ET 12/99: A turn of more than the century

A turn of more than the century

A transportation activist explains why Demand Side programs should be at the top of our lists.

by Jeffrey Neil Jones

raffic congestion, sprawl, air pollution, global climate change emissions and inner city decline have each triggered a cafeteria of policy approaches. We have had an alphabet soup menu of mandates and pollution thresholds on the books for years: Electric Vehicles, Zero Emission Vehicles, and Low Emission Vehicles, Corporate Average Fuel Economy standards, but that doesn't mean they've been met.

Even with CAFE standards, the reality has been a grand slide in overall automobile fuel efficiency. The time for a new approach, a turn of more than the century, has arrived. We must enact a steady phased-in shift from command-and-control government regulation to a more market-demand-based means by which each of us, in our daily lives, is voluntarily able to make better choices -- both for ourselves, the environment and our overburdened public systems. We need to implement tools tailored to create different daily incentives to commuters and consumers.

On demand

This process would involve a revenue-neutral shift of the taxation burden from income and property taxes to market-demand approaches. Such methods implement the economic tenets of what's called "marginal cost pricing" or "demand side management" (DSM). Applying these principles allows us to act in ways that lessen the burden to our pocketbook by avoiding taxes, and also align those actions with lessening of the current effects related to traffic congestion, sprawl, air pollution, greenhouse gas (global warming) emissions, and inner city decline.

Think about it this way: at a restaurant, what if one were choosing between the old smorgasbord (buffet) one-price-fits-all or the increasingly common pay-by-the-ounce? Most people are more likely to eat (way) more at an all-you-can-eat for one low price, than at the latter cost per marginal unit approach. This latter pricing method simply acknowledges human nature.

Similarly, when businesses wish to steer choices away from crunch times or towards lag periods, we are familiar with such marginal cost pricing methods as: matinee movies, happy hours, early-bird specials, off-peak deals for air fares, toll bridges, or amusement parks, etc. You can probably recall a few like strategies that you have responded to.

This principle, applied to transportation and pollution issues, means greatly increased utilization of tools such as: Mileage Based Insurance (MBI), which is also called Pay-At-The-Pump-Auto-Insurance; the Smog Mileage Fee (also called the Emissions Based Vehicle Miles Traveled fee); Congestion Pricing, and High Occupancy Toll lanes (these latter two are not exactly the same); and the Rebate-able Gasoline Tax; to name a few. These are all viable approaches that achieve effective ends. There are several other related options.

Pay as you go, save as you stay

Remember that this strategy is revenue-neutral: no net increase in overall taxes collected, since some non-driving related charges would be reduced. People can avoid these environmental tax shift (ETS) fees, and that is appealing. The less one drives, or engages in other polluting activities, the less one pays. And there is an equity benefit here -- people who have been creating less pollution all along will usually have fewer adjustments to make; and they will no longer be subsidizing others' relative wastefulness.

Because these charges are to an extent optional, people would be motivated to seek other means of access to desired destinations. Drivers would begin to better evaluate a variety of transport adjustments, including shortening commutes over time, buying more fuel efficient vehicles, using modes other than Single Occupancy Vehicles (SOVs), such as transit, bicycles, car/vanpools, etc.

A move toward, and actual widespread usage of a more balanced multi-modal transportation system would ensue. All of this could affect political leaders' willingness to explore innovations now finally backed up by real citizen scrutiny. In contrast, current regulatory expectations are merely imposed in a hopeful, top-down fashion that naively assumes consumer demand will follow the mandate.

We would be much better off if officials focused on such decisions as: what does it cost society to provide a given public good or service? How great is the negative impact of a given action? What price will deter its overuse, and still collect sufficient funds to reasonably cover the full cost of the public (i.e., government's) provision and response?

This shift of effort would initiate gradual land use changes, such as the clustering of commercial, residential and transit depot siting, increasing cohesion of neighborhoods and of the sense of community. Over time, the clustering of commercial and residential siting will likely occur.

