GHG

Principal Economics July 2022

To achieve a 41 per cent reduction in transport emissions by 2035, the New Zealand Emission Reduction Plan aims to decrease the 2035 Vehicle Kilometre Travel by 20% (compared to the 2019 levels).

This report investigated various policy levers and their combinations and sequencing to achieve the VKT reduction target across three of the New Zealand largest urban areas, namely Auckland, Wellington and Christchurch. For our policy analysis, we adopted a wide range of policies consisting of 27 policy instruments consisting of various non-auto options, vehicle travel reduction initiatives, land use policies, and trip reduction policies. Our results suggest that mode shift only partially contributes to VKT reduction in most policy mixes and travel reduction will be required.

Road pricing is necessary to achieve the target.

The road pricing required by 2035 for achieving the VKT reduction targets is equal to 17c/km, 18c/km, and 13c/km in Auckland, Wellington and Christchurch, respectively.

These figures are additional to the existing road and fuel charges. The extra annual revenue collected in 2035 from road pricing would equate in today’s dollars to $520m in Auckland, $114m in Wellington and $123m in Christchurch, which sums up to $758m across the three regions. Our recommended policy packages consist of road pricing and a range of non-pricing policies. Our report provides guidance on policy optimisation and suggests using an adaptive decision-making framework. The revenue collected from road pricing can be used directly or indirectly to mitigate the identified adverse equity impacts. After considering the impact of COVID-19 and other (third) factor, we identified a small but statistically significant impact from the HPT on mode shift.

We identified improved PT coverage as a necessary condition in our investigation of data.

Particularly, for mode shift, we analysed the sensitivity to price of PT, and concluded that PT pricing is not sufficient in absence of improved accessibility.

For the sufficient conditions, we further investigated the combination of policies. To understand the driver(s) of reducing VKT and the impact of different policies (and their interactions) we need to account for the complexities in estimating GC elasticities. This includes the variation in response to policies across different socioeconomic groups; the uncertainty in response driven from lack of information; and the variations because of changes in infrastructure, economic trends, and norms.

Analysis of own- and cross-product elasticities

Our initial results confirmed the findings from earlier studies of an insignificant impact of price on mode shift. However, after we assumed improved PT coverage, our cross-product elasticities become statistically significant. We further investigated the variations of cross-product elasticities across the regions. Accordingly, the sensitivity of mode shift between PT and LV to (fuel and PT) price is higher in Auckland and Christchurch and lower in Wellington (compared to average New Zealand). We further disaggregated the results for different socioeconomic groups and across suburbs. The findings can be used to inform local PT fare structure and to prioritise investments in improvement of PT coverage.

Impact of the recently implemented half-price public transport (HPT) policy

All else equal, with the increase in the exposure to COVID-19, there is a lower likelihood of using public transport. The estimated impact of the HPT suggests a 1.43 per cent increase in the patronage compared to light vehicles as a result of the HPT. Our results do not identify significant difference in response to the HPT policy across different income groups. We also investigated the causal impact of the recently implemented half-price public transport (HPT) policy on mode shift after considering the impact of various relevant factors, including the uptake of economic activities with the ease of restrictive COVID-19 rules, the shortage of bus drivers, and the higher living costs. On a linear basis, that is equal to a 0.029 percent diversion from LV with a one per cent decrease in PT fares. This is smaller than the findings presented in our elasticities database. However, our finding is consistent with Ipsos’s (2022) finding from their survey of the impact of the HPT that only 7 per cent of new public transport journeys were due to half price fares. We suggest that this small impact is possibly because our estimate captures the immediate impacts of the HPT policy, and is likely to increase over time.

Assessment of the impact of policy packages and their sequencing

After investigating over 500 scenarios in each region, consisting of various combinations of policies, we concluded that road pricing is necessary for achieving the VKT reduction target. In addition to the road pricing, the other policies included in our recommended (Customised) policy packages for the three regions include land-use policies that support location of residential and employment growth at greater intensification over time; investment in TDM programmes (such as workplace travel reduction plans) and consideration of other (eg, tax) incentives with an objective of increasing the proportion of workers working from home from around 10% to 15% and thus reducing commuter travel; reduction in (free-flow) speed-limits of at least 10% and preferably 20%; continued support for the significant improvements planned for PT; and a permanent 50% reduction in real PT fares. We used the range elasticity estimates to sensitivity test the results of the transport modelling.

Economic impact of the VKT reduction policy packages

After considering the CO2-e emission impacts, the net impact for Auckland (AK), Wellington (WL) and Christchurch (CH) are -$361.4m, -$28m, and -$88.1m annual loss to the regional GDP. The sum of the effect is equal to -$386.5m loss to the national GDP. For the economic impact of the identified policy packages, we used Principal Economics’ subregional Computational General Equilibrium (PE-CGE). We investigated two scenarios, with and without specific allocation of the collected revenue from the pricing policy. To identify the best allocation of the revenue is beyond the scope of our analysis, but our allocation of the revenue to subsidise the production of green electricity shows the potential impact of more efficient allocation of the collected revenue. The revenue allocation could also address the identified equity issues. The allocation of the revenue to green electricity is associated with 175.5 million lower losses to the economy. Our results suggested that the overall impact (ie, after considering the wider economic impact) on affordability of households across New Zealand (as measured by real wages) will decrease by -0.5% in the SQ revenue allocation scenario and by -0.2% in the allocated revenue scenario.

Equity impact of the VKT reduction policy packages

Our results suggested that the GDP loss is likely to be incurred by all income groups (in aggregate) but will be disproportionately incurred by high income household groups in Auckland and Christchurch and by lower income groups in Wellington. This is mainly due to the lower sensitivity of the high-income groups to higher road pricing. In terms of air quality, we identify higher net benefits for the medium high-income groups because they are located in the areas with highest reduction in CO2e emissions. In Christchurch the net benefits are relatively smaller for the lowest income group. Affordability impacts are the most negative for the highest income group. Because of the normative nature of equity discussions, the distributional analysis should be further reconsidered after consideration of the preferred equity type. However, we suggest that addressing the equity discussions are critical for political acceptance of the VKT reduction policies, given the significant equity impacts identified in our report.

In addition to the road pricing, the other policies included in our recommended policy packages for the three regions include:

  • Land-use policies that support location of residential and employment growth at greater intensification over time
  • Investment in TDM programmes (such as workplace travel reduction plans) and consideration of other (eg, tax) incentives with an objective of increasing the proportion of workers working from home from around 10% to 15% and thus reducing commuter travel
  • Reduction in (free-flow) speed-limits of at least 10% and preferably 20%
  • Continued support for the significant improvements already planned for PT, including investment for bus-priority and quality-improvement measures for all PT modes
  • A permanent 50% reduction in PT fares.
  • Continued support for cycling network infrastructure improvements, with an overall aim of improving its perceived attractiveness by around 10% (compared to 2018)

Next steps towards the implementation of the policies

While the large (20%) VKT reduction target of the ERP is possible to achieve, the decisions required are difficult, due to their implementational complexities and the uncertainties involved. Particularly the political uncertainty is high due to public sensitivity to the (road) pricing policy, which may lead to further delays. Delays in decision-making will close the window of opportunity for achieving the VKT reduction target in a politically palatable manner (due to the immediate pricing level required to achieve the same (VKT reduction) outcome). We have included policies that will improve political acceptance of the recommended policy packages. Also, to improve the chances of success, our report recommended using an adaptive decision-making process, which should consider demographic and population, macroeconomic, technological, climate change, and political uncertainties. In the report, we suggest future research on different aspect of this report. In summary, the key three steps for each regional council will be to as follows: