Monthly Archives: March 2013

Congestion issues are prevalent across many metropolitan areas in various nations. The Economic cost are captured in terms of monetary value, and reflected in the underlying negative externalities. These costs include: additional commute time, petroleum cost, increase in green house gas emissions, and disutility to commuters. In this blog entry, I will address the issue in the London Congestion Tax Policy.

The London congestion charge was introduced in February 2003. This policy is a taxation scheme specifically targeted within the Congestion Charge Zone (CCZ). It is levied on vehicles during peak hours on business days from 7 am to 6 pm.

Policy Coverage

The regions receiving charges involves the City of London, and the West End. In addition, charges apply to the various major roads: Pentonville Road, City Road, Old Street Commercial Street, and Mansell Street, etc. (Wikipedia.org).

In order to monitor for taxable vehicles, IBM utilizes an automatic number plate recognition technology (ANPR), and the Transport for London (TfL) is responsible for revenue collection.

By convention, there is price discrimination for vehicles paying at different times, and paying method. If vehicles pay by midnight on the day of travel, the charge would be £10 per day (Transport for London). However, if the charge is paid the next day, £12 is applied. Alternatively, vehicles would pay £9 charge, if it is registered with CC Auto-pay (TfL). This payment scheme incentivizes drivers to pay on time, and to use the auto-pay method to increase efficiency. Any failure on payment, would incur £120 charges (politics.co.uk, 2013). This would be reduced to £60 for payment in 14 days. However, there would be surge charges to £187 after 28 days. Auto-payment can be registered via TfL.

Tax exempted vehicles

Vehicle on roadside maintenance, registered cars fulfilling emissions of 100g/km or less of CO2, in addition to the Euro 5 standard, vehicles with nine or more seats, motor-tricycles are exempted from the taxation scheme (tfl.gov.uk, 21). There are refunds available to individuals who pay monthly or annual cash advance, alongside reimbursements to patients who are unable to travel by public transit. The exemption also extends to the firefighters, and the care-takers of patients who are driving vehicles (ibid, p.21). Residents close to or living in the Congestion Charge Zone can apply for a 90% discount via CC Auto-payment method (ibid. p.10). Free road access was also granted to hybrid cars (ibid p.25). However, the reformation of the discount policy on hybrid vehicles introduces a more stringent standard to hybrid, and electric car emissions. This reformation involves changing the original policy of discounts to greener vehicles in general, to a new Ultra Low Emission Discount Scheme. Hence, free access no longer applies to some hybrid vehicles.

Problem with revenue collection

In the Department of Transportation, the annual report mentioned the loss of tax revenue collection from this policy was approximately 26% due to the fact that the registered-vehicle owner was bankrupted, deceased, or untraceable (Wikipedia.org).

In addition, there are problems within the detection system reading foreign license plates (Police Executive Research Forum). By local law, foreign cars can only be used within the duration of six months prior to registering with the UK license plates. This condition applies to both visitors and non-residents (Vehicle Excise and Registration Act, 1994).

In addition, local newspapers reported incidence of duplicates of number plates in order to avoid congestion charges (BBC News, 2004). However, since TfL is a well-developed monitory body with adequate records for the number plates, it is difficult for vehicle owners to avoid congestion taxes.

Implementation Results

For the first six months of implementation, a survey from TfL indicated that the average number of cars in the central zone has been reduced by 60,000, which represents 21 percent decrease (Fahey, Trinity College Dublin). In addition, 50-60% of the reduction was attributed to the use of public transit, 20-30% was attributed with avoidance access to charged zones (Dunt & Stevenson). The remainder was attributed to access outside peak hours, cycling, increased car-sharing, and reduced trips (ibid).

The TfL is the authority responsible for congestion tax collection. In the fiscal year 2009/10, the TfL raised £148m in net revenue, which is then used for investment in improving the transportation system in London (Department of Transportation, 2013).

Hence, the Congestion charge results in displacement of automobiles.

Distributional Effects

Congestion tax is aimed at charging frequent drivers at traffic-sensitive zones.

