Chapter 9
Transport and the natural
environment
Contributed by Stephen Ison
Learning Outcomes:
On reading this chapter, you will learn about:
᭿ The relationship between the macro economy and the environment
᭿ The impact which transport has in terms of the environment
᭿ The main issues surrounding the carriage of freight and its impact on the environment
from a balanced perspective
᭿ How economics can aid in our understanding of how transport affects the environment
᭿ The economic options which can be considered as a means of addressing environmental
issues.
INTRODUCTION
The link between the demand for transport and economic growth and thus the need for travel
has been detailed in Chapter 2. This link has environmental implications and if left unchecked
these will impact on economic activity. Vehicle emissions impact on the quality of life both at the
local level in terms of air quality and hence individual health, and at a more global level in terms of
CO2 emissions, an important source of greenhouse gases which impact on climate change. This
chapter seeks to utilise economic theory as a means of analysing the relationship between transport
and the environment. It starts by outlining the background to the general environmental problem,
before detailing the various transport emissions and their impact and then specifically examines
freight transport’s impact on the environment. The chapter then develops an economic model of
pollution and explores the types of measures which could be implemented as a means of dealing
with the problem.
The macroeconomic concept of the circular flow of income relates to the flow of income and
expenditure between households and firms and can be used in order to set the scene in terms of
transport and the environment. With respect to the circular flow of income households receive
income for the factor services they have undertaken and with that income they buy goods and
services, including transport. This can be seen in the upper portion of Figure 9.1.
We have seen part of this diagram already as Figure 2.3 in Chapter 2. What it did not take
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account of however was the constraints imposed on the economy by environmental factors, of
which transport plays a significant part. These can be seen on the lower part of Figure 9.1 and
includes aspects on which transport impact. For example, if you take the period 1996 to 2006 car
passenger transport has increased from 622bn to 686bn passenger kilometres (a 10 per cent
increase), with car transport comprising 85 per cent of all passenger kilometres (DfT 2007b).
As for domestic freight then the road also dominates, representing 64 per cent of all domestic
freight transported, increasing from 153.9bn tonne kilometres in 1996 to 163.4bn tonne
kilometres in 2006, a 6 per cent increase. (DfT, 2007b). In terms of air transport movements there
has been an increase from 0.9bn passenger kilometres in 1996 to 1.2bn passenger kilometres in
2006, which represents a 33 per cent increase. All of these increases in transport activities impact
on the environment. In addition, whilst air transport is still relatively small it is a significant
contributor to climate change. The reason for this is the release of greenhouse gases into the upper
atmosphere (Chapman, 2006). A concern is the projected growth in air transport as seen in Table
9.1.
The environment, transport and the economy can be linked in three ways as illustrated in
Figure 9.1.
a) Natural resources: transport makes use of natural resources most notably oil which is in fact
the most dominant source for transportation (Chapman, 2006). According to the International
Energy Agency (2002) the transport sector accounts for 54 per cent of the primary
oil demand in OECD countries.
Figure 9.1 The macro economy and the environment
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b) Waste products, including transport emissions, are generated by both households and firms in
the transport activities in which they are engaged. For example firms in transporting goods
from the ports of East Anglia to the Midlands or households travelling by private car to and
from work both emit carbon dioxide into the atmosphere and contribute to global warming.
The natural environment can be seen as a ‘dumping ground’ for waste products, and one
that apparently comes at a zero economic cost.
c) Amenity services relates to the natural environment which provides households with benefits
such as recreational space and areas of natural beauty such as National Parks, accessed
predominately by the private motor vehicle. These can clearly be affected by economic
activity and the related transport decisions made by both households and firms in terms of
transport emissions.
In terms of waste output and transport emissions there are a range of pollutants associated with
transport and passenger cars in particular. These include emissions of carbon dioxide, carbon
monoxide, nitrogen oxide, particulates, benzene and 1,3-butadiene. The pollutant emissions are
given in Table 9.3 and it can be seen that transport, and road transport, in particular, are major
contributors particularly in terms of carbon monoxide and nitrogen oxide.
