Introduction

Rail transport is seen as being of growing importance in Europe and elsewhere due to its lower environmental impact than other transport modes. Previously, the advantage of rail was seen in terms of noise, visual and local air pollution. While all these factors are still important, energy consumption and greenhouse-gas emissions have become the main concerns.
Regulation, pricing, and investment decisions can maximize these advantages. However, this requires quantification and monetary valuation of environmental externalities so they can be reflected in the price of alternative modes and for cost benefit analysis when appraising regulations and investment proposals.
This article discusses recent research in Europe to determine the monetary value of these factors and offers some results. Then, it discusses how to use these monetary values in pricing and investment decisions.

Valuation of Environmental Externalities

In an efficient market economy, prices indicate the costs of alternative goods and services. Consumers can choose whether particular goods and services are worth the cost, or whether they prefer cheaper alternatives. In turn, companies will decide whether to invest in productive capacity on the basis of a comparison between the revenue they earn from the facilities and the cost of providing them.
However, in the absence of specific regulator y intervention, environmental costs and benefits have largely been ignored in these decisions, because environmental effects are largely what economists describe as externalities.
This means they are inflicted on persons who are not party to the transactions causing them. The textbook solution is for governments to quantify and value the externalities and to levy charges or taxes that reflect externalities in the price paid for goods causing them. In private investment decisions, such taxes may be used to ensure companies take externalities into account; in the case of government decisions, social cost benefit analysis explicitly considers the value of such costs and benefits alongside all other relevant factors. This internalization of environmental costs provides incentives for an efficient trade-off between costs and environmental impact in decisions both about technology (what infrastructure to provide, what vehicles to use) and behaviour (how much to travel, where, when and by what mode).
This approach to handling environmental effects requires valuing environmental costs and benefits in money terms at the amount people are willing to pay for benefits or the compensation they need to accept costs. There are a number of ways to achieve this. Sometimes, the costs or benefits are traded directly in markets; for example, when crops are damaged by pollution, healthcare costs are incurred or output is lost through time off work. In cases where the costs are not traded in any market, such as the disamenity effects of noise and air pollution, there may be markets where individuals show their willingness to pay as part of the price they pay for a good that is traded in markets.
For environmental effects, the house purchase and rental accommodation markets commonly use this method. For example, houses enjoying lower noise or air pollution, and having higher visual amenity sell for higher prices; price reflects the present value of the stream of additional benefits such a house offers. Consequently, the common analysis approach performs statistical analysis of large samples of house prices to find the impact of environmental variables on price.
However, this has some weaknesses. For example, the change in house price represents a stream of benefits over time, but the discount rate used in summing them is unknown. From this viewpoint, rents are easier to analyze if there is a sufficient market for rented property. In addition, house prices only reflect people’s perceptions of environmental quality. Thus environmental impacts directly affecting amenity, such as noise and visual pollution, will be measured more accurately than indirect effects, such as the impact of air pollution on health. Indeed, some forms of pollution may not be perceived at all.
Another approach to environmental valuation is to rely on hypothetical surveys. These can ask about issues such as willingness to pay to avoid health risks, which might otherwise not be perceived. The disadvantage is that people may not answer accurately when faced with a hypothetical question, either because they do not give the issue sufficient thought, or because they perceive an advantage in deliberately distorting their answer. (For example, if they perceive questions about noise nuisance as presaging plans to build a motorway near their homes and for which they might not be adequately compensated, they may wish the authorities to value noise at an inaccurately high level). Carefully designed surveys that give respondents hypothetical choices between realistic options but with no obvious incentive to distort their answers can minimize these problems.
For indirect effects, such as health, the lack of knowledge by the general population about the consequences of pollution mean that it is better to use scientific evidence to try to predict the effect, and then to value the risk of ill health or loss of life itself. This approach—known as the impact pathway approach—has been much used in European research.
The most difficult of all valuation problems is global warming. While there is much research on the final consequences of global warming, it is subject to high uncertainty. On the other hand, governments do make political decisions on the levels of greenhouse-gas emissions that are acceptable and sign-up to achieving them. Consequently, for the transport sector, if these constraints are indeed binding, the cost of more greenhouse-gas emissions from transport is not more global warming but more action to reduce greenhouse-gas emissions elsewhere. Although still not easy to quantify, this is much easier than forecasting the long-term consequences of global warming.
However, we can state that the work done in European transport and environmental research over the last decades to improve methods and data input has led to a significant increase in the quality of standard values and in acceptance by the science community. The challenge for now is how to convert the scientific output to concrete pricing policy proposals, as the ongoing EU debate about taxation of heavy goods vehicles (HGVs) shows.

Values of Environmental Externalities by Mode

Many studies have been undertaken of environmental costs of transport in Europe, sponsored either by the European Commission or individual member countries. Evidence on social cost estimation has recently been synthesized in the form of a EU handbook published by the IMPACT project.
Using examples from this handbook, Table 1 shows the position of road and rail passenger transport. The figures represent short-run marginal costs for an additional vehicle or train km. Note that the units are Euro cents per vehicle or train km; for trains, the data relates to a typical German train, which on average carries around 100 passengers, but certainly has a capacity of more than double that. It is clear that electric trains have major advantages over diesel trains, and petrol cars over diesel cars. However the electricity generation mix is important for the level of upstream and downstream costs. Beyond that, the other crucial issue is load factor. For example, an urban electric train carrying 100 passengers has only a fifth of the environmental impact per passenger of 100 single-occupancy petrol cars; in the case of diesel trains, many more than 100 passengers are needed to produce a significant advantage for rail. The position of rail relative to road is slightly less advantageous in inter-urban markets, but rail—and especially with electric traction—is very much superior to air over the distances that the two compete.
Table 2 makes the same comparison for freight. A mean load for a German freight train is about 480 tonnes (or at least 15 times that of a typical HGV), but varies greatly with commodity. Again, with electric traction, rail has an enormous advantage over road at any reasonable load, but for diesel the advantage is marginal. Water also has advantages over road, and is competitive with diesel trains. It is worth noting that although environmental externalities are seen as an important reason for favouring rail transport there are other reasons too. Rail has increased safety and lower external accident costs (i.e. costs not borne by the user either directly or through insurance) than road transport. In European conditions, road congestion poses a greater external cost. Consequently, to the extent that rising congestion is not offset by increased road capacity, dealing with the problem of congestion is an even more important factor favouring rail over road in Europe. In an ideal world, this would be reflected in charges for use of roads. If it is not, there is a case for reducing rail infrastructure charges below the level of the costs extra rail use causes to offset road underpricing. Similarly, reduced road congestion as well as environmental pollution is an important factor in making the case for rail investment in Europe.

Policy Uses of Environmental Valuations

Conclusion