Background

Background of the project
As traffic grows faster than capacity, congestion is set to become increasingly serious. Delays caused by congestion cost today in the order of 1-2% of GDP across the OECD. The case for road user charging (RUC) is very clear, see [18] for a recent exposition. Aggregate welfare gains can be achieved by reducing traffic when there is unpriced congestion. RUC, charging at marginal external cost, can potentially achieve the optimal level of traffic. Information requirements for RUC are small as the decision whether to travel is left to travellers. But the revenues collected from RUC are typically larger than the welfare gain. This means that car drivers as a group will tend to loose from RUC and they will therefore tend to be against RUC. Furthermore, the final welfare consequences of RUC depend crucially on the use of revenues. A poorly designed RUC can lead to losses rather than gains.

Denmark has a very high registration tax, which causes a direct welfare loss for households. The registration tax is under pressure from the EU. Reducing the registration tax will also yield a welfare gain. It is therefore possible to design a welfare improving RUC that replaces revenues from the registration tax with revenues from RUC. The acceptability problem of RUC is reduced since car drivers are compensated. This is a major reform, not just for the transport sector, but for society as a whole. The resulting welfare gains can be correspondingly large.

Denmark seems set to introduce RUC reform in about a decade.