Congestion pricing

Overview

Congestion pricing or congestion charges is a system of charging users of public goods that are subject to congestion through excess demand, such as through higher peak charges for use of bus services, electricity, metros, railways, telephones, and road pricing to reduce traffic congestion; airlines and shipping companies may be charged higher fees for slots at airports and through canals at busy times. This pricing strategy regulates demand, making it possible to manage congestion without increasing supply. According to the economic theory behind congestion pricing, the objective of this policy is to use the price mechanism to cover the social cost of an activity where users otherwise do not pay for the negative externalities they create (such as driving in a congested area during peak demand). By setting a price on an over-consumed product, congestion pricing encourages the redistribution of the demand in space or in time, leading to more efficient outcomes. Singapore was the first country to introduce congestion pricing on its urban roads in 1975, and was refined in 1998. Since then, it has been implemented in cities including London, Durham, England, Stockholm, Gothenburg, Milan, and New York City. In the United States, it was also considered in Washington, D.C., San Francisco, and Boston prior to the COVID-19 pandemic. Outside of the United States, congestion pricing programs have been piloted or proposed in Bangkok, Cambridge, Edinburgh, Switzerland, and Hong Kong in the 1980s and since 2018. Greater awareness of the harms of pollution and emissions of greenhouse gases in the context of climate change has recently created greater interest in congestion pricing. Implementation of congestion pricing has reduced traffic congestion in urban areas, reduced pollution, reduced asthma, and increased home values, but has also sparked criticism and political discontent. There is a consensus among economists that congestion pricing in crowded transportation networks, and subsequent use of the proceeds to lower other taxes, makes citizens on average better off. Economists disagree over how to set tolls, how to cover common costs, what to do with any excess revenues, whether and how "losers" from tolling previously free roads should be compensated, and whether to privatize highways.

Description

Congestion pricing is a concept from market economics regarding the use of pricing mechanisms to charge the users of public goods for the negative externalities generated by the peak demand in excess of available supply. Its economic rationale is that, at a price of zero, demand exceeds supply, causing a shortage, and that the shortage should be corrected by charging the equilibrium price rather than shifting it down by increasing the supply. Usually this means increasing prices during certain periods of time or at the places where congestion occurs; or introducing a new usage tax or charge when peak demand exceeds available supply in the case of a tax-funded public good provided free at the point of usage.

According to the economic theory behind congestion pricing, the objective of this policy is the use of the price mechanism to make users more aware of the costs that they impose upon one another when consuming during the peak demand, and that they should pay for the additional congestion they create, thus encouraging the redistribution of the demand in space or in time, or shifting it to the consumption of a substitute public good; for example, switching from private transport to public transport. This pricing mechanism has been used in several public utilities and public services for setting higher prices during congested periods, as a means to better manage the demand for the service, and whether to avoid expensive new investments just to satisfy peak demand, or because it is not economically or financially feasible to provide additional capacity to the service. Congestion pricing has been widely used by telephone and electric utilities, metros, railways and autobus services, and has been proposed for charging internet access. It also has been extensively studied and advocated by mainstream transport economists for ports, waterways, airports and road pricing, though actual implementation is rather limited due to the controversial issues subject to debate regarding this policy, particularly for urban roads, such as undesirable distribution effects, the disposition of the revenues raised, and the social and political acceptability of the congestion charge.

Congestion pricing is one of a number of alternative demand side (as opposed to supply side) strategies offered by economists to address traffic congestion. Congestion is considered a negative externality by economists. An externality occurs when a transaction causes costs or benefits to a third party, often, although not necessarily, from the use of a public good: for example, if manufacturing or transportation cause air pollution imposing costs on others when making use of public air. Congestion pricing is an efficiency pricing strategy that requires the users to pay more for that public good, thus increasing the welfare gain or net benefit for society. Nobel-laureate William Vickrey is considered by some to be the father of congestion pricing, as he first proposed adding a distance- or time-based fare system for the New York City Subway in 1952. In the road transportation arena these theories were extended by Maurice Allais, Gabriel Roth who was instrumental in the first designs and upon whose World Bank recommendation the first system was put in place in Singapore. Also, it was considered by the Smeed Report, published by the British Ministry of Transport in 1964, but its recommendations were rejected by successive British governments. The transport economics rationale for implementing congestion pricing on roads, described as "one policy response to the problem of congestion", was summarized in testimony to the United States Congress Joint Economic Committee in 2003: "congestion is considered to arise from the mispricing of a good; namely, highway capacity at a specific place and time. The quantity supplied (measured in lane-miles) is less than the quantity demanded at what is essentially a price of zero. If a good or service is provided free of charge, people tend to demand more of it—and use it more wastefully—than they would if they had to pay a price that reflected its cost. Hence, congestion pricing is premised on a basic economic concept: charge a price in order to allocate a scarce resource to its most valuable use, as evidenced by users' willingness to pay for the resource". As applied to traffic, there are technically two types of congestion pricing. Cordon or area pricing defines the boundaries of an affected area -- typically an area of dense travel demand such as a city center -- and charges for personal vehicles to cross its boundaries. Lane or facility pricing charges for access to a single facility, such as a segment of road or bridge. In practice, the term "congestion pricing" is often used to refer to cordon pricing but not facility pricing, as this is a newer idea.

