Pergamon S0264-2751 (97)00057-7 Cities, Vol. 14, No. 3, pp. 169-174, 1997

© 1997 Elsevier Science Ltd All rights reserved. Printed in Great Britain

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Software review

Full cost accounting of urban transportation: implications and tools

Todd Litman Victoria Transport Policy Institute, 1250 Rudlin Street, Victoria, BC, VSV 3R7, Canada (Tel. and Fax: (250) 360-1560; e-mail: litman@islandnet.com; web page: www.islandnet.corrd-litman)

This article summarizes current research on full-cost accounting as it applies to urban transportation, and describes a computer software program which can be used to incorporate full cost analysis into transpor- tation decision making. In recent years several studies have estimated the magnitude and distribution of transport costs. These indicate that a significant portion of costs are external. These include a portion of accident damages, parking subsidies, roadway facilities and services, the value of land devoted to roads, and a variety of negative environmental and social impacts. In addition, the majority of users' vehicle costs are fixed. Both external and fixed costs cause underpricing, which encourages inefficient and inequi- table travel patterns. This price structure leads to increased motor vehicle traffic, environmental degradation and urban sprawl. Although motor vehicles are expensive to own, they are so cheap to operate that problems such as congestion and pollution are forced to become constraints to further growth. Pricing reforms are essential to reduce transportation problems. Least cost transportation planning based on full-cost accounting lets decision makers identify optimum investment strategies and policies. A new microcomputer software program, Transportation Cost Analyzer, can help incorporate full costs into planning and policy making, such as evaluating the cost savings of a transportation improvement or the benefits to society of transpor- tation demand management programs. © 1997 Elsevier Science Ltd.

Full cost accounting of transportation

There is increasing recognition that urban transportation planning must consider a broader range of impacts, including indirect social and environ- mental costs. As stated in the Draft Sustainable Transportation Principles, presented at the OECD conference 'Towards Sustainable Transport' held in March, 1996 in Vancouver, BC, "Decision makers must move as expeditiously as possible toward fuller cost accounting, reflecting the true social, economic and environmental costs". Since the primary benefits of most transportation improvement pro-

grams consist of reductions in travel time, accident and environmental costs, full cost accounting allows better evaluation of both costs and benefits.

Full cost definitions and estimates

A number of recent studies have attempted to evaluate full transpor- tation costs (Apogee Research, 1994; IBI Group, 1995; Kageson, 1994; Lee, 1995; MacKenzie et al, 1992; Miller and Moffet, 1993; Office of Tech- nology Assessment, 1994; Poldy et al, 1994; Van Seters et al, 1993; Works Consultancy Services Ltd, 1993). We

have built on this work, and additional research in other disciplines including ecological economics, social studies and land economics, to develop cost estimates and an analysis framework (Litman, 1996). Table 1 lists costs that result from transportation activities. The estimated magnitude and distri- bution of these costs are illustrated in Figs 1-3.

How a cost is distributed and per- ceived determines how it affects trans- portation decisions. Consumers are most affected by costs that are internal, variable, direct and short-term. Public agencies tend to focus on direct market costs since they are easiest to measure. External, fixed, long-term, non-market

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Figure 1 Estimated costs of urban driving (Litman, 1996). This figure illustrates average estimated urban automobile costs ranked by magnitude. Based on 1/3 urban peak and 2/3 urban off-peak travel costs. (1996 $US)

External Non-Market 23%

iable Vehicle External Marb Costs

10% 12%

Internal xed Vehicle Costs Non-Marl 23%

(User Time & 32%

Figure 2 Distribution of automobile costs (Litman, 1996). This figure illustrates the estimated distribution of automobile costs according to whether they are internal (user) or external, fixed or variable, market or non-market. These factors affect users' travel decisions, and planning and policy making.

and indirect costs tend to be under- valued. Many costs of driving have these attributes, which skews users' and society's transportation decisions, resulting in economic inefficiency, inequity and unsustainability.

Efficiency and equity impacts of transportation underpricing

A basic tenet of market theory is that economic efficiency is maximized

when prices (defined as perceived, internal, variable costs) reflect total marginal costs. The results of all major research indicates that automobile use, and particularly urban automobile use, is significantly underpriced relative to

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[]External Non-Market ] [ ] External Market I [ ] User Time & Risk I • Fixed Vehicle Costs I • Variable Vehicle Costs I

Average cost distribution for various Modes (Litman, 1996). This graph shows the estimated cost distribution for 11 modes by major category (1996 Canadian dollars)

the full costs imposed. About one-third of total transport costs are external. In other words, user costs would need to increase 50% to internalize all costs. Since fuel only represents a small por- tion of total user costs, fuel prices would need to increase several fold to internalize all costs.

