Property rights in the transport industry: the implementation of tradable fuel permits

Abstract

Automotive road transport creates many external costs, such as congestion, pollution, noise and stress. These externalities are generally considered the blatant symptoms of an unsustainable economic and transport system. Therefore, transport economists are searching for more sustainable sustainable systems. So far, their main focus is on pricing mechanisms: road and congestion pricing, variable taxation and tolls. But these traditional policy measures are not only ineffective (congestion is not to disappear due to demand inelasticity) and inefficient (road tolls typically reflect average operational costs, not marginal benefits) but also unjust because they risk to deprive poor people of their right of free movement. If, however, property rights can be established, the efficiency properties of markets can be combined with social concerns. More precisely, markets for transport rights can be set up that allocate permits for transportation among all citizens whilst internalizing the costs of pollution and so on. Hence, tradable rights may potentially become the key concept in sustainable development policies. Opponents of a permit system in the transport sector argue that the transaction costs of suc a system are prohibitively high. However, since the introduction of Intelligent Transport Systems - which are also used in pricing sytems - the design of an efficient permit system is becoming more realistic. The permit system may thus create a sustainable and affordable road transport network. Firstly, the system is highly effective in reaching its goal since precise and measurable targets can be set easily and the automotive transport industry is more sensitive to quantitative than price signals. Secondly, the system allows a fair social distribution of means. Tradable rights have already been introduced in practice. The most important examples are emission rights (the U.S. Acid Rain Program and the California RECLAIM program). We draw upon these experiences to develop tradable fuel permits(TFP). This paper examines the design of a TFP system of which following aspects are discussed: geographical distribution, target group, allocation aspects, cap and trade, implementation path and technology. Specific attention is paid to monitoring, enforcement and transaction costs. The implementation of the TFP-system will not only lead to a sustainable road transport system, it will be an unequivocal enhancement for further innovation in the car industry.