I would infer that the Government has imposed a progressive tax, which implies as households or individual private income increases, there is a higher “vehicle ownership rates,” and “vehicle utilization rates. (Crawford, 3)”

However, the regressivity/progressivity of the tax varies (ibid, 4). According to the Institute of Fiscal Studies, the nature of the tax largely depends on “whether the average level of income in households increases faster or less fast, than the ability to pay as we consider successively higher income bands. Thus, the average charge rate varies in income. (Crawford, 5)” As we examine the changes in average charge rates from lower to middle income bands, average charge rate increases (Crawford, 5). However, the charge rate diminishes as we move to households on the higher level of the distribution. We can infer that the tax is progressive from lower to middle income levels, since average charge rate increases with income. However, the progressivity diminishes in transition from middle income to higher income (ibid). Beyond the point of middle income, average charge rate declines at higher income level (ibid). Thus, the tax becomes regressive. Higher income pays a lower rate of charge.

Source: Crawford, Ian. “The Distributional Effects of the Proposed London Charging Scheme.” Institution of Fiscal Studies <<http://www.ifs.org.uk/bns/bn11.pdf>>.

In general, the Congestion Tax policy is effective. This is because the revenue is recycled towards road infrastructure development, which mitigates the tax burden in lower income households (Crawford, 6).

Evaluation of efficiency & Recommendations

If the tax is effective, we would anticipate a reduction in road access. However, we are uncertain about the elasticity of road demand. A higher elasticity would result in larger reduction in demand, and the converse is true.

Vehicles from the commercial and public sector tend to be inelastic in terms of access to certain routes. In terms of vehicle size, it is not uncommon to have tractors, trucks, large SUVs on the road in these two sectors. Henceforth, when we examine the fuel economy associated with larger vehicles, a higher usage in petroleum results in greener house gas emissions.

On the other hand, vehicles of personal use, depending on the size of the household, and consumer preference on vehicle size, vehicle size varies from large movable dwellings, SUVs, vans to lighter private cars like mini cooper, and hybrids.

In my opinion, the daily access fee could be more effective if it is levied at different rates based on fuel economy, in addition to vehicle size. Given that the government has sufficient funding to invest on road infrastructure, Boris Johnson, the Mayor, should propose an investment project on weigh in motion systems (WIS) to levy on vehicles with higher mass. As a result, this new technology could enhance, not only efficiency in traffic flow, but also target specifically on vehicles with higher green house gas emissions.

In the near future, vehicles could have RFID tags to identify vehicles’ modelling year, which allows the TfL to compare the charged vehicle against a fuel economy database to determine the trip’s environmental impact.

Works Cited

BBC News. “Car Cloners Trying to Avoid Charges.” 24 June, 2004. 19 March, 2013. <<http://news.bbc.co.uk/2/hi/uk_news/england/devon/3837349.stm>>.

Crawford, Ian. “The distributional effects of the proposed London congestion charge scheme.” 20 March, 2013. <<http://www.ifs.org.uk/bns/bn11.pdf>>.

Dunt, Ian and Stevenson, Alex. “Congestion Charge.” 20 March, 2013. <<http://www.politics.co.uk/reference/congestion-charge>>.

Fahey, Colm. “Analysis of Road Pricing and a study of the  feasibility on the M50.” 20 March, 2013. <<www.tcd.ie/Economics/SER/sql/download.php?key=86>>.

Her Majesty’s Stationery Office. “Vehicle Excise and Registration Act.” 18 March, 2013.<<http://www.legislation.gov.uk/ukpga/1994/22/contents>>.

“London Congestion Charge Consequences.” 18 March, 2013.<<http://www.cchargelondon.com/effect.html>>.

Multiple Contributors. “London Congestion Charge.” 18 March, 2013. <<http://en.wikipedia.org/wiki/London_congestion_charge>>.

Police Executive Research Forum. January 2012. “How are innovative technologies transforming policing.”  18 March, 2013. <<http://policeforum.org/library/critical-issues-in-policing-series/Technology_web2.pdf>>.

Transportation For London. “Discount for exemptions, transport for London.” 16 March. 2013.  <<http://www.tfl.gov.uk/roadusers/congestioncharging/6713.aspx>>

Transportation for London. “What do you need to know about congestion tax charging.” March 15, 2013. <<http://www.tfl.gov.uk/assets/downloads/congestion-charging.pdf>>.

Motivation

As I’ve browsed through the economic blogs online, landfill tax policy analysis is not quite as a conspicuously popular topic of interest as I perceived. I will give you an overview of the tax instrument adopted on landfill waste. My starting point for landfill policy analysis would address the following concerns: Does the tax policy achieve revenue neutrality? Does it have appropriate tax rate charged to the polluters? In other words, does the tax rate achieve optimality by equating private benefits of damage to social marginal cost? If not, what are the possible alternatives or recommendations to enhance the tax policy in the Netherlands?

