Incorporating revenue loss and congestion cost into rail freight subsidy design: Lessons learned from the China-Europe freight transportation network

Abstract

Using the China-Europe freight transportation market as a real-world case, this study utilizes network-based evaluation and optimization models to analyze and improve the efficacy of government subsidies on China Railway Express (CRE). To ensure the completeness and effectiveness of the evaluation and optimization results, we include into the models the full range of CRE service lines, China-Europe liner shipping lines, major highway networks in China and Europe, and all types of containerized freight demands in the market. A multimodal, multicommodity freight transportation network equilibrium model explicitly considering transportation capacity is taken as a subsidy evaluation tool, which can characterize the individual mode-route choice behavior and take into account shipping cost, transit time, capacity-induced congestion surcharge, and unobserved transportation impedances as shippers' decision-making disutility. The evaluation work reveals that the currently implemented subsidy scheme increases the CRE-carried freight volume by 78.7 % in total. However, it does not perform equitably well for those CRE lines that experience heavy congestion or depart from coastal regions of China, and it even exacerbates the congestion of some CRE lines. To overcome these unexpected deficiencies, we propose and implement a subsidy optimization model of a bi-term objective and bi-level structure for simultaneously maximizing capacity utilization and minimizing congestion level of all CRE lines. This model embeds the aforementioned network equilibrium model as its submodel in the lower level. From the optimized subsidy scheme, we found that while the government's monthly average subsidy expenditure is lowered by 7.7 %, the total revenue loss and total congestion surcharge decrease by 27.7 % and 63.9 %, respectively, compared to the current subsidy scenario. This result indicates a tripartite win-win-win situation for the government, CRE operator, and cargo shippers. Overall, through such an optimal subsidy design, the social benefit generated by a subsidy expenditure of $1 increases from $0.69 to $1.20 to the entire China-Europe freight transportation market.