Transport is a major consumer of energy. In fact in 2004, 36 per cent of all United Kingdom
energy consumption was used by transport.
Case study 9.1 Transport emissions
Carbon dioxide: the largest source of carbon dioxide in the UK is combustion of fossil fuels and
in terms of domestic transport accounts for 23 per cent of carbon dioxide emissions which is not
insignificant at 23.3 million tonnes of carbon. The non-transport source of carbon dioxide
includes sectors most notably domestic, industrial, commercial, agricultural, and the military.
Globally, the transport-related emissions of carbon dioxide are growing rapidly with the use of
petroleum as a major source of fuel. Carbon dioxide is an important greenhouse gas and one
which is estimated to account for in the region of two thirds of global warming.As for the direct
Table 9.1 Forecast of air traffic demand: 2004–2030 (Million terminal passengers at UK
airports)
2004 2010 2020 2030
....................................................................................................................................
International
Low – 225 310 370
Mid 180 230 325 400
High – 235 340 435
Domestic
Low – 50 65 80
Mid 40 50 70 85
High – 50 70 95
Source: Adapted from DfT 2007a
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health implications the impact is rather less than for other emissions detailed below. In fact,
carbon dioxide is all important for the internal respiration in the human body. In saying this, if
the levels of carbon dioxide are not in balance then it could lead to health implications, such as
asphyxiation.
Carbon monoxide is the product of internal combustion engines, and domestic transport
accounts for approximately 50 per cent of carbon monoxide emissions, representing 1,199
thousand tonnes per annum in the UK. It is a toxic substance which impacts, amongst other
things,on an individual’s respiratory and central nervous system.Catalytic converters have been
important in reducing the amount of CO in car exhausts by oxidising CO to CO2.
Nitrogen oxide is caused by combustion engines and other industrial, residential and commercial
sources that burn fuels. It can impact on the environment in a number of ways, once
emitted it can be transported many miles before being deposited as acid rain impacting on
forests, lakes, wildlife, crops and buildings. This means that buildings and historic monuments
can deteriorate and lakes can become uninhabitable in terms of wildlife. The increased nitrogen
in rivers and lakes accelerates eutrophication, which leads to a depletion of oxygen thus
reducing the stock of fish. It can also react with 1,3-butadiene in the atmosphere with sunlight
to form ground level ozone which is a major component of summer time smog.It is also harmful
to human health impacting on the functioning on the respiratory and lung system and can in
fact cause premature death. Domestic transport comprises 684 thousand tonnes per annum
within the UK and accounts for 42 per cent of nitrogen oxide emissions.
Particulates (PM10) also impact on health including effects on both the respiratory and
cardiovascular systems. It particularly impacts on asthma sufferers. 27.3 per cent of particulates
are the result of domestic transport which represents 40.9 thousand tonnes per annum
within the UK.
Both benzene and 1,3-butadiene emitted from car exhausts are seen to be a human carcinogen,
which means it is an agent that is directly involved in the promotion of cancer. It can also
suppress the immune system, increasing the risk of infection. Benzene is present in vehicle
exhausts and evaporative emissions of gasoline-dispensing systems. As for 1,3-butadiene it
arises from the combustion of petroleum products. The introduction of catalytic converters in
1991 had a major impact on the emissions of 1,3-butadiene from road transport. In terms of
emissions then domestic transport accounts for 25 per cent (3.5 thousand tonnes) of benzene
emissions and 63 per cent (1.7 thousand tonnes) of 1,3-butadiene.
Lead has historically been a major source of emission from motor vehicles and industry. With
the prohibition of lead-based petrol (four star),however,lead emissions have fallen dramatically
from the transport sector, with domestic transport now only comprising 2.3 per cent of all
emissions, at 2.1 thousand tonnes per annum. Lead has an impact on health in terms of damage
to the kidneys, liver, brain and nerves. Exposure to lead can also lead to osteoporosis and
reproductive disorders.
