The serpent in the lobby

Click to learn more about the Forum
Click to learn more about the Forum

The most powerful man in the world is a gun-toting gay immigrant tobacconist married to a feminist oil executive receiving welfare benefits. He makes, modifies and abrogates laws with an ease that most politicians would envy, apart of course from the ones he pays to do his dirty business for him.

At least that’s the impression you could get from reading the press and seeing how often, and in what way, the word “lobby” is used. Generally, it’s in relation to undue influence on government decision-making, and the lobby or lobbyist is presented as inherently suspicious. Here’s a typical example from the UK’s Daily Mail: “The Frankenfood Conspiracy: Secret summit where slick lobbyists for bio-tech giants seduced Tory Ministers into changing their tune on GM food”. Even when the tone is more measured, lobbying is still implicitly pejorative.  Here’s another UK paper, the Daily Telegraph: “The BBC is biased toward the pro-immigration lobby while ignoring those with opposing views, a study has claimed”. One side of the debate is a pro-immigration lobby. The other is not an anti-immigration lobby, but a much more human, reasonable and objective-sounding  group of people with views.

There’s nothing new about this negative perception of lobbying. A 19th century edition of the Oxford English Dictionary gave this wonderfully ambiguous quote to illustrate the meaning: “What is known as lobbying by no means implies in all cases the use of money to affect legislation.” Lobbying has been a feature of US political life almost from the start, and in the 1860s, one paper wrote: “…winding in and out through the long, devious basement passage, crawling through the corridors, trailing its slimy length from gallery to committee room, at last it lies stretched at full length on the floor of Congress – this dazzling reptile, this huge, scaly serpent of the lobby.”

Whatever the semiotics, it’s obvious that lobbying has a poor reputation, made worse by the regular scandals associated with the practice, and by evidence that if you spend enough money, you can get policy made in your interest rather than for the public good. An IMF working paper established a link between extensive lobbying by firms in the financial, real estate and insurance sectors and high-risk lending practices. The IMF concluded that “prevention of future crises might require weakening political influence of the financial industry and closer monitoring of lobbying activities to understand the incentives better”.

Lobbyists themselves are aware of their poor image and many would like to see changes, according to an OECD survey of lobbying professionals published in Lobbyists, Governments and Public Trust, Volume 2: Promoting Integrity through Self-regulation. (Volume 1 reviews country experiences with government regulations designed to increase scrutiny). The type of information lobbyists believe should be disclosed includes the name of client and employer, issues lobbied and contributions. The majority of lobbyists surveyed supported mandatory disclosure of information. On the other hand, only around 5% of lobbyists thought that “overall lobbyist expenditure” should be disclosed.

Based on comparative reviews, country case studies and an analytical framework endorsed by governments, the OECD developed 10 Principles to guide decision makers regarding transparency and accountability in lobbying and to “support a level playing field in developing public policies”. On reading these I was reminded of a meeting at the OECD Forum last month where a speaker whose job was to campaign for health care reform mentioned that she was an “advocate” and not a “lobbyist”. It’s not surprising then that people involved in lobbying often prefer to describe themselves in some other way, so among other things, the Principles state that “Countries should clearly define the terms ‘lobbying’ and ‘lobbyist’ when they consider or develop rules and guidelines on lobbying”.

The meeting of the OECD Council at Ministerial Level that followed the Forum requested a “forward-looking Agenda on Trust to support an open, balanced and informed public decision-making process”. The first steps are already being taken. Today and tomorrow, the OECD’s Forum on Transparency and Integrity in Lobbying  is bringing together high level government officials and representatives from the private sector and civil society to discuss lessons learned from their experiences in designing and implementing rules and guidelines on lobbying.

Lobbyists can provide valuable data and insights. But the rest of us have the right to know who they’re getting their data and insights from and who is paying them to present information and opinion to government officials and other public employees.

Useful links

OECD work on fighting corruption in the public sector

School’s out, but what’s next?

Click to read the book
Click to read Education at a Glance 2013

Over the past few weeks, many young people walked through the doors of high schools and universities for the last time. For some, the next steps of their journey are well mapped out – more education, an internship, maybe even a job. For others, things are far less clear.

