Australia's Future Tax System

Final Report: Detailed Analysis

Chapter E: Enhancing social and market outcomes

E3. Road transport taxes

E3–3 Road pricing should reflect social costs

Recommendation 61:

Governments should analyse the potential network-wide benefits and costs of introducing variable congestion pricing on existing tolled roads (or lanes), and consider extending existing technology across heavily congested parts of the road network. Beyond that, new technologies may further enable wider application of road pricing if proven cost-effective. In general, congestion charges should apply to all registered vehicles using congested roads. The use of revenues should be transparent to the community and subject to further institutional reform.

Recommendation 62:

The Council of Australian Governments (COAG) should accelerate the development of mass-distance-location pricing for heavy vehicles, to ensure that heavy vehicles pay for their specific marginal road-wear costs. Revenue from road-wear charges should be allocated to the owner of the affected road, which should be maintained in accordance with an asset management plan. Differentiated compliance regimes to enforce this pricing policy may need to be considered to balance efficiency benefits from pricing against the costs of administration and compliance for some road users.

Recommendation 63:

States should improve compulsory third party insurance to better reflect individual risks.

Recommendation 64:

On routes where road freight is in direct competition with rail that is required to recover its capital costs, heavy vehicles should face an additional charge on a comparable basis, where this improves the efficient allocation of freight between transport modes.

For road users to make the best decisions about where, when and how to travel, they need to know the relative costs and benefits of each available choice. They most often choose the trip that is quickest or cheapest for them. The most obvious costs they incur are the private costs of vehicle operation, any road tolls and the time taken to travel. Each individual and business faces these costs and makes decisions based on them.

But there are additional costs that road users do not pay. The cost of the delay they cause others at peak hour, the wear that a particular truck causes to a specific road, or the local pollution caused by an individual trip, are all costs that 'spill over' onto other road users and the community at large. Because these costs are not priced directly, road users have little incentive to take them into account.

Some level of spillover cost is unavoidable. The costs that spillovers impose on society need to be balanced against the costs of reducing them. The road-wear cost saved by closing a road to heavy vehicle traffic may be far less than the cost of the freight going by a longer alternative route or not being transported at all. The costs of eliminating congestion entirely would far outweigh the benefits.

If people faced prices that included the costs of spillovers, they would make better decisions from the point of view of society as a whole. Congestion costs can be reduced by travelling at different times of the day, by taking a different route, by choosing to catch a bus or train, to cycle or walk, to share a private car or taxi, or by using the telephone or internet instead. A well-functioning and efficient road network would help achieve the best use of infrastructure for society by providing clear and direct price signals to potential road users.

In technical terms, potential road users should face the 'short-run marginal social cost' of accessing the road. They are 'short-run' because they consider the use of only the existing road, without regard to how future roads would be financed. 'Marginal' means that it is the impact of the additional (or next) decision to use the road that is relevant. For example, the marginal cost of driving outside peak times is much lower than the average daily cost (which includes congested peak times). Finally, 'social' refers to the costs to society as a whole — including spillover costs. In contrast, 'private' costs are the costs incurred by the individuals whose activities give rise to the costs.

Individuals mostly make decisions based on private costs. If private and social costs can be brought into alignment, individuals will make the best decisions for society as a whole.


Variable road prices should be set to reflect the short-run marginal social cost of road use, which includes spillover costs.

The costs and benefits of targeted prices

The more closely targeted the price is to the activity that gives rise to costs to society, the better the resulting allocation of resources. Blunt instruments do little to improve efficiency. For example, while fuel tax marginally reduces road use, it has a relatively trivial impact on spillover costs such as congestion or road damage that depend on where and when vehicles travel. To have much effect on congestion, fuel tax would need to be set at a high rate that would significantly over-tax drivers on uncongested roads.

Improved road pricing also has some offsetting costs, particularly administration and compliance costs. The theoretically ideal pricing system would have prices continuously varying by time and location. While technology is advancing rapidly, the costs of pricing the entire network this way and the ability of road users to respond to the information mean that, in practice, a great deal of averaging over time and location will be necessary, pending major improvement in the cost-effectiveness of emerging technology.

