The Conference Board of Canada Greatly Overestimates the Degree to which Drivers Cover Road Costs

Recently the Conference Board of Canada released a study that claims that upwards to 90% of Ontario road costs are covered by drivers. The purported findings of the study were gleefully touted by all major news sources, and if one was careless enough to read appending user-comments, one could expect that they were rife with remarks of smug self-satisfaction and entitlement, and perhaps claims of moral superiority in the horrific “war on cars.” I was immediately sceptical of the findings because previous studies have estimated, on a national level, that driver-related revenues covered upwards to 64% of road costs, and I argued that even this was probably an overestimate.

Predictably, most of the media reports did not pay close attention to the ranges (often just reporting the 90% figure) and methodologies used, nor did any of them spot or comment on any of the obvious issues in the study. I figured this was typical journalistic inaccuracy and sensationalism. But then I read the press release on the Conference Board of Canada’s website. It leads off by claiming “Majority of Ontario Road Infrastructure Costs Paid by Motorists.”

This is a false statement.

The crux of the study’s findings is the assumption that fuel taxes are to be considered a fee for driving and that the revenue generated by such taxes should be entirely earmarked for road infrastructure, operations, and maintenance. This argument is problematic enough in itself, but since in actuality fuel taxes are not earmarked exclusively for roads, it is clear that their press release is (intentionally) untrue. If they didn’t want to be misleading (at least not with regards to the findings of their own study), they should have said that the majority of Ontario road infrastructure costs could be paid by motorists. But even this is exaggerated.

All studies on road costs (and road related revenues) on national or provincial levels (and even at municipal levels) remark on the difficulty of making such estimates, for a variety of reasons, most notably the difficulty of getting access to detailed accounting and figures at multiple levels of government. And estimating road costs simply based on government expenditures is often problematic, as costs are dispersed in peculiar ways, or expenditures are often vaguely categorized. So, in this regard at least, the study authors did a respectable job in many regards, with a difficult subject. As regards to the study itself, I’m not implying that any particular set of “raw” data was false or misrepresented so as to skew the results (I cross checked all the sources used). Rather, overall the study makes numerous conveniently misleading assumptions, which allow for accurately presented data to support questionable arguments (which are further misrepresented in the press release).

The overall approach of the study was to tabulate all road-related costs (building of new infrastructure, operations and maintenance, policing), and all the road-related revenues in Ontario, and calculate the ratio between the two. They claim, “Province-wide, fuel taxes and other fees cover between 70 and 90 per cent of annual road construction, maintenance and policing costs.”

To be precise, if one actually looks at the study, over the years 2008-2010, the highest-end estimate is 87.6% and the lowest-end estimate is 56.6%. But this range is based on using extreme values across different years, which could hardly be representative of typical recover costs because the range could be exaggerated by outliers. The high-end estimates for 2008, 2009, and 2010 are 87.6%, 75.9%, and 74.2% respectively. Obviously this set is too limited to draw any conclusions about long term trends, but ostensibly the 86.7% value is the outlier. It could easily be the case that this year had an anomalously high cost-recovery ratio, due to deferring road infrastructure costs to later years. On the same note, since road infrastructure costs are incurred over long periods of time, looking at short-term annual expenditures doesn’t make sense either, since one year could have anomalously high costs, if it marks the beginning of a major capital investment.

The folks at the Conference Board of Canada are aware of these issues, and take them into consideration in their analysis. They actually offer three different cost-recovery ratios based on three different methods for estimating road costs. One is an expenditure approach, which merely looks at governmental budgets and tallies the total amount spent on road costs. The next is an annualized capital expenditure approach. For the reasons I just mentioned, it makes more sense to try and calculate how much capital costs will cost annually over the lifetime of the capital project, rather than treat them as one-time costs. The third way is a road inventory approach which estimates the cost of building and maintaining lane-kms of road, and then multiplies this by an estimate of the size of the total road network.