Their uncertainty is underlined by the latest data on “NEETs” – young people not in employment, education or training – in OECD countries. On average in 2011 (the most recent year for which internationally comparable statistics are available),  around one in six young people between the ages of 15 and 29 fell into that category. In some OECD countries, the proportion rose to as high as one in three among people in their mid to late-20s.

These numbers appear in the latest edition of the OECD’s Education at a Glance, which paints a worrying picture of the job prospects of young people in the wake of the Great Recession. But it also underlines the continuing – and growing – importance of education as they make their way in the world.

Take the figures for joblessness. Between 2008 and 2011, unemployment among people with relatively little education rose by 3.8 percentage points in OECD countries. For graduates, however, it rose by less than half that, 1.5 points. As the OECD’s Andreas Schleicher told the Financial Times yesterday, “The crisis has amplified the value of a good education.”

He repeated that point during a Tweetchat earlier this evening that discussed the educational choices facing young people as well as how we can ensure that governments actually deliver that “good education”.

One early questioner wanted to know if the rising cost of education meant it was still worth pursuing a college degree. That brought a response that regular readers here won’t find too surprising: “Yes, costs have increased, but the returns have increased even faster.” (If you want to see the numbers, turn to page 100.)

As we’ve discussed before on the blog, rising college costs are also leading many to wonder if higher education won’t rely increasingly in the future on Massive Open Online Courses – MOOCS. Andreas clearly thinks it will: “MOOCs will play an important role in the future provision of higher education, we’d better get ready for it!”

Turning to the wider world of education, Nick von Behr was concerned about teacher quality, and asked “how much should an OECD country monitor the quantity and quality of teacher training?” Andreas echoed the importance of this issue: “Our data shows huge variability in the performance of students even within schools. Evaluating teaching has a lot of promise.”

Rajagopal CV wanted to know if the OECD had “any tips or magic wand to make teaching the most sought-after work”. One answer, he was told, was to look to Finland, which gets nine applicants for each teaching post and “provides good career perspectives, great teacher collaboration, good professional development”.

And at a time of budget pressure, a number of questioners asked about education financing. The good news, said Andreas, is that “so far most countries have protected education spending well, even in crisis”. But he stressed that what mattered more was not the absolute size of education budgets but “ how you invest yr money”. In that context, he believes, the quality of teachers matters more than the size of classes.


Useful links

OECD work on education

OECD educationtoday blog

Getting Rid of “Responsible” from “Responsible Business Conduct”

Global Forum Business Conduct
Click to go to the Forum website

Today’s post is by Bhaskar Chakravorti Senior Associate Dean for International Business & Finance at The Fletcher School, Tufts University, and founding Executive Director of Fletcher’s Institute for Business in the Global Context. He is the author of “The Slow Pace of Fast Change.”

Today’s OECD Global Forum on Responsible Business Conduct comes not a minute too soon, with far too many recent examples of irresponsible – and, in many cases, criminal conduct – in international business. There is reason to worry that such problems will worsen as the center of gravity of the world’s economic activity moves towards the developing nations, since the necessary institutions and the context within which global business operates have not had the time to catch up with the rapid market changes. For this reason, business must take on a disproportionate share of responsibility to compensate for the missing institutions.

Of course, simply putting people together in a room will not resolve all issues. But we can make a start. I am particularly excited about the fact that I have the privilege of moderating a discussion with leaders representing multiple stakeholder groups during the opening plenary. We can help establish a tone for the Forum.

One of the themes I would like to explore is how to make the “responsible” adjective in the term “responsible business conduct” redundant. Responsibility is a rather loaded term. It suggests that decision-makers in the business world want to conduct themselves in one way, while responsible business conduct would require something quite different.

You cannot scold, regulate, punish and nag your way to responsible conduct. It has to become part and parcel of regular business practices. This means that everything that comes under the label of “responsibility” is compatible with the natural incentive systems that drive managerial conduct. I see four developments that might offer clues on how to make responsible conduct compatible with managerial incentives.

Environmental, Social and Governance Investing (ESG) Criteria and Shareholder Activism. To understand what drives business conduct, follow the money. What if money were not to follow you if you deviate from responsible conduct? ESG investing aims to do precisely that. Beginning with the churches in the 1920s that excluded “sin stocks”, ESG compliant portfolio managers screen companies that do not meet certain environmental, social and governance criteria. This can make a difference to the conduct of managers.