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In terms of Figure 9.1 there is a need to break the link between the economy, and its related
transport activity, and the environment, which could be argued is unsustainable. Sustainable
transport can be defined as ‘the ability to meet society’s need to move freely, gain access,
communicate, trade and establish relationships without sacrificing other essential human or ecological
values, today or in the future’ (WBCSD, 2002). The Eddington Study (2006) reports that
transport sector emissions are a ‘significant and growing contributor (around a quarter in 2004) to
the UK greenhouse gas emissions’ and these emissions are seen to have an impact on long-term UK
economic growth. This is reinforced by the Stern Review (2006) which provides evidence of
the negative impact climate change will have on economic growth. The UK Government is of the
opinion that climate change is ‘the greatest long-term challenge facing the world today and that
transport policies can make an important contribution to tackling climate change’ (DfT, 2007a).
Case study 9.2 Aviation and the environment
There has been a growth in air transportation in the past 40 years and Table 9.2 illustrates
that growth, in terms of airport traffic over the period 1990–2006. It reveals an increase in
international and domestic air transport movements, both landing and take-off, of 86 and
42 per cent respectively.
The table also reveals that while all airports have experienced growth in air transport
movements some have shown greater growth than others,such as Stansted,with significant lowcost
airline development, Manchester and Edinburgh. There are undoubted benefits in terms of
the growth in passenger and cargo movements, not least in terms of employment opportunities
created and the enhanced mobility of the population. For example, there were 85,071 employed
directly by UK airlines worldwide in 2006 positions such as pilots and co-pilots, cabin
Table 9.2 Traffic (in thousands) at UK airports: 1990–2006
1990 1994 1998 2002 2006
...........................................................................................................................................................
International:
UK operators 479 529 655 753 808
Foreign operators 340 403 480 543 713
Domestic: 301 308 331 364 427
TOTAL: 1,120 1,240 1,476 1,660 1,948
Of which:
Gatwick 189 182 240 234 254
Heathrow 368 412 441 460 471
Luton 40 17 44 55 79
Stansted 24 58 102 152 190
Birmingham 66 71 88 112 109
East Midlands 29 33 39 49 56
Manchester 122 146 162 178 213
Edinburgh 48 61 72 105 116
Belfast 38 33 37 38 48
Source: Adapted from DfT statistics
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attendants,maintenance and overall personnel,tickets and sales personnel.In addition,there are
thousands employed in areas such as cargo handling and travel agencies. Like other modes of
transport however there are negative effects of aircraft movements in terms of the environment.
Table 9.3 illustrates the emissions from civil aircraft over the period 1995–2005 with
resulting effects on health and the quality of life. The figures for civil aircraft are insignificant
when compared to road transport but as can be seen pollution emissions from road transport
and non-transport end users have been declining over the period in question,unlike civil aircraft.
In addition, by definition air travel is a major generator of road traffic as passengers and cargo
need to get to and from the airport.
Aircraft noise is an additional external effect of aviation. Aircraft noise is measured as an
equivalent continuous sound level (Leq) averaged over a 16-hour day (0700 to 2300) and
is calculated during the peak summer months. 57 Leq is seen as the onset of disturbance, 63 Leq
and 69 Leq as moderate and high disturbance respectively. The 471 thousand air transport
movements based on Heathrow in 2006 affected a population of 258,000 within the 57 Leq
contour. For Gatwick the figure was 45,000 population within the 57 Leq contour (DfT, 2007b).
Table 9.3 Pollution emissions from transport and other end users in the UK: 1995–2005
Thousand Tonnes/percentage
Pollution type: 1995 1997 1999 2001 2003 2005 % of
2005 total
...........................................................................................................................................................
