Central London is one of the world’s first and largest congestion charge zones. The zone covers about 22 Km2 and comprises 370,000 inhabitants and 1.2 million jobs. While widely viewed as politically successful, the scheme’s economic assessment is more controversial. As a result, there’s a lot to learn from London’s example; policy makers around the world should pay attention.
Policy coverage
The congestion charge was initially introduced in 2003– then, at an amount of £5 per day. In 2005, the charge increased to £8 and currently amounts to £10 (about 18 CAD).
The charge only applies between 7 AM and 18.30 PM on weekdays (the busiest times). For a map of the charge zone, click here.
Central London residents receive a 90% discount and particular types of vehicles are exempt, including motorcycles, buses, taxis, ultra low emissions vehicles, and emergency service vehicles.
The implementation is simple. Motorist pay in advance or within 24 hours of their downtown visit. A network of cameras monitors the visiting vehicles and issues penalties to individuals who haven’t paid the charges. To facilitate payment, the city allows various methods of payment: online, by phone, by text message, automatic payment, or by postal order.
Distributional Effects & Tax Revenues
Central London is characterized by high land values, internationally significant organizations, businesses, and shopping destination. As a result, the charge mostly affects middle to high-income individuals. However, as will be discussed later, shop owners pay a large portion of the burden as the charge results in fewer patrons and lower sales.
The tax revenues are invested in public transportation improvements, positively impacting everyone’s commute and, in particular, low income individuals.
Policy Effectiveness
Economically speaking, directly taxing congestion is the most effective method of reducing it to optimal levels. It allows individuals to face the true cost of driving. When making a decision to drive, individuals generally do not account for their contribution to congestion, which is bared by others. A congestion charge, however, internalizes this cost so that it enters individuals’ decision-making process. A tax is widely accepted in Economics as a direct solution to negative externalities (the economic term for costs that are not bared by their creator).
Given the strong theoretical support for the congestion tax, it is important to understand whether the policy is effective in practice.
As Transport for London, the implementing agency, indicated in its 2004 report, the impact on congestion was immediate and dramatic: traffic was reduced by 12% overall (34% for cars, while motorcycles, bikes, taxis, and buses increased). Of the 70,000 fewer cars per day in the zone, about half shifted to public transport, about 30% reduced their trips, and the rest made different adaptations, such as travelling at different times. The report also points out that commercial establishments in the area suffered a decrease in revenues. But the report provides alternative explanations for this negative outcome, including a 3-month shutdown of a major subway line and fear of terrorism because of the Iraq war. In the end, the report finds that the tax provided net benefits (including time savings and costs).
In the paper, Changes in the frequency of shopping trips in response to a congestion charge, Schmöcker and other authors conducted surveys to determine the change in shopping frequency and concluded that the primary reason was indeed the congestion charge (2006).
A different study, The London congestion charge: a tentative economic appraisal, by Prud’homme and Bocarejo, concluded that the costs of the congestion charge scheme far outweigh the benefits. The study reached this conclusion by estimating demand and cost curves for road usage and calculating the related gains and losses (2005).
In response to this last study, Charles Raux published comments critiquing the assumptions. He explains that the difference in results between the Transport for London report and Prud’homme and Bocarejo’s report hinges primarily on the value of time. The former study uses €15.6/h while the latter uses different (lower) prices depending on the type of trip, ranging between 12.8€ and 8.8€. Given the makeup of travellers during the congestion charge time interval (higher income and travelling for business), Raux argues (convincingly) for a value of time at least as high as the one used by Transport for London. The author also points to other faulty methodologies and important variables left out by the other study. Nevertheless, Raux acknowledges that the cost of collecting congestion charge revenues in high and detracts from the net gains (2005).
A more recent article in The Economist explains that despite congestion initially falling by 30%, the benefits have eroded and roads are only 8% less clogged than before 2003. Nevertheless, London has become a nicer place to wander around: some streets have been given to pedestrians, pavements have been widened and traffic-light phasing has changed in favor of people on foot (2012).
Overall, despite some controversy, the congestion charge is effective.
Conclusion
London’s policy makers have learned a few lessons: first, congestion charges can be politically successful (the mayor that implemented the policy was voted again into office and the following mayor kept the tax). Secondly, they are effective in reducing traffic and improving pedestrian areas. But in addition to the high implementation costs (about 170 million euros), the charge is expensive to the commercial sector that looses customers. This last point isn’t immediately obvious: the motorists subject to the tax are generally viewed as paying the entire burden. Yet, indirectly others are affected. Nevertheless, the effect isn’t necessarily a bad one as it provides an incentive for stores to relocate to areas less affected by traffic.
Hopefully, other cities and countries can follow suit, carefully considering the segments of the population that will be impacted.
Works Cited
“A Capital Idea.” The Economist. The Economist Newspaper, 24 Feb. 2007. Web. 30 Mar. 2014.
Charles Raux. “Comments on ‘The London congestion charge: a tentative economic appraisal.’” Transport Policy 12.4 (2005): 368-371. Print.
“Congestion Charge.” (Official). N.p., n.d. Web. 30 Mar. 2014.
“Keep Moving.” The Economist. The Economist Newspaper, 30 June 2012. Web. 30 Mar. 2014.
Rémy Prud’homme, Juan Pablo Bocarejo. “The London congestion charge: a tentative economic appraisal.” Transport Policy 12.3 (2005): 279-287. Print.
Schmöcker, Jan-Dirk, Achille Fonzone, Mohammed Quddus, and Michael G.H. Bell. “Changes in the Frequency of Shopping Trips in Response to a Congestion Charge.” Transport Policy 13.3 (2006): 217-28. Print.