Roads

Practical implementations of road congestion pricing are found almost exclusively in urban areas, because traffic congestion is common in and around city centers. Congestion pricing can be fixed (the same at all times of day and days of the week), variable (set in advance to be higher at typically high-traffic times), or dynamic (varying according to actual conditions). As congestion pricing has been increasing worldwide, the schemes implemented have been classified into four different types: cordon area around a city center; area wide congestion pricing; city center toll ring; and corridor or single facility congestion pricing.

Cordon area and area wide

Cordon area congestion pricing is a fee or tax paid by users to enter a restricted area, usually within a city center, as part of a demand management strategy to relieve traffic congestion within that area. The economic rationale for this pricing scheme is based on the externalities or social costs of road transport, such as air pollution, noise, traffic accidents, environmental and urban deterioration, and the extra costs and delays imposed by traffic congestion upon other drivers when additional users enter a congested road.

The first implementation of such a scheme was Singapore Area Licensing Scheme in 1975, together with a comprehensive package of road pricing measures, stringent car ownership rules and improvements in mass transit. Thanks to technological advances in electronic toll collection, electronic detection, and video surveillance technology, collecting congestion fees has become easier. Singapore upgraded its system in 1998, and similar pricing schemes were implemented in Rome in 2001, London in 2003 with extensions in 2007; Stockholm in 2006, as a seven-month trial, and then on a permanent basis. In January 2008 Milan began a one-year trial program called Ecopass, charging low emission standard vehicles and exempting cleaner and alternative fuel vehicles. The Ecopass program was extended until December 31, 2011, and on January 16, 2012, was replaced by Area C, a trial program that converted the scheme from a pollution-charge to a congestion charge. The Gothenburg congestion tax was implemented in January 2013 and it was modeled after the Stockholm scheme. Singapore and Stockholm charge a congestion fee every time a user crosses the cordon area, while London charges a daily fee for any vehicle driving on a public road within the congestion charge zone, regardless of how many times the user crosses the cordon. Stockholm has put a cap on the maximum daily tax, while in Singapore the charge is based on a pay-as-you-use principle, and rates are set based on traffic conditions at the pricing points, and reviewed on a quarterly basis. Through this policy, the Land Transport Authority (LTA) reports that the electronic road pricing "has been effective in maintaining an optimal speed range of 45 to 65 km/h for expressways and 20 to 30 km/h for arterial roads".

Singapore

In an effort to improve the pricing mechanism, and, to introduce real-time variable pricing, Singapore's LTA together with IBM, ran a pilot from December 2006 to April 2007, with a traffic estimation and prediction tool (TrEPS), which uses historical traffic data and real-time feeds with flow conditions from several sources, in order to predict the levels of congestion up to an hour in advance. By accurately estimating prevailing and emerging traffic conditions, this technology is expected to allow variable pricing, together with improved overall traffic management, including the provision of information in advance to alert drivers about conditions ahead, and the prices being charged at that moment. In 2021 the Land Transport Authority required that all motorists replace their old Electronic Road Pricing readers with new Global Navigation Satellite System based readers. This will allow the large gantries to be replaced with smaller gantries, and the pricing will remain cordon based, even though the potential now exists to price based on distance traveled.

London

A proposal by former Mayor of London Ken Livingstone would have resulted in a new pricing structure based on potential CO2 emission rates by October 2008. Livingstone's successor as Mayor of London, Boris Johnson, announced in July 2008 that the new CO2 charging structure will no longer be implemented. Johnson decided to remove the 2007 Western Extension from the congestion charging zone beginning on January 4, 2011, to increase the basic charge to £10, and also to introduce an automated payment system called Congestion Charging Auto Pay (CC Auto Pay), which will charge vehicles based on the number of charging days a vehicle travels within the charging zone each month, and the drivers of these vehicles will pay a reduced £9 daily charge. In November 2012 Transport for London (TfL) presented a proposal to abolish the Greener Vehicle Discount, and the Ultra Low Emission Discount (ULED) went into effect on 1 July 2013, limiting the free access to the congestion charge zone to selected vehicles. There has been criticism because during the first ten years since the scheme was implemented, gross revenue reached about £2.6 billion, but only £1.2 billion has been invested, meaning that 54% of gross revenues have been spent in operating the system and administrative expenses. A new toxicity charge, known as T-charge was introduced from 23 October 2017. Older and more polluting cars and vans that do not meet Euro 4 standards will have to pay an extra £10 charge within the Congestion Charge Zone (CCZ). On 8 April 2019, the T-charge was expanded into the Ultra Low Emission Zone (ULEZ).

