Paying the Polluter
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Paying the Polluter

Environmentally Harmful Subsidies and their Reform

Edited by Frans H. Oosterhuis and Patrick ten Brink

Pledges to reform environmentally harmful subsidies (EHS) have increased over the past few years, at both global and national levels. Paying the Polluter addresses the most important issues to be considered when embarking upon these necessary reforms.
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Chapter 7: Environmentally harmful subsidies in the transport sector

Laurent Franckx and Inge Mayeres


In this chapter we analyse three possible cases of EHS in the transport sector: the absence or partial implementation of road pricing, company car taxation and tax deductibility of commuting expenses. Even while some steps have been taken in an environmentally progressive direction, there are still possibilities for reform. The absence or partial implementation of road pricing leads to an implicit subsidy for road users. Where road pricing has been introduced, it was limited to specific segments of the market (trucks on motorways), which significantly reduces the beneficial impacts on congestion and the environment. Differentiated kilometre charges that apply to all vehicles and cover a larger part of the network, would be a good direction for reform. In the case of company car taxation, test-cycle CO2 emissions are increasingly included as a parameter in the determination of the in-kind benefit. However, parameters affecting local air quality have not been included. Moreover, the in-kind benefit does not depend directly on the actual kilometres driven, which is also an important determinant of CO2 emissions and other external costs. As people are not perfectly flexible in their location of residence, it can make sense to subsidize commuting up to a point, and certainly to decrease the price of commuting compared to leisure travel. However, these subsidies should favour the transport modes with the smallest social costs. Where reforms have been implemented successfully, these were not mainly motivated by environmental concerns. Therefore, the resulting schemes are still not quite optimal. Further reforms will probably take place when improving the environmental performance of the tax and subsidy system also allows the pursuit of other objectives that are higher on the political agenda.

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