In addition, and perhaps even more significantly, such investors also engage in shareholder activism that has a significant impact on executive decisions. But this also requires a larger body of clients who demand such criteria from their portfolio managers.

At least $13.6 trillion of assets under management incorporate ESG concerns into their investment selection and management, according to the Global Sustainable Investment Review 2012, representing 21.8% of the total assets under management in the regions covered.  In addition to religious institutions, there are other major investors, such as state pension funds and corporations, who have an interest in growing this form of investing.

Creating Shared Value. This approach focuses on areas where responsible conduct can help in growing the pie rather than asking managers to consider a zero-sum situation between business interests and those of other stakeholders. Michael Porter of Harvard Business School argues that this can be accomplished by re-conceiving products and markets, reconfiguring value chains, enabling local cluster development. These notions take on a particularly crucial role in the emerging markets where many key institutions are missing or have not kept pace with market growth.

Tailored products and helping to fill gaps in the context can clearly contribute to longer-term value creation despite the near term costs, and provide incentives to managers who take a longer view. The challenge is that most managers have been schooled in Porter’s earlier framework of the Five Forces model, which places a high premium on playing in industries where managers can optimize on their negotiating power. This is based on a static concept of industries and markets and has more of a zero-sum connotation. So I am glad Professor Porter is taking the lead in dismantling a framework – ill-suited for dynamic market contexts – that he had originally created.

Rewards for Optimizing Needs of Multiple Stakeholders. Good managers inherently manage competing demands from several parties and take pride in setting priorities and making trade-offs. Many managers and executives often start out as entrepreneurs primarily motivated by a “purpose” that extends well beyond profit. These inherent traits of many managers tend to remain under-utilized and under-rewarded. Reminding managers of such inherently powerful motivators and reinforcing the mindset can prove to be a powerful incentive to look beyond the demands of shareholders or the analyst on Wall Street – and consider the needs of other stakeholders: employees, consumers, the environment, advocacy groups, the market ecosystem, etc.

It is extremely important to get enough of a community of peers to come together around such a notion to enhance managerial motivation. But most critically, such an initiative has to be led from the very top of the corporate hierarchy and must be consistently applied to the managerial rewards systems affecting decision-makers at every layer. It cannot work if the CEO says one thing in public and then goes back to the line management and simply rewards them for “making their quarterly numbers.”

CEOs can take comfort in the analysis by Raj Sisodia of Babson college that 18 such publicly traded companies out of the 28 he studied outperformed the S&P 500 index by a factor of 10.5 over 1996-2011. Sisodia and Whole Foods’ founder, John Mackey has now started encouraging a community of such peers to gather as “conscious capitalists”.

Legislating CSR. Finally, another way to align managerial incentives with responsible business conduct is by simply requiring it by law. India might become the first country to have mandatory CSR: a Bill in the Parliament requires companies above a certain size to ensure that they spend at least 2% of annual profits on CSR activities. It is hard to tell how productive such a measure might be, but it offers an opportunity for the wider international community to observe and learn from an experiment in taking a blunt instrument approach to the problem.

We are in effect coming to the realization that singling out responsible conduct can set it outside the realm of business-as-usual. Paradoxically, the way to ensure more responsible outcomes, may be to aspire to the day when we do away with the notion of responsible business conduct. For it to be a reality we must create mechanisms and incentives that produce a larger overlap between responsible business conduct and plain, unadorned business conduct.

Useful links

Inaugural Address by Her Excellency Dr. Dipu Moni, Foreign Minister of Bangladesh, at the OECD Global Forum on Responsible Business Conduct (pdf)

OECD Guidelines for Multinational Enterprises

OECD Policy Framework for Investment User’s Toolkit

Eurasia: The Silk Road to Competitiveness

Leveraging their comparative advantage
Leveraging their comparative advantage

Today’s post is by Antonio Somma and Vanessa Vallée of the OECD Global Relations Secretariat’s Private Sector Development Division

Seen from a sweltering hotel lobby surrounded by palm trees, the view could be considered somewhat surprising. Turquoise beach? Sand covered surfers? No, try a snow swept tundra and ultra modern skyscrapers plated with 10-story TV screens. We’re in Astana, Kazakhstan and it’s February. Welcome to today’s Eurasia, land of contrasts.