Brief Overview Of the Landfill Tax History

The European Commission plays a pivotal role in the development of a thematic strategy on waste recycling and curtailment. One of the economic instruments is landfill taxes.

The Netherlands introduced the landfill tax in 1995. The motivation behind implementing this policy was primarily driven by decision-makers’ political and administrative interests. They wanted to bridge the gap between the costs of landfilling and incineration.

In 2002, the decision was made to centralize responsibility within waste management by shifting the powers from the provincial authorities to the central government authorities. The amendment to the Environmental Management Act reflecting the change came into force on 8 May 2002.

Landfill Tax System – How does it work?

Netherlands created the landfill tax in 1995.The landfill of municipal waste and recyclable waste is banned, as well as separated construction and demolition waste. However, the Ministry of Finance has decided to abolish the tax policy in order to simplify the tax system. In recent years, revenues from the tax on landfill have drastically decreased in line with the reduction of the waste landfilled. Consequently, the tax has been eliminated on 1 January 2012.

Initially when the tax was introduced, the rate was levied at EUR 13 per tonne. In 2000, two different levels of taxes were introduced. The policy aimed at charging landfilled waste high taxes for a diversion towards incineration if recycling is not a feasible option. This high tax rate applies to all except for waste with a density of greater than 1100 kilograms per cubic metres. Any waste over such density is assumed to be non-combustible, and is allowed to be landfilled at a lower tax rate. In 2005, there was a considerable increase to EUR 85 per tonne while the low tax increased slightly from EUR 13 to 14 per tonne. A tax on co-incineration also existed but is currently of no charge.

1)       A high rate for combustible and recyclable waste, 107.49/t Euro

2)      A low rate for non-combustible waste, 16.79/t Euro

Who monitors and collects..

The Landfill tax is collected by landfill operators, along with payment of the gate fee. The tax is passed onto the Dutch finance ministry. The simplistic design in this system creates a compliance of close to 100 per cent.

Leakage Issues

As a result of insufficient incineration capacities, until 2005 waste-producers choose between export to neighbouring countries or the acceptance of high landfill costs in Netherlands.

In order to avoid the landfill tax, between periods of 2002-2005, many combustible waste was shipped to Germany. This ended the abrupt implementation of a landfill ban in June 2005 in Germany.

In January 2007, the Netherlands opened their borders for the incineration of waste (both household and commercial/industrial) and kept closed the borders for the landfilling of combustible waste. This action was taken to stimulation the construction of more incineration capacity in Netherlands but so far there have been few significant quantities of cross border trade in combustible waste.

Revenues generated, how are they utilized?

The revenues from the Dutch landfill tax are not earmarked, and therefore comprises part of the overall budget. The revenues from the landfill tax are received by the Treasury Department. It is part of a scheme of greening the tax system, restrictions to undesirable activites are tax revenue generators for the Treasury (use of groundwater, pesticides, energy, packaging, etc.)

The revenue was the highest in 2001 and has been reasonably stable until 2008, where the revenue began to decrease and further decreased in 2009 and 2010.

Environmental Impacts

 

As shown above, many landfills were closed down after 1995. There is a continual decrease of landfill sites in operation alongside a decrease in supply of waste in landfilled.  Take 1996 and 2005, as comparative examples, we have seen significant improvements in comparison to 1992. Why?

Due to more diversion from landfill to recycling, and incineration, as shown below:

 

“Overview of the use of landfill taxes, Europe” http://scp.eionet.europa.eu/publications/WP2012_1/wp/WP2012_1

  

 

 

 

 

 

 

 

 

 

Economic Impacts

The combination of landfill ban with an increasing landfill tax was critical in bringing treatment capacity on-stream over the past few years. In particular, since 2002 when an increase in landfill tax was approximately EUR 80 per ton made landfill more expensive than other alternatives. Currently, the combination of tax and gate fees costs approximately EUR 127 per tonne to landfill a tonne of waste, which is significantly higher relative to EUR 90 per tonne for incineration. 