Nitrogen oxides:
Road transport 1,098 1,014 900 749 636 549 34
Civil aircraft 4.4 4.9 6.3 7.3 7.5 9.1 0.6
All transport 1,204 1,127 1,004 840 756 684 42
Non transport users 1,180 1,030 965 988 972 983 58
Carbon monoxide:
Road transport 4,180 3,664 3,003 2,128 1,594 1,124 46
Civil aircraft 31 39 47 59 47 58 2.4
All transport 4,224 3,717 3,065 2,200 1,655 1,199 50
Non transport users 2,072 1,957 1,875 1,691 1,292 1,218 50
Sulphur dioxide:
Road transport 52 28 14 4.2 4 3 0.4
Civil aircraft 0.3 0.5 0.4 0.5 0.5 0.6 0.1
All transport 83 58 39 23 31 43 6
Non transport users 2,239 1,583 1,188 1,096 960 660 94
Particulates (PM10):
Road transport 54 47 43 38 36 34 22
Civil aircraft 0.1 0.1 0.1 0.1 0.1 0.1 0.1
All transport 59 53 48 42 42 41 27
Non transport users 179 161 149 136 113 109 73
Source: Adapted from DfT (2007b)
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Overall therefore, there are global impacts and local environmental impacts associated with
aircraft movements. At the global level there is the effect of aircraft emissions on climate change.
Aviation emissions are small but growing, as illustrated in Table 9.3, and it is estimated that by
2050 aviation’s contribution to man-made climate change will be somewhere between 3 and 7 per
cent. At the local level there is the local air quality effects of emissions from aircraft at airports,
the effect of aircraft noise, the noise, emissions and congestion resulting from surface access to
airports as well as the land take and urbanisation as a result of airport development.
FREIGHT TRANSPORT AND THE ENVIRONMENT
This short section will consider the main issues surrounding freight transport and its impact upon
the natural environment. As shown in Chapter 2, over time levels of freight transport activity
have been very closely related to economic growth as measured by GDP. As we will see later in
Chapter 12, however, the levels of both factors have also been affected by the reduction in trade
restrictions between nations over the period. This is no more so present than within the European
Union, which since the introduction of the Single European Act in 1986 (which introduced the
single European market) has seen a considerable rise in the movement of goods between member
states. With that has come increased freight transport activity and concern over the impact this has
had upon the environment. This has been particularly true in geographical areas that have seen
large increases in freight transport flows but that are also regions of particular environmental
sensitivity, the most obvious example being the Alps. Perhaps surprisingly, although air pollution is
an international issue, this has led to strong national policies rather than policies at the EU level.
This is particularly true in Switzerland, which introduced a through truck 28 tonne weight limit,
and Austrian decisions on night and weekend road haulage movements. What exactly however is
the problem with freight transport and the environment?
We have already seen earlier in this chapter the impact of road transport on the environment.
With regard to freight, these issues are also generally tied up with road haulage; however, two
particular problems for the road haulage sector is that its relative share of nitrogen oxides has
been growing considerably as more private cars have been fitted with catalytic converters. The
second problem is that its share of carbon dioxide will also probably become a relatively greater
problem as cars become more fuel efficient. As a consequence, over time the issue with road
haulage’s impact on the environment will become more acute as the impact of the car is lessened.
Nevertheless, actual figures on the impact of freight transport upon the environment are
difficult to obtain. Given in Figure 9.2 however are the relative levels of road transport by type of
transport and the level CO2 emissions for each (road-based) mode.
This in many ways highlights the problem with road haulage, specifically that it has a far larger
share of CO2 emissions (and NOX emissions) than its share of road transport, thus it has a
disproportionately high polluting effect. Road haulage is also particularly high in the emission of
particles, with DfT statistics (DfT, 2007b) quoting values of emissions per vehicle kilometre some
nine times higher than that for a diesel private car. Since the introduction of Euro emissions
standards,however,particularly Euro III,1
these have been considerably reduced by just over a factor
of two; however, this is still considerably less than the impact of Euro standards on private vehicles
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– for a diesel motor car, the effect has been to reduce the emission of particles by a factor of just
under five, hence highlighting the problem that road haulage share of emissions is increasing.
