In hopes to reduce traffic congestion in Melbourne, the Victorian Government has passed a parking levy in January of 2006 on busy parking spaces located in the city. The purpose of introducing this levy by the government was to target those drivers that use all-day parking and to discourage them from driving during peak hours as a means of reducing congestion on the road. This levy covers three types of parking on the street: municipal, commercial, and private as well as non-residential parking. Municipal parking applies to any parking that is supplied by the city for local drivers in the city, whereas commercial parking applies to those parking spaces that has an actual ownership and is provided to customers utilizing their service, as such parking in a restaurant’s lot. Thirdly, the private and non-residential parking are those off-street parking spaces that are reserved for certain owners, such as tenants reserving them for their employees to park. When implementing this levy, the government had forecasts of generating annual revenue of $40 million, which the income will then be transferred over to improving public transport in metropolitan Melbourne ^[1].

              Like any policies, there are typically exemptions and it is no different in this case either. Residential spaces are exempted from this levy, such as parking spaces for guests and visitors, loading docks, motobike parking, vehicles displaying a disabled-sign, and free parking that may be provided by the owner as the owner would pay the levy in such cases. So essentially this levy was designed with the the target as drivers who require all-day parking in mind, to achieve reducing traffic congestion in the busiest parts of the city. Furthermore, with the levy implemented, drivers would be encouraged to not park all day and thus the supply of short stay off-street parking would be indirectly increased and these generated incomes can then fund better public transport. In a way, the people that would experience the greatest impacts from this levy would be those who drive and work in the downtown core, requiring to park all-day. As a result from this levy, owners of car parks will be charged a flat annual rate of $400, which got increased twice the amount to $800 in 2007 after the first year of implementation ^[1].

              Observing the responses of car park operators to the levy, some of them chose to discriminate against their customers by passing on the cost to only the short-stay ones rather than to their early-bird and all-day customers. On the other hand, some operators decided to partially absorb this levy cost themselves. So in a way, this levy was not implemented appropriately because it led to discrimination in how the costs of congestion are mitigated overtime. Thus, instead of effectively reducing traffic congestion and reducing costs, the levy re-organized how the costs are distributed, whereas the drivers who needed parking in the downtown core areas had to pay for them.

              Revenue was indeed generated through this implementation, but cost was not reduced and congestion did not improve. Furthermore, it also did not achieve its goal for increasing the supply for short stay off-street parking ^[1]. In order for the levy to be effective in achieving the goals stated, all drivers that require parking should have to face the costs in proportion to their usage. This means that this car park tax needs to tax appropriately on all users that need the resource instead of focusing on just subsets of drivers in the city. This internalizes the negative externalities, for example congestion costs, by targeting drivers in proportion to the costs that are imposed on other users of the road. Then this will be more effective in changing behaviours of drivers in response to the levy as they all now have to face a proportion of the costs, and some will decide to avoid peak hours when operators charge higher prices, opt for transit or other means of transportation.

              By not charging to the proportional amount of congestion caused by drivers, the motivation to look for alternatives is weak because those who are charged are most likely the ones able to afford parking in the first place. In a sense, demand for parking is pretty inelastic because taxing those who drive to work in downtown will need a large increase before they switch permanently to transit since driving to work in downtown are mostly the wealthier ones to begin with. Thus, the levy only causes a slight response on the demand for parking and not very effective in stimulating them to turn to other modes of transportation.

               Very obviously, the distributional effects of this levy are geared towards the rich people who can afford to drive and park all-day in downtown. The selective nature does not treat all those who create congestion equally because it has no direct penalties for those drivers who cause congestion by driving and not requiring parking. More directly, the levy does not apply to short stay off-street parking, and is only charged at an annual flat rate. However, this further encourage commercial parking operators to treat their customers differently such as by slightly increasing early-bird parking charges while significantly increasing short stay drivers due to the levy^[2]. For example, when the levy was implemented in 2006, early-bird parking increased within the first few months and again increased in the beginning of 2007 when the levy was raised from $400 to $800 in 2007. However, as seen in Figure 1, the early-birds were not charged by all operators for the effects of the levy because the parking price increased by 17% from Dec. 2005 to Sept. 2007 when the levy was $800 in year 2008, and this was actually a 28% preimum on the price that was in December 2005. Since these were done in real terms, this means that the parking rate increased by just a mere 11%.

Figure 1. Changes in real early-bird parking charges due to levy imposed. (Source: Transport Research Forum, 2011)^[2]

              In contrast, the poor are not affected as significantly by this levy if they are not driving and parking in downtown. In fact, since the revenue generated from this levy is proposed to be used towards improving public transit, then the poor would indirectly benefit somewhat from this levy in the long-run. This improvement in transit would also mean that the rich who are targeted by this levy are indirectly supporting the cost for improving public transit. As congestion has not been found to have decreased significantly from this levy since the cost is not high enough to reduce their demand for parking, the poor can be viewed as benefiting from this levy while the rich are penalized for driving to work.