This should not prevent the realisation of substantial gains from efficient pricing using current technology. Most congestion costs are highly concentrated at certain places and times and road-wear costs are significant only for specific types of vehicle.

The degree to which road taxes should be targeted therefore depends on a trade-off between the economic gains from better resource allocation and the economic costs and community acceptance of imposing a road pricing regime.


Taxes or charges to improve efficient use of infrastructure should be imposed only where the benefits of improved resource allocation outweigh the additional administration and compliance costs. Compliance regimes should be designed to ensure that implementation and transaction costs are not disproportionate to the benefits.

This trade-off between costs and benefits is changing. The cost of road pricing technology has fallen significantly in the past few decades, and the technology is now sufficiently mature to support limited road pricing for specific applications (see Box E3–1). For example, full electronic tolling under free-flow conditions is already in place on many urban toll roads. If current trends continue, the cost of technology will continue to fall.

Box E3–1: Telematic technology in heavy vehicles

Excise fuel taxes have been the primary method of collecting road charges for close to a century. While this form of revenue collection has low costs and is easily administered, technological advances have the potential to enable road pricing that can vary according to vehicle types on specific roads. These telematic technologies have high up-front costs, including the installation of in-vehicle units (IVUs) and toll gates, but could make road user charges for heavy vehicles based on mass, distance and location a reality and facilitate enhancements to road networks.

Telematics technology is only in its infancy but it has much potential. European Union countries currently use IVUs to charge congestion fees and road user fees for heavy vehicles according to the vehicle's class, mass, duration and time of travel. Further advances in telematic technologies and reduced costs would make the installation of IVUs in small vehicles feasible and create the possibility of integrated road networks.

Integrated road networks with telematics technologies can provide real-time traffic flow data to traffic management systems, from which automobile navigation systems can calculate optimal travel routes, coordinating the entire road network and reducing overall travel times. Telematics can also enhance the safety of the network by switching vehicles to auto navigation in the event of a near collision. Additional benefits include telematic drive-as-you-go insurance, mobile data transmission and emergency warning systems.

Urban congestion

One of the largest spillover costs from road transport is congestion in Australia's major cities. The typical costs associated with congestion include travel delays, variable travel times (unreliability), higher vehicle operating costs (including higher rates of fuel consumption), reduced productivity, increased driver and passenger stress, additional greenhouse gas emissions, poorer urban environment and air quality (as vehicles under congested conditions emit more pollutants than vehicles under free-flow conditions) and, as a consequence, higher health costs.

Congestion costs are increasing. In the absence of road pricing, the Bureau of Transport and Regional Economics (2007) forecasts that the avoidable social costs of congestion will rise to around $20.4 billion by 2020. This estimate is based on 'business as usual' assumptions about road investment and management.

These costs are concentrated in large capital cities at peak times. The projected costs are set out in Chart E3–1 below. They increase with population growth and economic activity.

Chart E3–1: Social costs of congestion for Australian metropolitan areas

Base case projected estimates (1990–2020)

Base case projected estimates (1990–2020)

Projected costs for Canberra, Hobart and Darwin are less than $1 billion in 2020. Time costs are based on deadweight losses for current congestion. That is, social costs refer here to the estimated aggregate costs of delay, trip variability, vehicle operating expenses and motor vehicle emissions — associated with traffic congestion — being above the economic optimum level for the relevant network.

Source: BTRE (2007, p. 109).

Congestion not only imposes costs now, but evidence suggests it also harms long-run growth in heavily congested cities. One reason is that congestion is felt largely around work times, which affects the cost of doing business and getting to work. Congestion acts like a tax on employment, but without any revenue flowing to government. For example, a recent study estimated that, in the United States, a 10 per cent increase in congestion for a heavily congested city such as Los Angeles reduces long-run employment growth by around 4 per cent (Hymel 2009). Poor management of infrastructure therefore reduces productivity.


Traffic congestion is concentrated in Australia's largest cities. Under a 'business as usual' scenario, the avoidable costs of congestion may grow to around $20 billion in 2020. These costs are concentrated in specific locations, with levels of congestion varying throughout the day.