In terms of comparisons with other modes of freight transport, Short (1995) cites figures from
Befahy (1992) who calculated comparative differences in pollution rates per road and rail tonne
kilometre moved. For three measures of air pollutants, nitrogen oxide, hydrocarbons and carbon
monoxide, the levels of emissions for road were four times higher per tonne moved than by rail in
the case of the first, forty-five times higher for hydrocarbons and thirty-five times higher for
carbon monoxide. These however appear to overstate the issue, with similar comparisons made by
the Strategic Rail Authority in 2005 as quoted by the Freight on Rail campaign (FoR, 2008)
revealing smaller differences. Their figures suggest that emission per tonne kilometre of freight
moved were 12 times higher for PM10 (particles), ten times higher for carbon monoxide, five and
half times higher for nitrogen oxides and 12 times higher for carbon dioxide. The main reason for
the considerable differences in the two studies cited however is due to the advances made in
controlling the emissions of road vehicles over the intervening periods. These have resulted in
a substantial decrease in comparative differences, although differences still remain significant.
Schipper and Fulton (2005) however make the important point that the composition of freight
drives the modal mix. Hence low-volume high-value commodities tend to go by road, whilst high
volume low value commodities by rail. Unlike passenger transport, therefore, where such comparisons
are based upon (roughly) the same unit of measurement in the form of passenger kilometres,
the different composition of freight tonne kilometres make such comparisons far more problematic.
Thus for example a significant modal shift from road to rail would change the freight
composition on the relative modes (particularly rail), and this change would in turn impact on
emissions per tonne kilometre hauled.
As the impact of transport on the environment is an international issue, we end this short
section with a brief international comparison of freight carbon emissions per capita for a number
of developed countries. Research by Schipper et al. (1997) found that the US had a figure of over
twice as many freight carbon emissions per head than seven countries of the European Union.
Norway also had around an output 50 per cent higher than the EU countries. This suggests that
there exist considerable variations around the world of the impact of freight transport on the
environment in relation to the size of the population.
Figure 9.2 Road transport 2005: modal share and share of CO2 emissions
Source: Drawn from DfT (2007b)
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To conclude this short section and bring it into focus with the economics of transport, relating
freight transport to Figure 9.1 it would appear that road haulage has a disproportionately high call
upon environmental resources highlighted in that figure, and thus the total cost of that mode of
transport is relatively more understated than the other freight transport modes. As environmental
concerns heightened, this is likely to have a more detrimental impact on the use of the mode. How
this might be brought about is considered later in the chapter under policy options for addressing
environmental concerns; however, to put some of these issues in perspective we end this section
with a case study titled ‘is it really road haulage that is bad for the environment?’.
Case study 9.3 Is it really road haulage that is bad for the
environment?
We saw above that road haulage is a major contributor to the deterioration of the natural
environment, far more so than any other land-based individual transport mode. If road haulage
is so bad for the environment, therefore, why don’t we just get rid of it? That would, after all, be
the ultimate conclusion of such a finding.What this highlights is that what has been presented so
far is only one side of the argument, but this issue should not be looked at in isolation. This case
study attempts to give some insight into the wider problems that may result as a consequence
of significantly reducing the reliance on the mode, as this in turn brings into focus the issues
involved in attempting to lessen transport’s impact on the environment.What follows however is
pure speculation on the author’s part; this is designed merely to give some idea of the problems
that this would involve rather than act as a highly accurate scientific study. In compilation of
this case,thanks are due to Professor Alan McKinnon on whose research some of this case rests
(see McKinnon (2006) for further details). That research was a scientific study aimed at
developing a scenario for a temporary disruption in road haulage services of a week.In this case,
we speculate on some of the issues involved in a more long-term modal shift.