Since the auto is the de facto mode available to most people (though up to 30 percent still do not drive), anything that draws SOV-users to other modes (including car/van-pooling) creates what I'll call "renewed road capacity." It is now time for drivers to begin to pay for added or replenished capacity through these approaches.

These fees should be somewhat sequestered in order to assure that they'll be used on infrastructures for alternative transportation forms. The modes of transit, carpool incentives, bicycling, walking, etc., are likely to have heightened demand as people avoid driving-related charges. In other words, I'm suggesting that these fees not be poured into the general fund, or at least not totally.

To drive or not to drive

Where regressivity is perceived to be a problem, most of these marginal cost pricing approaches can be linked to rebates. Conversely though, the fees need to be high enough to help fund the transit infrastructure needs for the next century. And that's a big bonus for those who can't, don't or won't drive. After all, access to desired destinations is the real issue.

People are non-drivers for a variety of reasons. Regardless of whether they are poor, elderly, underage, have disqualifying driving records, dislike solo commutes, or any other reason of choice or circumstance -- implementation of this tax burden shift could lead to great increases in the quality of life and transport/opportunity for millions.

It would be a serious mistake to engage in a new transportation infrastructure building program without assuring that it is paid for by this type of tax-shifted approach. General fund-sourced bonds are the wrong source. Use-based charges are the better means for funding infrastructure bonds. The reason for this is simple.

Consider this example: I struggled for months trying to learn to juggle until one day someone suggested I focus on the throw, not the catch. That change in emphasis made all the difference. The same is true for infrastructure finance: focus first on how the money is derived from the public, i.e., the forms of taxation and fees. If done properly, it will clarify what the real spending needs are.

Under the strategies of marginal cost pricing, the smorgasbord's "free ride" on public resource subsidies is shifted to the pay-by-the-unit approach. Depending upon the situation, that unit could be per mile, per pound of pollution, per time on congested road, per unit of summer afternoon electricity, per volume/amount of solid waste, etc. These could all have some bearing on a variety of problems, including greenhouse gas emissions or other pollutants.

Collection strategies

The fees would encourage individual members of the public to get more certain about what their real needs are, and stop unnecessarily wasteful uses from being subsidized by the general taxpayer. People still get to make their own choices and are better able to balance their needs without more cumbersome governmental involvement. Businesses are free to respond to the changing markets.

In infrastructure planning, the method of collecting the funds is critical to the projections of demand -- for the simple reason that subsidies and remote, indirect taxes encourage excessive use. If the general fund taxpayer is paying for the system, then drivers feel no pocketbook incentive to use the public good, i.e., road system, conscientiously. This is the cause of the phenomenon of latent demand, "If you build it, (expand a highway or build a new one) they will come." With increased capacity -- fewer cars per lane in a given time period -- we drivers perceive a "better deal" (time-wise) in driving, and so we drive more.

So, focus first on the manner in which funds are actually raised. Only then will we have a chance of insuring that the attention we do finally put on allocations -- consideration of the infrastructure and innovations, and of the opportunity costs of various modal proposals (transit type, alternative means, changing an HOV lane to HOT lanes, etc.) -- yields a system in which all modes can have sizable market share, and in which the technological innovations our nation is so noted for actually get purchased and used.

In a way, this fiscal strategy isn't such a big change. Drivers, until recent decades, have always paid for new road capacity via gas taxes. The move since the mid-80s to build prisons from huge general revenue-funded bonds shifted the orientation. It would be disastrous to continue that shift to the highway portion of the $100 billion that Senator Burton's special Transportation Infrastructure committee projects. Those needs would only exist if taxpayers continued to subsidize car drivers, artificially spiking demand.

A working example

To note a relevant lesson from the energy arena, consider that in the early 1970s, officials projected the need for tens of coal and nuclear-powered generating plants to meet expected needs. The state's leaders proved the experts wrong simply by implementing Demand Side Management. This ingenious solution included electricity fee schedules, called increasing block (or tiered) pricing, that charged more for higher amounts of use. An efficient use ethic was instilled, which encouraged energy conservation education and voluntary commercial energy-waste auditing. That proceeded and shaped the demand for new technologies -- energy efficient appliances, lighting, heating and insulation, etc. The need for generating capacity leveled off; amazingly, Californians now use the least energy per capita in the US.