Most other roads are uncongested virtually all the time, and many urban roads are uncongested at night. Vehicles on these roads impose negligible congestion costs.

Non-price policy responses are limited

Faced with an imbalance between demand for road space and its supply, one option is to increase the supply of roads. While this may have worked in the past, it is likely that for most major Australian cities the cheapest supply-side options have already been taken. Acquiring more land for urban roads, building new bridges or digging new tunnels are expensive ways to meet future needs. While additional investment in new roads does expand road capacity, it does not lead to an efficient allocation of road space.

Even where expanding capacity is affordable, there is also a question of how many additional roads — and how much additional traffic — can be introduced without undermining the liveability of Australia's major cities, the sustainability of the urban environment and the management of urban sprawl. Evidence from cities in the United States between 1983 and 2003 found that the extension of most major urban (unpriced) roads induces a proportional increase in traffic (Duranton & Turner 2009). A survey of several studies suggests that, within three years, 50 to 100 per cent of new capacity is filled with induced traffic — that is, with new road users (BITRE 2008).

Non-price measures to reduce congestion, such as TravelSmart, also give rise to induced traffic.10 The additional capacity they create is soon filled up by new road users. This effectively expands supply, which brings economic benefits to the additional travellers.

Introducing congestion pricing does not negate the need for expanded supply of roads in many cases, or other non-price measures. However, pricing is needed to leverage the value of urban road space, to ensure that investment in road capacity is put to its highest value use.

Congestion can be reduced by targeting prices to time and location

Congestion can be reduced by imposing a charge or tax that varies according to prevailing levels of congestion. In practice, this means a variable tax that rises at peak periods, falls away as usage falls, and is zero when there is no congestion. In theory, the tax should be different for different roads and should change at each intersection along any particular road. The purpose of this tax is to reflect the social marginal cost of congestion, and provide incentives for some people to avoid the tax by changing their travel behaviour.

Traffic flows would improve, as fewer vehicles would demand access to roads at peak times. There would be less delay and roads would be used more evenly throughout the day. Congestion would be more widely spread geographically as some road users shifted from the most congested roads to other roads. The purpose of congestion charging is not to eliminate congestion altogether, but to ensure that road users make decisions that reflect the full costs their travel imposes on society.

In theory, a congestion charge or tax would apply to all vehicle types and road users. It would take into account the size of different vehicles. For example, a motorbike takes up significantly less space on the road than an articulated truck and would be charged accordingly. Limited exceptions may be necessary in some circumstances (most obviously, for emergency vehicles).

Congestion charges should be the same for both business and private users, as the spillover costs of congestion are the same for each (see Recommendation 61). However, individual road users will place different values on faster travel, better reliability and reduced driver stress. Road users who need to arrive at their destination quickly or punctually, such as a courier or a person going to a job interview, would probably be better off despite having to pay the congestion tax (see Box E3–2 following).

Box E3–2: Getting to the airport on time

While much of the cost of urban congestion falls on commuters, for some people the costs can be more acute. A missed flight not only costs money, but ruins holidays and throws out business schedules.

Tollways already serve many of Australia's major airports, using technology that could readily be adapted for variable pricing.

If at least one lane, to and from the airport, were priced to keep traffic flowing, then an express option with a higher fee would always be available to passengers to get to the airport on time, or to get into town quickly. It would provide an express option when the congestion charge costs less than missing a flight or a meeting.

Moreover, by taxing only one lane, the congestion charge would be optional. People who leave plenty of time before flying would not need to take the express lane. This would also demonstrate the practical benefits of congestion charging compared to conventional roads.

Congestion charges are fundamentally different from conventional road tolls. Road tolls are typically designed to recover the capital cost of building a particular facility (for example, a specific road or bridge). Typically, the toll is the same whether a vehicle is driving at night or at a peak time. In fact, contractual arrangements between toll road operators and State governments often prevent prices from being adjusted to manage congestion levels (Clarke & Hawkins 2006). By contrast, congestion charges are set on a variable basis to ensure the best use of the asset, and fall to zero at times of low demand.

