profitable before GHG abatement benefits. Revoking the commuter tax credit results in a net social gain before GHG abatement benefits of € 100-120 per tonne CO2 in the short-haul market around Oslo, and € 1 200-1 500 in the long-haul domestic market.
The increased fuel tax option results in very similar benefits in the short-haul market, but smaller benefits in the long distance market: € 180-220 per tonne CO2.
The by far least efficient option is to raise the toll rates and ferry fares. Here, CO2 abatement comes at a cost a € 1 700-2 000 and € 8 000-10 000 on short, resp. long distance trips.
In terms of equity, however, the ranking of the three options is completely reversed. In the short-haul travel market, the tax burden of an abolished commuter tax credit is shown to be 15 times higher in the bottom income bracket than in the top income bracket. For the higher fuel tax and tripled toll rates options, the corresponding ratios are 7 and 2, respectively. All options are, according to this argument, regressive.
Equity effects may be measured along a number of different dimensions other than income. In this study, effects have also been computed by age, gender, county of residence, household type, and household car ownership. While the latter two dimensions are found to exhibit few interesting differences, certain clear patterns of inequality do emerge in terms of age, gender and geography.
In summary, when policy makers are to choose among the above three options, the traditional contradiction between equity and efficiency is as present as ever. Abolishing the commuter tax credit would be the most profitable of the three policy options considered, but also the most regressive. The opposite – high cost and low regressivity – is true of tripled toll rates and ferry fares.
Association for European Transport