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How green are congestion charges? Economic instruments and sustainable transport ALAN NEALE Introduction Congestion charging is now on the political agenda of most developed, and many developing, countries. Although the main aim is to reduce urban traffic congestion, a positive contribution to sustainable development is often claimed in addition. But are the sustainability benefits real, or simply a cosmetic add-on to gain public support for what would otherwise be an unpopular measure? And who would be the winners, and who the losers, if the policy was introduced? These are the questions this paper seeks to address. It is widely agreed that transport policy, worldwide, is in a state of crisis. Increasing car ownership and vehicle use have combined with lack of investment in public transport to create widespread congestion, and attempts to solve this by new road building have often been self-defeating because of the additional traffic generated. The damaging environmental consequences of unrestrained growth in road capacity and motor vehicle traffic - in terms of land use, air quality and contribution to global warming - are becoming increasingly apparent. Technological developments like catalytic converters are reducing pollutant emissions per vehicle, but, at current rates of demand growth, positive impacts on air quality are being cancelled out by increases in vehicle miles. Electric vehicles, as promoted in recent Californian legislation, would have a more powerful impact on local air quality, but many emissions would merely be displaced from the exhaust pipe to the power station (Neale, 1995). As governments are realizing that demand restraint as well as improved vehicle design will be required to tackle the problems of increased road traffic, technological advances are opening up new possibilities of automatically debiting road users with a charge which varies according to the level of congestion. This is a development which answers many of the practical objections which have been raised to road pricing as a way of rationing scarce road space, turning what was an obscure academic debate into a live political issue and opening up the possibility of solving two political problems (congestion and environmental damage) with one policy innovation. Much current discussion of road pricing remains at a technical level, with tranpsort economists using abstract models to estimate the ‘optimal’ level of charge and transport engineers measuring the performance characteristics of alternative charging systems. The fact that technical fixes have social consequences has been given little attention, cxcept, partially, by politicians who have been wary of going too far along the path of marketizing road space for fear of alienating electoral support from motorists. Now that the technical 0 Joint Editors and Blackwell Publishers Ltd 1995. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 IJF, UK and 238 Main Street, Cambridge, MA 02142, USA

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How green are congestion charges? Economic instruments and sustainable transport

ALAN NEALE

Introduction Congestion charging is now on the political agenda of most developed, and many developing, countries. Although the main aim is to reduce urban traffic congestion, a positive contribution to sustainable development is often claimed in addition. But are the sustainability benefits real, or simply a cosmetic add-on to gain public support for what would otherwise be an unpopular measure? And who would be the winners, and who the losers, if the policy was introduced? These are the questions this paper seeks to address.

It is widely agreed that transport policy, worldwide, is in a state of crisis. Increasing car ownership and vehicle use have combined with lack of investment in public transport to create widespread congestion, and attempts to solve this by new road building have often been self-defeating because of the additional traffic generated. The damaging environmental consequences of unrestrained growth in road capacity and motor vehicle traffic - in terms of land use, air quality and contribution to global warming - are becoming increasingly apparent. Technological developments like catalytic converters are reducing pollutant emissions per vehicle, but, at current rates of demand growth, positive impacts on air quality are being cancelled out by increases in vehicle miles. Electric vehicles, as promoted in recent Californian legislation, would have a more powerful impact on local air quality, but many emissions would merely be displaced from the exhaust pipe to the power station (Neale, 1995).

As governments are realizing that demand restraint as well as improved vehicle design will be required to tackle the problems of increased road traffic, technological advances are opening up new possibilities of automatically debiting road users with a charge which varies according to the level of congestion. This is a development which answers many of the practical objections which have been raised to road pricing as a way of rationing scarce road space, turning what was an obscure academic debate into a live political issue and opening up the possibility of solving two political problems (congestion and environmental damage) with one policy innovation.

Much current discussion of road pricing remains at a technical level, with tranpsort economists using abstract models to estimate the ‘optimal’ level of charge and transport engineers measuring the performance characteristics of alternative charging systems. The fact that technical fixes have social consequences has been given little attention, cxcept, partially, by politicians who have been wary of going too far along the path of marketizing road space for fear of alienating electoral support from motorists. Now that the technical 0 Joint Editors and Blackwell Publishers Ltd 1995. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 IJF, UK and 238 Main Street, Cambridge, MA 02142, USA

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problems are close to a solution, the search is on for ways of making the charges more palatable. At the same time, charging is being promoted as a way of not only easing congestion, but also limiting the environmental impacts of increased road use.

