Why transport policy should not be determined at the EU level
6 June 2016
SUGGESTED
Housing and Planning
Government and Institutions
7 June 2016
Economic Theory
The main objectives of EU transport policy can be placed into two broad categories. The first is to increase economic and social cohesion by improving transport links in order to reduce barriers to trade and address the locational disadvantages of relatively poor and peripheral regions. The second is to reduce the impact of the transport sector on the environment. The EU has made a commitment to reduce overall greenhouse gas emissions from its 28 Member States by 20 per cent compared to 1990 levels until 2020, by 40 per cent until 2030, and by 80-95 per cent until 2050. Given that the transport sector is currently responsible for approximately one fifth of greenhouse gas emissions, the impact of such targets is likely to be substantial.
The development of new infrastructure in the bloc appears to have been a policy failure. This profoundly politicised process, which has prioritised ‘cohesion’ over maximising economic returns, has meant significant resources have been diverted to poor value schemes where the costs have almost certainly outweighed the benefits .
A case in point is the flagship Lyon-Turin high-speed rail link, which is co-financed by the EU under the European Interconnection Mechanism and forms part of Priority Axis no. 6 (Lyon-Trieste-Ljubljana-Budapest-Ukrainian border) of the Trans-European Transport Network (TEN-T). The estimated cost of this megaproject has already risen from €12 billion in 2002 to €26 billion in 2012. Independent analysis suggests that the costs of the scheme will far outweigh the benefits, even if the optimistic official traffic forecasts are accepted. And this calculation does not include the deadweight loss associated with raising tax revenue.
Any rational economic analysis would conclude that such an investment represents extremely poor value for money for EU taxpayers, particularly given the potential for high returns from road schemes in core areas of the bloc. The current Lyon-Turin railway has vast spare capacity. Rail freight traffic on the corridor decreased from 10 million tonnes in 1997 to less than 3 million tonnes in 2009, while freight levels on competing roads have also been declining.
The long-term costs of the environmental component of EU transport policy is probably far higher still, but these costs are hidden, and are not readily appreciated by taxpayers and consumers, who face higher prices, but who will probably not link them to EU policy. Key additional costs include increased public transport subsidies resulting from modal shift, more expensive vehicles due to environmental standards, and higher fuel costs due to the emissions trading scheme and biofuels requirements.
In 2009, the EU introduced mandatory emission standards for new vehicles. Until 2015, the average CO2 emission level of new passenger cars was to be cut from about 160g per km to 130g, with separate targets for other vehicle types. Average emission levels of new cars were already showing a downward trend at the time, but they fell by no more than 1 per cent per annum, so the EU targets required substantial additional investment in carbon abatement. In 2013/14, the EU set more stringent follow-up targets for 2020, with the most important one being a 95g/km target for passenger cars.
The problem with this policy is not necessarily that the targets are too stringent, but that the approach is extremely prescriptive and inflexible. It is not limited to setting overall targets for the industry as a whole, rather, each individual vehicles manufacturer has their own individual set of targets. Those manufacturer-specific targets are set according to the composition of their car fleet, with manufacturers of heavier vehicles being allowed a higher level of emissions. This is why Daimler and BMW, which produce relatively large and heavy cars, have been given target levels of 140 and 139 g/km for 2015 (101 and 100 g/km for 2020), while Toyota and Fiat, which produce relatively small and light cars, have been given targets of 128 and 123 g/km (92 and 89 g/km for 2020). The policy is already producing the inefficiencies that one would expect. Unsurprisingly, some manufacturers found it much easier to meet their targets than others: in 2012, Peugeot-Citroën, Toyota and BMW had already overfulfilled their targets, while others had yet to get there.
Suppose that instead of trying to reduce emissions through micro-management, they EU has simply reduced the number of carbon permits traded via the Emissions Trading Scheme (ETS). The overachievers could then have cut their emissions even more, and sold the permits thereby freed up to those carmakers who faced the greatest difficulties in reducing emissions. The total volume of emission reductions could have been the same, but it would have been implemented by those manufacturers who had the means to achieve those reductions at the lowest cost.
Note, also, that the targets refer to the average emissions, not to the total emissions, of a carmakers’ fleet. Had they simply tightened the ETS a bit, one fairly obvious measure that car manufacturers could have taken would have been to simply produce fewer cars, rather than to drastically change their engineering. Especially for an upmarket producer, focused more on margins rather than volume, this might well have been the preferable alternative. But it is an alternative which the EU approach does not recognise. A manufacturer who reduces their production volume will still have to achieve the same reduction in average emissions on the remaining car fleet, while conversely, a manufacturer who increases their production volume will not have to keep their total emissions constant through sharper cuts in average emissions.
There are various other distortions in the EU carbon standards. The term ‘average emissions’ is somewhat misleading, because it is not the actual emissions that will be compared against the target level. It is a hypothetical value which is calculated using a politically determined formula that gives special weights to features the EU wants to encourage. For example, if a company produces two cars emitting 45g of CO2 per km and one car emitting 90g, its ‘average emissions’ in this sense will not be 60 g/km, but 52 g/km, since the EU awards so-called ‘super-credits’ to cars which emit less than 50g of CO2 per km. This introduces additional distortions as reducing emissions from 50 g/km to 49 g/km counts for more than reducing emissions from e.g. 60 g/km to 59 g/km. Manufacturers can also obtain credits for using so-called ‘eco-innovations’, i.e. politically favoured technologies.
In short, the whole approach represents dirigisme taken to the extremes. And a similar criticism also applies to the Fuel Quality Directive (2009/30/EC), the Renewables Directive (2009/28/EC) and the Biofuels Directive.
