Month: March 2013

GOAL: To reduce traffic congestion, improve transport services and journey time reliability for drivers, and to efficiently distribute goods and services in London.

Background

The London Congestion Charge was officially implemented in February, 2003. The city of London initially became aware of the traffic congestion problem in the 1990s, when the average travelling speed in central London decreased drastically. In 1995, The London Congestion Charge Research Program, created by the Transport of London (TfL), reported that a congestion charge would not only reduce congestion, but generate net revenue and additional economic benefits as well. They suggested a fare of £4.00 be charged on all vehicles that enter the center London area. In response to this proposal, another group wrote “Review of Charge Options of London”, and argued that an area license scheme would be more efficient at reducing congestion than a fare. After debating and analyzing the scheme for 18 months, Ken Livingstone, first Mayor of London, officially proposed the area licensing scheme to central London on February 17^th, 2003. Since then, the congestion charge has been modified nine times to improve the operation and service of the scheme. Under constant review, the rules were last modified in April 2012.

Operation of the London Congestion Charge

Monitored by TfL, and operated by IBM, the congestion fee is charged on non-exemptible vehicles that travel within the Congestion Charge Zone (CCZ) between 7am and 6pm on weekdays in central London. The charge is not effective on weekdays, between 6pm to 7am, on public holidays, and anytime during Christmas Day and New Years’ Day. All payments can be made online or using auto pay, by phone or automated phone service, at a shop, by post, or by text messaging. All vehicles are required to pay the charge once every day regardless of how frequently they drive in and out of the CCZ. The standard daily congestion charge is £10.00, which is reduced to £9.00 if paid with auto pay, and increased to £12.00 if paid by the end of the second day of travelling. Drivers are allowed to pay either on the day of travel, or in advance of up to 90 days; however they will be notified with penalty charges if the payments are not made by midnight of the travelling day. Failure to pay results in a penalty charge ranging from £60 to £187.00- the standard £120.00 penalty charge is cut to £60.00 if paid within 14 service days, but raised to £187.00 if not paid within 28 service days. All rules and charges were updated in April 2012.

The London Congestion Charge Zone (CCZ)

Above is a map of the London Congestion Charge Zone provided by TfL. Cameras are set up at entrances, exits and sections of the Congestion Charge Zone to read and match vehicles’ number plates with database to check if the charge has been paid, or if the vehicles are exemptible or discounted from the charge^[1].

Discounts and Exemption

Exemption

All vehicles must pay for the congestion charge unless they’re registered under Driver and Vehicle Licensing Agency as National Health Service vehicles, two wheeled motorbikes and sidecars, emergency vehicles (i.e. Ambulance or Fire engine), vehicles used by one or more disabled people or vehicles that have a “disabled” taxation class. Licensed taxi or minicab is also excluded from the charge. Also, certain vehicles, such as registered buses, are also exempted from the congestion charge, under the condition that they must be registered with TfL to qualify. These vehicles include automobiles that belong with Her Majesty’s Coastguard and Port Authorities, the Royal Parks Agency, or the armed forces. As well as selected operational vehicles from the London boroughs and Breakdown Organizations.

Discounts

Residents who live in the area of the charging zone are allowed to register for the 90% residents’ discount; though a registration fee of £10 is required. Also, vehicles that meet required conditions are eligible to apply for the 100% congestion charge discount. Examples include the Greener Vehicles which emit 100g/km or less of carbon dioxide, vehicles with nine or more seats, and motor tricycles that are no wider than one meter, and no longer than two meters, etc.  People with Blue Badges are also allowed to register for the 100% discount.

Distribution Effect and Impact of the Policy

Public Transport

One of the purposes of the congestion charge was to reallocate the road space from private vehicles to public transportations. After introducing the congestion charge in 2003, bus waiting time was decreased by 30% in the CCZ, and dropped by another 18% in 2004.

It was initially estimated that public transport would increase the entering rate into London by 3%, and travelling within CCZ by 4%^[2]. Surprisingly the rise in the number of people entering London by bus doubled the initial estimation as a result of high cost of congestion charge. This increase in passengers further reduces traffic delays, and increases transport providers’ revenue by decreasing average cost per passenger, which allows the public transit to improve their service levels (i.e. lower bus fares). Improved service encourages more passengers to switch from driving to taking the public transit, which further reduces congestion and increases transport providers’ revenue.