The issue is not simply that auto- mobile users are unfairly subsidized; after all, most of the external costs are borne by people who themselves use automobiles, at least in North America. Underpricing also causes inefficient consumer behavior. It encourages more travel than would otherwise occur, and more automobile travel where other tra- vel modes would otherwise be chosen. It also creates cross-subsidies within the population of automobile users. People who drive less than average are forced to subsidize those who drive more than average.

Externalized costs are not the only cause of underpricing. Although auto- mobiles are expensive to own, costing a typical household thousands of dollars annually, the variable cost of any one trip is low. This also reduces the ratio between prices and total costs. Due to these fixed costs, average vehicle costs per mile decline with increased use, so vehicle owners have an incentive to maximize driving 'to get their money's worth'. Because of increasing auto- mobile dependency (automobile-ori- ented land-use patterns and a lack of

travel choices), a personal automobile is essential to participate in many employment, education and social activities. Once individuals purchase an automobile they have little incentive to limit their automobile use, since vehicle owners pay fixed and external costs no matter how much or little they drive.

To put this another way, automobile owners receive only a small portion of the total savings they would produce by reducing their driving. For example, under urban peak period travel con- ditions, automobile driving imposes external costs averaging $0.35 km 1, while bus riders external costs average only $0.11 km t, resulting in external cost savings of $6.00 for a typical 25 km round trip commute shifted from driving to public transit. But these sav- ings are not returned to consumers. Driving often costs a car owner less than bus fare, despite the higher total cost of automobile use, due to the large portion of fixed and external costs. This underpricing reduces the incentive for individuals to use the cheapest overall travel option for any particular trip.

Although underpricing such a com- mon consumer good may appear ben- eficial from a narrow perspective (and indeed benefits many individuals in the short term), mispricing reduces overall economic efficiency. External costs are not eliminated. They show up instead as higher prices for commercial goods

(for parking subsidies), increased local taxes (to pay for road services), increased injury and illness (from pol- lution and accidents), and lower resi- dential property values (externalities from urban traffic). Underpricing cre- ates automobile dependency which reduces travel choices (Newman and Kenworthy, 1989).

This is not to say that driving would cease if costs were internalized and marginalized. Automobile users would be willing to pay a higher price for some trips. However, a significant por- tion of driving has relatively low value to the user, either because the trip itself provides little net benefit or because alternative modes exist. Increasing prices to reflect a greater portion of total costs would reduce low value driving, improving the overall efficiency of our transportation system.

With the current price structure, operating a motor vehicle is so cheap that problems such as urban traffic con- gestion, roadway facility costs, and pol- lution are forced to become constraints to further growth. Such problems are unavoidable as long as driving is sig- nificantly underpriced.

How does underpricing affect econ- omic development? Low transport costs increase economic efficiency and productivity, leading to economic development, but transport underpric- ing has the opposite effect by encour- aging wasteful use of resources.

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Excessive automobile dependency and use gives North America an economic disadvantage relative to Japan (Hook, 1993). More efficient transport reduces Japanese industrial and employment costs, increases productivity and frees funds for capital investment. Most claimed benefits of underpricing are really economic transfers, in which one group benefits at another's expense. Underpricing may have been justified early in this century to achieve econ- omies of scale in vehicle and roadway development, but not now.

Another argument used to justify underpricing is that increasing the price of driving is inequitable. This is only true from a narrow perspective. Although underpricing benefits low- income drivers directly in the short term, it increases automobile depen- dency over the long term. Land use pat- terns become more dispersed so indi- viduals must travel farther to access activities. This increases total user transportation costs, which is especially disadvantageous to the poor (Johnson, 1993). Non-drivers suffer immensely from underpriced driving since they incur external costs, have fewer trans- port choices, and are increasingly dis- advantaged relative to drivers. Under- pricing forces people who drive less than average (who tend also to have lower incomes) to subsidize the auto- mobile use of their wealthier neighbors.

Environmental impacts By increasing total motor vehicle own- ership and use, underpricing signifi- cantly increases motor vehicle environ- mental impacts. Efficient pricing is essential for sustainable transport. Even the best new technologies that reduce environmental and social costs will not be implemented unless consumers per- ceive economic incentives to adopt them. Non-pricing strategies for achieving individual environmental goals, such as vehicle fuel efficiency mandates, can increase other external costs by further reducing the ratio between users' variable costs and total costs. Increasing fuel efficiency makes automobile operating cheaper, leading to more driving, accidents, pollution and sprawl (Nivola and Crandall, 1995).

