Background and Political Origin 

In 1980’s, the rapid production and ownership of cars caused traffic congestion in Seoul, capital city of Korea^[1] . About 25% of the total Korean population are living in Seoul and its severe traffic congestion became a major problem. Based on my personal experience (I had lived there for 17 years), Seoul is the most notorious city for the traffic congestion in Korea. For the solution of the congestion problem, the Seoul Metropolitan Government (SMG) had suggested several transport policies mainly focused to increase the supply of the transportation system, such as, constructing and expanding roadways in the early 1990’s^[2]. However, these were not enough to ease the congestion and SMG had a financial problem to build more transportation facilities^[3]. After 1993, SMG changed its focus on the transportation demand management (TDM)^[2]. The government of Seoul chose the congestion pricing scheme among options of TDM due to its high effectiveness to control traffic volume^[2].Namsan #1 and #3 tunnels have the most serious traffic congestion problems as the tunnels are the main roads linked to central business district (CBD). On November 11, 1996, the SMG  began to implement a toll fee of ₩2000 (US $1.7) on private cars having less than two occupants as 90% of the total traffic in Namsan is caused by private cars and 78% of them are single occupied ones^[3].

Goals

Two main goals are^[4]:

1) to reduce high traffic volume in certain areas (Namsan #1 and #3 tunnels) of Seoul

2) to encourage residents to use the public transportation more frequently

Coverage

Covered vehicles by the congestion pricing^[1]:

• Private cars having less than two occupants using two toll gates in Namsan #1 and #3 tunnels

Exempted vehicles^[1]:

• cars with more than three passengers
• emergency vehicles
• vans and trucks
•  handicapped person’s vehicles
•  reporters’ vehicles
• vehicles for welcoming foreign guests
• diplomat’s vehicle
• taxies and buses.

Implementation

Until October 1996, all vehicles passing through Namsan #1 and #3 tunnels were charged ₩100 to recover the construction costs of roadways in Seoul for 20 years^[2]. Since November 11, 1996, private cars with one or two occupants, passing tunnels in both direction, have been charged  a congestion toll of ₩2000^[3]. The toll fees can be paid by cash and credit cards at toll booths located at the two tunnels. The toll is collected from 7am to 9pm during weekdays and 7am to 3pm on Saturdays^[2].  There is no charge on Sundays and national holidays^[2]. ₩10,000 must be paid for violation penalties^[2]. Collected toll fees are mainly used for investment in public transport system^4]

Performance  & the effectiveness of the policy

There are two research papers done to analyze the effectiveness of the congestion pricing scheme in Seoul: (1) “Developments in Road Pricing and Traffic Restraint, Seoul Case” by Eui-Young SHON (2000) and (2) “FOUR-YEAR-OLD NAMSAN TUNNEL CONGESTION PRICING SCHEME IN SEOUL – Success or Failure?” by B. SON and  K.Y. HWANG (2012). According to the papers, the effectiveness of the scheme can be proved by the following four parts:

1. A reduction in the traffic volume on Namsan tunnels
2. Shortened travel time
3. A change in traffic volume in alternative roads
4. An increase in different vehicle usage

1. The following table shows the congestion pricing efficiency of solving the traffic congestion. During the first month, the traffic volume was reduced by 24.9%. After two years, the rate was decreased to 10.6%. However, the travel speed significantly increased from 21.6 to 31.9kph^[2].

2. As the congestion toll is charged during the certain time, from 7am to 9pm, the traffic volume between 6 am and 7am and between 9pm and 11pm increased by 12% and 20%. This way, travel time was able to be shortened during the congestion toll  charged period^[2].

3. The table below shows the change in traffic volume on four alternative roads with no charge. The data is only based on the private cars. Whereas the alternative roads’ traffic volume increased by 11%, the average travel speed was improved after two years of implementation. The speed is increased because the traffic signal delays at intersections between the Namsan tunnels and alternative roads were reduced by improved traffic on the tunnels^[2].

4.  Drivers were more likely to shift from private cars with less than two occupants to vehicles exempted from the congestion toll. The number of  buses, taxis, and private cars with more than 3 occupants were significantly increased; increased car-pool by 144.9%, bus by 62.2%, taxi by 211.6% and truck and other toll-free vehicles by 57% from 1996 to 1998^[2].

The dramatic decrease in traffic volume, travel time and the increase in speed on Namsan tunnels were resulted by the congestion pricing scheme,  applied on the tunnels which are  notorious for the traffic congestion in Seoul. Number of vehicles on alternative roads increased, but the travel speed was not worse off. Furthermore, more people were encouraged to use public transportation. These are all impacts of the pricing scheme pointed out by two papers of analysis I found. The impacts can prove that the pricing scheme effectively achieved  its two main goals.