Driving the decision process

A similar strategy applied to transportation and related sectors could go a long way towards alleviating both congestion and emissions problems while increasing the quality of life for all Californians. Under present subsidies, time, in the form of congestion delays, is the fundamental cost to drivers. As such, it has replaced monetary out-of-pocket costs as the motivation of driving trip decisions; it's "the driver of driving," so to speak. Parking charges, or lack thereof, are the only real direct monetary (out of pocket) cost which currently influences most driving decisions. Gas prices, with CPI adjustments incorporated, are still near the Feb. 1999 point, which was the lowest ever.

The "sunk" costs of car ownership -- monthly payments, insurance, registration, etc. -- are not relevant to most daily decisions to drive. They've been paid regardless of whether one drives 50 or 50,000 miles. Moving such charges as registration and insurance to marginal, per mile basis would do a lot to initiate reforms. Even the cost of cars could be influenced by a "fee-bate" on the price of highly energy efficient or low polluting models. And remember, this approach is revenue-neutral: no net increase in overall taxes would be proposed.

True, the more one drives the higher maintenance costs tend to be; yet this is another factor which doesn't enter our momentary "should I drive or not" calculus. It's the $5 on parking we may have to pay today, and not the $500 that we'll pay "down the road" on maintenance, that influences decisions to drive today, and how far, and for how many trips.

This is why increasing the marginal, or unit, cost of each mile driven (or each kilowatt hour used, or each gallon of water consumed) helps insure a more balanced use of public resources. As commuters -- consumers of the public resource known as the road system -- we find that we can avoid the fee by using the service more efficiently. Yet each of us gets to choose with little or no outside intervention what that efficient level of use is.

The government may also employ incentives on essentially private actions that result in increased choice on the part of commuters. Employee parking cash out, which was codified in California in 1992 (AB 2109), offers some real potential benefit; but it has not been implemented by the California Air Resources Board. Here, the law simply mandates a choice -- that employers fitting specific conditions offer each employee the chance to take the cash value of a heretofore-subsidized parking space, or buy it back. Those that choose to take the cash, i.e., relinquish the space, then have the opportunity to arrive at work via means other than the SOVs. In most cases, this means carpooling, but other modes also are used.

A bulletin that I read about Senator Sher's November 16 Global Warming Policy Response hearing in Los Angeles said, "economists will address the way California's economy can benefit by leading the world in the clean technologies of the future." How we will create the demand for those clean technologies so that they are sure to be employed within this state? And how will our political solutions provide models for other parts of the world that we hope will clamor for our ingenious new technologies?

I suggest that, without the pricing policy and tax burden-shifting tools outlined above, we may just be creating a new slough of Edsels and other ideas that get moth-balled due to lack of individual incentives to buy them. We need to move away from the concept that government should be enforcing regulations it imposes from "on high" -- not abandon it, but de-emphasize it where other means work effectively.

The real turn-of-this-century could be towards an alignment of the principles of market-based economics with the findings of political scientists. Done properly -- and this will take some fine-tuning -- people will do a whole lot more to regulate themselves via their daily choices. Where this works, government could assume a role more of facilitator and supervisor. This would free some of its resources for enforcement in spheres less responsive to market-based means, which are certainly not advocated here as a universal panacea.

This idea should underpin the responses of governance in this new century -- that people prefer to have more choice about the ways in which they live their lives and how they adjust to the environmental and public impacts that their lifestyle choices make. Government can restructure its means of ordering our daily lives in ways that enable us to increase the opportunities for all, enhances the "live-ability" of neighborhoods, slows the juggernaut of sprawl and vital resource waste, and reverses ecological destruction.

By shifting the taxation burden in a revenue-neutral fashion as I've outlined, we can make the desired changes, and still reduce our fast-accelerating contribution to congestion, urban sprawl and global warming and other emissions. It's time to give this approach its "turn" on our road to the new century.

