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LONDON CONGESTION

PRICING – IMPLICATIONS FOR

OTHER CITIES

TODD LITMAN*

Background

A basic economic principle is that consumers shouldpay directly for the costs they impose as an incentiveto use resources efficiently. Urban traffic congestionis often cited as an example: if road space is unpricedtraffic volumes will increase until congestion limitsfurther growth. For decades economists have recom-mended road congestion pricing (special tolls for dri-ving on congested roadways) as a way to encouragemore efficient use of the transport system, and ad-dress congestion and pollution problems, providingnet benefits to society.

In recent years a few cities have implemented variousforms of congestion pricing, including Singapore,Orange County (California State Route 91) and thecities of Trondheim, Oslo, and Bergen in Norway, butproponents have been frustrated by the political re-sistance congestion pricing faced in other major cities.

Central London is a particularly suitable city for con-gestion pricing because of its limited road capacity(the streets network in the core area has hardly ex-panded since the medieval ages), andheavy travel demand result in severecongestion, plus relatively good trav-el alternatives, including walking,taxi, bus and subway services, whichare used by most travelers. Onlyabout 10 per cent of peak-periodtrips were made by private automo-bile. For decades transport plannershave recommended congestion pric-ing in central London.

In 2000, London’s political system was restructuredto create a new, elected mayor with new powers tomanage the city’s transport system and raise taxes tofund transport improvements. Ken Livingstone wonwith a platform that included congestion pricing im-plementation. Revenues are to be used to fund pub-lic transit improvements.

This plan was criticized by various interest groups,including politicians, motorist groups and some labororganizations. The Conservative mayor candidatepromised to end the congestion pricing program ifelected. There are half a dozen daily newspaperspublished in London, and many of them were skep-tical or opposed to the program. However, MayorLivingstone, considered a “radical” politician, pro-ceeded with the charge.

How the program works

Since 17 February 2003 motorists driving in centralLondon (see Figure) on weekdays between 7:00a.m. and 6:30 p.m. are required to pay £5, increasingto £8 in July 2005. There are some exemptions, in-cluding motorcycles, licensed taxis, vehicles used bydisabled people, some alternative fuel vehicles, bus-es and emergency vehicles. Area residents receive a90 percent discount for their vehicles. The chargingarea is indicated by roadside signs and symbolspainted on the roadway. The city is currently devel-oping a plan to expand the charging zone westwardin 2006 or later.

* Todd Litman is Executive Director of theVictoria Transport Policy Institute, Victoria,British Columbia, Canada. litman@vtpi.org.

London Congestion Charging Area

Payments can be made at selected retail outlets, pay-ment machines located in the area, by Internet andcellular telephone messaging, any time during thatday. Motorists can purchase weekly, monthly and an-nual passes with modest (15 percent) discounts. Anetwork of video cameras records the license platenumbers of vehicles and matches it with the paid list.The owners of vehicles that have not paid as re-quired are sent a £80 fine. This fine is reduced to £40if paid within two weeks, and increases to £120 if notpaid after a month – the same policy for parkingpenalties in the inner London area.

The system is considered effective. Approximately110,000 motorists a day pay the charge (98,000 indi-vidual drivers and 12,000 fleet vehicles), increasinglyby mobile phone text message. Non-payment rateswere high during the first few weeks, due to generalconfusion and errors (such as motorists confusingnumber 0 or 1 and the letter O or l), but these havedeclined as users and operators gain experience.

This system is not considered optimal because:

• The fee is not based on how many miles a vehicleis driven within the charging area.

• The fee is not time-variable, that is, the fee is nothigher during the most congested periods andlower during less congested periods.

• The fee does not vary by location. It would bemore efficient to have higher rates on more con-gested roads.

• The system has relatively high overhead costs.• Transit service (particularly the underground rail

system) is crowded and unreliable, although thisis changing as bus service improves and pricingrevenue is used to upgrade the system.

Costs and revenues

The program was predicted to have the followingcosts and revenues between 2001 and 2008, includingthree years of development and five years of opera-tion:

Table 1 shows the charging program’s originally pro-jected costs and revenues. However, charge revenuesturned out to be lower, and penalty revenues higherthan anticipated – resulting in a net “gain”. The2004/05 budget year is projected to earn £190 (insteadof £160) million in total revenues (£118 million in feesand £72 million in fines), with £92 million in overheadexpenses, resulting in £97 million in net revenues.

