Internalizing External Costs of Transport with a Focus on Climate Change

From an economic perspective, the impacts of traffic noise, air pollution, or CO2 emissions are external effects as the emitter does not pay for the damages caused to others – especially to future generations. This paper focuses on current challenges in the transport sector to internalize transport externalities with economic instruments, in particular with regard to mitigate CO2 emissions. It will be argued that many published economic models, in particular neoclassical economic models, are not appropriate to internalize all external effects properly. However, some approaches of ecological economics appear to be favorable if the external effects are subject to high uncertainty and occur in the far future – as in the case of climate change impacts. It presupposes a clear target setting for every type of externalities in terms of safe minimum values and calls for applying a variety of instruments with optimally triggered intensities to achieve the targets at minimum costs. The optimal mix of instruments may vary over space to take into account the different economic, social, and environmental structures.