Email the author at jefnjoneucla.edu.

A turn of more than the century A transportation activist explains why Demand Side programs should be at the top of our lists. by Jeffrey Neil Jones
	raffic congestion, sprawl, air pollution, global climate change emissions and inner city decline have each triggered a cafeteria of policy approaches. We have had an alphabet soup menu of mandates and pollution thresholds on the books for years: Electric Vehicles, Zero Emission Vehicles, and Low Emission Vehicles, Corporate Average Fuel Economy standards, but that doesn't mean they've been met. Even with CAFE standards, the reality has been a grand slide in overall automobile fuel efficiency. The time for a new approach, a turn of more than the century, has arrived. We must enact a steady phased-in shift from command-and-control government regulation to a more market-demand-based means by which each of us, in our daily lives, is voluntarily able to make better choices -- both for ourselves, the environment and our overburdened public systems. We need to implement tools tailored to create different daily incentives to commuters and consumers.
On demand
	This process would involve a revenue-neutral shift of the taxation burden from income and property taxes to market-demand approaches. Such methods implement the economic tenets of what's called "marginal cost pricing" or "demand side management" (DSM). Applying these principles allows us to act in ways that lessen the burden to our pocketbook by avoiding taxes, and also align those actions with lessening of the current effects related to traffic congestion, sprawl, air pollution, greenhouse gas (global warming) emissions, and inner city decline. Think about it this way: at a restaurant, what if one were choosing between the old smorgasbord (buffet) one-price-fits-all or the increasingly common pay-by-the-ounce? Most people are more likely to eat (way) more at an all-you-can-eat for one low price, than at the latter cost per marginal unit approach. This latter pricing method simply acknowledges human nature. Similarly, when businesses wish to steer choices away from crunch times or towards lag periods, we are familiar with such marginal cost pricing methods as: matinee movies, happy hours, early-bird specials, off-peak deals for air fares, toll bridges, or amusement parks, etc. You can probably recall a few like strategies that you have responded to. This principle, applied to transportation and pollution issues, means greatly increased utilization of tools such as: Mileage Based Insurance (MBI), which is also called Pay-At-The-Pump-Auto-Insurance; the Smog Mileage Fee (also called the Emissions Based Vehicle Miles Traveled fee); Congestion Pricing, and High Occupancy Toll lanes (these latter two are not exactly the same); and the Rebate-able Gasoline Tax; to name a few. These are all viable approaches that achieve effective ends. There are several other related options.
Pay as you go, save as you stay
	Remember that this strategy is revenue-neutral: no net increase in overall taxes collected, since some non-driving related charges would be reduced. People can avoid these environmental tax shift (ETS) fees, and that is appealing. The less one drives, or engages in other polluting activities, the less one pays. And there is an equity benefit here -- people who have been creating less pollution all along will usually have fewer adjustments to make; and they will no longer be subsidizing others' relative wastefulness. Because these charges are to an extent optional, people would be motivated to seek other means of access to desired destinations. Drivers would begin to better evaluate a variety of transport adjustments, including shortening commutes over time, buying more fuel efficient vehicles, using modes other than Single Occupancy Vehicles (SOVs), such as transit, bicycles, car/vanpools, etc. A move toward, and actual widespread usage of a more balanced multi-modal transportation system would ensue. All of this could affect political leaders' willingness to explore innovations now finally backed up by real citizen scrutiny. In contrast, current regulatory expectations are merely imposed in a hopeful, top-down fashion that naively assumes consumer demand will follow the mandate. We would be much better off if officials focused on such decisions as: what does it cost society to provide a given public good or service? How great is the negative impact of a given action? What price will deter its overuse, and still collect sufficient funds to reasonably cover the full cost of the public (i.e., government's) provision and response? This shift of effort would initiate gradual land use changes, such as the clustering of commercial, residential and transit depot siting, increasing cohesion of neighborhoods and of the sense of community. Over time, the clustering of commercial and residential siting will likely occur. Since the auto is the de facto mode available to most people (though up to 30 percent still do not drive), anything that draws SOV-users to other modes (including car/van-pooling) creates what I'll call "renewed road capacity." It is now time for drivers to begin to pay for added or replenished capacity through these approaches. These fees should be somewhat sequestered in order to assure that they'll be used on infrastructures for alternative transportation forms. The modes of transit, carpool incentives, bicycling, walking, etc., are likely to have heightened demand as people avoid driving-related charges. In other words, I'm suggesting that these fees not be poured into the general fund, or at least not totally.