The costs and benefits of particular congestion charging arrangements would vary from city to city and between different parts of the same city. As a first step, there are likely to be benefits from introducing variable congestion charges on individual tolled lanes, or from converting existing toll roads to congestion pricing (see Recommendation 61).

The introduction of simple congestion premiums on the Sydney Harbour Bridge and Tunnel shows that time-variable pricing is feasible using technology that is already in place on some Australian roads (see Box E3–3). Moreover, a major Australian toll road provider is currently building a road in Virginia in the United States, with some lanes that will be tolled using fully electronic time-variable pricing, designed to ensure a free flow of traffic in those lanes at all times.

Box E3–3: Electronic time-of-day tolling on Sydney Harbour Bridge and Tunnel

The objective of time-of-day tolling for the Sydney Harbour Bridge and Tunnel was to encourage use of the road network outside peak times, thereby easing congestion on the network during the peak times. The tolling arrangements are:

  • Motorists travelling from 6.30 am to 9.30 am and from 4 pm to 7 pm on weekdays pay an increased toll of $4 to use the harbour crossings.
  • For motorists who travel during 9.30 am to 4 pm weekdays and from 8 am to 8 pm on weekends the original $3 toll applies.
  • At all other times motorists pay a reduced toll of $2.50.

The full impact of time-of-day tolling is difficult to quantify due to the influence of other factors that affect driver behaviour.

However, to date the data show an increase in the number of vehicles travelling into the city via the harbour crossings in the hour before the peak period, and a corresponding decrease in the volumes during the 6.30 — 9.30 am peak period in 2009, as compared to the same period in 2008.

Source: Road Traffic Authority NSW (2009).

Where tolls are levied by private infrastructure operators, State governments should negotiate to compensate operators if the switch to variable tolls involves a loss of revenue. If there is a gain in revenue, the operator should be required to pass the gain either to the government or to road users through reduced toll levels at off-peak times.

The effect on other parts of the road network of pricing just one part means that the costs and benefits of partial pricing need to be carefully considered, as do the institutional arrangements for setting and monitoring congestion charges. Over time, congestion pricing should extend to all significantly congested parts of the road network, subject to cost-benefit assessment and the pricing technology available.

The introduction of direct congestion pricing would allow indirect measures to deal with congestion, including parking space levies in inner cities, to be withdrawn.


Road pricing technology already in use on tolled Australian roads could be used to introduce variable congestion pricing in a range of circumstances.

Compensation for congestion pricing

Charging for congestion has different effects on different road users. Those who value their time most highly, and have the means to pay, would receive a net benefit from a faster, more reliable and less stressful journey in exchange for paying the charge. Road users who are unwilling to pay the charge would have options to travel via different routes or at different times, to car-pool, to take public transport, or not to travel at all. Other road users — particularly those who do not already have access to frequent and reliable public transport services — would have no alternative but to pay.

In the long run, people and businesses would adapt, which could lead to more compact urban centres. People would make different choices about where to live, work and study after taking into account the currently unpriced costs of congestion. City dwellers and road users would benefit from improved traffic conditions.

However, for some motorists time savings may not outweigh the cost of the charge, or an absence of transport alternatives in some areas may give groups in some areas little alternative but to pay the tax. Given that the goal of this tax is to correct a market failure, not to raise revenue for government, some form of compensation for these groups could be necessary to ensure broad community support (Hubbard 2009).

This issue of how funds are used is important. If revenue from congestion charging is available for State general purposes, they would have an incentive to allow congestion to increase — in effect charging a rent tax on cities. For this reason, how congestion revenue is used needs to be made transparent (see Recommendation 61).

The Bureau of Infrastructure Transport and Regional Economics (2008) surveyed a range of potential options for using the revenue from congestion charging (see Chart E3–2).

Chart E3–2: Options for disbursement of (net) congestion charging revenue

Chart E3–2: Options for disbursement of (net) congestion charging revenue

Source: Adapted from BITRE 2008.