              Even though this levy generates a solid and steady flow of revenue, the method is selective and achieving those stated goals are not practical with this policy. Instead of reducing congestion costs, they are shifting them to the wealthier counterparts of the city and focussing on raising revenue. Congestion is due to different traffic and times, as well as types of vehicles on the road, but this levy is pin-pointing into a small portion of road users instead of taxing everyone proportionally.

             Furthermore, since the levy is applicable to the owner of parking spaces, different operators will respond differently to the levy. Some may pass more of the costs onto their customers while others choose to absorb more themselves, and on it goes. Thus, this is also inefficient in discouraging drivers to drive into neither downtown nor changing their transportation behaviours. However, since the revenue generated from this levy goes toward improving public transit, then perhaps it can improve congestion indirectly, but this also depends on how substitutable transit and car driving is. In this case here, since demand for parking in Melbourne is already quite inelastic, then transit is not very substitutable unless revenue improves it in the long-run.

^[1] https://www.propertyoz.com.au/wa/library/05%20AE%20VIC%20Melbourne%20Car%20Parking%20Levy.pdf

^[2] https://docs.google.com/viewer?a=v&q=cache:0LnssGNLeVkJ:www.atrf11.unisa.edu.au/Assets/Papers/ATRF11_0071_final.pdf+&hl=en&gl=ca&pid=bl&srcid=ADGEESgcOEXdBSyrNBZrywAuStssZ3u0xLWDX5MfsW5wrvWRnKMk0iBv8qrl8NavTGgPjQ6jKQ8rhpWbRcifp4as0j14Ms3zMtdTuFcn9bYprrLqkuNZwKNoANsvZL9zPE9GyJYBTkjD&sig=AHIEtbSOFlQFMBUsHHElNn-xO53BLgFqIw

http://www.eng.monash.edu.au/news/shownews.php?nid=43&year=2012

http://www.sro.vic.gov.au/SRO/sronav.nsf/childdocs/-3A87315B22BC23FFCA2575A100441F59-EFC160ABBE873990CA2575B70020FC3B-7A9067647FE241FBCA2575D8007DF289?open

In the US, sulphur dioxide (SO2) is a by-product from coal burning electricity production.
In fact, the largest sources are from fossil fuel combustion at power plants (73%) and other industrial facilities (20%), whereas smaller sources of SO2 emissions are due to industrial processes.

Policy’s Political Origin

The problem emersed in the 1980s due to American power plants sending up vast clouds of SO2, which then fell back to earth in the form of acid rain, damaging forests, lakes and buildings across US and eastern Canada. Many environmentalists were pushing federal officials requiring utility companies to install scrubbers to remove SO2 from their exhausts. By the end of the Reagan administration, Congress had rejected 70 different acid rain bills.

It was not until the 1988 election, when the president of the Environmental Defense Fund phoned Bush’s new White House counsel, Boyden Gray, to suggest that the best way for Bush to pledge as the “envrironmental president” was to fix the acid rain problem through the approach of the cap-and-trade system. Both EDF and the Bush White House felt that emissions trading would be the ideal way to address this problem, and the system was then implemented since the early 1990s as part of the 1990 Clean Air Act.

Goals

Since the early 1990s, the U.S. sulphur dioxide cap-and-trade system has been implemented with aims to reduce acid rain emissions from power plants. Under the Bush administration to curb major threats to the nation’s environment as well as to reduce acid rain levels, urban air pollution, and toxic air emissions, the SO2 cap-and-trade was established under the 1990 Clean Air Act Amendments.

The primary goal of this Act was to reduce the nation’s annual SO2 emissions by 10 million tons below its 1980 leves of 18.9 million tons. Through limitation of the overall aggregate SO2 emissions with this cap and trade system, it also had hopes to encourage innovation and to increase efficiency in the energy production industry.  

Two Phases of the Policy Implementation

The policy sets a cap on the aggregate SO2 emissions within the U.S. electricity sector, and each permit of emissions was referred to as an “allowance”, where 1 allowance per ton of SO2 emissions was required. In order to achieve this goal, the policy was implemented in 2 phases. Phase 1 came into effect in 1995, affecting 263 units at coal-furning electric power plants across 21 eastern and mid-western states to cut their SO2 emission rates to 2.5lbs/mmBtu. New generating units built since 1978 had to limit their SO2 emissions to a lowest achievable rate of 0.6lbs/mmBtu. To provide a glimse on the magnitude, coal with 1.25% sulfur and 10,000 Btu/lb emits SO2 at 2.5lbs/mmBtu, with lower emissions produced by either lower sulfur content or higher Btu content.

