The London Pollution Charge

The London Congestion Charge is to tax more highly polluting vehicles more in a bid to reduce pollution. From October 2008, drivers of many sports cars, MPVs and 4x4s will pay £25 per day rather than the current level of £8. In addition, the charge will be abolished for the lowest polluting vehicles.

The Congestion Charge is generally regarded as a success, and environmental groups are applauding the new structured charge as an effective way of shifting drivers of ‘gas guzzlers’ into cleaner cars or onto public transport. The CC is a hypothecated tax in that the revenue it raises is, in theory, used to fund improvements to public transport.

What, exactly, does the CC aim to achieve? It is called a congestion charge, but the new structured tax appears to be more focused on reducing CO2 emissions. So should it really be called the Pollution Charge?

Green taxes do one of two things: they either reduce consumption and production significantly (when demand is price elastic) and collect relatively low revenues, or fail to reduce consuption and production by much (when demand is price inelastic) but collect high revenues.

Pollution and congestion are related but they are not the same thing. A Daihatsu Charade, after all, takes up almost as much road space as a Range Rover. And there are surprising disparities in the types of cars which have emissions levels just above or below the 225 g/km level used. [To see what emissions category your car fits into, see here.]

Another problem with the CC is that, once it is paid for a vehicle on a given day, the driver has an incentive to get value for money by driving as much as possible within the zone. A more sophisticated model of road pricing per distance travelled may prove prohibitive in terms of adminstration and costs.

We will have to wait until after 27th October (when the changes occur) to see if drivers pay up, switch to cleaner vehicles, or take the bus or tube instead. Of the three, I think the latter is the least likely, which means just as many cars on the streets of central London, especially as there could be a substitution from public transport (which isn’t cheap in London either) into cleaner cars. Existing owners of newly CC exempt vehicles may be waiting to tear up their travelcards as we speak.

Once the own price and cross price elasticities of demand for different transport modes and car types in London become known, the better idea we will have of whether the Congestion Charge should be renamed the Pollution Charge.