Travel impacts

Transport for London, the local transport authorityand part of the city of London’s administration, andvarious academic organizations established a five-year monitoring program to evaluate the transport,economic, social and environmental impacts of con-gestion charging (see references for London Con-gestion Charging Website).

Just over a million people enter central London dur-ing a typical weekday morning peak (7–10 a.m.).Over 85 percent of these trips are by public trans-port. Prior to the congestion pricing program about12 percent of peak-period trips were by private au-tomobile. During the programs first few months au-tomobile traffic declined about 20 percent (a reduc-tion of about 20,000 vehicles per day), resulting in a10 percent automobile mode share.

Most people who change their travel patterns dueto the charge transfer to public transport, particu-larly bus. Some motorists who would otherwise drive through central London during peak periodsshift their route, travel time or destination. Othersshift mode to taxis, motorcycles, pedal cycles, or towalking

This has significantly increased traffic speeds withinthe zone. Average traffic speed during charging days(including time stopped at intersections) increased 37percent, from 8 miles-per-hour (13 km/hr) prior to thecharge up to 11 miles-per-hour (17 kms/hr) after pric-ing was introduced. Peak period congestion delaysdeclined about 30 percent, and bus congestion delaysdeclined 50 percent. Bus ridership increased 14 per-cent and subway ridership about 1 percent. The third-year annual report indicates that these improvementsare continuing (Transport for London 2005).

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Table 1

Congestion charging program: Projected costsand revenues

Total(NPV)

in £ millions

Per operat-ing year

in £ millions

Start up costs 180 36 Operating costs 320 64 Total cost, 2001 – 2003 500 100 Charge revenues 690 138 Penalty revenues 110 22 Total annualized revenue,2004 – 2008 800 160

NPV = net present value.

Source: Compilation by the author.

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Taxi travel costs declined significantly (by 20–40 per-cent) due to reduced delays.Vehicles can cover moremiles per hour, so taxi and bus service productivity(riders per day) and efficiency (cost per passenger-mile) increased substantially. There has been someincrease in motorcycle, moped and bicycle travel,and vendors have promoted these modes.

The program’s net revenues will be used to improvepublic transit services, including more buses and ma-jor renovations to the subway (“tube”) system,which is widely agreed to be in need of significant re-development. Bus service is being improved in manyways, including an expanded bus lane system, withenforced surveillance using a network of over 1,400on-bus and roadside video cameras.

Public and political response

Before implementation this plan was widely criti-cized by various interest groups, including politi-cians, motorist groups and some labor organizations.The Conservative mayor candidate promised to endthe program if elected. Many newspapers were skep-tical or opposed to the program, and opponents pro-duced a website titled Sod-U-Ken (see references)to promote their objections.

The congestion pricing program has since becomegenerally accepted by the public and interest groups,including many that initially criticized it, such as auto-mobile clubs. Within a month of its start residents ofother areas in London began requesting to be includ-ed, and the Conservative candidate no longer pro-mised to end the fee. In 2004, Mayor Livingstone wasreelected, largely on the success of the road pricingprogram and his plans to expand the pricing zone.

London First (see references), a business group whosemembers account for 22 percent of the city’s GDP,supports the city’s congestion charge. A survey per-formed May 2003 found that its members consider thescheme to have overall positive impacts on businessactivity.The majority (69 percent) felt charging had noimpact on their business, 22 percent reported positiveimpacts on their business, and only 9 percent reportedan overall negative impact. Many industries supportthe charge because its direct costs are offset by savingsand benefits, such as faster delivery times. CertLogistics, a distribution company that delivers to manydowntown restaurants and hotels, reports its deliverytimes have been cut by as much as 50 percent, and oth-

er industries find that their employees spend less timedelayed in traffic, and so can attend more out-of-officemeetings in a day. The £5 charge pays for itself in just17 minutes of travel-time savings for employees earn-ing average London wages (£34,000 per year), andmany city center employees earn far more.

London Chamber of Commerce (see references)members have been more skeptical of the program.A March 2003 survey found that many city center re-tailers blame the charge for reduced sales (althoughthe Iraq war and its security measures, a temporaryclosure of two subway lines, and a general economicdownturn also impacted local business activity), andsome threaten to leave the city. Opposition to theprogram tends to be greater among smaller retailers,and may partly reflect political ideology (the businesscommunity tends to oppose Mayor Ken Livingstoneand his policies), and may represent a political strat-egy to gain more special treatment to benefit localretail businesses, such as lower parking fees and spe-cial discounts.