This paper starts with a brief, non-technical review of the historical development of area road pricing, and goes on to examine recent policy debates in Britain. The next section focuses on the distribution of the revenues from congestion charging - a key factor for governments in determining its political ‘acceptability’. A short exploration of the concept of sustainable transport is then followed by assessment of the possible environmental and distributional consequences of congestion charging. Specific reference is made to institutional conditions in Britain, but the issues which are raised will have widespread applicability.

Road pricing: from theory to practice Pigou’s suggestion, in the first edition of his 7he Economics of Welfare (1920), that users of congested roads should pay for the costs, in terms of additional travel time, they impose on other road users met with little response, and was deleted from subsequent editions of his text. The argument was resurrected, however, a third of a century later, by Alan Walters (1954), and then put into practice in the Asian city-states, whose unitary governments feared that if traffic congestion in their central business districts intensified economic development would slacken. Singapore’s Area Licensing Scheme has been in operation since 1975 and is due to be automated in 1997. Hong Kong experimented with electronic road pricing in 1983-5, but decided not to go ahead with the scheme, even though the pilot scheme demonstrated 99 % technical reliability and benefit - cost ratios far greater than for car ownership restraint or for new road construction (Hau, 1990).

Norway is, at present, the only country outside Asia to have introduced area road pricing, with systems in Bergen (1986), Oslo (1990) and Trondheim (1991); but considerable research projects are under way in Europe, the USA and Japan to develop Advanced Transport Telematics (ATT) systems which combine automatic debiting with driver assistance in the form of features such as semi-automated driving and dynamic route guidance (Catling, 1994). Field trials in Cambridge, England, have already determined that it is technically feasible to charge according to time spent travelling in congested conditions (Clark et al., 1994), making, for the first time, the neoclassical economic ideal of marginal social cost pricing a realistic possibility.

Policy responses in Britain In the early 1960s, public concern about urban transport problems led the British Ministry of Transport to set up an expert Panel to investigate the technical feasibility of road pricing, and the resulting Smeed Report recommended that meter systems should be developed to charge road users according to the congestion costs they impose on other users (Ministry of Transport, 1964). Although the government accepted Smeed’s arguments about the long-term desirability of road pricing, they doubted its practicability in the short term and favoured, instead, tougher parking controls as a way of solving urban traffic problems. Neoclassical economists continued to proclaim the virtues of congestion charging, but the issue disappeared from the policy agenda for the next quarter century.

British government road policies in the 1980s, for example, were in stark contrast to their policies towards the rest of the public sector. During this decade, most public

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services (including public transport) were transformed by the introduction of private sector management techniques and by the spread of privatization. Yet, at the same time, expansionary road programmes were developed with little regard for the financial disciplines which constrained public spending in other areas, and government policy, particularly in the 1989 White Paper Roads for Prosperity, showed an almost Keynesian belief in the capacity of expanded collective provision to benefit private individuals.

In the early 199Os, the British government responded to developments in ATT by exploring the possibilities of introducing tolls on inter-urban motorways. At this point, road pricing was seen not as a method of demand restraint, but as an opportunity to open up new sources of finance for motorway building, ‘enabling the economy to benefit from a faster rate of expansion of transport capacity than would be possible if road investment was limited to the public purse’ (Department of Transport, 1993). More recently, however, government priorities have shifted away from crude supply expansion and towards an exploration of how road prices might be varied to reflect congestion costs and restrain demand (particularly in urban areas), and the Department has funded a f 3 million research programme to explore the feasibility of introducing congestion charging in London.

These shifts in the early 1990s coincided with evidence from the Department of Transport’s advisers that new roads do not merely redistribute existing trips (as COBA, its cost- benefit evaluation model, had specified), but generate new traffic as well, throwing doubt on the assumption that extra road capacity reduces congestion (SACTRA, 1994). Mounting concerns about the effects of unrestrained road traffic growth on air quality and global warming, highlighted by a Royal Commission report (Royal Commission on Environmental Pollution, 1994), and about the extent and militancy of opposition to new road schemes, gave added pertinence to the need to be seen to be doing something to restrain traffic growth.