Twenty-five years ago the story was different.  Most of the thirteen economies of Eurasia taking part in the OECD Eurasia Competitiveness Programme shared the same Soviet institutions which kept a lid on economic, political and social differences. Today the lid is off and divergences between countries are growing as they race to find a place in the global economy. Take the income gap:  In 1990, average GDP per capita for the region was $4670 USD with the richest country four times better off than the poorest. By 2010, the gap had widened to almost seven times (if Afghanistan is excluded) between the region’s growth leader, Belarus, and Tajikistan.

Some had an initial advantage, with countries like Kazakhstan, Azerbaijan, Uzbekistan and Turkmenistan possessing significant oil/gas and mineral reserves that are profitably feeding a voracious world market. However, the resource blessing could turn into a curse and compromise long-term prosperity if countries do not diversify and find new sources of growth.

Other Eurasia countries have had to find alternate paths to economic development.  Economies like Ukraine and Belarus have leveraged existing capabilities inherited from Soviet times such as a strong industrial base and a scientific tradition to become significant players in chemicals, aviation, machinery and IT programming.  Georgia has been named one of the world’s top business climate reformers after jumping from 112th to 9th place in only eight years (2005-2013) and after major achievements in e-government is now leading on the use of smart phone apps for m-government. Yet despite its strong performance on reform, Georgia’s GDP per capita trails the regional average by almost forty percent. And many of the region’s entrepreneurs are still struggling to attract needed investment and financing.

Differences notwithstanding, the countries from the region share a host of common comparative advantages:  almost universal literacy rates, proximity to major markets such as China, the EU, Turkey and Russia, and a willingness to accept new ways of living and working thanks to centuries of ethnic diversity. Today’s diverse Eurasia is poised to become a new frontier for economic opportunity but the challenge remains of how to tap all of its countries’ potential.

Eurasian governments have requested the OECD’s support in analysing their economies and proposing concrete solutions to help them diversify, increase productivity, and link up to global value chains. This is all the more relevant today as Russia – a major trading partner for the region – is in talks with the OECD about accession. It is in the interest of all to bring economies of the region up to global standards in areas like business conduct, taxation, investment and government regulation.

At the end of this month, leaders from Eurasia will launch a new initiative to collectively track progress on competitiveness reform in the region. While experience shows that applying OECD recommendations can help to establish confidence in an economy, this is no guarantee of success. However, the fact that these countries are planning to implement the peer review process shows they are aware that there is a lot to learn from each other. This is perhaps the key for Eurasia to find its own unique path to growth and prosperity.

Useful links

The OECD Eurasia Competitiveness Programme 2013 Ministerial Conference “Implementing Policies for Competitiveness in the Eurasia Region”, will take place in Warsaw on 27-28 June co-hosted by the government of Poland and the OECD.  Follow it on Twitter https://twitter.com/OECD_psd and via #eurasia2013.

Industrial policies for development: It’s more than you think

Click to find out more
Click to find out more

Today’s post is by Anne-Lise Prigent, the editor in charge of development publications at OECD Publishing.

It was a dirty word. Not something to boast about. Yet it was widely practiced, even by its harshest critics. Industrial policy is now back it seems – unless, as Stiglitz says, it never really left. The third edition of Perspectives on Global Development from the OECD Development Centre demystifies industrial policies. Does this edition live up to the outstanding standards set by the first two? Yes, and it should prove just as useful too.

As Cambridge professor Ha Joon Chang puts it: this “landmark publication… shows a supreme degree of pragmatism”. It “looks for ways to make industrial policy work better, rather than having an ideological debate on whether it exists and whether it can ever succeed. It is an excellent example of how that exploration may be conducted in an intelligent, well-informed and balanced way”.