In short, EU transport policy has not been a roaring success. EU infrastructure projects have suffered from a bias towards ‘White Elephants’, EU environmental measures have suffered from too much dirigisme and micro-management. It does, however, not automatically follow that the UK would have done better outside of the EU. Unfortunately, our own political class sometimes has a tendency to amplify the EU’s worst tendencies, rather than acting as a counterbalance.
Read their IEA Discussion Paper ‘Stuck in Brussels: Should transport policy be determined at EU level?’ here.
The development of new infrastructure in the bloc appears to have been a policy failure. This profoundly politicised process, which has prioritised ‘cohesion’ over maximising economic returns, has meant significant resources have been diverted to poor value schemes where the costs have almost certainly outweighed the benefits .
A case in point is the flagship Lyon-Turin high-speed rail link, which is co-financed by the EU under the European Interconnection Mechanism and forms part of Priority Axis no. 6 (Lyon-Trieste-Ljubljana-Budapest-Ukrainian border) of the Trans-European Transport Network (TEN-T). The estimated cost of this megaproject has already risen from €12 billion in 2002 to €26 billion in 2012. Independent analysis suggests that the costs of the scheme will far outweigh the benefits, even if the optimistic official traffic forecasts are accepted. And this calculation does not include the deadweight loss associated with raising tax revenue.
Any rational economic analysis would conclude that such an investment represents extremely poor value for money for EU taxpayers, particularly given the potential for high returns from road schemes in core areas of the bloc. The current Lyon-Turin railway has vast spare capacity. Rail freight traffic on the corridor decreased from 10 million tonnes in 1997 to less than 3 million tonnes in 2009, while freight levels on competing roads have also been declining.
The long-term costs of the environmental component of EU transport policy is probably far higher still, but these costs are hidden, and are not readily appreciated by taxpayers and consumers, who face higher prices, but who will probably not link them to EU policy. Key additional costs include increased public transport subsidies resulting from modal shift, more expensive vehicles due to environmental standards, and higher fuel costs due to the emissions trading scheme and biofuels requirements.
In 2009, the EU introduced mandatory emission standards for new vehicles. Until 2015, the average CO2 emission level of new passenger cars was to be cut from about 160g per km to 130g, with separate targets for other vehicle types. Average emission levels of new cars were already showing a downward trend at the time, but they fell by no more than 1 per cent per annum, so the EU targets required substantial additional investment in carbon abatement. In 2013/14, the EU set more stringent follow-up targets for 2020, with the most important one being a 95g/km target for passenger cars.
The problem with this policy is not necessarily that the targets are too stringent, but that the approach is extremely prescriptive and inflexible. It is not limited to setting overall targets for the industry as a whole, rather, each individual vehicles manufacturer has their own individual set of targets. Those manufacturer-specific targets are set according to the composition of their car fleet, with manufacturers of heavier vehicles being allowed a higher level of emissions. This is why Daimler and BMW, which produce relatively large and heavy cars, have been given target levels of 140 and 139 g/km for 2015 (101 and 100 g/km for 2020), while Toyota and Fiat, which produce relatively small and light cars, have been given targets of 128 and 123 g/km (92 and 89 g/km for 2020). The policy is already producing the inefficiencies that one would expect. Unsurprisingly, some manufacturers found it much easier to meet their targets than others: in 2012, Peugeot-Citroën, Toyota and BMW had already overfulfilled their targets, while others had yet to get there.
Suppose that instead of trying to reduce emissions through micro-management, they EU has simply reduced the number of carbon permits traded via the Emissions Trading Scheme (ETS). The overachievers could then have cut their emissions even more, and sold the permits thereby freed up to those carmakers who faced the greatest difficulties in reducing emissions. The total volume of emission reductions could have been the same, but it would have been implemented by those manufacturers who had the means to achieve those reductions at the lowest cost.
Note, also, that the targets refer to the average emissions, not to the total emissions, of a carmakers’ fleet. Had they simply tightened the ETS a bit, one fairly obvious measure that car manufacturers could have taken would have been to simply produce fewer cars, rather than to drastically change their engineering. Especially for an upmarket producer, focused more on margins rather than volume, this might well have been the preferable alternative. But it is an alternative which the EU approach does not recognise. A manufacturer who reduces their production volume will still have to achieve the same reduction in average emissions on the remaining car fleet, while conversely, a manufacturer who increases their production volume will not have to keep their total emissions constant through sharper cuts in average emissions.
There are various other distortions in the EU carbon standards. The term ‘average emissions’ is somewhat misleading, because it is not the actual emissions that will be compared against the target level. It is a hypothetical value which is calculated using a politically determined formula that gives special weights to features the EU wants to encourage. For example, if a company produces two cars emitting 45g of CO2 per km and one car emitting 90g, its ‘average emissions’ in this sense will not be 60 g/km, but 52 g/km, since the EU awards so-called ‘super-credits’ to cars which emit less than 50g of CO2 per km. This introduces additional distortions as reducing emissions from 50 g/km to 49 g/km counts for more than reducing emissions from e.g. 60 g/km to 59 g/km. Manufacturers can also obtain credits for using so-called ‘eco-innovations’, i.e. politically favoured technologies.
In short, the whole approach represents dirigisme taken to the extremes. And a similar criticism also applies to the Fuel Quality Directive (2009/30/EC), the Renewables Directive (2009/28/EC) and the Biofuels Directive.
In short, EU transport policy has not been a roaring success. EU infrastructure projects have suffered from a bias towards ‘White Elephants’, EU environmental measures have suffered from too much dirigisme and micro-management. It does, however, not automatically follow that the UK would have done better outside of the EU. Unfortunately, our own political class sometimes has a tendency to amplify the EU’s worst tendencies, rather than acting as a counterbalance.
Read their IEA Discussion Paper ‘Stuck in Brussels: Should transport policy be determined at EU level?’ here.
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