Environmental considerations did not feature in the 1993 proposals for motorway tolling, except negatively, in a recognition that, if charges were set too high, traffic might be diverted to less suitable roads. The British government has, however, sought support from environmentalists for congestion charging in urban areas. In 1992 it claimed that ‘by careful analysis of the environmental changes it may be possible to refine the design of road pricing options to enhance environmental benefits and reduce disbenefits’ , although, it added, ‘the focus of the Department’s work is on tackling urban congestion’ (HM Government, 1992). By 1994, it was suggesting, as part of its obligation under Agenda 21 to make future development sustainable, ‘that users pay the full social and environmental cost of their transport decisions, so improving the overall efficiency of these decisions for the economy as a whole and bringing environmental benefits’ (HM Government, 1994).

Charge revenues and political ‘acceptability’ Experience so far suggests that political acceptability is a key element in the introduction of road pricing. In Hong Kong, government unwillingness to alienate private motorists, who were vocal in their opposition to new charges on top of tax increases and a stock and property market crash, appeared to be the main reason for the decision not to take their pilot scheme further. The need to secure public acceptance was an important part of the design criteria in Norway. Because of this, the tolls have been fairly modest and have had little traffic restraining effect, and the revenues have been specifically linked to new road construction. Only in Singapore, where the population has long been conditioned to restrictions on personal behaviour and a single party has monopolized political power, has a government felt able to discount opposition from motorists and take significant steps toward full congestion pricing.

Anxiety about alienating car-using voters surfaces repeatedly in British government deliberations as to whether or not to implement congestion charging. Worries about

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invasion of privacy can probably be allayed by the use of smart cards which do not require centralized storage of information, but congestion charging, by its very nature, imposes costs on road users in terms of either charges paid or journeys forgone, and there is widespread distrust in assurances that the result will be improved journey times. Opinion surveys in the UK suggest that, although most people see congestion and pollution as major urban problems, few support congestion charging as a way of reducing them, unless it is directly linked to improvements in transport infrastructure (Jones, 1991; Cullinane, 1992). More problematically, under full congestion charging the amount paid for a particular journey would not be known in advance, as it would depend on actual road conditions and journey speeds at the time of travel. Charge variability is likely to be the most unpopular aspect of ‘pure’ congestion charging and this has not yet been tested, either in surveys or in reality.

To overcome opposition from motorists, many supporters of congestion pricing advocate reductions in vehicle and fuel duties to offset the charges. Back in the 1960% for example, the Smeed Committee ‘assumed that the introduction of road prices would be accompanied by a corresponding reduction in existing taxes so that the motoring population as a whole would pay no more than it would otherwise have done’ (Ministry of Transport, 1964).

More recently, Newbery has blamed non-implementation of electronic road pricing in Hong Kong on government failure to make it clear that charges would replace licence fees. ‘The proposition that needs to be put to the public’, he suggested, ‘is that in exchange for the entire system of current road taxes . . . road users will be charged according to their use of congested road space, at a rate which for the average road user will be roughly the same . . . As more than half the road-using population drives less than the average number of miles in congested areas, this should command majority support’ (Newbery, 1990). He is encouraged by calculations which suggest that the cost of congestion is roughly equal to current total road taxes, because ‘the critical question is whether the new system of prices would increase the cost of road use for most road users. If so, then it will be resisted and is likely to be politically infeasible’ (Newbery, 1994).

Another strategy which is often suggested for overcoming motorists’ resistance is to ensure that the revenues from congestion charging are seen to go on projects which benefit motorists, rather than just disappear into a general revenue fund (in Britain, this would mean challenging the Treasury’s longstanding opposition to hypothecation of tax revenues). Some proponents of congestion charging suggest that the most effective use of the revenues would be to enhance public transport. This makes sense in situations where there is already an established public transport network whose quality (or lack of it) is a major determinant of car use, and it is a view which survey evidence suggests would win qualified support from many British motorists, although opinions do not always translate into behavioural change.

