Mobility and well-being

Include externalities in pricing

Whether it's investing or cutting back, mobility requires choices. Do we, as a society, opt for the rail network or for road safety? Do we want to be able to guarantee everyone a minimum of mobility or do we determine our choices based on utility? And how do we take sufficient account of the effects on nature, the environment and health? The issues themselves are not simple, but they are often interrelated. In order to substantiate policy choices as well as possible, we need well-founded data and analyses. One of the most important tools for incorporating externalities into pricing and policy implementation is true pricing.

What is true pricing? The concept of true pricing is 'hot' and already has a surprisingly long history. Well-being is about the balance between consumption, externalities and the distribution of social welfare. More than a hundred years ago, economists proposed to achieve this balance by translating externalities into money (levies and subsidies). True pricing is defined as the calculation of the real costs and benefits of a product or service, including all direct, indirect and hidden effects. A practical variant for mobility is: determining and internalising external and infrastructure costs and benefits.  
From a government perspective, it's about pricing in such a way that users take external and infrastructure costs into account in their mobility choices. In doing so, it ensures broader prosperity: no major infrastructure investments are needed and in some cases it even generates money for the government. 

What we already know...

In this article, we use a broad definition of true pricing. Within the framework of well-being, we see it as an instrument to make well-being indicators measurable, transparent and comparable. Based on this, we can effectively set up pricing instruments or other policy measures. Such an instrument is more than welcome, because mobility is very complex due to all the variables that play a role directly or indirectly. Fortunately, over the past fifteen years, the necessary research has already been done into the infrastructure costs and external costs of various modalities, both in the Netherlands and in the rest of Europe. Transport economists have published several studies on principles and possible measures to internalise external costs. An example is about a return trip from Amersfoort to Barcelona: it compares external and infrastructure costs, taxes and charges for planes, trains, long-distance buses, electric and fossil passenger cars. For more information on these and other examples, a list of sources has been added at the bottom of this article with available literature.

... and what we don't know yet

On the other hand, recent research is lacking for shorter, domestic journeys in the Netherlands. In addition, there are issues in the field of methodology. For example, externalities of production and scrapping of vehicles are often not included in calculations. Also, many assumptions are often needed to calculate external costs, which makes results more vulnerable to comment. Consider, for example, the distribution of vehicle types and fuel efficiency. In addition, key figures — for land take, damage to nature and landscape and pollution of soil and groundwater — come from studies conducted before 2014. And for the internalisation of CO2 costs, we are now working with a CO2 price that is based on the 1.5-degree target, which is higher than the CO2 price that was used a few years ago on the basis of the ambitions of the time. So additional research is definitely needed to arrive at relevant, up to date results.

Measure or Assume

Just as there are different definitions, there are also different measurement methods to determine the value of mobility. A lot depends on the choices we make. Do we include the construction costs of new infrastructure in the calculation or do we assume that the existing infrastructure will be retained? Do we calculate with marginal or average costs?
Such choices can lead to completely different outcomes. When it comes to the latter question, there is no difference for some external and infrastructure costs, such as for_CO2, air pollution and variable maintenance costs, but for others, such as for congestion and noise, there is. In addition, indicators often depend on time, such as noise nuisance caused by night flights or location, for example a^m2 in the canal belt or in the polder.
Finally, well-being brings in other elements to measure: effects elsewhere and distributional effects. We can also give these an explicit value. In doing so, we will sometimes have to make assumptions. But if they relate to essential variables, it may be better to work with bandwidths than with questionable 'hard' figures — also with a view to public acceptance.

The table below provides a general overview of relevant benefits and costs that we could quantify. Regardless of whether we do or not, it's good to be aware of all the possible impacts.

Making true prices visible

A look at business can be inspiring. Since this year, the Corporate Sustainability Reporting Directive (CSRD) has been in force across the European Union. This directive requires more and more companies to report on their impact on people and climate. In practice, in some cases this means reporting on as many as a thousand indicators. It is interesting to see how some large companies have visualised this avalanche of data in various ways to make their impact visible. A list of examples of integrated annual reports is included at the end of this article.

A transparent visualisation can be seen, for example, at Safaricom, a leading telecommunications company in Kenya that offers a wide range of services. The company has made a significant contribution to economic development and digital transformation in East Africa and is known for innovative solutions. The figure below shows how Safaricom approaches valuation in an innovative way by including social and environmental costs in addition to economic costs.

How do we make it comparable?