That is not to say that this book paints a rosy, unrealistic picture of industrial policies. Countries have used industrial policies with more or less success and this report does not only look at successes, it also draws lessons from failures. Nimrod Zalk (Department of Trade and Industry, South Africa) will probably not be the only policy maker to consider that the book’s checklist of pitfalls is very useful. These range from indiscriminate subsidies and never-ending support, to short-termism, lack of monitoring and evaluation, preventing competition, and closed-door bureaucracy-led prioritization.

What are industrial policies really about? Their definition tends to be broad nowadays. It includes both innovation, infrastructure and skills policies as well as targeted interventions boosting a specific sector,  activity or cluster. And it is not only about  manufacturing, it’s also about high value added activities in agriculture and services (Beyond Industrial Policy).

In the context of developing economies, industrial policies imply “targeted government actions aimed at supporting production transformation that increases productivity, fosters the generation of backward and forward linkages, improves domestic capabilities and creates more and better jobs”.

Industrial policies are not necessarily easy to put in place. The risk of failure is high. But as Ha Joon Chang points out, the fact that something is difficult cannot be a reason not to recommend it. Countries, like individuals, learn by doing, so “without trying out ‘difficult’ policies, like industrial policies, capabilities cannot be improved”.

Why should developing countries turn to industrial policies now? Is it because of the crisis? In fact, countries like Brazil and Morocco started to design and implement industrial policies before 2007. There has been a deep, structural shift of the world’s economic centre of gravity towards Asia and the South which brings tremendous opportunities – and challenges – for developing countries. Today, the combined GDP of China and India amounts to one-third of that of the OECD area and it should outstrip it by 2060. Asian economies are increasingly integrated with China through supply chains. And China, India and Brazil have emerged as new partners for Africa. South-South trade and investment are on the rise.

The geography of production and innovation is changing. Like never before, new forms of FDI and the offshoring of high-value-added activities open up opportunities for learning, innovation and entering into new activities and sectors. At the same time, rising “middle classes” mean new consumer markets – by 2030, 80% of the world’s middle classes will be living in developing countries. And all this is happening in a context of intensified competition where innovation is essential.

Countries now try to diversify, enter new sectors or activities and thus upgrade domestic production. For example, Brazil, China, India and South Africa are using sectoral technology funds and public procurement to promote innovation. Brazil, Morocco and India are using FDI to foster innovation and industrial upgrading. They promote new forms of linkages between multinational companies (MNCs) and local firms to increase spillovers to the domestic economy.

21st century industrial policies will be agile, responding to change will be key. They will be iterative: countries need to be able to reorient actions when goals are not achieved. And interactive: industrial policies are about people and (territorial) inclusion. Dialogue with partners, the private sector and among peers will also be essential to share knowledge and make progress. For example, national development banks are regaining ground as key partners in strategy setting (Brazil) and in promoting greener development  (e.g., special schemes to finance green technologies  in South Africa).

Industrial policies require a high level of co-ordination and sequencing of actions in several fields such as skills, finance and infrastructure. Investing in more and better skills is not enough, skills mismatches should be reduced. Increasing access to finance for companies to invest in innovation and production development  will be essential. This is especially true for SMEs that only received around 11% of total credit in Africa and the Middle East, less than 13% in Latin America and less than 20% in Southeast Asia, compared with nearly 25% in OECD countries. And infrastructure gaps can jeopardize the efforts of  domestic companies to become more competitive. About 60% of the world’s infrastructure stock is located in high-income countries, 28% in middle-income countries and 12% in low-income countries.

Industrial policies are highly specific to country and time. Like a well-adjusted bow, they should match each country’s development level and aim at the right targets – neither too high nor too low in the value chain, building on comparative advantage without being a slave to it. China for example has a comparative advantage in manufacturing, yet one-third of the value added of its exports originates from services. Indeed, catching-up stories suggest that economic development comes with changes in specialisation and trade patterns and with growing innovation capabilities. Finland, Korea and China are cases in point.

Industrial policies help accumulate capacities and know-how. They are about making strategic choices to address long-term structural issues and setting the conditions for business to prosper. To take off, they require political leadership, well-functioning institutions and empowered regional governments. Not meddling governments, myopic bureaucracy and cramping markets. No, as Shakespeare said, “ambition should be made of sterner stuff”.