To drive or not to drive
	Where regressivity is perceived to be a problem, most of these marginal cost pricing approaches can be linked to rebates. Conversely though, the fees need to be high enough to help fund the transit infrastructure needs for the next century. And that's a big bonus for those who can't, don't or won't drive. After all, access to desired destinations is the real issue. People are non-drivers for a variety of reasons. Regardless of whether they are poor, elderly, underage, have disqualifying driving records, dislike solo commutes, or any other reason of choice or circumstance -- implementation of this tax burden shift could lead to great increases in the quality of life and transport/opportunity for millions. It would be a serious mistake to engage in a new transportation infrastructure building program without assuring that it is paid for by this type of tax-shifted approach. General fund-sourced bonds are the wrong source. Use-based charges are the better means for funding infrastructure bonds. The reason for this is simple. Consider this example: I struggled for months trying to learn to juggle until one day someone suggested I focus on the throw, not the catch. That change in emphasis made all the difference. The same is true for infrastructure finance: focus first on how the money is derived from the public, i.e., the forms of taxation and fees. If done properly, it will clarify what the real spending needs are. Under the strategies of marginal cost pricing, the smorgasbord's "free ride" on public resource subsidies is shifted to the pay-by-the-unit approach. Depending upon the situation, that unit could be per mile, per pound of pollution, per time on congested road, per unit of summer afternoon electricity, per volume/amount of solid waste, etc. These could all have some bearing on a variety of problems, including greenhouse gas emissions or other pollutants.
Collection strategies
	The fees would encourage individual members of the public to get more certain about what their real needs are, and stop unnecessarily wasteful uses from being subsidized by the general taxpayer. People still get to make their own choices and are better able to balance their needs without more cumbersome governmental involvement. Businesses are free to respond to the changing markets. In infrastructure planning, the method of collecting the funds is critical to the projections of demand -- for the simple reason that subsidies and remote, indirect taxes encourage excessive use. If the general fund taxpayer is paying for the system, then drivers feel no pocketbook incentive to use the public good, i.e., road system, conscientiously. This is the cause of the phenomenon of latent demand, "If you build it, (expand a highway or build a new one) they will come." With increased capacity -- fewer cars per lane in a given time period -- we drivers perceive a "better deal" (time-wise) in driving, and so we drive more. So, focus first on the manner in which funds are actually raised. Only then will we have a chance of insuring that the attention we do finally put on allocations -- consideration of the infrastructure and innovations, and of the opportunity costs of various modal proposals (transit type, alternative means, changing an HOV lane to HOT lanes, etc.) -- yields a system in which all modes can have sizable market share, and in which the technological innovations our nation is so noted for actually get purchased and used. In a way, this fiscal strategy isn't such a big change. Drivers, until recent decades, have always paid for new road capacity via gas taxes. The move since the mid-80s to build prisons from huge general revenue-funded bonds shifted the orientation. It would be disastrous to continue that shift to the highway portion of the $100 billion that Senator Burton's special Transportation Infrastructure committee projects. Those needs would only exist if taxpayers continued to subsidize car drivers, artificially spiking demand.
A working example
	To note a relevant lesson from the energy arena, consider that in the early 1970s, officials projected the need for tens of coal and nuclear-powered generating plants to meet expected needs. The state's leaders proved the experts wrong simply by implementing Demand Side Management. This ingenious solution included electricity fee schedules, called increasing block (or tiered) pricing, that charged more for higher amounts of use. An efficient use ethic was instilled, which encouraged energy conservation education and voluntary commercial energy-waste auditing. That proceeded and shaped the demand for new technologies -- energy efficient appliances, lighting, heating and insulation, etc. The need for generating capacity leveled off; amazingly, Californians now use the least energy per capita in the US.