Changes in tax revenues:

 

 

 

 

 

 

 

 

Snapshot of the implementation results

The landfill tax was introduced in 1995 at level of NLG 29,20 (Euro, 84.78 per tonne). In 2005, the rate has increased to 84,78 per tonne. In the period 1995 – 2003, the landfilled waste in the country decreased by around two thirds from 8,215 ktonne to 2,753 ktonne. During the same period, the amount of waste incinerated by around 75% from 4695 ktonne to 8218 ktonne. The amount recycled waste increased by around 30% in the same period from 38,435 ktonne to 49,936 ktone. These are not only the result of the landfill tax, but also a ban on the landfilling of combustible waste.

 

 

 

 

 

 

 

 

From Fig 3.1, We can see the declining total amount of waste reduction per capita in 2001-2003.

 

 

 

 

 

 

 

 ibbid, Source: same as figure 3.1

In terms of policy effectiveness, landfill tax serves as an effective instrument to restrict both households and service sectors from over-producing. This is because when disposal costs are reflected in the charges to the waste producers, particularly in the case of the service sector, the landfill tax is essentially effective.

However, if the disposal charges are not imposed on the generators, landfill tax is deemed to be ineffective alongside the imposition of the landfill ban. It appears to be that the tax instrument is not fully binding. The only tool which has incentivized households to reduce landfill waste is the landfill ban. In other words, the landfill tax rate is not sufficiently high to be internalized within households. Thus, the government ought to raise taxes in order to account for losses in tax revenues and minimize the negative externalities of not having sufficient reduction of landfill waste from households.

From what I have learned from my environmental economics lectures, the main objective of an environmental tax policy is to raise the firm’s private marginal cost until it equates with social marginal cost. However, in the case of Netherland’s household sector, it has not fully achieved the socially efficient level of output due to overproducing landfill waste. The diagram below shows a tax equal to distance “E,” which is the level of damage caused at the optimal level of output.

 Landfill waste taxation policy (simplified, per-unit tax senario)

 

 

Although environmental taxes are used more frequently to deal with negative externalities, prior to the policy and project implementations, there must be an ex-ante cost benefit analysis with the appropriate parameters specified, and suitable discount rates (capital rate of return in private sector) utilized upon benefits from the future periods. In effect, this would help us with choosing the suitable tax rate.

In general, the information from incinerational sources was adapted to Dutch situations. In particular, one needs to take into account the size of the population exposed to the local impacts of landfills and incineration plants.

Table S.1 shows the estimates of external, private and net social costs for waste treatment options: landfilling, incineration, and co-incineration. “Negative” costs of displaced energy production are considered: 

 From the data above, there is clearly no well-defined lowest social cost option. All we could say that on the outset, the net social cost of landfilling is lower than co-incineration. Thus, the minimal social cost solution is NOT zero landfilling, but instead a combination of landfilling (with methane recovery) and recycling could be a possible option. However, the country would need to have enough availability of landfill sites supply.

Given the fact that the Dutch tax rate on landfill is high at 80 Euro per tonne, the country could decrease tax rate for landfill and increase waste tax rate for incineration. However, if the waste tax rates for both landfilling and incineration are at 10, this could reverse incentive of diverting landfill waste to recycling and incineration significantly.

Alternatively, the country could explore the possibility of tradable landfill permits which combines the efficiency of a tax and a cap on landfill waste production. It also encourages waste producers with less efficiency in landfill waste reduction to either buy permits or adopt innovate technology to prevent or curtail waste production.

In addition, as economists, we need to determine whether explicit pollution taxes would be shooting one-self on the foot or an agent for corrective measures in resolving market failure. In fact, many argue that explicit taxes lead to government failure and a lack of improvements in sustainable efforts.

My criteria of evaluation involve the following:

1)  Revenue Neutrality 

In terms of tax collection, the Dutch system is rather simplistic. However, it is questionable whether the Treasury has achieved revenue neutrality when it has significantly increased the high landfill tax rateto 80 Euro in 2002. The conditionof neutrality only holds true if the government decrease taxes or increase benefits such as labour pensions, better low income welfare support.

2) The next best alternative after elimination of landfill tax

It might be more cost effective for governments to switch away from pollution taxation to direct subsidies to encourage greater innovation in designing cleaner production technologies. However, the Netherlands government would need to implement to subsidy with caution to ensure that subsidy is contributed to waste-reduction activities rather than the technology or the target group,  

 The impact of green taxes depends critically on the use of revenue flows. If they are balanced by reducing other taxes through ‘revenue recycling’, research suggests that green taxes could result in overall economic improvements

2)      Appropriate level of taxation?! Alternative ways to further enhance waste reduction…

It is difficult to quantify the benefits from landfill waste reduction if no proper monitory system is implemented. In the case of Netherlands, since the country is densely populated with a relatively small economy, it is not a draconian task for policy implementers to explicitly measure the monetary values of the benefits of reducing the externalities. The only challenging aspect would be how to best allocate resources into developing the incineration technology given that the capacity is limited within the country. Thus, there should not be restriction on incineration capacity both domestic and abroad. By allowing the export of combustible waste would capitalize the effectiveness of landfill tax, given that there is sufficient incineration capacities in neighbouring countries.

