What is road pricing?

It's some way off, but Britain is set to be the first country to adopt road pricing to tackle congestion. What does this mean for drivers and for business?

Is congestion really that bad?

Yes, and it costs UK business £20bn a year, according to CBI figures. Traffic levels in Britain have jumped 11.4% since 1997, and last year topped 500 billion vehicle-kilometres for the first time nearly twice as much traffic as in 1980. In some ways, a marked increased in vehicle use is an encouraging sign of a healthy economy. Official figures show that vehicle-kilometres surged during the late 1980s boom and in the long period of expansion since the mid-1990s. During the economic slowdowns of the early 1990s and the early 1980s, on the other hand, vehicle use remained static, or grew much more slowly.

However, as Britain becomes richer, its road system has reached saturation point putting future economic growth at risk. To give the present Labour government credit, it spotted this some time ago. In 1998, John Prescott remarked that the new government would have failed if it didn't cut road traffic. Sadly, this hasn't happened. Since 1997, the biggest increase has been on the motorway network vital to UK businesses of all sizes where traffic is up 19%.

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So what has the Government announced?

A nationwide system of road pricing, in place by 2016, where motorists pay per mile to drive on public roads, with the price varying according to the road and the time of day. Last month, new transport secretary Douglas Alexander announced £10m of new funding to help private-sector firms develop the technology that local authorities will need to run the system. A further £7m is already being spent on trials in seven cities. The plan is to have a large-scale pilot scheme running within five years, for which £200m will be available by 2008-2009, before rolling out the scheme nationwide. If adopted, this would make Britain the first big country in the world to use road pricing to tackle road congestion. The tiny city state of Singapore started a tolling scheme in 1975, and there are limited congestion charging systems in Melbourne, Toronto, and Trondheim in Norway. But there is no comparable system anywhere in the world.

How will it work?

The Government's initial study proposes a graduated scale of charges, depending on when and where a journey takes place. Using a system of satellite tracking, a central computer system will keep a record of every journey made by every vehicle. In the middle of the night on a country road, the motorist would pay the lowest rate of 2.4p a mile, or even nothing, while at peak periods on the M25 they would pay the maximum levy of £1.34. According to the study, only 0.5% of all traffic would qualify for the highest rate. The RAC has called for an independent body to set the prices, on the model of the Bank of England's monetary policy committee which sets interest rates independent of the Treasury.

What is the economic case for road pricing?

In market theory, traffic congestion can be seen as a cost like any other and it's not the only cost driving imposes on others. Every journey we make increases congestion, local pollution, the emission of greenhouse gases and the risk of accidents for other people. A pricing scheme that charges more to travel at the peak times and on popular roads would encourage drivers making less pressing journeys to avoid busy periods and routes cutting congestion for everyone. The evidence from London's flat-rate (£8 per day) congestion charge is that financial incentives work and that even a small response from drivers can greatly improve traffic flow. There, a 15% reduction in actual journeys reduced delays by 30%. Although some smaller retailers inside the congestion zone say business has suffered, the cut in congestion provides an overall boost to the economy, making essential business travel and the movement of goods easier and more predictable. According to the Government study, the changes in driver behaviour resulting from its pricing scheme would cut congestion by half and produce savings of £12bn a year. Arguably, road-pricing is also progressive fairer than a flat-rate tax, such as the vehicle licence since the rich drive more than the poor.

So will fuel tax be slashed?

Unlikely. Many motorists hate the idea of road pricing and it would be politically tempting to cut fuel taxes in an effort to placate them. But that's far from guaranteed. The Government has been careful not to promise that the new road-pricing system will be "fiscally neutral". It's almost certain that the existing road tax would be scrapped, but some proponents of road pricing argue that it would be wrong to cut fuel duty, since it serves a different purpose. Taxes on fuel, they argue, give drivers an incentive to avoid creating pollution as opposed to road pricing, which encourages them to avoid congestion.

What technology will be used?

It's too early to say which specific companies stand to benefit directly from the UK's planned move towards road pricing. However, the Government has made it clear that while it is spending money on developing technical models, its basic strategy is to piggy-back' on existing technologies. When road pricing is adopted, the basic technology is likely to be a variant, or a combination of, two kinds of system already in development. The first is "tag and beacon", where cars carry a transmitter that is read by roadside or overhead sensors. The alternative is a satellite-based system based on the Global Positioning System, which tracks and records vehicle movements.