Goodwin (1989) proposes a division of the revenues into three equal parts - improved public transport, new road infrastructure and general tax revenue - which, he suggests, will maximize political support for the charges. Where urban public transport is less well developed, however, proponents of congestion charging tend to have different priorities. Small (1992), for example, suggests that, in Southern California, revenues should be split equally between new transportation services, reduced general taxes and reimbursements to road users.

None of these proposed solutions addresses the problem of the specific unpopularity of charge variability in a pure system. To some extent, the driver information aspects of ATT may mitigate against the uncertainty of congestion charging. Alongside the congestion charge, a vehicle’s on-board computer would be able to provide up-to-date information on road conditions and parking availability, making it possible for drivers to avoid jams and reduce their charges. However, the sophistication of the equipment required would be such that only the richest drivers could afford it, and safety and

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environmental quality would suffer as ‘better’ information encouraged increased rat-running.

Sustainable transport Following the 1992 Earth Summit, most governments pay at least lip service to the notion of ‘sustainable development’. Sustainability is, however, a concept which can mean different things to different people, and it is notoriously difficult to operationalize. In the Brundtland Report, which popularized the idea, ecological values are considered only in so far as they affect human beings, and the emphasis is on meeting the basic needs of the poor without compromising the environment’s ability to meet the needs of future generations (WCED, 1987).

These twin notions of equity and futurity are carried over, in watered-down form, into the Earth Summit’s Agenda 2 1, but are often almost unrecognizable by the time they are translated into government policy frameworks to implement that Agenda. The UK government’s strategy document, for example, refers to societies’ aims to ‘secure higher standards of living, now and for future generations’, and to ‘protect and enhance their environment, now and for their children’, erasing all reference to equity considerations (HM Government, 1994).

Definitions of sustainable transport run up against all the difficulties involved in defining sustainable development generally. Using the Brundtland Report’s approach as a guide, however, the Royal Commission on Environmental Pollution (1994) has identified a number of objectives for a sustainable transport system. These include integration of transportation and land use policy to minimize the need for transport, achievement of air quality standards that will prevent damage to human health and the environment, habitat conservation and reduced carbon dioxide emissions.

How is sustainability to be achieved? Neoclassical economists believe not only that economic instruments are more effective than regulatory controls in meeting environmental objectives, but also that the size of any charge should be determined by economic valuation of the external costs involved. In the transport sector, however, their valuation methodology ensures that environmental costs are swamped by congestion costs, because marginal time savings are valued in relation to earnings potential, while damage to future health and well-being, and to biodiversity, is literally ‘discounted’ by the technique, and little weight is given to the accessibility needs of people living on a low income.

If congestion charges are to become the sole economic instrument of demand restraint, and their level is to be determined by economic valuations of time savings, it is hard to see how the objectives of a sustainable transport system, such as those outlined above, could be achieved in practice, except as a fortunate but accidental by-product. Clearly, what is needed is a careful examination of both environmental impacts and distributional consequences rather than a bland assumption that what reduces urban congestion will also promote sustainability .

Environmental impacts Enthusiasts for Advanced Transport Telematics see implementation as having three main objectives: improving efficiency, improving safety and reducing environmental impact. In the voluminous research literature on ATT that has appeared in recent years, there is much analysis of the relative advantages of different technical solutions and what the benefits might be for private road users. Applications to public transport are given some attention, and there is some discussion of consumer resistance to congestion charging and

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how this might be overcome. References to environmental impacts are, however, generally confined to unsubstantiated statements about smoother traffic flows resulting in increased fuel economy, reduced noise and improved air quality.

Clearly, the behaviour of internal combustion engines under stop-start conditions does worsen both fuel economy and air quality. Yet the main study which is relevant to this issue, by Gyenes (1980), concluded that if all peak-period traffic flows in Britain could be increased to off-peak levels, this would only lead to a 1.5% saving in fuel. Although recalculation using current traffic conditions might produce a larger fuel penalty, the savings are likely to be less than what could be achieved by shorter trip distances or by a shift to public transport.

Some economists claim that congestion charging would encourage these changes, but the linkages are rarely specified. Often, they seem to suggest that, because congestion and pollution are both externalities, they can both be solved by the same policy instrument. This skates over the difference between congestion costs, imposed by individual road users on other road users but internal to road users as a group, and pollution costs, imposed by road users on the wider community - a difference which would imply that congestion and environmental impacts should be targeted by different policy instruments.