All approaches have their limitations, but the road inventory actually takes stock of the amount of roads that exist, which solves the issue of relying on often vague and inaccurate budget items. In any case, the expenditure approach is the least desirable, and this is implied in the study itself, but this is the approach that appears to yield the 70-90% estimate (actually 74.2-87.6%) used in the press release. Otherwise, it’s hard to figure out where this figure actually comes from. The estimates for the annualized capital expenditure approach for 2008, 2009, and 2010 are 77.8, 75.1, and 73.2 and for the road inventory approach, 57.3, 56.7, and 56.6  (notice how the annualized approaches take care of the outlier for 2008). Overall, the three year sample is too limited to give any clear idea of the long-term yearly costs of roads, though, in this regard, the road-inventory approach is again arguably the most accurate because its estimates of road costs are annualized based on decades-long capital and maintenance costs, and thus the figures do not ebb and flow based on uncharacteristically high or low expenditures or revenues.

In light of all these issues, the claimed 70-90% cost-recovery is an inaccurate representation of what the study actually shows. Indeed, it seems a dubious overestimate.

This all merely takes issue with how the Conference Board’s own study was represented in their own press release (and predictably, all of the major newspapers that covered this study repeated the 70-90% cost recovery claim).

But there are further issues with the study itself that demand attention.

There is a small problem with the estimation of revenues generated from “road-fuel taxes” in Ontario. Ontario doesn’t have “road-fuel taxes;” it has a fuel tax (for diesel) and a gasoline tax (for gasoline, aviation fuel, and propane). The latter does not make any distinction between different uses of gasoline for tax purposes (except for refunds) as taxes are paid at the supply level. The Statistics Canada data set that is used to estimate gas and fuel tax revenues specifies “road-use tax rates” but there is no such data for Ontario. They try to adjust for this by taking into account refunds that would be applied to farming equipment or any other combustion engine that runs on gasoline used for commercial purposes not subject to the Highway Traffic Act. But there are other uses of gasoline that are taxed and not differentiated from road motor-vehicle uses. In short, if you use gasoline for your boat, snowmobile, ATV, or golf cart, you pay gasoline tax in Ontario and this would be included in the Conference Board’s estimates. Admittedly, this probably makes up only a tiny fraction of gasoline sales (though, if I had funding from the boating, snowmobiling, ATV, or golf cart lobby I would take the time to make a more rigorous estimate and then write a report arguing that they are overpaying for “road-fuel taxes” for roads that they don’t even use), but based on this data, and assuming that nearly all off-road vehicles use regular gasoline, we could estimate that non-road uses of gasoline make up about 7% of the total gasoline use in Ontario. That’s $266 million that could be used for snowmobile trails!

It’s also bogus that the study includes revenue from fines into the analysis. It requires some sketchy reasoning to insist that penalties relating to the improper use of motor-vehicles should be seen as a regular cost of road infrastructure. By this reasoning, the most egregious offenders are paying too much for roads. It would be like saying that kids that get fined for drinking in parks are covering the cost of their park use.

Beyond these smaller issues, one of the core assumptions of the study, that 100% of fuel tax revenues should be earmarked for road costs, is suspect. There are many other costs directly related to having motor-vehicle fuels readily available.

The most crucial shortcoming of the Conference Board’s report is the persistently thorny issue of externalities. The study gives token attention to externalities, but does not attempt to provide any total estimates for externality costs related to road use (though they provide vehicle-kilometer-travelled estimates). The press release claims, “research evidence on [social costs] was examined, and typical estimates of the external components of congestion, accidents and emissions would not change the conclusions of the calculations radically.”

Oh really?

The Conference Board’s report estimates that the costs of air pollution and greenhouse gases to be 2.5 cents per vehicle-kilometer-travelled. Based on an estimate of 127 trillion (!) vehicle-kilometers-travelled from the Ontario Ministry of Transportation for 2009, that comes out to a cost of $3.14 billion. And that’s just for air pollution and GHGs. This doesn’t include any of the other environmental issues that could be associated with road transportation (and hence, might be reasonably expected to be paid for with revenues from fuel taxes), such as chemical spills, or the production of fuel for transportation use, vehicle production and disposal, or the environmental costs of maintenance and operations. Even if we take the suspiciously high road-recovery estimate of 86.7% for 2008 as our starting point, adding another $3.14 billion in costs drops that down to 64.4%. Pretty radical. And again, that’s just by adding air pollution and GHGs.