Criticism

Some issues of criticism are discussed below.

Business activity

As mentioned above, some businesses consider them-selves harmed by the program, particularly bulk goodretailers that rely on customers who drive privatecars. However, other economic activities have benefit-ed due to improved access by other modes, reduceddelay for high-value vehicle trips, and improved envi-ronmental conditions. A shift in the location of bulkretailing is not necessarily harmful to the regionaleconomy if the city center locations they vacate areused for equally productive activities. Economic theo-ry suggests that congestion pricing should increaseoverall productivity and business activity by favoringhigher-value activities over lower-value activities, andreducing congestion costs. Some criticisms were basedon inaccurate assumptions (for example, theater pa-tronage impacts are slight since the charge does notapply evenings and weekends when most perfor-mances occur), or were addressed by special treat-ments (such as discounts for certain types of employ-ees). Various studies and surveys indicate minimaloverall impact on economic productivity and activity,although some sectors and businesses are affectedmore than others, either positively or negatively(Transport for London 2005).

System accuracy

The congestion pricing system uses a network ofvideo cameras to record license plate numbers, andoptical character recognition (OCR) technology toread this information, identify “unpaid” vehiclesand generate citations for violators. During the firstfew weeks the rate of false positives (motoristswrongly ticketed) was high, in part due to both dri-vers and OCR systems misinterpreting characters orusing incorrect registration data. Failure rates havedeclined over time as motorists and operators gainexperience.

Traffic spillover impacts

There was concern that congestion may increase onnearby roads due to diverted traffic. Although somediversion occurred the effect appears to be too smallto measure, and may be addressed in the future byexpanding the priced area and charging more vari-able fees (higher rates in the center and lower ratesin outer zones). Although there is 10 percent moretraffic on the peripheral roads, journey times onthem have not increased, in part because traffic sig-nal systems on these roads were adjusted in antici-pation of these traffic shifts.

Fairness

Some critics argue that road pricing is unfair becauseit constitutes “double charging”, since motorists al-ready pay registration and fuel taxes and is unfair tolower-income people who must drive, such as work-ers who commute to central London during off-hours. Some motorists are exempt (e.g., people withdisabilities) or have substantial discounts (residentswithin the priced area) not available to others. Thiscriticism has raised debate concerning what pricingis equitable and how reformscan be most fair and beneficialto consumers. Some concernshave been addressed with spe-cial exemptions or policies.

Pricing efficiency

Most economists favor a variableroad use fee that reflects the typeof vehicle, when it is driven,where and how much it is drivenwithin the priced area, since thatmost accurately reflects the costs

imposed by driving and gives motorists an incentiveto minimize their negative impacts, for example, byshifting from peak to off-peak periods, or by mini-mizing their mileage. The current system uses a flatfee applied to any vehicle that drives within the cen-tral area during weekdays, so once a motorist pays thefee they have no incentive to minimize driving. Thisflat-rate system was chosen because it was relativelyfast and easy to implement, and simple to understand.A more sophisticated system that allows variable feesis likely to be implemented in the future.

Cost efficiency

A substantial portion of revenue is used to pay pro-gram expenses. About half of the program’s rev-enues are spent on overhead costs (project develop-ment, equipment and operations). Critics argue thatthere are more cost effective ways to collect money.However, as a congestion reduction strategy and away to improve bus service it has proven to be an ef-fective and cost efficient investment.

Loss of privacy

There is concern that the network of video camerasand the system for tracking vehicles within Londonis an invasion of privacy. However, British cities al-ready have extensive video surveillance systems, andaccess to vehicle location data is controlled to limitinvasion of privacy. However, these factors have noteliminated this concern.

Winners and losers

Table 2 characterizes the groups which are eitherwinners or losers of London congestion pricing.

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Table 2

Congestion pricing: Winners and losers

Winners Losers

• Downtown bus riders

• All transit riders (due to in-creased funding for improve-ments)

• Taxi riders and drivers

• Motorists with high-value trips

• Most city center businesses

• Overall city productivity

• Pedestrians and cyclists

• Motorists with marginal-valuetrips

• City center businesses thatdepend on low-cost weekdaycar access

• Residents and motorists inborder areas who experiencespillover impacts

• City center parking revenue recipients

Source: Author.

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Implications for other cities

London’s congestion pricing project is considered animportant test of the political feasibility of conges-tion pricing in major democratic cities. London’s ex-perience shows that congestion pricing is technicallyfeasible and effective, and that it is possible to over-come the political and institutional resistance to suchpricing.As a result, it will help put congestion pricingon the menu of transportation improvement optionsin other cities.

This pricing program indicates that private automo-bile travel is more price sensitive than most expertsbelieved. This is good news for congestion reductionbut bad news for revenue generation.

Better pricing systems are needed to optimize theincentive, with prices that vary depending on thetype of vehicle, when, where and how much it is dri-ven. These are technically feasible, and have beenimplemented in Hong Kong and Singapore, but theyinvolve greater investments and potential loss ofprivacy.

Implementation is not easy. It requires a suitablecombination of travel and political conditions, in-cluding widely dispersed benefits and the abilityto overcome public skepticism. Compared withother cities London has a particularly small por-tion of automobile commuters, and many of themreside outside the city. As a result, a relativelylarge portion of voters perceive themselves asbenefiting from the fee. Voters in other cities maybe more skeptical that they will benefit from sucha fee.

Summary

Since 17 February 2003 the city of London hascharged a fee for driving private automobiles in itscentral area during weekdays as a way to reducetraffic congestion and raise revenues to fund trans-port improvements. This has significantly reducedtraffic congestion, improved bus and taxi service andgenerates substantial revenues. Public acceptancehas grown and there is now support to expand theprogram to other parts of London and other cities inthe UK. This is the first congestion pricing programin a major European city, and its success suggeststhat congestion pricing may become more politicallyfeasible elsewhere.

References

CFIT (2002), Paying for Road Use, Commission for IntegratedTransport, www.cfit.gov.uk/reports/pfru/ index.htm).

Congestion Pricing Bibliography, www.hhh.umn. edu/centers/ slp/conpric/bib.htm.

European Program for Mobility Management, www.epommweb.org,provides resources for transportation demand management plan-ning and program development.

European Transport Pricing Initiatives, www.transport-pricing.ne,in-cludes various efforts to develop more fair and efficient pricing.

Faber, O. (2000), Fair and Efficient Pricing in Transport – The Roleof Charges and Taxes, European Commission DG TREN in associ-ation with EC DG TAXUD and EC DG ENV. Available throughthe European Program for Mobility Management, www.epommweb.org.

Hau, T. (1992), Economic Fundamentals of Road Pricing, ReportNos. TWU 1 and TWU 2, Infrastructure and Urban development,World Bank (Washington DC), available at www.worldbank.org/html/fpd/transport/publicat/pub_tran.htm and at www.econ. hku.hk/~timhau.

HHH Institute of Public Affairs (1996), Buying Time; Guidebookfor Those Considering Congestion Relief Tolls, Value PricingWebsite, www.hhh.umn.edu/centers/slp/conpric/guide1.pdf.

Litman,T. (1996),“Using Road Pricing Revenue”, in TransportationResearch Record 1558, TRB (www.trb.org), pp. 24-28, available atwww.vtpi.org.

Litman, T. (2005), Socially Optimal Transport Prices and Markets,VTPI (www.vtpi.org).

London Chamber of Commerce, www.londonchamber.co.uk.

London Congestion Charging Website, www.cclondon.com. For in-formation on the monitoring and evaluation program seewww.tfl.gov.uk/tfl/cclondon/cc_monitoring.shtml.

London First, www.london-first.co.uk.

Shaffer, B. and G. Santos (2004), Preliminary Results of the LondonCongestion Charging Scheme, TRB Annual Meeting, (www.geog.ox.ac.uk/staff/gsantos-files/trb2004.pdf).

Sod-U-Ken, www.sod-u-ken.co.uk.

T&E (2003), Congestion Pricing in London: A EuropeanPerspective, European Federation for Transport and Environment(www.t-e.nu/Factsheets/2003/14-2-03-CongestionBriefing.PDF).

Transport For London, www.tfl.gov.uk/tfl, provides updates onLondon’s pricing program.

Transport for London (2005), Central London Congestion ChargingImpacts Monitoring Third Annual Report, Transport for London,www.tfl.gov.uk/tfl/cclondon/pdfs/ThirdAnnualReportFinal.pdf.

Vickrey, W. (1992), Principles of Efficient Congestion Pricing,Columbia University, available at www.vtpi.org/vickrey.htm.

VTPI (2005), “Road Pricing,” Online TDM Encyclopedia, VictoriaTransport Policy Institute, www.vtpi.org/tdm/tdm35.htm.