Of these, there is a strong theoretical argument for using congestion revenue to cut taxes on the labour of affected workers (Parry & Bento 2001), though it would be difficult in practice to identify and target all potential users of the congested roads. Coordination between Australian and State governments may be needed to ensure that motorists are not paying twice for roads, and that the impact on vertical equity of road pricing is appropriately addressed.

In the short term, the introduction of congestion pricing on existing roads would place stress on existing public transport services, and make it more apparent where these are inadequate. For this reason, the introduction of congestion charging needs to be coordinated with (and to help finance) additional investment in public transport for affected communities. Congestion charges can also help finance the provision of new road capacity in congested areas (see Section E3–4 How should roads be financed?).

Heavy vehicle road-wear

Another significant cost of road use is the wear on the road. Australia's road network comprises more than 337,000 kilometres of sealed roads (BITRE 2009, p. 32). Roads deteriorate over time, and require ongoing maintenance to keep them up to standard. Some deterioration is purely time- and climate-related. However, the Productivity Commission's (2006) survey of cost allocation studies for road maintenance expenditure showed that between 32 and 100 per cent of maintenance costs are due to heavy vehicles. The remaining unattributable costs are the same regardless of usage. Cars do negligible damage to roads.

Road-wear attributable to heavy vehicles increases exponentially in accordance with the loaded axle-weight of the vehicle. However, the current fuel-based road user charging is levied at a flat rate per litre of fuel — independent of the vehicle, where it is driven or the actual road-wear caused. While fuel use increases with the mass of the load being carried, it does so at a decreasing rate due to economies of scale in vehicle size (Productivity Commission 2006, p. 120). If fuel-based charges alone were used to pay for road-wear, they would over-recover costs at the low end of the range of heavy vehicle sizes and under-recover at the high end. In practice, registration charges that increase with vehicle size are used to make up the difference.

These current arrangements (see Box E3–4) still lead to over-recovery from some heavy vehicles (those that travel fewer annual kilometres, are more lightly laden than the average or are less fuel efficient) and under-recovery from others (those that travel further than the average, or are more heavily laden, or are more fuel-efficient than the average).

Existing charges do not fully reflect the wear that trucks do to individual roads. Pavement durability varies across the road system. Generally, the more heavy vehicles use a road, the greater the appropriate level of investment in pavement durability and in other road assets, such as bridges. Pavements on minor roads are constructed with less strength and therefore suffer more wear from heavy vehicles. Prices that do not differentiate between individual roads give users limited incentive to consider the full road-wear consequences of their decisions about mode, route and types of truck.

Box E3–4: Existing heavy vehicle charging

The Australian Transport Council is responsible for the national operation of a road user charging system for heavy vehicles. This system is designed to recover the cost of ongoing road maintenance for the wear caused by heavy vehicles transporting road freight, as well as making a contribution to the fixed costs of the road network.

The National Transport Commission determines heavy vehicle user charges so as to recover fully those infrastructure costs attributed to heavy vehicles. This includes all vehicles in excess of 4.5 tonnes that access the road network. Charges are recommended by the Commission and decided by vote of the Australian Transport Council, comprising ministers for transport from all jurisdictions. Charges recommended by the Commission are set so that the total revenue generated by these charges recovers that portion of road expenditure associated with heavy vehicles.

The charges comprise a per-litre reduction in eligibility for fuel tax credits and an annual registration charge that varies by vehicle class. The fuel tax component (called a road user charge) is levied by the Australian government. From 1 July 2009, the road user charge is 21.7 cents per litre.

The Productivity Commission (2006) noted that around 30 per cent of the costs associated with heavy vehicle road use are recovered through State government registration fees. These fees are adjusted each year to help keep pace with road spending. Since 2006, the registration proportion has risen and the annual adjustment has been extended to the road user charge component.

The current arrangements also prevent road owners from receiving compensation from users for damage to their assets. Instead of being compensated through road damage charges, road owners (such as local councils) sometimes try to protect the value of their assets through prescriptive regulations or access restrictions.