Useful links

OECD Development Centre

When you are old and grey and full of sleep

A good life in old ageThe hardest job I ever had was as a nursing assistant in a psychiatric hospital. On a typical shift, five or six of us would look after 60 patients or more. This was the usual staff:patient ratio throughout the establishment, except in the section for the “criminally insane”. In such conditions, the care philosophy was brutally simple. As a colleague explained on my first day, “If they move, we give them drugs. If they don’t move, we give them electric shocks”.

The hospital had been built as a lunatic asylum in the 19th century, on a moor that was miles from the nearest village. It looked exactly as you’d expect: a grim fortress with bars on the windows and locks on the doors. Our job wasn’t really to look after our patients, we looked at them to make sure there was the same number at the end of the day as at the start.

Except in the geriatric ward where I worked for a few months. Many of the patients were bedridden, and the nurses took great pride in the fact that not one of them ever got a bed sore. We even healed some horrific wounds that had become gangrenous. Some of the people I met there made me realise that in calling their institutions “asylums”, the Victorians were stressing something positive. An asylum is a place of refuge, maybe a last resort, and some of our men (the regular staff always called them “our men”, never our patients, inmates, cases, clients…) had nowhere else to go.

One man had lived on the road for nearly 30 years, making sure he got sent to prison for the winter until finally a magistrate told him he was too feeble to look after himself. The only place that would take him was the psychiatric hospital. Another man was paralysed by Parkinson’s disease and his wife couldn’t cope. A third had spent his whole life locked up after being abandoned as a baby because he had Down syndrome.

The majority of the men had a combination of psychiatric and other conditions – Alzheimer’s, alcoholism, schizophrenia, various degrees of paralysis, and so on. What they had in common was the need for the long-term care the hospital provided. It’s a need that’s going to grow, with the number of people aged over 80 in OECD countries doubling between now and 2050. The share of the over-80s will rise from 3.9% of the population now to 9.1% in 2050, and from 4.7% to 11.3% in the EU-27.

The OECD and the European Commission have just produced a report on monitoring and improving quality in long-term care. If you’re worried about growing old, A Good Life in Old Age? will do nothing to reassure you. “…at least one in two people admitted to hospital from a care home setting are at risk of malnutrition… at least 30% of older people in acute hospitals and 40% of older people in care homes meet the clinical criteria for a diagnosis of depression… There is no sign of a consistent decline in the incidence of physical restraint use… two-thirds of LTC [long-term care] users in institutions were exposed to one or more medication errors… one old person dies due to a fall every five hours… Pressure ulcers are known to affect a large number of LTC recipients in nursing homes…”.

So, what can be done, other than head north to cast yourself adrift on an ice floe before global warming melts them all? A Good Life in Old Age? suggests a combination of regulation; standardization and monitoring; and incentives for providers and choice for consumers. However, most countries do not collect information on quality systematically, and if they do, their efforts are limited to information on aspects such as staffing and the care environment, what the report calls “inputs” rather than the outcomes for the person’s health and well-being.

The OECD and EU are right about the importance of attitudes and behaviours in the quality of care, even if they use the hideous expression “leveraging consumer choice and centeredness” to say so. Apart from depression, I never came across any of the issues listed above, because the people I worked with were “consumer centred” even if the consumers in question had no choice.

That experience convinced me that it’s possible to provide quality care even in a highly unfavourable setting. The OECD-EU report suggests that there are plenty of solutions to help do so now and in the future.

Useful links  

OECD work on long-term care

OECD work on health

Avoiding death by diesel

One for each lung
One for each lung

Today’s post is by  Simon Upton, head of the OECD Environment Directorate, founder and Chair of the Round Table on Sustainable Development, and former New Zealand environment minister.

If I proposed the building of a large industrial enterprise that would lead to the early death of around 40,000 people, I strongly doubt that the idea would survive the evening news.  Yet air pollution from diesel-fuelled road transport kills an estimated 40,000 people a year in France – that’s roughly ten times the number of people who die in road accidents.  Unlike a large, easy-to-target industrial plant, the culprits are millions of mobile combustion sites that whiz around carrying the very people who would oppose my large plant.

