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Focus: Transportation Management

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From SCDigest's On-Target E-Magazine

March 9, 2011

Logistics News: GAO Tells Congress Freight Carriers, especially Trucking, are not Paying True Costs of Moving Goods


Government Investments and Especially "Social Costs" not being Paid by Carriers and Shippers, Report Says; Here Come Higher Diesel Taxes? A $126 Billion Gap


SCDigest Editorial Staff


Last week, the Government Accountability Office (GAO) issued testimony and a report to the Subcommittee on Select Revenue Measures under the House Ways and Means Committee that says that the US transportation industry generally, and trucking carriers specifically, are not paying the true full costs of moving the goods.

The report suggests that consumers in the end are the ones under-paying, as they should bear the ultimate full costs of delivering the freight, but the path to addressing this problem, if there is one, would clearly seem to be to pass higher costs directly on to shippers and carriers, which would then attempt to pass those added costs on to downstream customers.

SCDigest Says:

Taking the GAO cost estimate of a unpriced costs of $66,000 per million ton miles for trucking, that says there are total unpriced costs of about $126 billion that the GAO believes need to be more specifically paid for by the trucking industry. Ouch!
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The lengthy report was titled "A Comparison of the Costs of Road, Rail, and Waterways Freight Shipments That Are Not Passed on to Consumers," and was created at the direction of the subcommittee, which was looking to better understand if carriers were paying their fair shares of total costs.

As the report notes early on, the GAO estimates "that freight trucking costs that were not passed on to customers were at least 6 times greater than rail costs and at least 9 times greater than waterways costs per million ton miles of freight transport. Most of these costs were external costs imposed on society. In particular, the modes generate external costs related to accidents and pollution that are not reflected in prices. Furthermore, available data also indicate that at the national level, the infrastructure costs (both marginal and fixed) attributable to commercial freight transported by trucks and over waterways exceed the revenue that these freight transportation providers pay governments to fund that infrastructure."

The GAO calls these gaps between actual full costs and what the carriers now pay “unpriced costs,” and that of the three modes studied, trucking generates significantly more unpriced costs than does freight moved by rail or inland waterways.

The report and its conclusions are likely to generate some controversy, however, as the majority of these unpriced costs come in the form of social costs such as congestion and pollutants that are difficult to estimate and for which there may not be a broad consensus of the real impact.

The report broke costs incurred by government and society into three buckets:

• Fixed cost investments (primarily infrastructure projects)
• On-going costs (road resurfacing, for example)
• Social costs

The GAO estimates in total that $62,000 per million ton-miles of service in total unpriced freight trucking costs across these categories were not passed on to consumers or shippers. In contrast, freight rail and waterways services both imposed about $9,000 in unpriced costs per million ton–miles, respectively.

To put that in perspective, there about 2.04 million million freight ton miles for trucking in 2007 ("million million" is correct). So, taking the GAO cost estimate of a unpriced costs of $66,000 per million ton miles for trucking, that says there are total unpriced costs of about $126 billion that the GAO believes need to be more specifically paid for by the trucking industry. Ouch!

Distortion of Freight Mode Choices?

In addition to possible issues with the US budget and deficit, the GAO emphasizes that unpriced costs also distort competition and cause inefficient allocations of resources in the freight transportation sector.

(Transportation Management Article Continued Below)





The report uses the graphic shown below to illustrate this potential impact (assumes service is the same for all modes, not true of course but valid for this comparison).



In the first scenario, Mode B uses $125 in resources to ship the package; Mode A uses $100 in resources. In this case, price accurately reflects costs incurred to provide the freight service for both modes. Looking to minimize expenses, the shipper makes the logical decision and chooses the less expensive option (Mode A). The freight service provider represented by Mode A is rewarded for providing service more efficiently than the competitor, and the $25 of resources that otherwise would have been used if the product were shipped by Mode B can be used more efficiently in other ways to produce benefits for society.

In scenario 2, the government provides a subsidy to Mode B, enabling it to charge a price that is $50 below its marginal costs. As in the first scenario, the shipper selects the lower-priced option; however, in this case the subsidy results in the service being provided by the higher-cost producer. As a result, $25 of resources that otherwise could have been used to provide other societal benefits are not used efficiently.

The third scenario shows how external costs can distort competition and reduce economic efficiency in a manner similar to government subsidies. In this scenario, Mode B generates $50 in external costs that are not reflected in the price charged to the shipper. The fact that these costs are not passed on to the shipper makes Mode B more competitive than it would be if it had to include those costs in the price. Consequently, the shipper chooses Mode B, despite the fact that society bears $25 more in costs than if the other mode had provided the service.

Devil is in the Details

The report primarily relies on data from the 2000-2007 time frame, augmented by interviews with experts in the US Department of Transportation (DOT) and Environmental Protection Agency (EPA) as well as others inside and outside the government.

What is perhaps most interesting is the breakdown of the "unpriced" costs. The report says there are $66,000 in total "marginal costs" for the trucking industry, meaning costs associated with each mile of moving freight, offset by $11,000 in revenue coming to the government from taxes and fees.

However, of the $66,000 total costs, $59,000 are associated with "societal costs" - trucking taxes and fees actually exceed costs for road maintenance and such.

• $44,000 for pollution (using EPA estimates)
• $8000 for accidents
• $7000 for congestion

The report notes that the GAO estimate for the cost of pollution from trucks is probably understated as it is, and does not include costs for some other emissions that could be considered, including CO2.

The unpriced costs for trucking for fixed infrastructure investments for trucking are much lower - just $7000 per million ton miles. Together, the $55,000 in marginal unpriced costs and $7000 in unpriced fixed costs lead the $62,000 in total unpriced costs cited above.

The report's conclusion is that these unpriced costs lead both to general tax payers bearing a greater cost than they would if these costs were appropriately priced into the mode, and that as noted above it may be leading to distortions in modal usage and private and public investment.

It notes though there are complicating issues, including measurement of social costs, issues of "fairness," (say road development in rural areas), and challenges with how to price fixed investments in infrastructure.

The report also says that "Ideally, policy that is able to align marginal prices with marginal costs on a shipment-by-shipment basis would provide the greatest economic benefit. However, achieving this in practice would typically result in high administrative costs," and thus is not really practical.

The report was not really meant to provide a solution, only an analysis of the costs, but clearly the implication is thathat is needed are increases diesel fuel taxes and other fees, primarily for trucking, to cover this unpriced cost gap. Whether Congress would attempt to actually cross that chasm, especially when so a high percentage of the unpriced costs related to social costs, remains to be seen.

We expect this discussion is far from over.


What is your reaction to this GAO analysis? Is trucking not paying its fair share of total social costs? Do you think the sociall costs estimates are fair or should be used? How do you see this playing out? Let us know your thoughts at the Feedback button below.

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The report is reasonable. I think it should be used as a basis to increase cost on trucking. I would prefer fuel taxes as the primary means to increase Government revenue. This would be a huge stimulus to see US. Trucking embrace a move to natural gas which the US has plenty of vs. continuing to import foreign oil.
Michael R. Lowry