Local Business

The effects of the congestion charge varies across businesses; reduced congestion and travel time could be beneficial to some businesses, but a decrease in car trips is likely to have negative impact on retailers. The survey conducted in 2004 showed that most firms felt the overall effect of the congestion charge on London’s economy was neutral, with positive and negative effects being approximately equal^[2].

Residents

Considering the survey conducted on the residents of the CCZ, majority of the residents reported that the congestion charge has either benefited or had no effect on them at all.

Social Costs and Benefit Analysis

When calculating the benefits of the charge, time saving and increasing in reliability of buses and car transportation are two of the most important components accounted for; expectedly there have been evidential improvements in both components. The operation cost of the policy appears to be twice as high as expected, and it represents more than 2/3 of the benefits gained. While the net benefits clearly appears to be positive, the gain is less than most anticipated as the costs represent a substantial fraction of the total revenue^[2].

Effectiveness of the Policy

The London congestion charge has been successful both in reducing congestion, and gaining popularity among the people in London. In general, traffic delays in the CCZ has reduced by approximately 30%, with 15% congestion time reduction in traffic circulating and 18% drop in entering the zone during charging hours^[2]. Journey time reliability has also increased by about 30%. Despite the historical political resistances British faced in attempt to introduce road pricing in the past, political opposition has been minimal^[2]. In fact, the success of the London congestion charge has led the government into considering the possibility of introducing a national road pricing. The Department of Transport estimated that if the London congestion charge was applied to all urban and interurban roads, the charge would be responsible for over 80% of the congestion reduction.

Conclusion

While the studies did not exclusively analyze the effect of the charge on the poor and rich, I personally think that the congestion charge benefits the poor greatly. Since the poor can’t afford to own a private vehicle, they travel by public transport regardless of the existence of the congestion charge. As mentioned, with the charge implemented, more people switch to the public transit, which increases their service levels such as decreasing fare, decreasing waiting time, and increasing bus frequencies, etc. All of these are to the poor’s advantage. Even though the change in traffic composition benefits the poor as well as the rich, the effect of the congestion charge is more complicated on the rich. For millionaires who do not care for the congestion charge would choose the comfort of their private vehicle over public transport. However, successful businessmen might put a high value on time and feel that the time wasted on traffic is not worth them using their own vehicles; though if one hires a private driver, and has the habit of working in the car, the issue with time wasted in congestion does not exist. Hence, there is clearly room for argument in terms of how and to what extent the charge fee affects the rich, as well as how each individual chooses to deal with it. Generally speaking, the amount of rich that chooses to forfeit their private vehicle for public transportation is relatively low. Fortunately only a minority of the population belong to the “truly wealthy” category, that their decisions would not have a big affect the results of the congestion charge.

The London congestion charge has definitely met its stated goals; in fact the amount of reduction in congestion has exceeded the initial predictions, and these reductions were sustained in subsequent periods. As the success story of the London congestion charge wide spreads, and potentially convert into a large scale project. Nations that are trying to imitate London must not neglect that some of the characteristics that London contains are crucial to the successful operation of the congestion charge scheme. London has a well developed and fully functional public transport system, which offers a number of alternatives to the residents. Also, London’s geography allows the city to use the “ring road” around inner London as a suitable boundary for the charge. Not all cities or regions have these characteristics; potential problems could arise when the same congestion charge is applied.