On the other hand, increase in the amounts of waste exportable to neighbouring countries for landfilling would significantly decrease the effectiveness of landfill taxes.. thus it simply creates a loss in tax revenues and a “spillover” of negative externalities to the neighbouring countries.

In addition, the government should take into account that the potential problems resulted from charging unit tax for landfill. For instance, dumping to neighbour’s bins, dispose of it at work, illegally dump waste or burn it themselves. This effect is evidently common especially when the elasticity of demand for disposal service is inelastic. This implies that waste producers are more price sensitive, thus an introduction of a unit price would cause the two effects: 1) reduction in waste 2) part of the reduction might be caused by illegal dumping

However, unit tax does have its advantage as it encourages households to increase prevention and home composting.  In addition, even when there is illegal dumping, as long as the value for recycling is positive, the unit-base pricing would provide the second best optimum. On the other hand, if the value of the waste material is worthless, then another policy like the deposit-refund system should be considered.

3)      Consumer welfare effects

In terms of an increase in landfill taxes, it increases prices which can impose an adverse effect on consumer welfare. Depending on the incidence of tax burden, for low income households, payment to landfill taxes can serve as a large proportion of their income. Thus, the government should consider a tax rebate for households that achieved a certain quantity of reduction in landfill on a quarterly basis. Alternatively, government could change the tax policy to make the large households with higher waste production pay a premium once they have reached the bylaw threshold, and additional per unit charges apply hereinafter.  

4)      Employment and Investment Consequences

If incineration waste taxes, and landfill waste taxes are raised in one country, this would develop structural unemployment due to a shift in production to other countries with lower tax rates.  Globally speaking, the new welfare effect has not changed, since this outcome is merely a transfer of waste from one country to another. Consequently, the country would face high unemployment and a loss of international competitiveness. Thus, with a higher taxation would lead to a decline in profits and a fall in the flow of both foreign direct investments and domestic investments, which generates positive externalities in reducing energy intensity of an industry or innovation to improve the environment.

Lesson Learned

Both the landfill ban and fiscal and legislative measures help diversion of waste away from landfill to alternatives. However, it is difficult to distinguish whether the positive externalities arises from landfill tax or the landfill ban itself. The taxation policy in the Netherlands is, in general, effective. It is evident that there are reductions in landfill waste as industries and households start using alternative waste processing such as incinerations, and are becoming increasingly environmentally conscious through reduction, recycle, and more means of prevention. Although there are still certain loopholes for illegal dumping, and ineffective diversion of waste, it is difficult to get around with it. (Given the simplistic nature of the tax and monitory system).  

References

Barellings Helen; Beukering Pieter; Kuik Onno; Linderhof, Vincent; Oosterhuis, Frans. Effectiveness ofLandfill Taxation. Novemeber 24, 2005.<<http://www.ivm.vu.nl/en/Images/Effective%20landfill%20R05-05_tcm53-102678_tcm53-103947.pdf>>.

Barellings, Helen & Linderhof, Vincent. Istitutute for environmental studies (IVM). <<http://ecomod.net/sites/default/files/document-conference/ecomod2006-rum/1382.pdf>>

European Topic centre on Sustainable Consumption and Production (EIONET).The Netherlands Fact Sheet. <<http://scp.eionet.europa.eu/facts/factsheets_waste/2009_edition/factsheet?country=NL>>.

Fischer, Christian; Lerhner, Mathias, McKinnon, David. EIONET. “Overview on the use of European Landfill taxes.”<<http://scp.eionet.europa.eu/publications/WP2012_1/wp/WP2012_1>>

Indian Ocean Commission. <<http://environment.ioconline.org/fr/solid-waste-management/micro-composting-and-seperate-collection-of-biodegradable-waste.html>>.

UCD Dublin. “Economic Instruments for Evironmental Policy.” <http://www.economicinstruments.com/index.php/component/zine/article/280>.