Tradable Fuel Permits: Towards a Sustainable Road Transport System

Abstract

Pollution and congestion are generally considered the blatant symptoms of an unsustainable economic and transport system. Over the past decades, the steadily growing use of the road transport system is causing major negative externalities. Moreover, with a 20% share, road transport is one of the main energy-consuming industries in the EU. Therefore, transport and environmental economists are developing more sustainable transport systems. So far, their main focus is on pricing mechanisms: road and congestion pricing, variable taxation and tolls. But these traditional policy measures such as road pricing are not only ineffective (congestion is not to disappear due to demand inelasticity) and inefficient (road tolls reflect construction and tolling costs, not market prices) but also unjust because they deprive poor people of their right of free movement. The uneasy tension between efficiency and effectiveness on the one hand and sustainability and justice on the other can be resolved by a tradable permit system that meets economic, ecological, and social demands. Little attention is paid to rationing road transport use by ticketing or the distribution of permits, in other words quantity-based instruments. In particular, opponents of the permit system argue that the administrative and transaction costs of such a system are prohibitively high. However, since the introduction of Intelligent Transport Systems – which are also used in pricing systems – the design of an efficient permit system is becoming more realistic. This system does create a sustainable road transport network. Firstly, the permit system is highly effective in realising a fixed objective since it is possible to set precise and measurable targets. Secondly, the system allows a fair social redistribution of means. Thirdly, since road users are more sensitive to quantitative signals than to price signals, an efficient road transport market can be set up. This paper examines the design of a tradable fuel permits (TFP) system of which following aspects will be discussed: geographical distribution, target group, allocation aspects, cap and trade, monitoring & enforcement, implementation path and used technology. The implementation of the TFP-system will not only lead to a sustainable road transport system, it will be an unequivocal enhancement for further innovation in the car industry. 1 Limburg University Centre, Faculty of Applied Economic Sciences, 3590 Diepenbeek, Belgium {evy.crals;mark.keppens;lode.vereeck }@luc.ac.be