Reference

^[2]The London Congestion Charge: http://classes.igpa.uiuc.edu/jgiertz/London-congestion.pdf

Transport for London Official Website: http://www.tfl.gov.uk/roadusers/congestioncharging/default.aspx

http://www.tfl.gov.uk/tfl/roadusers/congestioncharge/whereandwhen/

http://www.tfl.gov.uk/roadusers/congestioncharging/17098.aspx

http://www.tfl.gov.uk/tfl/roadusers/congestioncharge/whereandwhen/assets/DetailMapECCZ.pdf

http://www.tfl.gov.uk/roadusers/congestioncharging/6714.aspx

^[1]http://www.tfl.gov.uk/roadusers/congestioncharging/6718.aspx

Central London Congestion Charging Scheme Impacts Monitoring Summary Review: January 2005 http://www.tfl.gov.uk/assets/downloads/impacts-monitoring-report-january-2005.pdf

 

GOAL:

To properly price the disposal of waste by landfill: the cost of landfill in the UK was low compared to other European countries, and failed to internalize the social cost of environmental impacts

To encourage efforts to minimize the waste produced, and the use of non landfill waste management options, such as re-using, recycling, and composting.

Background

In 1996, the Conservative government of the United Kingdom published a strategy to develop plans for sustainable waste management, and promised to achieve a 25% recycling rate for household waste. The UK Landfill Tax was a part of this strategy; it was brought into existence by the Finance Act 1996 and officially began on October 1^st, 1996. The UK Landfill Tax was hailed by the UK government as its first environmental tax.

What is Landfill and Landfill Tax?

Landfills are solid waste disposal sites, where waste is deposited, compacted, and periodically covered over a layer of soil. There are two types of waste – active and inactive (inert). Inert is classified under inactive waste, which includes a broader variety of classifications of waste.  Inactive waste covers most materials used in a building fabric, and most forms of concrete, glass, and soil, etc. Active waste covers all other forms of wastes, such as wood, and plastics.

Landfill Tax is an environmental weight based tax on the waste disposal to landfill paid by the local companies, authorities or organizations. All landfill site operators with license or permit for landfill sites are liable to pay the tax. However, they will pass the tax onto the local businesses by charging a cost on top of normal landfill fees.

Tax Coverage

Unless it is specifically exempted, landfill tax applies to all material disposed of as waste.

Exemption

Waste removed from inland waterways and harbours via dredging and disposed of to landfill is exempted from landfill tax. Any naturally occurring substances which result from extraction of sand, gravel or other materials from the seabed as part of commercial operations, qualify for the exemption. Since 2007, the exemption has been extended to apply to waste disposals where additives that contain dehydrating properties are added to ensure it’s not in liquid state. Additionally, waste produced from mining and quarrying operations is also excluded. Burials of dead pets are not taxable, even though pet cemeteries are allowed to be treated as landfill sites under the environmental law.

Landfill Tax Rate

In general, the environmental taxation rate is usually established in one of two ways. The rate is set to:

1. charge for the social cost of the negative externality per unit of taxation
2. achieve particular targets such as to reduction in landfill demand by increasing the landfill cost

It is common to have the tax escalation over time until the desired objectives are achieved.

UK Landfill Tax Rate

In the UK, an escalator approach to taxation has been adapted since the landfill tax analysts suggested that the impact of the externality based tax was small. The alternative method was recommended to achieve environmental targets in 1998.

The amount of tax levied is calculated according to the weight of the waste disposed of, at two different rates depending on whether the material is active or inactive waste. The lower rate applies to the inactive waste, which pollutes less waste, and the standard higher rate applies to all other taxable active waste.

When both standard and lower rated materials are contained in the waste, the rate used is determined by the form of material that dominates the waste. For example, an incidental amount of standard rated waste is disregarded, if the mixture is composed mainly of lower rated materials, and the whole load is taxed at the lower rate.  Also, all materials are taxed only once. For instance, if 80% of the materials are new, and 20% of the waste has been taxed before, tax is only due on the 80% of the new waste.

The government Emergency Budget 2010 announced that the standard landfill tax rate will increase by £8.00/tonne annually from April 2011 until at least 2014. There will be a price floor which prevents the rate to drop below £80.00/tonne from 2014/2015 to 2019/2020.

Appropriate?

Assuming the reduction in waste production and the landfill prevention are tightly associated, the marginal social benefits of avoided landfill are undoubtedly very high. Extended externalities analyses have proven rational for a much higher taxation rate.

