Computable general equilibrium models and their use for transport policy analysis

Changes in transport policy and investment in transport infrastructure have in general important implications for the government budget, and also important income distributional consequences. In countries like Denmark, due to high marginal rates of taxation, raising government revenue and re-distributing income is associated with substantial costs, both distortionary costs and administrative costs; it is therefore important in the context of evaluating transport projects to take these effects into account. Using the methods, which have traditionally been used for transport policy analysis, it is difficult to assess correctly these essentially general equilibrium effects. However, in recent years advances in the theory and practice of Computable General Equilibrium (CGE) modeling have considerably facilitated the quantification of general equilibrium effects. It is therefore pertinent and timely to consider whether in the context of transport policy analyses the importance of being able to evaluate general equilibrium effects can justify the added complication of using general equilibrium rather than partial equilibrium approaches. This report addresses this question. It presents a methodology for CGE based policy analysis, identifies the appropriate theoretical framework for the use of the methodology for transport policy analysis, and provides a concrete example of its use, assessing, based on stylized assumptions, the consequences of the introduction of road pricing. The example clearly illustrates that in evaluating changes in transport policy, it is not only the direct effect on the traffic and related effects on pollution, road congestion and accidents which are important, but also the effect on the tax base, mainly through the effect on the labour supply, and the income distributional effects. On this basis the report concludes that using CGE models for transport policy analysis is likely to be associated with considerable benefits, and thus should be further explored.