Milan

The Ecopass pollution charge ended on December 31, 2011, and was replaced by the Area C scheme, which went into effect on January 16, 2012, initially as an 18-month pilot program. The Area C scheme is a conventional congestion pricing scheme and is based on the same Ecopass geographic area. Vehicles entering the charging zone incur a charge of €5 regardless of their pollution level. However, residents inside the area have 40 free entries per year and then a discounted charge of €2. Electric vehicles, public utility vehicles, police and emergency vehicles, buses and taxis are exempted from the charge. Hybrid electric and bi-fuel natural gas vehicles (CNG and LPG) were exempted until January 1, 2013, though exemption has been postponed until December 31, 2016. The scheme was made permanent in March 2013. All net earnings from Area C are invested to promote sustainable mobility and policies to reduce air pollution, including the redevelopment, protection and development of public transport, "soft mobility" (pedestrians, cycling, Zone 30) and systems to rationalize the distribution of goods.

Stockholm

On 1 January 2016, congestion taxes were increased in the inner-city parts of Stockholm, and also the congestion tax was introduced on Essingeleden motorway. This was the first increase of the tax since it was introduced permanently in 2007. The congestion tax is being introduced at the access and exit ramps of two interchanges on Essingeleden in order to reduce traffic jams in peak periods, and with shorter traffic jams on Essingeleden, the surrounding roads are expected to have shorter tailbacks. The transport agencies involved expected to reduce traffic on Essingeleden by some 10% in peak hours. One week after the tax began to be charged, traffic on the motorway had decreased by 22% compared to a normal day in mid-December. The tax increase was implemented not only to improve accessibility and the environment, but also to help develop the infrastructure. The additional funds will contribute to finance the extension of the Stockholm Metro. As the Stockholm congestion tax varies by time of the day, the highest increase took place at the two busiest rush hour periods, 7:30 to 8:29, and 16:00 to 17:29, from SEK 20 to SEK 30. The objective was to steer the traffic towards other times of the day and public transport, and in this way reduce congestion in the Inner City area. Also the maximum amount levied was raised to SEK 105 per day and vehicle.

Norway

Several cities in Norway have tolled entrances to the more central urban areas, the first being Bergen in 1986. Starting with Trondheim in 2010, later in Kristiansand, Bergen and Oslo, time differing fees were introduced, so that rush hours (in Oslo 06.30 – 09.00 and 15.00 – 17.00) cost more. The price is (in 2020) typically NOK 28 (€2.37) per passage, but to enter Oslo to the inner city and leave means passing five stations which costs NOK 126 (€10,66).

New York City

New York City implemented congestion pricing in 2025, becoming the first city in the United States to do so. Most vehicles entering the central business district of Manhattan south of 61st Street are charged a fee that varies by time of day. The tolls are a source of revenue for the Metropolitan Transportation Authority (MTA), which operates the city's public transit. In 2017, New York Governor Andrew Cuomo declared a state of emergency for the MTA. As a solution, Cuomo proposed using congestion pricing as a means of funding the agency. Later that year, a commission to investigate the feasibility of congestion pricing found that such a scheme could benefit New York City. State lawmakers approved a congestion pricing plan in March 2019. The Federal Highway Administration gave its final approval on June 26, 2023, allowing the MTA to begin setting toll rates for the proposed congestion zone. Implementation was scheduled for 30 June 2024, but in an announcement by Governor Kathy Hochul on 5 June 2024, the plan was indefinitely postponed. In November 2024, Hochul announced an intent for the toll to go forward with a planned implementation on 5 January 2025, at a reduced rate.

Old town centres

Around Europe several relatively small cities, such as Durham, England; Znojmo, Czech Republic; Riga, Latvia; and Valletta, Malta, have implemented congestion pricing to reduce traffic crowding, parking problems and pollution, particularly during the peak tourism season. Durham introduced charges in October 2002, reducing vehicle traffic by 85% after a year; prior to this 3,000 daily vehicles had shared the streets with 17,000 pedestrians. Valletta has reduced daily vehicles entering the city from 10,000 to 7,900; making 400 readily available parking places in the center. There has been a 60% drop in car stays by non-residents of more than eight hours, but there has been a marked increase of 34% in non-residential cars visiting the city for an hour or less.

Rejected proposals

Hong Kong conducted a pilot test on an electronic congestion pricing system between 1983 and 1985 with positive results. However, public opposition against this policy stalled its permanent implementation. In 2002 Edinburgh, United Kingdom, initiated an implementation process; a referendum was conducted in 2005, with a majority of 74.4% rejecting the proposal. Councils from across the West Midlands in the United Kingdom, including Birmingham and Coventry, rejected the idea of imposing congestion pricing schemes on the area in 2008, despite promises from central government of transport project funding in exchange for the implementation of a road pricing pilot scheme. In 2007, New York City shelved a proposal for a three-year pilot program for implementation in Manhattan, and a new proposition was denied in 2008, with potential federal grants of US$354 million being reallocated to other American cities. Greater Manchester, United Kingdom, was considering a scheme with two cordons, one covering the main urban core of the Greater Manchester Urban Area and another covering the Manchester city centre. The measure was supported by the government, but three local authorities rejected it (Bury, Trafford and Stockport); the support of two-thirds of Manchester's 10 local councils was needed for it to be implemented. A comprehensive transport investment package for Manchester, which included the congestion pricing element, was released for further public consultation and was to be subject of a referendum in December 2008. On 12 December 2008 the scheme was overwhelmingly rejected by 10 out of 10 councils by a public referendum.