Heavy vehicle charges may currently cover the aggregate costs of road-wear, but these charging arrangements do not generate prices or revenues that are closely aligned with social costs. Australia's heavy vehicle task is diverse; as a result there are significant cross-subsidies between different trucks on different routes. This provides little incentive to choose combinations of route, vehicle configuration and loaded mass that take into account the impact on roads. Moreover, road owners, including local governments, do not receive compensation directly from heavy vehicles for the road-wear they cause.

Trucks should pay for the specific road-wear they cause. Charges for road-wear would be based on the actual loaded weight of a truck and vary according to the particular roads on which it travels. Revenue from these charges could be used to compensate road owners (including local governments) for the maintenance costs attributable to the truck.

This process would need to be accompanied by transparent institutional arrangements, to ensure that road owners do not have incentives to maintain roads poorly in order to increase road-wear charges. For this reason, the receipt of revenue from road-wear charges should be contingent on the road owner adhering to a management plan based on economically or socially warranted standards of road condition and pavement durability (see Recommendation 62).

Box E3–5: Avoidable capital costs of pavement durability

There is a view that heavy vehicle pricing should allocate the capital costs of building stronger pavements to heavy vehicle classes. Under this approach, the additional capital cost of building pavements to handle trucks that cause above a given amount of damage is allocated to those trucks.

However, road use pricing theories suggest that this approach does not make best use of available resources once the investments are made. The benefits should be compared with the costs before decisions are made about the most damaging truck types to allow on the network, the maximum loads they are permitted to carry and the pavement strengths to provide.

Once the pavements have been built, it is wasteful to exclude trucks from the network by charging above the short-run marginal costs they actually impose. On the other hand, this approach to road pricing requires that the general taxpayer pays the infrastructure costs of roads attributable to heavy vehicles. In practice, the opportunity cost for government in making these investments might be high.

There may be supply incentive and horizontal equity arguments favouring an allocation of these costs to trucks, and to generate revenues to road owners making these investments; however, these come at some cost to efficiency.

Introducing mass–distance–location pricing

Through its Road Reform Plan, the Council of Australian Governments (COAG) is developing better charging arrangements for heavy vehicles. Its investigation of the feasibility of mass–distance–location pricing is scheduled for completion by December 2011. This process includes a research and policy reform agenda that aims to lay the foundations for alternative models of heavy vehicle road pricing, and to evaluate the costs and benefits of moving to more direct road pricing. Receiving this report earlier could accelerate road pricing reforms (see Recommendation 62).

Pricing based on mass, distance and location would not necessarily require a sophisticated technological solution installed in every truck, particularly those whose road-wear damage costs are small or whose use is occasional. In such cases, the costs of installing and maintaining technology, such as telematic units, might outweigh the efficiency gains from targeting costs. Where possible, technology should be used to support implementation of the policy — but the implementation of technology is not itself a tax policy goal. This approach recognises that the road freight task in Australia is exceptionally diverse.

At one end of the spectrum are very heavy vehicles such as B-triples — weighing up to 82.5 tonnes and measuring up to 36.5 metres in length. These vehicles are used primarily on long-haul intercity routes, and are employed almost constantly throughout the year. Many of them are already fitted with telematic devices for their own fleet management purposes. If road damage is to be priced through mass-distance-location pricing, then a targeted compliance regime for this policy may require information on the loaded weight, distance travelled and roads travelled by some vehicles to be recorded by a certified telematic device.

At the other end of the spectrum, some vehicles may be used only occasionally, on a limited range of roads or for specific tasks. For example, a farmer may use a heavy vehicle three to four times a year as a means of transporting produce to market. In some cases, the costs of installing and maintaining a finely calibrated telematic device are likely to outweigh any efficiency benefits. It may be better to establish a compliance regime based on self-assessment of distance travelled, licensed rather than actual mass, and a reasonable estimation of the types of roads travelled (see Recommendation 62).

