A more sustainable urban transport system: the case of tradable entry permits

At present, urban transport is a significant part of total mobility. Moreover, suburbanization and reduction of urban density, the increase of car ownership and the expansion of the road network have made the car the prevailing urban transport mode. This evolution causes not only congestion, but also safety and environmental problems. Because road network supply at present does not meet the demand, a reduction of the use of private cars in the city seems desirable. To this end, transport and environmental economists are developing more sustainable urban transport systems. Their focus is mainly on pricing mechanisms; internalizing the congestion externality by means of tolling was already recognized by Dupuit in 1844 [1] and well-founded by economists like Pigou in 1912 [2] and Knight in 1924 [3]. Since the Kyoto Protocol, however, there is a renewed social, political and scientific interest in tradable permits. In a system of tradable permits, the regulatory authority determines the cap and the corresponding amount of permits. This cap can be set equal to e.g. the capacity of the road or the city centre. The permits are valid for a defined period and tradable. Trading of permits among different users will, enforcement problems aside, establish a market price. Similar to tolls, permit prices will signal damage costs and give users financial incentives to reduce car use. In this paper, a system of tradable entry permits (TEP) in a city centre is designed and the various possible (side)-effects are discussed. Furthermore, it is reasoned why the system should be preferred to tolling or road pricing systems, such as the congestion charging scheme in London. Finally, this analysis will show that TEP can be a useful instrument, but that its success is heavily dependent on the transaction costs of the scheme, which in turn are largely determined by its design.