Internalisation of External Effects in European Freight Corridors

External effects or externalities “consist of the costs and benefits felt beyond or ‘external to’ those causing the effect” (Anderson, 2006). In the case of transportation, the negative externalities (costs) can take the form of air pollution, noise and accidents. Since external effects do not have a market price, external effects are a form of market failure.Wear and tear of the infrastructure isexternal to individual drivers andoperators,and thus also includedin the analysis. External costs can be internalised in various ways e.g. through regulatory measures, technological development or taxes and charges. Some forms of taxation are more effective than others in internalising costs. For example, fuel tax is effective in reducing CO2emissions as it will tend to promote technological change to reduce emissions per kilometre travelled as well as reducing the kilometres driven. A fixed, undifferentiated annual tax on owning a vehicle will, on the other hand, be ineffective in relation to reducing CO2emissions. While it will have some impact on reducing vehicle ownership (and thus indirectly vehicle use), it will not affect kilometres driven by individual vehicles. In this paper the focus is on the “rate of internalisation”. This term is used to describe to what extent the marginal external costs, based on existing regulations and technology (e.g. the European Emission Trading Scheme and emissions classes for road vehicles), are compensated for through charges or taxes. Internalisation at a certain time is thus expressed as the ratio between average charges and taxes on the one hand, and marginal external costs on the other. In this case, a full rate of internalisation would imply that the transport companies are fully charged for the marginal negative effects caused by their transport. If the ratio is below 1, the taxes and charges levied are lower than the existing marginal external costs to society, i.e. there is an under-internalisation. The aim of this project is to study the rate of internalisation of external effects through taxes and charges in two European freight corridors during 2012; for road, rail, and sea transport, respectively.The study is based on two presumed freight corridors, between Norway (Narvik) and Italy(Naples), and between Norway (Oslo) and the Netherlands (Rotterdam). The analysis is further differentiated on a national level, where each country constitutes one segment of the transport.