Distributional effects of the policy

There is no study to prove distributional effects of the policy, however, I think it is clear that poor and rich people are impacted unequally. Although both groups have to pay the same toll fee, 2000 won (US. $1.70), the impact of the policy on the poor and rich are different. In my personal opinion, there are three different cases to prove its unequal impact.

1) People with higher income are impacted less: Withdrawing $1.70 from $10,000 isn’t as big of an impact as withdrawing $1.70 from $100.

2) Poor people are less likely to own a car and more likely to use public transportation. The majority of them would not have to be concerned of paying a toll as well as the rich who are financially capable of paying the fee.

3) Two of the toll gates are located in Namsan and the further away your live from it, the higher the probability of paying a toll. As the area further has lower housing price than Namsan, I can say that the people living there are relatively poorer than the people living in Namsan which is central business district. So, poor people are impacted more.

Therefore, I can conclude that all three cases are relative to the divisions of the rich and poor. The impact of the tax on the people of higher income (a.k.a. the rich) is less than on the poor.

Revenue and its impact on the burden for the rich or poor
According to the website of the Korean government, the revenue from the toll is used for the investment in the development of public transport system^[4]. There was no numerical data of how much revenue has been gathered since 1996 and how much of it has been allocated for the investment purpose^[4]. As the poor are more likely to use the public transport, they can get higher benefit and the impact of revenue use on the burden for the poor would be bigger.

Personal Opinion

Based on the information and data I found, I have no doubt about the effectiveness of the congestion pricing. It has successfully achieved two main goals: a reduction in traffic volume in Namsan and encouraged use of the public transport. No study has been done to test its cost-effectiveness, and social and private welfare benefits. However, as SMG chose the scheme among TMD options, I can tell that it has the most cost effectiveness. I think that this pricing is also quite fair. The poor was more  impacted but they can get more benefits obtained from the congestion pricing. They are more likely to use the public transport and the revenue of the scheme is used for the investment in the improving public transportation system. I believe that congestion pricing on other parts of Seoul can be successfully done if it is the same as the scheme applied in Namsan.

References:

[1] http://enviroscope.iges.or.jp/contents/APEIS/RISPO/inventory/db/pdf/0056.pdf

[2] http://www.iatss.or.jp/pdf/research/26/26-1-03.pdf

[3] http://siteresources.worldbank.org/INTURBANTRANSPORT/Resources/shon1.pdf

[4] http://contents.archives.go.kr/next/content/listSubjectDescription.do?id=006501

FRE525: A blog on Sweden’s NOx Tax Policy

1) The coverage of the policy. Discuss the sector covered and exempted. How does the policy implement over time?
2) Discuss the use of revenue from the tax. Is the tax revenue neutral? That is, it is designed to pay back all its revenue collected back to its population. Is its revenue earmarked towards a particular use? Or is the tax revenue put into general tax receipts?
3) Discuss the appropriateness of the tax rate? Do you believe it is approximately equal to the marginal damage from the pollutant regulated?

Sweden’s NOx Tax policy

What NOx tax is

A NOx tax is a charge on every kilogram of nitrogen oxides (NOx) emitted from large stationary combustion plants.

Background and Policy’s Political Origin 

Sweden is one of the countries that has been very vulnerable to acid rain mainly caused by nitrogen oxides (NOx) and sulphur dioxide (SO2). The acidification damages the ecosystem in forests and lakes and human health, and emission of Nox also causes eutrophication in forest soils and on sea beds. As Sweden’s major environmental problem was acidification in the 1980’s, the Swedish Parliament decided to reduce airborne emissions of NOx by 30 per cent by 1995, compared to 1980 levels. With the Swedish Environmental Charges Commission proposal in 1990, a charge of 40 SEK per kg of NOx emitted by combustion plants producing at least 50GWh was introduced on 1 January 1992.  The tax system was expanded to include plants producing at least 40 and 25GWh in 1996 and 1997.

Aims

1) Accelerate and stimulate investment in advanced combustion and pollution abatement technologies

2) Allow cost-effective implementation to reduce emissions rapidly by the mid 1990s

How it works

In 1992, combustion plants producing at least 50GWh energy per year were charged by 40 SEK per kg of NOx emitted (or $6.4 per kg). The plants producing at least 40GWh and 25 GWh useful energy per year were also included in 1996 and 1997. The tax rate remains constant. At the beginning of every year, all plants must fill in a form regarding their energy production and NOx emitted for the previous year and send it to Swedish Environmental Protection Agency (SEPA). Most plants measure emissions by using the equipment approved by SEPA. The plants that either have no measuring equipment or whose equipment is temporarily out of order use a standard assessment calculated by1.5times the average emission level. SEPA randomly selects a number of plants each year for inspection. For environmental benefits, the tax revenue except the cost of administration is returned to the participating plants, in proportion to their production of useful energy. The administration cost is approximately 0.3% of total tax revenue.