The diversity in visualisation shows that the field of true pricing is in full development. At the same time, the need for standardisation will increase significantly in the coming years. After all, companies and governments will want to be able to compare the results of different choices and scenarios. Concrete steps in this direction are being taken by the Value Balancing Alliance, an international group of large companies, ranging from Bosch to BMW, from DHL to Deutsche Bank, and from L'Oréal to Michelin. The alliance's explicit goal is 'to create a way to measure and compare the value of companies' contributions to society, the economy, and the environment — a metric that was not previously reflected on a company's balance sheet and with which we translate social and environmental impacts into comparable financial data.' Such a transparent approach will also become increasingly relevant for governments, particularly in relation to investors and other stakeholders.

Actively embracing and supporting

True pricing is not going to solve our problems on its own. We know that charging consumers a 'true price' leads to diverting to alternatives without a true price. That is why the instrument deserves to be embraced and supported by governments for broad application.
Some points to consider: in general, we see a development towards an increasingly holistic approach where companies and consumers expect us to be complete. We are also seeing shifts in the value we assign to specific impact: for example, we are increasingly including the social costs of traffic accidents.
Moreover, new questions are constantly coming our way. What happens when we start using new fuels? What impact do new technologies have, that make remote working increasingly possible? And what do we as a society actually think is important in fifteen years' time? We will therefore have to work actively and iteratively with true pricing and continue to respond to new developments.

What we really value

Everything starts with measuring and making visible, so that we can create awareness and then apply the insights in practice. And even if pricing in for users does not guarantee that targets will always be achieved, we can set limits — for example, a CO2 cap based on a cap and trade system and a blending mandate for sustainable fuels. At the end of the day, we will not be able or willing to express everything in financial terms, but perhaps that is not necessary for effective policy-making. In any case, true pricing can help to determine what we really consider to be of value.

And what's next?

Although the Netherlands is a frontrunner in quantifying external effects, we can steer even better towards desirable policies and thus continue to set an international example.

The next steps? We have three pieces of advice for this:

1. First, make more quantified data available — the insights from that are already valuable.
   • Make the overview of costs and benefits to be quantified as complete as possible, for example with the Delphi method, to collect and consolidate all existing insights.
   • Quantify more of the costs and benefits, as average or marginal, but also in bandwidths, in order to be able to use the most appropriate metric for each situation.
   • Accept that they will always be estimates and assumptions, no matter how well we do.
   • As a government, join the Value Balancing Alliance for more unity in international valuations.
   • Determine how to deal with costs and benefits that we cannot or do not want to quantify, because they are not material or too politically/socially charged.
2. Then — where possible — translate the insights into (price) measures to change behaviour, such as:
   • Voluntary pricing can work, but the effect is limited: for example, only 2% to 3% of air passengers buy off their CO2 emissions. .
   • Mandatory pricing: this changes behaviour in the right direction, but social acceptance requires a good understanding of the effect on all the different target groups (e.g. income class, people with a physical disability and so on).  
   • Therefore, analyse distributional effects between these target groups by quantifying the impact for each subgroup.
   • Limits, such as a CO₂ ceiling, make it possible to achieve an absolute target, but require gradual implementation.
   • Also reward people who are not mobile, such as by encouraging rush hour avoidance.
3. Use the same insights when prioritising investment and weighing alternatives:
   • Agglomeration effects due to urban densification have large quantifiable benefits. This densification also leads to a higher occupancy rate of infrastructure and public transport facilities, which reduces external and infrastructure costs per passenger kilometre. However, it can also lead to higher congestion costs per passenger-kilometre.
   • The benefits of densification are at odds with congestion in and around cities, quality of life and availability of facilities in rural areas, so be aware of the balance between the different regions.
   • Analyse investments in a broad context, both in terms of effects (in the future, outside the Netherlands, distributional effects) and in terms of solutions: sometimes an extra facility in a village is cheaper than organising transport to the nearest city.

Literature

Martens, 2006 - Basing Transport Planning on Principles of Social Justice
EC, 2012 - An inventory of measures for internalising external costs in transport
CE Delft, 2019 - Handbook on the external costs of transport
KiM, 2019 - Travelling by plane, train, bus or car
Van Oort, 2021 - Innovations in the appraisal of public transport projects
CE Delft, 2022 - The price of a trip
Gösling ea, 2022 - The lifetime cost of driving a car
Ministry of Infrastructure and Water Management, 2022 - Framework for Well-being
CE Delft, 2023 - The price of a plane ticket
Value Balancing Alliance - https://www.value-balancing.com

Examples of integral annual reports

Novartis, 2021 - Novartis in Society - Integrated Report 2021
Natura, 2021 - Integrated Profit & Loss Accounting 2021
Safaricom, 2021 - Sustainable business report - Standing together: Going beyond