Maddison and Pearce (1993) provide a fairly typical example of recent economic thinking in this respect. In chapter 10 of Blueprint 3, entitled ‘Transport and the environment’, they explore at some length the nature of congestion as an external cost (pp. 153-4) and how congestion charging would promote economic efficiency by internalizing this cost (pp. 159-61). The discussion is an abstract one and the only evidence quoted is an incorrect statement that electronic road pricing in Hong Kong increased road speeds by 40% (p. 160). In fact, this is based on a misreading of Hau (1990) - the 40% road speed increase from 1979 to 1984 was nothing to do with the 2,600 vehicles in the road pricing experiment, but the result of the depressing effect of the 1982 financial crisis on real incomes, a massive increase in licence fees and fuel duties, and extensions to the mass transit system. The only reference Maddison and Pearce make to the environment in their discussion of congestion charging is a statement that: ‘Although specifically directed at relieving congestion, road pricing schemes also contribute to reducing pollution by decreasing road traffic generally as well as by encouraging a switch to mass rapid transit systems which have lower pollution emissions per passenger kilometre’ (ibid. : 162). Each part of this assertion is open to question.

Whether or not congestion charging encourages a switch to public transport depends on whether or not there is an adequate public transport infrastructure with spare capacity to switch to, and in many cities the public transport system is as congested at peak times as the road network. Here, much depends on decisions about how the revenues from congestion charging are spent. If they help finance new investment in public transport, then modal shift will occur along with some new trip generation. But if, as in Norway, the revenues go mainly to finance new road building, then such a shift is unlikely and total emissions would almost certainly increase.

Whatever is done with the revenues, there is no guarantee that congestion charges will reduce traffic ‘generally’ rather than just within charging zones. What is critical here is the extent to which congestion charging within city boundaries would induce motorists to make longer trips to avoid having to pay the charge. In the short term, this might be confined to shopping and leisure trips, as has happened in Bergen and Oslo, but in the longer term congestion charging would accelerate trends of suburbanization and the relocation of jobs to out-of-town business and retail parks (often poorly served by public transport, but with abundant car parking space). Planning policies aimed at reducing the need to travel would be undermined, and both car ownership and distances travelled by car could increase.

In fact, many proponents of congestion charging, including Maddison and Pearce, follow the Smeed Report and Newbery in suggesting that the charges should replace

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existing vehicle taxes (mainly fuel duties) so that, in effect, the revenues go straight back to motorists. This would remove the possibility of combining congestion charges (to deal with congestion) with fuel duties (to deal with environmental impacts). In addition, encouragement would be given to increased car ownership and use outside the charging zones, and incentives for vehicle owners to purchase fuel-efficient vehicles would be reduced. Air pollution impacts might be lower with the congestion charging option than with fuel duties because air quality thresholds, particularly for nitrogen dioxide, are more likely to be exceeded in congested urban areas. There would, however, almost certainly be environmental costs from replacing fuel duties by congestion charges in the form of increases in the total amount of pollutant and greenhouse gas emissions.

In overall terms, there seems to be no case on environmental grounds for preferring congestion charges to fuel duties and, as the British Royal Commission on Environmental Pollution (1994) has suggested, the latter possess the advantages of already being in existence and of being simple to administer. In the long term, too, as Weizsacher and Jesinghaus (1992) have argued, steadily increasing fuel duties should bring about dynamic benefits for the environment, in the form of more fuel-efficient vehicles, shifts to less energy-intensive forms of transport and the development of renewable energy resources. These dynamic benefits would be lost if fuel duties were replaced by congestion charges.

Distributional consequences It is not only in developing countries that environmental degradation has a particularly adverse effect on the poor - air pollution from car exhausts, for example, is a burden imposed by vehicle owners on everyone in their path, but poor inner-city dwellers who do not themselves own cars but live near busy roads suffer more from it than do two-car households living in leafy suburbs. The distributional consequences of congestion charging are, therefore, just as much a part of its contribution to transport sustainability as are its environmental impacts, suggesting that political acceptability criteria need to be widened to include the interests of the disadvantaged.