Other environmental and amenity costs

Cars and trucks generate a wide range of other spillovers, such as changing the character of cities, and reducing the amenity of the urban environment. In particular, there is an emerging literature highlighting the risks of 'community severance' related to roads. This can be related to physical barriers (imposed by road infrastructure on pedestrians, cyclists and motorists), psychological barriers (including concerns about traffic noise and road safety), and social impacts (particularly on neighbourhood communities) (Department for Transport 2005).

While these have a significant impact on people's quality of life, there may be a limit to the extent they can be targeted directly through road charges. To impose a charge requires a clearly defined activity or person to tax, and evidence to determine the tax rate. Managing some spillovers can be complex and more easily achieved through planning. That said, introducing congestion pricing would help reduce many of these negative spillovers and encourage density near public transport nodes.

The following subsections discuss some of these spillover costs.

Greenhouse gas emissions

In addition to creating urban congestion and road-wear, road transport also imposes a significant spillover cost on the environment. In 2005, transport accounted for around 14 per cent of Australia's greenhouse gas emissions — with road transport contributing almost 90 per cent of transport emissions (Australian Government 2008, pp. 6–9). At the time, transport emissions were the second-fastest growing category of emissions.

Changes in the climate induced by an increased concentration of greenhouse gases in the atmosphere are now widely recognised as a significant spillover from the use of fossil fuels. However, unlike air pollution, which imposes localised costs that vary across regions, the impacts of greenhouse gas emissions are global in nature. An economy-wide response offers the most efficient way for Australia to contribute to global emissions reductions (see Section E2 Taxes to improve the environment).

When the proposed Carbon Pollution Reduction Scheme (CPRS), or similar scheme, comes into operation, it would be inefficient to impose taxes on transport or fuel specifically to reduce greenhouse gas emissions. The different costs of greenhouse gases associated with different fuels would be most effectively targeted using the CPRS, which would provide a relative price advantage to greener fuels.

That said, the other reforms suggested in this section may have incidental effects on greenhouse gas emissions. For example, reducing congestion would also remove the emissions associated with it. On the other hand, any reduction in fuel tax could marginally increase fuel use. However, the environmental impact of any corresponding increase in fuel use would be more than offset by the introduction of a broad-based CPRS, which would lead to a more efficient outcome than imposing a heavier tax on transport. A further practical difficulty arises in determining the appropriate point in the application of the CPRS for the application of full adjustment to fuel taxes.


In principle, greenhouse gas emissions are best dealt with through an economy-wide tool, such as the proposed Carbon Pollution Reduction Scheme.

Local pollution and noise

Vehicles generate significant levels of local air pollution and noise. The health impact of air pollution from motor vehicles was estimated at between $1.6 billion and $3.8 billion for 2000 (BTRE 2005). However, because most pollution costs are highly localised and contingent on engine and fuel types, attempting to measure them directly for taxing or charging purposes may not be practical with current technology. Alternative policies, such as fuel and engine standards, may be a better way to target this type of pollution, recognising that these impose costs on all road users.

Similarly, problems of measuring vehicle noise — and putting a value on the harm it causes — mean that tax is unlikely to be an appropriate instrument to mitigate this spillover cost. It can, however, be mitigated through improved road design, housing insulation, movement restrictions for certain vehicles and environmental planning policies, as well as engine design and in-service maintenance standards for heavy vehicles. These approaches also have costs, and will be imperfect.

In some cases the costs of addressing spillovers using current technology would exceed the benefits from doing so. Nevertheless, where local pollution and noise costs are highly correlated with congestion, it may be possible to build these spillover costs into a congestion charge. It may also be possible to use pricing more extensively as lower cost technology becomes available.


The spillover costs of noise and air quality are locally concentrated and difficult to measure and value. Where these costs are closely related to congestion, they might be priced into congestion charges. Otherwise, they could be addressed, at least in part, through appropriate regulations.

Accident, policing and other regulatory costs

The risks associated with road use require substantial government regulatory and operating expenditure. While some of these costs are fixed, others vary with the use of roads. For example, police expenditure on road safety and traffic management was estimated at $674 million in 2006–07 (Commonwealth Grants Commission 2008 p. 7), not including further costs relating to the administration of the justice system.