Coverage

Major sectors covered by Sweden’s NOx tax are the food and beverages industry, wood and wood products industry, paper and paper products industry, metal products – machinery and equipment industry, chemical industry, energy industry and waste combustion industry. Cement and lime industry, coke production, mining industry, refineries, blast-furnaces, glass and isolation material industry, wood board production, and processing of biofuel sectors are exempted due to unfeasibly high costs of metering.

Performance

The policy could successfully lead a huge decrease in nitrogen oxides emissions. From 1992 to 1997, total emissions per unit of useful energy were reduced by 35%. Emission levels between 1992 and 1993 fell by 42% from waste incineration,  23% from energy production plants ,17% from the pulp and paper industry , 13% from the metal industry. With the 1996 and 1997 expansions, which brought 200 new combustion plants into the tax system, total emissions increased. However, the average emission coefficient (kg NOx /MWh produced energy)  for the plants actually had been decreasing since 1992.

Tax Revenue

Rather than collecting the tax revenue for the government budget, the tax revenue except the cost of administration is returned to the participating plants, in proportion to their production of useful energy. As the administration cost is approximately 0.2 – 0.3% of total tax revenue,  most of the tax revenue are refundable to the plants. Thereby, the tax revenue is neutral. 96% of tax revenue are earmarked for subsidies to abatement investments or for research and development and 4% are used for metering. Any plant paying the NOx tax were eligible to achieve the subsidy. The plants used this subsidy to install emission measuring equipment, to invest in NOx reducing techniques which are combustion method and flue gas treatments (SNCR and SCR).

Tax Rate

Since 1992, the tax rate has remained constant at 40 SEK per kg of nitrogen oxides emitted by combustion plants, in nominal terms. The decision to set the charge at 40 SEK per kg NOX was based on engineering data on expected effectiveness and costs of abatement investments at electricity power stations and district heating plants. The abatement cost was found to range between 3 and 84 SEK per kg reduced NOX. Midpoint of the range is about 43 SEK per kg. A charge of 40 SEK per kg was therefore considered reasonable and appropriate. Unfortunately, there are no empirical studies that show whether the tax rate corresponds to the marginal damage costs. Norway shows that marginal damages from NOx emissions in Norway is about NOK 25/kg. The NOx tax rate in Sweden is SEK 40/kg, or NOK 33/kg. If the marginal damage in Sweden are the same as in Norway, the Swedish NOx tax rate seems to be a little above the marginal damage cost estimated.

Personal Opinion

Based on the information, I can conclude that Sweden’s NOx tax is effective, efficient and fair. Its effectiveness is shown by the reduction in NOx emissions. The annual average emission level was 35% lower in 1992 than in 1990. Since the emissions have been reduced more rapidly than expected, I can say the tax have reduced the emissions efficiently. As the tax system only included larger plants, tax refund prevented unfairness compared to smaller plants exempted by the tax and competiveness to decrease the size of plants. The average abatement cost is 10SKr per kg of NOx emitted. The NOx charge (40Skr per kg) has provided an economic incentive to the plants. The charge is also cost-effective for society. Net social benefit has estimated to be 252 million Skr. The reduction of NOx is usually less successful than SO2 reduction because of technical difficulties. France and Norway failed to reduce NOx significantly. So, I strongly believe that Sweden’s NOx tax policy can be used as a benchmark.

References:

http://books.google.ca/books?id=_rqDi8MA-kEC&pg=PA164&lpg=PA164&dq=sweden+nox+charge+design&source=bl&ots=E65-WZ3keL&sig=yTyDUhqUqhjaVJorgSrDko9V__0&hl=en&sa=X&ei=K3U6UbXQFMPXyAHHxYHgDQ&ved=0CEUQ6AEwBDge#v=onepage&q=sweden%20nox%20charge%20design&f=false

http://ec.europa.eu/environment/enveco/taxation/pdf/ch5nox.pdf

http://www.naturvardsverket.se/Documents/publikationer/620-8245-0.pdf

http://yosemite1.epa.gov/ee/epa/eed.nsf/2602a2edfc22e38a8525766200639df0/f5f2680e0a67338385257746000aff2d!OpenDocument