At global, regional and national levels, air pollution poses a major challenge to public health.  The OECD’s Environmental Outlook to 2050 projects that between now and 2050, the number of people who die globally from exposure to particulates will more than double from 1.5 million to 3.5 million. Not all of that can be attributed to road transport emissions. But it is a very significant contributor and is getting worse in emerging economies too as rising affluence brings with it increased personal mobility.

Increased mortality also carries a heavy economic cost.  That’s obvious just from anecdotes.  It cannot be good for Beijing’s economy that significant numbers of highly skilled people want to leave or not come there in the first place because of the risk air pollution poses, particularly to their children who are growing up in a soup of particulate and noxious gases.  But these economic costs are quantifiable and they are serious in most developed economies.

One of the tools used to quantify costs is the Valuation of Statistical Life (VSL) which puts a cash value on a human life. Many people don’t like politicians quantifying life or death trade-offs in monetary terms.  However, not making such judgments doesn’t avoid the trade-offs – it just hides them from view. An OECD meta-analysis of VSL estimates suggests a figure of €3.5 million per statistical life in the EU27 for example. This is higher than the €1 or €2 million used by the EU Commission in analyses of policies to limit air pollution, and implies that some policies excluded by the EU may in fact be cost-effective.

How could policy interventions be improved so as to reduce air pollution from road transport and improve human health?

First, apply the policy instruments as close as possible to the problem you are trying to tackle.  For CO2 emissions, the policy instrument of choice is a tax related to the carbon content of the fuel since CO2 emissions are directly linked with that carbon content. For NOx and other exhaust pipe pollutants, the link with the amount of fuel used is not so direct.  The way the vehicle is driven and the type of engine technology is determinant.  Similarly, noise and congestion are not directly linked to fuel-use.  For all these social costs, the ideal policy instrument is road user charges that vary with the place and time of driving, and with the environmental characteristics of the vehicles.

For local air pollutants, any charging or taxing regime should use real world emissions measures, not artificially optimistic test scenarios.  There is a large and widening gap between the emissions standards that countries are imposing and emissions under normal driving conditions. There may have been no real improvement in NOx emissions from diesel vehicles in European countries since the mid-1990s and while there has been some reduction in particulates emissions, there has been an increase in the amount of NO2 from diesel vehicles.

Almost all OECD countries apply much lower tax rates on diesel fuel than on petrol.  There is no conceivable environmental justification for this.  Diesel is responsible for more local air pollutants such as NOx and PM than gasoline – although volatile organic compound (VOC)  emissions from petrol-driven vehicles also can contribute to smog problems in some places. On the CO2 score, diesel is also more polluting, causing higher emissions per litre fuel than petrol.  The fact that you can drive further on a litre of diesel than a litre of gasoline means the benefits of the greater fuel efficiency are entirely captured by the private driver.  And to the extent that high fuel efficiency makes driving cheaper, there is an incentive to drive further – and there is evidence that this tends to be the case with the result that CO2 emissions are not reduced.

An increasing number of cities apply congestion charges, but nationwide road-charging systems are only used in Switzerland, and only for heavy goods vehicles. Some countries have motorway charging systems for heavy goods vehicles that include environmental components, and France and Italy for instance have infrastructure funding systems for all vehicles on their motorways. Given that coverage is partial, traffic can simply divert to non-charged routes, thus redistributing the environmental load.

If the current patchwork quilt of measures is far from ideal, how in a pragmatic way might it be improved?  If a road pricing system is deemed unfeasible for the present, the best approach would be to maintain the current system of fuel taxes but announce the gradual phase-in of a significant increase in tax rates on diesel fuel. After, say, 7-10 years, there would be a significantly higher tax on diesel than on petrol.  Such a timeframe would give both car owners and manufacturers time for the stock of vehicles to turn over to reflect the new pollution priorities.

In principle this could meet the bulk of the pollution reduction objectives that worry people.  If taxes on motor vehicles were maintained – say for fiscal reasons – then it would make sense to take account of local air pollutants in the calculation of tax rates, as Israel has done.

Finally, any package of measures should involve a revision of emission standards to better reflect real-world driving.

Useful links

Simon Upton was one of the key speakers at the EU’s Green Week conference held in Brussels on 4-7 June

OECD work on the environment

Economic evaluation of health impacts due to road traffic-related air pollution: An impact assessment project of Austria, France and Switzerland