Most discussions of the effect of congestion charging on different social groups suggest that high-income motorists will benefit at the expense of low-income motorists, because they place a higher subjective value on travel time and are better able to afford the charges. The distributional consequences of an actual conges'tion charging scheme have never been studied in a systematic way, however, and a number of different outcomes are possible which, like environmental impacts, depend crucially on factors such as the extent of trip diversion to out-of-town destinations and how the revenues are spent.

If, to take one possible scenario, the revenues from congestion charges are passed back to motorists in the form of reduced fuel duties, and there is massive relocation of jobs, shops and leisure facilities to out-of-town centres which are inaccessible by public transport, this would adversely affect the life chances of poor households without a car who are trapped in the inner city. The reduction in fuel duties would, however, benefit many poor households in rural areas who depend on car use for access to jobs and shops.

If, on the other hand, revenues from congestion charging went into the improvement of the public transport infrastructure, and inner-city areas were revitalized, then the benefits would be shared by car owners and public transport users alike. In the short term, mobility-impaired city dwellers, who cannot easily use public transport and who depend on a car to get around, would suffer, although in the long term this could be ameliorated by investment in more effective dial-a-ride schemes.

In Britain, the picture is further complicated by the comparative low reponsiveness of fuel consumption to moderate price increases (Dargay, 1993; Dasgupta et al., 1994). It is tempting for proponents of road pricing to conclude from this that congestion charges,

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which would have a direct visible impact, if not on the driver’s pocket or purse, then at least on the car’s computer display, would be more effective in restraining travel demand than fuel duties. But why are the observed price elasticities so low in Britain? Key factors here include unusually high levels of company car provision, and subsidized petrol and parking, which shield many drivers from even the private costs of their journeys. While firms in every developed country provide cars for staff who need them to do their job (sales representatives, for example), Britain is unusual in the extent to which firms give senior and middle managers company cars as a perk of the job. In 1994, the British government cut back on the generosity of its tax treatment of company car benefits, but tax concessions and corporate policy still massively encourage their provision and use.

If company cars have limited the effectiveness of fuel duties in restraining fuel consumption, they could equally limit the effectiveness of congestion charges in reducing congestion, as the part played by company cars in traffic congestion is extraordinarily significant. In 1989, for example, 47% of all car commuters entering central London in the morning peak were in company cars and 87% received some form of company assistance with their trip, such as ‘free’ parking or fuel (Kompfner er al. , 1991). Company car commuters into central London are overwhelmingly high-income males, with no passengers, and driving longer distances than other car commuters. They are more favourably disposed to congestion charging than private motorists, their assumption being that the company would pay the charge (Harris Research Centre, 1991). If, as seems likely, company car drivers, like commercial operators, would not change their travel behaviour in response to congestion charges because their firms (and ultimately their firms’ customers) would pick up the bill, then the main impact would be on motorists who do not receive company assistance. In effect, company car drivers would receive most of the benefits of reduced congestion and pay none of the cost.

One of the main lessons from energy-efficiency campaigns in Britain is that it may be more effective in environmental terms, and less punitive in social terms, to tackle the structural rigidities which create demand inelasticities than to rely on price changes alone (Neale, 1994). The same may well be true of transport. Certainly, action to remove company assistance for private motoring would have positive benefits for everyone except company car drivers themselves, and would increase the possibility of being able to use economic instruments to reduce congestion and improve environmental quality without having damaging consequences for the disadvantaged. Without such action, the main effect of additional congestion charges or of increased fuel duties would be an inflationary one, with limited effects on either congestion or environmental quality.

Conclusion The effectiveness of congestion charging schemes in reducing traffic congestion depends crucially on demand elasticities, which reflect structural factors like the size of the company car sector. Whether or not they produce environmental benefits is even more problematic. Indeed, many of the complementary measures currently being promoted to make charging more palatable to motorists would conflict with the aims of a sustainable transport system. If, for example, the introduction of congestion charging were to be accompanied by significant reductions in fuel duties and no additional measures to restrain traffic were introduced, the result would almost certainly be a net increase in both fuel consumption and environmental damage. Until it becomes possible to charge vehicles according to the pollutants they emit, the environment may well be better off without road pricing.

Alan Neale, East London Business School, University of East London, Longbridge Road, Dagenham, Essex RM8 2AS

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