The leading social or external costs of motor-vehicle use are accidents. The estimates for accident costs don’t differentiate between internal costs (like insurance premium costs, and out-of-pockets costs) that are incurred by the user, or external costs that are incurred by the social system (like the costs of health care for accident victims), but in total they come out to be $8.8 billion. (One study‘s medium-range estimate pegs the total social costs of motor-vehicle accidents in Ontario at $17.9 billion). The same study estimates the cost in 2004 of health care, extra policing, ambulance and fire response, and court cases related to motor-vehicle accidents to be $341.2 million. It is not clear how much of the rest of accident-related costs are ultimately covered by tax dollars (such as property damage). It’s also telling that the Conference Board’s report treats accident costs as either individual costs or “in-between” costs, the latter of which are costs “that a group of users of a common good or service impose upon each other but not on the rest of society.” As if public property has never been damaged in an motor-vehicle accident or a pedestrian has never been killed by a car.

Congestion costs are estimated at another $2.5 billion. The Conference Board argues that congestion costs are internal to motor-vehicle users, but this is not the case, as non-drivers still have to put up with the noise, added pollution, and inconvenience of intense traffic, especially if they live on heavily trafficked streets.

It’s also misleading to think of many of these costs as externalities, since they are already internalized by the social system, such as the health costs for dealing with respiratory illnesses caused by air pollution, or the cost of ambulance and fire response in the case of accidents.

In any case, the contention that externalities would not change the conclusions radically is preposterous. Of course, the stated purpose of the study is to focus exclusively on road-recovery costs. But therein lies the speciousness of the study. To speciously isolate road costs from all the other costs associated with driving is what allows policy makers and drivers alike underestimate or ignore the real costs of motor-vehicle transportation.

The standard argument for road-infrastructure systems is that they are necessary for the economy. People have to get to work and goods have to get to market. But it is possible to imagine alternate transportation systems equally capable of accomplishing such things that don’t involve, for example, individuals driving by themselves in large multi-passenger combustion engine vehicles. But such alternatives are notoriously difficult to compare in terms of “economic benefits” because they involve re-imagining entire socio-technological systems. It is not possible to measure an independent transportation system against a static background of other infrastructure. Cars are convenient for driving on massive highways and getting to suburbs. Massive highways and suburbs need not exist. In short, “economic benefits” are path dependent. (Though none of this is to say that we couldn’t be doing a lot better on our given path).

Most crucially, the core difficulty in deducing the “economic benefits” of radically different socio-technological systems is in estimating what might be called “opportunity costs.” Building massive road infrastructure eliminates the possibility that the land could have been used for something else. The land used for parking lots and roads could have been used for something with a higher revenue-generating capacity. But even this operates within a taken-for-granted economic paradigm. Estimating opportunity costs are essentially intangible, because the possibilities are endless, and the possibilities are variably valued. To use public land in a particular way is to value that use. A parking spot might be worth tens of thousands of dollars a year to one person, but virtually worthless to another. This is what this kind of reductionist cost analysis (and economics in general) will always fail to account for. Thus, even if motorists did pay for the costs of their driving (which, contrary to what the study suggests, they don’t even come close), this in itself cannot be a justification or validation of our current transportation system.


One thought on “The Conference Board of Canada Greatly Overestimates the Degree to which Drivers Cover Road Costs

  1. Thanks for this; the studies conclusions seemed flawed at the outset, but unfortunately most people have been buying into the headlines. I was just listening to talk radio slamming the subsidization of public transit based on this study. I went looking for clarity and found it on your blog. Thanks again.

    Like

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