Road accidents are a source of further spillover costs to the Australian community. There were 1,616 road fatalities recorded in 2007 (BITRE 2009). The Bureau of Transport Economics (2000) estimated the total cost of accidents in Australia in 1996 at $15 billion (1996 dollars). Of this, $8.4 billion were 'human costs' such as death and injury, and the remainder were property and other costs. Many of the direct accident costs associated with road use are spread across individuals and businesses through a range of State-based legal liability rules and compulsory third party insurance (CTP) arrangements.

However, these compulsory third party charges are not specific to individual risk profiles. In this way, they are more akin to a tax on all road users to fund an insurance pool, than an actuarially determined insurance premium that rewards safer drivers. The NSW premium model does better reflect risk than the community-based premium concept adopted in other jurisdictions; however, this is not a pure individually risk-priced model and has high administration costs.


Compulsory third party insurance premiums are not charged on the basis of individual risk or driving behaviour.

Existing CTP schemes provide little incentive for riskier drivers to drive less, or to drive more carefully. The introduction of distance-related pricing for driver insurance would give explicit recognition to the fact that road safety diminishes, and the likelihood of road accidents increases, with distance driven. For other insurance products, private insurance companies are seeking to remedy this misalignment of risk through the introduction of pay-as-you-drive insurance, under which drivers pay a higher insurance premium the further they drive.

One option that could be explored is linking CTP insurance to driver licensing charges. A rebate (total or partial), based on the individual's driving history, as reflected in demerit points, is feasible, reliable and has a direct link to road safety campaigns.

Recommendation 63 proposes that States improve CTP insurance to better reflect individual risks.

Freight allocation between road and rail on specific routes

Like roads, the provision of rail infrastructure has strong economies of scale and lumpiness of investment; however, it is operated on a broadly commercial basis. It must charge above its short-run marginal costs to achieve cost recovery. The Productivity Commission (2006) found that, in practice, rail fails to cover its full economic costs on many routes, although it is intended to do so. Requiring trucks to meet only the short-run marginal costs of the infrastructure they use raises concerns about competitive neutrality with rail.

For most of the road network, there are no parallel railway lines and no modal competition. But for the major corridors in the national road network, the two modes are, to a varying extent, substitutes (BITRE 2009). As these roads are the most heavily trafficked non-urban roads for trucks, they are built with the strongest pavements and hence have the lowest road-wear costs.

Under the short-run marginal cost principle discussed earlier, charges for heavy vehicles generally and, in particular, for heavy vehicles travelling on these routes, would be lower than they are now. A consequence could be a major shift in mode share from rail to road. In the short term there may be increased congestion, environmental costs and accident costs. In the longer term, there may be increased need for investment in road capacity and closure of railway lines. This could be a less economically efficient outcome than the present situation.


In Australia, different transport modes tend to complement each other rather than compete. However, on specific routes there is significant competition for freight between road and rail. Where access to rail is priced above its short-run marginal cost for cost recovery purposes, competition with road freight priced at marginal cost might lead to an inefficient allocation of freight between road and rail.

One approach would be to subsidise rail and have both modes charge at short-run marginal cost. However, subsiding rail could lead to other problems. In particular, it could reduce incentives for efficient management and operations. Another solution would be to charge heavy road vehicles above the costs of road-wear to the extent necessary to ensure a reasonably efficient modal split for freight, subject to the constraint that rail covers its full costs (see Recommendation 64).

In practice, it is extremely difficult to estimate the amounts to add on to heavy vehicle road-wear costs to achieve the most efficient modal split. The existing road pricing system, which allocates part of the fixed costs of the road system to heavy vehicles on a vehicle-kilometre basis in addition to the attributable road-wear costs, imposes charges on heavy vehicles that exceed road-wear costs. While this amount is not in any sense economically efficient, it might lead to better intermodal allocation on some routes than a pure short-run marginal cost pricing approach.

10 TravelSmart programs by the Australian and State governments ask people to make voluntary changes in their travel choices, encouraging people to use other ways of getting about rather than driving alone in a car — for example, using buses, trains and ferries, car-pooling, cycling or walking, or through tele-working.