Cases

Internalization of external costs in road transport.
Are shippers ready?

HERENT – The European Commission published a proposal in June last year with a view to introducing levies on all modes of transport (road, water, air and rail traffic). The proposed measure makes a direct link between the modes of transport and their respective social and environmental impact.

The consequences of applying such a measure will be far-reaching. The cost structure and profile of the entire European network will change. How and when the effects of this evolution will be felt by shippers is as yet unclear. The important thing as a shipper, however, is to anticipate and, why not, create a competitive advantage from this opportunity.

Transport remains underused

Transport is unavoidable and contributes significantly to the growth of our economy. And yet it cannot be denied that the damage to the environment and society caused by passenger and goods transport is enormous.

Nobody expects an immediate improvement in this situation. It is estimated that in Europe alone, 370 000 people die every year as a result of the effects of air pollution, which can in large part be ascribed to vehicle emissions. In addition, road congestion is a problem we are all confronted with on a daily basis.

The number of tonnes per kilometre is rising faster than the volume of goods produced (which means we are driving around more and more with a tonne of goods) and on top of that, the trucks on the roads are seriously underused. It is estimated that 25% of the total distance is driven without payload. However, the actual load rates for the remaining 75% are also unclear. Experience has taught us that this situation is the result of at least two factors: the “just-in-time” principle – whereby the volume of goods per delivery is reduced – and the “over” packaging of goods.

Only 20% of external costs carried by the instigator

This fact has not gone unnoticed by the European Commission. The “external costs” of transport, in particular air pollution, noise and congestion problems, are only partially covered by existing levies. The extent to which these costs are passed on to the final instigator is still a matter of debate. Recent publications claim that these levies only cover some 20% of the external costs. The coverage in the air cargo sector is even 0% because at present there is no levy on the fuel consumption of aircraft.

Online calculation of levies

The various forms of impact have been analysed and converted into figures. A clear explanation of the calculation methods is described in the IMPACT report*.

Levies must not be discriminatory and must be a genuine instrument for improvement. For this reason, various factors are taken into consideration. A truck driving in the city during peak periods would have to pay a higher kilometre levy compared with one driving at night on an empty highway. The vehicle type and “Eur” emission classification would also have to be taken into account.

New i-technology will simplify the introduction of such a model. The location of a truck as well as the payable levy will be determined and calculated online. This levy will be charged via a periodical invoice with a detailed overview of the various trajectories, thus simplifying the recuperation of costs from the respective customers.

The levy will be payable by all trucks over 3.5 tonnes and will range from € 0.35 to € 0.80 per kilometre driven. Details of the levies in other modes of transport are not yet known. The European Commission has nonetheless stated that this levy will be introduced from 2011. The revenue from these levies will be distributed amongst the member states to help develop new, improved infrastructure.

The levy and the calculation principles have of course already been disputed. Those opposed to the new measures not only highlight their damaging social consequences but also their significant effect on inflation (estimated between 2 and 3%)**. At this point in time, the details of the levy calculations are still not known. We are also unable to predict whether the principles and the amount of the levies will survive the various lobby groups.

Measure with serious consequences

Accelerated specializations amongst transport companies will no doubt appear per line, destination or mode of transport. The policy with regard to the problem of empty kilometres and available capacity will become the new challenge. In any case, we see the waning of competition between transporters for long and mid-distance transport.

With their greater ecological efficiency, alternatives to road transport – such as inland shipping, rail and short-sea transport – will be taxed at a lower rate in terms of tonnes/kilometre. Their relative cost will therefore decrease, making such modes of transport potentially much more competitive. The Commission is targeting a shift in the market whereby a wider and qualitatively better offering is to emerge through a significant increase in demand.

However, there is a risk of the opposite occurring. The explosion of demand could generate bottlenecks due to insufficient available resources and a lack of suitable infrastructure. If everyone suddenly wants to transport goods by train and barge tomorrow, then there will be a huge problem the day after.

Finally, this considerable increase in transport costs could have a negative effect on the transit times and reliability of delivery. The more intense search for the cheapest means of transport will inevitably result in longer transport (transit) times and this for both full and partial loads.

…and the shipper foots the bill

With an “average” levy of, e.g. € 0.50 per kilometre, it must be realized that this will result in a 50% increase in transport costs. This is based on the current cost of € 1 per kilometre for a semi-trailer over a long distance.

The foreseeable and immediate consequence of the application of such a measure is without doubt the drastic reduction of transport over mid to long distances of goods with a low value. An increase of 50% for a product whose transport costs represent 2% of its value, increases this cost to 3%. If the actual transport costs represent 10% of the value, then this will be increased to around 15%.

Be prepared is the message

Even if this levy is not introduced in 2011 or if it is lower than expected, it should still be clear that the costs are likely to rise considerably in the coming years. Below are a few critical questions aimed at making you better prepared as a shipper:

Extent of load:
Are the goods optimally loaded?
Is the maximum allowable weight/available volume of the vehicle always used?
Are the goods packaged too much or too little (preventing, e.g., the stacking of palettes).
Empty kilometres:
What is the percentage of empty kilometres per truck? How much of this is passed on to the transporter?
Have you thought of implementing a system of return freight?
Have you investigated the potential synergies with suppliers/customers?
Network / intermediary stock:
Could the establishment of intermediary stock extend the available transit/transport times (thus creating possibilities for using cheaper means of transport)?
What is the balance between financing the cost of additional stock and the savings resulting from using slower and cheaper means of transport?

* http://ec.europa.eu/transport/costs/handbook/doc/2008_01_15_handbook_external_cost_en.pdf

** http://www.umpeurope.org/Communiques/2008/07/Vatanen08072008.pdf

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