Underpriced driving and the

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resulting automobile dependency have significant land use impacts (Moore and Thorsnes, 1994). Automobiles require more space than other modes and encourage more travel, increasing the portion of land that must be dedi- cated to transport facilities. Auto- mobile-oriented cities devote 2 to 3 times as much land per capita to streets and parking as multimodal cities. This increase in total pavement imposes economic, environmental, social and aesthetic costs on society. Futhermore, automobile use encourages sprawl by degrading the urban environment and accommodating low-density develop- ment at the urban periphery. This cre- ates a self-reinforcing cycle of increased automobile use, reduced tra- vel options, urban blight, low density land development and automobile dependency. Urban sprawl may provide benefits to users, but it also imposes a variety of external costs including habi- tat losses, reduced greenspace and water quality, and increased per capita public service costs.

Transportation improvement priorities Transportation investment analysis typically focuses on increasing vehicle traffic flow at the lowest financial cost to public agencies and facility users. The negative impacts of generated traffic that result over the long term from increased roadway capacity tend to be ignored in highway planning (Hansen et al, 1993). As a result, pro- jects are implemented that may provide no overall benefit when all costs are considered. Full cost accounting tends to give far greater weight to the poten- tial benefits of travel demand manage- ment, alternative travel modes and traffic calming.

If you ask, "Do you think that traffic congestion is a major problem?" most people would probably answer yes. If you ask them, "Are you willing to invest in road capacity improvements to solve congestion problems?" a majority would probably agree. But if presented the options more realistically by asking, "Do you want to spend a lot of money on expanding roadway capacity that provides only moderate reductions in traffic congestion but will increase your long term transport costs

and taxes, degrade the environment, encourage urban sprawl, and reduce the livability of your community, or would you rather create a more efficient trans- portation and land use system?" the preference for increased road capacity is likely to disappear.

Policy recommendations A number of changes in transportation pricing and investment decisions can help create a more efficient and equi- table transportation system. As much as possible, vehicle users should pay the full costs they impose on society, and fixed costs should be made variable. A common suggestion for internalizing costs is to increase fuel taxes. That, however, is not an optimal charge since fuel prices do not affect when or where driving takes place, or provide incen- tives to buy a low polluting car. Over the long run, drivers buy more fuel efficient cars, but these do not reduce congestion, accidents, parking costs, noise, sprawl, or most air pollutants. Recently, there has been growing inter- est in congestion pricing. This could internalize congestion costs but not other externalities. In fact, no single mechanism can capture all external costs due to their diverse nature. Sev- eral price changes are needed for opti- mal efficiency: weight-distance charges, fuel taxes, congestion pricing, smog fees, eliminating parking sub- sidies, marginalized insurance, and higher fines for law violators. Tax and price increases should be gradual and predictable to allow individuals and firms to adjust when making long-term decisions. One relatively easy strategy is to charge insurance and vehicle registration fees proportionally to vehicle mileage.

Transportation planning and invest- ment decisions should consider all impacts, including long-term and indirect costs, and the implications of generated traffic. Least-cost planning strategies can be used to evaluate trans- portation demand management on an equal basis with roadway capacity expansion (EcoNorthwest and Parsons Brinckerhoff Quade and Douglas, 1995). The value of having travel choices must be recognized. This means developing transportation sys- tems which provide effective mobility

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Cost categor ies Vehicle ownership Vehicle operating subsidies Travel time Internal accident External accident Internal parking External parking Congestion Road facilities Roadway land value Municipal services Equity and option value Air pollution noise Resources Barrier effect Land use impacts Water pollution Waste

M o d e s Average car Fuel efficient car Van/light truck Rideshare passenger Electric bus/trolley Motorcycle Walk Telecommute

to non-drivers. Transportation planners and engineers who are normally car dependent should make a habit of liv- ing at least a few weeks each year with- out use of a private automobile in order to experience the problems and pleas- ures of being dependent on other modes.

Changes in urban development pol- icy are needed to reduce automobile dependency by locating activity centers (employment centers, schools, shops, play areas) where they are most access- ible, and setting development and util- ity prices to reflect the higher costs associated with low density, sprawled locations (JHK and Associates, 1995). Lending institutions should consider the higher transport costs of suburban and exurban residences in mortgage assessments (multiple automobile own- ership is usually considered an asset rather than a liability).

Tools for transportation decision making

We have recently developed a microcomputer-based software pro- gram called the Transportation Cost Analyzer that automates full cost accounting calculations (Litman and Rintoul, 1996). It uses published cost estimates as defaults that can be changed or excluded to meet the needs of a particular situation. The program includes a matrix of 20 costs for 11 modes (see tables above) under urban peak, urban off-peak and rural travel conditions. Cost values are measured in 1996 $US per mile of travel. Each cost estimate is explained and fully refer- enced within the software. It indicates the distribution of each cost according to how much is internal or external,

Electric car Diesel bus Bicycle

fixed or variable, market or non- market. The software calculates total costs per vehicle mile and per passenger mile, and the distribution of costs. Costs are indicated for each of the three travel conditions separately, and as weighted averages. Results can be printed directly, or transferred to a spreadsheet or word processing program. Users can save results as a separate file for further analysis during a future session.

