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Tradable Fuel Permits: Toward a Sustainable Road Transport System

 Evy Crals, Mark Keppens and Lode Vereeck (2004a)

In our modern world, sustainable development has become an issue of worldwide concern. The E.U., for instance, has stated that sustainable development must be the central goal in all policies. The standard definition of sustainable development is: ‘meeting the needs of the present without compromising the ability of future generations to meet their own needs’. It is a strategy that requires the integration of economic growth, social equity and environmental management. Automotive road transport creates many external effects such as congestion, pollution, climate change, noise and stress which, by definition, are not taken into account by drivers and thus not or inadequately reflected in market prices. The market system needs a correction here. There are many devices for internalization. The best-known are probably (Pigouvian) taxes and regulation. Within the wide range of policy instruments to reduce emissions, transferable permits are currently gaining interest. They have been analysed largely (and positively) in the literature from a general and theoretical perspective. Tradable permits seem to be an effective instrument for the emission reduction of larger point sources and for air and water pollution (for instance the U.S. Acid Rain Program), while taxes can be used to reduce the emission of smaller or non-point sources . Little has been written about the practical implementation in specific industries such as transport. Nevertheless, this industry is the major source of air pollution as well as greenhouse gases as said before. Therefore, a tradable transport permit system genuinely merits further research. There are many different reasons why permit systems, such as the TFP system, are particularly promising for regulating the transport market in a way that meets economic, ecological and social demands. _ The permit system is, by nature, highly effective in realising a fixed objective since it is possible to set precise and measurable targets. Once the cap is set, supply is limited and this limit is absolute (disregarding fraud, of course). It follows that the quantitative objective will always be realised. In a system of fuel taxes or road pricing, however, the amount of vehicles kilometres is determined only ex post. Consumption and production may well exceed the optimum amount due to the price-inelasticity of demand. _ The price for TFP’s is determined by the market, hence truly reflects the participant’s (marginal) benefit of consuming fuel. Participants who are capable of reducing their usage relatively cheaply will do so, thus receiving extra revenues of selling or saving additional costs of purchasing permits. Those who face higher abatement costs will purchase extra permits to satisfy their mobility needs. The government can, in case of market distortions, adjust the annual cap by buying back or selling additional permits. The TFP system gives a clear incentive to improve the technology of energy efficiency of engines. These innovations allow further increase of the road transport. Those who use less energy-consuming vehicles can sell their superfluous TFP. _ Since the introduction of Intelligent Transport Systems – which are also used in pricing systems – the technological design of a TFP system is becoming increasingly realistic and cheap. _ The system allows a fair redistribution of mean since every citizen receives a basic package of TFP’s for free. Given the fundamental role that transport plays in exercising the right of free movement, the redistributive consequences of TFP merit close attention. By initially allocating permits for free, additional taxes are avoided. This is likely to promote the political and social legitimacy of the system. Moreover, the government does not have to take deliberate action in redistributing means in society: in the TFP system, there is a transfer of financial benefits from those citizens who pollute most to those who pollute less (polluter’s pay principle). By giving the citizens a free basic endowment of TFP, the government enables each individual to make a certain amount of car kilometres. The initial allocation can also be used to pursue general and specific social goals (promotion of socially weak groups, large families and so on).

in: Anne K. Haugestad and J.D. Wulfhorst (eds.), Future as Fairness: Ecological Justice and Global Citizenship, New York: Rodopi, p. 121-138. ISBN 90-420-1109-2

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