Driving the decision process
	A similar strategy applied to transportation and related sectors could go a long way towards alleviating both congestion and emissions problems while increasing the quality of life for all Californians. Under present subsidies, time, in the form of congestion delays, is the fundamental cost to drivers. As such, it has replaced monetary out-of-pocket costs as the motivation of driving trip decisions; it's "the driver of driving," so to speak. Parking charges, or lack thereof, are the only real direct monetary (out of pocket) cost which currently influences most driving decisions. Gas prices, with CPI adjustments incorporated, are still near the Feb. 1999 point, which was the lowest ever. The "sunk" costs of car ownership -- monthly payments, insurance, registration, etc. -- are not relevant to most daily decisions to drive. They've been paid regardless of whether one drives 50 or 50,000 miles. Moving such charges as registration and insurance to marginal, per mile basis would do a lot to initiate reforms. Even the cost of cars could be influenced by a "fee-bate" on the price of highly energy efficient or low polluting models. And remember, this approach is revenue-neutral: no net increase in overall taxes would be proposed. True, the more one drives the higher maintenance costs tend to be; yet this is another factor which doesn't enter our momentary "should I drive or not" calculus. It's the $5 on parking we may have to pay today, and not the $500 that we'll pay "down the road" on maintenance, that influences decisions to drive today, and how far, and for how many trips. This is why increasing the marginal, or unit, cost of each mile driven (or each kilowatt hour used, or each gallon of water consumed) helps insure a more balanced use of public resources. As commuters -- consumers of the public resource known as the road system -- we find that we can avoid the fee by using the service more efficiently. Yet each of us gets to choose with little or no outside intervention what that efficient level of use is. The government may also employ incentives on essentially private actions that result in increased choice on the part of commuters. Employee parking cash out, which was codified in California in 1992 (AB 2109), offers some real potential benefit; but it has not been implemented by the California Air Resources Board. Here, the law simply mandates a choice -- that employers fitting specific conditions offer each employee the chance to take the cash value of a heretofore-subsidized parking space, or buy it back. Those that choose to take the cash, i.e., relinquish the space, then have the opportunity to arrive at work via means other than the SOVs. In most cases, this means carpooling, but other modes also are used. A bulletin that I read about Senator Sher's November 16 Global Warming Policy Response hearing in Los Angeles said, "economists will address the way California's economy can benefit by leading the world in the clean technologies of the future." How we will create the demand for those clean technologies so that they are sure to be employed within this state? And how will our political solutions provide models for other parts of the world that we hope will clamor for our ingenious new technologies? I suggest that, without the pricing policy and tax burden-shifting tools outlined above, we may just be creating a new slough of Edsels and other ideas that get moth-balled due to lack of individual incentives to buy them. We need to move away from the concept that government should be enforcing regulations it imposes from "on high" -- not abandon it, but de-emphasize it where other means work effectively. The real turn-of-this-century could be towards an alignment of the principles of market-based economics with the findings of political scientists. Done properly -- and this will take some fine-tuning -- people will do a whole lot more to regulate themselves via their daily choices. Where this works, government could assume a role more of facilitator and supervisor. This would free some of its resources for enforcement in spheres less responsive to market-based means, which are certainly not advocated here as a universal panacea. This idea should underpin the responses of governance in this new century -- that people prefer to have more choice about the ways in which they live their lives and how they adjust to the environmental and public impacts that their lifestyle choices make. Government can restructure its means of ordering our daily lives in ways that enable us to increase the opportunities for all, enhances the "live-ability" of neighborhoods, slows the juggernaut of sprawl and vital resource waste, and reverses ecological destruction. By shifting the taxation burden in a revenue-neutral fashion as I've outlined, we can make the desired changes, and still reduce our fast-accelerating contribution to congestion, urban sprawl and global warming and other emissions. It's time to give this approach its "turn" on our road to the new century.
Email the author at jefnjoneucla.edu.