Technology that was introduced during this period included the flue-gas desulfurization equipment, which aided in the reduction of SO2 emissions by 90%. The success of this in turn qualified those companies that installed this technology an extension of 2 additional years after the 1995 deadline, if they still own allowances to cover their emissions during the extension period.

Phase 2 began in 2000, tightening the annual limits of emissions imposed on large emitting plants, as well as introducing restrictions on smaller plants fired by coal, oil and gas, encompassing over a total of 200 units. All units units generating over 25 megawatts were required to limit emissions to 1.2 lbs/mmBtu by January, 2000, and were subject to a fine of $2000 for each ton emitted over their allowance, distributed as 8.95 million tons per year.  

SO2 emissions have decreased 5.5 million tons from 1990 levels and more than 7 million tons from 1980. Source: Credit to EPA

Exemption

This system only applies to utilities and electricity generation in the States, and is not applicable to individual households that may be using coal furnaces for heat. Also, older plants were initially exempt from the program under the “grandfather” clause, with the assumption that they would shut down soon or undergo upgrade.

However, many of those that got upgraded did not install additional pollution controls as they were required, prompting lawsuits by the EPA against these older plants. Some of these lawsuits ended in billion dollar settlements with plants agreeing to pay penalties and to install the required controls. 

Policy Implementation and Cost-Effectiveness

In the long-run, this program has delivered desirable results as SO2 emissions have been reduced faster and at lower costs than anticipated, yielding wide-ranging health and enrivonmental improvements. To be more specific, a study in 2003 by the Office of Management and Budget found that the SO2 cap and trade program accounted for the largest quantified human health benefits – over $70 billion annually- of any major federal regulatatory program implemented in the last 10 years. In other words, the benefit to cost ratio is over 40:1.

In 2002, SO2 emissions from power plants were 9% lower than in year 2000 and 41% lower than 1980. This in turn leads to better air quality by reducing human exposure to pollutants that are known to cause health effects. Ambient concentrations of SO2 have decreased by as much as 40% since 1990 in the Northeas and Mid-Atlantic.

Analyses from the Environmental Law Institute, Environmental Defense, and MIT’s Center for Energy and Environmental Policy Research have all examined emissions trading under this program to have found that the result of this policy has not resulted in geographic shifting of emissions due to trading. On the other hand, the highest emitting sources have tended to reduce emissions by the greatest amount. This may be due to the fact that trading occurs under a nationwide cap that represents a reduction in total emissions and improvements in regional air quality. On-going evaluation of local emission impacts under the cap and trade program is important.

Compliance with ths program has been consistently high (over 99%), due to stringent penalties which provide a strong incentive for compliance and require that any excess emissions are offset. The cost of compliance has been substantially lower than estimated. Achievement of the required SO2 emission reductions in 2010 is now projected to cost between 1 to 2 billion dollars annually, which is a mere quarter of the original EPA estimates.

Distributional Effects

There are independent power plants that do not have an allocation of SO2 allowances. Usually it is the largest firms that are receivers for the allowances, which typically further adds to their increasing profits. This then in turn gives the large firms an even greater boost in being competitive over the smaller firms. Thus, income distribution is not evenly distributed due to this program’s intervention. Also, smaller firms that struggle to adapt to the newer technologies and installations often suffer from this unbalanced distribution.

Concluding Thoughts

Undeniably, the cap and trade system for SO2 emissions in the States has been overall very successful in reducing aggregate emission levels at a lower than predicted cost. On top of that, it also motivates firms to embrace innovation and adapt to new technologies in the course of reducing emissions.

Since the firms receive these allowances for free, then the policy rents from the system is also received by these firms rather than the government. In other words, they receive a valuable asset with a market price attached to it. However, due to higher firm profits from these permits, these firms will also be taxed at the corporate level and personal level, which then a portion indirectly goes to the government. If these partial government revenues are used to reduce labour taxes, then this system will produce an indirect revenue-recycling effect as well.

References

1. http://dbp.idebate.org/en/index.php/Argument:_US_cap-and-trade_in_sulfur_dioxide_was_successful
2. http://www.epa.gov/airmarkets/trading/factsheet.html
3. https://docs.google.com/viewer?a=v&q=cache:_zjUVXxe-QQJ:www.rff.org/documents/rff-dp-03-46.pdf+&hl=en&gl=ca&pid=bl&srcid=ADGEESiYThRY61wBlaTxK4QkP8z7JGQbST7uY-8uci6XO9ClkLH36L_Id6kTi4GjHeKyzvo0hDlJzB6KcEnEqApL7o4YsGSC6Swq12WFaJq99-VTDExKLITMlDXnE9QSm_j1xqTA21U0&sig=AHIEtbQ-RRAjfnXns-GafEnrhLuItYtnsw
4. http://www.oecd.org/dataoecd/24/33/2105265.pdf
5. http://en.wikipedia.org/wiki/Acid_Rain_Program