Transportation Cost Analyzer can estimate the costs resulting from an increase in automobile traffic, and the benefits of a shift from driving to alter- native modes, including bus, car poo- ling, bicycling, walking and telecom- muting. The results can help identify optimal policies and investments. In the past, such planning tended to focus on only three or four costs. Now, decision makers can incorporate a much larger range of impacts in their analysis. It can help answer questions such as:

• What are the full costs and net bene- fits of a policy or plan?

• Who bears the costs or gains the benefits?

• Do users pay a fair share of costs?

• What are the net benefits of a trans- portation demand management pro- gram, transit service improvement, new technology or alternative fuel?

• What are the full impacts of a road improvement or traffic calming pro- gram?

For example, the program can calculate the incremental costs that would result from an given growth rate in vehicle traffic, and the savings that would occur if the growth rate were reduced or shifted to other modes. It can indi-

cate what portion of those costs are

borne by users, government agencies, and by society as a whole. The program can help calculate the cost-effective- ness of transit investment or a transpor- tation demand management program. Because analyses can be saved as a separate file, users can easily test a wide range of options, perspectives and conditions.

This program is based on extensive research and testing. Earlier versions of this analysis model have been used for cost studies in Vancouver, British Columbia; Albany, NY; Santa Barbara, CA; and Ontario, Canada.

Transportation Cost Analyzer is a Windows 3.1 program, and can operate under Windows 95. It requires less than 1 MB of hard disk space. It comes complete with user manual and internal documentation. The program costs $US100 or $135 Canadian.

For more information on these analy- sis tools contact the Victoria Transport Policy Institute at 1250 Rudlin Street, Victoria, BC, V8V 3R7, Canada, Tel. and fax: (604) 360-1560, e-mail: lit- man @islandnet.com, Web page: http://www.islandnet.com/~litman.

References Apogee Research (1994) The Costs of

Transportation, Conservation Law Foundation, Boston.

EcoNorthwest and Parsons Brinckerhoff Quade and Douglas (1995) Evaluation of Transportation Alternatives; Least Cost Planning: Principles, Applications and Issues, FHWA, Washington DC, Metro- politan Planning Technical Report.

Hansen, M e t al (1993) The Air Quality Impacts of Urban Highway Capacity Expansion: Traffic Generation and Land Use Changes, Institute of Transportation Studies, Berkeley.

Hook, W (1993) Are bicycles making Japan more competitive? Sustainable Trans- port, Institute for Transport and Devel- opment Policy, New York.

IBI Group (1995) Full Cost Transportation and Cost-Based Pricing Strategies, National Round Table on the Environ- ment and Economy, Transportation and Climate Change Collaborative, Ottawa.

Johnson, E (1993) Avoiding the Collision of Cities and Cars; Urban Transportation Policy for the Twenty-First Century, American Academy of Arts and Sciences, Chicago.

JHK and Associates (1995) Transportation- Related Land Use Strategies to Minimize Motor Vehicle Emissions: An Indirect Source Research Study, California Air Resources Board, Sacramento.

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Kageson, P (1994) Getting the Prices Right: A European Scheme for Making Trans- port Pay Its True Costs', European Feder- ation for Transport and Environment, Bruxelles.

Lee, D (1995) Full Cost Pricing of High- ways, National Transportation Systems Center, Cambridge.

Litman, T (1996) Transportation Cost Analysis: Techniques, Estimates and Implications, Victoria Transport Policy Institute, Victoria, British Columbia.

Litman, T and Rintoul, D (1996) Transpor- tation Cost Analyzer, Victoria Transport Policy Institute, Victoria, British Colum- bia, computer software program.

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MacKenzie, J, Chen, D and Dower, R (1992) The Going Rate, World Resources Institute, Washington, DC.

Miller, P and Moffet, J (1993) The Price of Mobility, National Resources Defense Council, Washington, DC.

Moore, T and Thorsnes, P (1994) The Transportation~Land Use Connection, American Planning Association Chicago, #448/449.

Newman, P and Kenworthy, J (1989) Cities and Automobile Dependency, Gower, Aldershot.

Nivola, P and Crandall, R (1995) The Extra Mile; Rethinking Energy Policy for

Automotive Transportation, The Brook- ings Institute, Washington, DC.

Office of Technology Assessment (1994) Saving Energy in U.S. Transportation, US Congress, Washington, DC.

Poldy, F et al (1994) Victorian Transport Externalities Study, Volumes 1-4, Environmental Protection Authority, Melbourne.

Van Seters et al (1993) Cost of Transporting People in the British Columbia Lower Mainland, Greater Vancouver Regional District, Burnaby.

Works Consultancy Services Ltd (1993) Land Transport Externalities, Transit New Zealand, Wellington, Report #19.

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