Tax Revenue

The revenue raised from the landfill tax is strictly used for environmental related expenditures, and reduce other taxes. The tax revenue is hypothecated back to the tax payer through reduction in the national insurance paid by businesses. The Landfill Tax Credit Scheme (LTCS) allows the landfill operators to receive tax rebates by making contributions in projects (i.e. maintenance or improvement of a public park in the area near a landfill site) approved by Environmental Body (EB).

What is Landfill Tax Credit Scheme (LTCS) and How does it work?

The LTCS, introduced as a part of the Landfill Tax regulation, was designed to distribute funds generated from the UK Landfill Tax. It was used to mitigate the effect of the landfill tax in local communities, encourage partnerships between landfill operators, local communities, and the public sectors and create environmental benefits and jobs through projects that improve the lives conditions near landfill sites.

With the LTCS in place, land operators with contribution record are allowed to contribute up to 20% of their annual landfill tax liability to EB, who disperse the money through project funding. The land operators are then allowed to reclaim 90% of these funds; in other words, the LTCS hypothecates 20% of landfill tax revenue.

Effectiveness of the Policy

The landfill tax has a relatively low impact on the disposal and production of waste in the UK. There is an apparent increasing in recycling and reuse, but the gradual increase is offset by the rapid growth in municipal waste. There are three main reasons explaining the ineffectiveness of the tax:

1. The tax on municipal waste is insignificant, that the waste producers have no financial incentive to recycle,
2. The growing transport cost is an additional cost to the overall land-filling waste,
3. Alternative disposal options are taking large quantities of waste.

In addition, many products seem to have reached a plateau caused by market constraints.

As a major stakeholder, and responsible for 40% of the tax raised, the local authorities had little voice on the operation of the tax; majority of them felt that they had no choice but to pay the tax. Furthermore, the tax has been ineffective in changing the behavior of most potential producers of polluting waste: domestic households, and small and medium enterprises. Integrated with the other taxes, the landfill tax is charged at a flat rate for the households, and gives them no incentive to reduce waste production. Concerning businesses, the tax is too small of a cost to enforce change in behavior that is directly linked to waste production. Moreover, the landfill operators have little interest in funding recycling, as they do not directly benefit from the LTCS.

While the LTCS is currently the main environmental benefit resulting from the tax, the EBs are not dominating it with projects that promote sustainable waste management and achieve the overall objective of the landfill tax. To conclude, the landfill tax is at present ineffective, and it has made limited contribution to environmental sustainability.

Conclusion

Weighting the cost and effectiveness of the UK landfill tax, I personally do not think the tax is revenue neutral. The overall input is clearly outweighing the output, and the marginal damage created by the waste is not in equilibrium with the benefit generated from the tax. While the LTCS did generate some environmental benefit, the change in behavior of the waste producers and reduction in the waste produced generated directly from the tax have not been significant. Majority of the landfill tax was blended in with the other taxes, and left little financial incentive for the domestic and commercial waste producers to reduce their waste production. While tax payers feel the additional burden from the landfill tax, the money collected is not put into best use, and the potential effect of the tax are not maximized. In my opinion, the tax needs to be reallocated, and redesigned, and a higher landfill tax has to be charged to increase the effectiveness of the tax, as well as the awareness by taxpayers.

In conclusion, by simply raising the landfill cost via tax, and expecting the producers to turn to other waste management methods without providing additional financial support is clearly not enough to achieve sustainable waste management goals. In the case of the UK landfill tax, the relevant parties have not done what they proposed to do, and the goal of the tax has not been met at present.

 

Reference

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageExcise_ShowContent&propertyType=document&id=HMCE_CL_000509#P198_9153

http://ec.europa.eu/environment/enveco/taxation/pdf/ch15_uk_landfill.pdf

http://economicinstruments.com/index.php/component/zine/article/223

http://web.ebscohost.com/ehost/detail?sid=41d15560-fe77-4852-811c-ba51a4c69af2%40sessionmgr113&vid=5&hid=126

http://www.economicinstruments.com/index.php/solid-waste/charges-and-taxes-/article/222-

http://www.entrust.org.uk/

http://www.politics.co.uk/reference/landfill-tax

http://www.tandfonline.com/doi/pdf/10.1111/1467-9302.00224