We begin with the basic question that if the reliance on road haulage is to be eradicated or
significantly reduced,then how would all of the freight that is currently transported by the mode
be moved? Currently within the UK some 1.936bn tonnes of freight are shifted 167 billion
kilometres over a road network that is 398,350 kilometres in length. In comparison, 108
million tonnes of freight are moved 22 billion kilometres on a rail network 15,795 kilometres
long. In simple terms, therefore, the rail network simply could not cope with a significant
increase in freight loads, particularly given that in certain parts the network is already at
or close to capacity. To bring these figures more clearly into understandable terms, for each
head of population in the UK some 33 tonnes of freight are moved annually by road, compared
to just under 2 tonnes on the railways. Whilst railways were described in Chapter 2 as the driver
of the Industrial Revolution in the 19th century,road haulage is undoubtedly the mainstay of the
economy of the 21st century.
The modal split of freight however is not a straight division between the various modes
involved, but rather particular modes tend to specialise in certain sectors which results in an
uneven division of freight moved across the whole sector. Road haulage has an almost complete
monopoly at the lower levels of the supply chain in the delivery of retail supplies, hence any
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impact of reduced road haulage levels would be most acutely felt at that end of the supply chain,
i.e. by the consumer.
McKinnon (2006) evaluates four forms of substitution that could occur in the face of an
absence or reduction of road haulage levels. These are used below to examine the potential
longer-term consequences of a major modal shift.
Product substitution
One of the main issues with road haulage is that the greater flexibility that it presents has led to
the development of the concept of the whole logistical supply chain, with one direct result being
that inventories levels have been considerably reduced. Product substitution would effectively
involve a reversal of that position, where greater stocks would be held at all levels from production
through to consumption. Simple examples would be the substitution of fresh produce for
frozen and greater reliance on electronic communication rather than traditional postal services.
Major shifts would have to occur however in consumption patterns towards goods with a longer
useable life and a significant shift away from the consumer-orientated society. The impact on
production would be considerable, and this is considered further under locational substitution.
Modal substitution
This has been hinted at above where the substitution is in the mode of transport used. Thus road
haulage would be replaced by rail and maritime transport, with most of the emphasis falling on
rail. In simple terms, the rail network would have to change beyond all recognition in order to
cope with any increase in demand. This not only relates to the actual length of the network,
which would have to expand in size well in excess of pre-Beeching levels, but also would require
considerable enhancements in terms of loading gauges in order to accommodate larger and
heavier trains and in signalling to reduce headways in order to accommodate more traffic. Such
enhancements would not come cheap.
Vehicle substitution
Vehicle substitution is different from modal substitution in that it involves using the existing
road infrastructure,however,with vehicles that are far less polluting.A number of alternatives to
fossil-based fuels currently exist, the better known ones being biodiesel, bioalcohol (ethanol,
methanol, butanol), electricity and liquid gas. These alternatives however have a considerable
way to go before they could substitute fossil fuels. Whilst undoubtedly a biased viewpoint, the
AFCG (2003) nevertheless state that only natural gas could compete economically with existing
fuels and gain a market share in excess of 5 per cent by 2020.
Locational substitution
As with product substitution, locational substitution involves a reversal of long-term trends.
Over time there has been a major shift from high density living to a greater geographical
dispersion of the population and a general de-centralisation of activities. This not only refers to
the American concept of ‘urban sprawl’, but has occurred in many other countries where new
housing developments have generally been of the low density form. Location also relates to the
whole structure of industry, which is very different today to how it was 30 years ago. Logistics
play a major part in the whole industrial activity, and this has led to a centralisation of activity.
McKinnon (2006) highlights the case of agriculture and the requirement for the distribution of
winter feed and the centralisation of slaughterhouse capacity, which now involves both feed and
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animals being transported far greater distances. This change in industrial patterns is also very
true of manufacturing, where there is now a far greater tendency for movement through the
logistical chain of component parts. Whilst perhaps not a good example in the current context,
motor cars do nevertheless provide a good example of this change; in the past cars were built in
a single factory and components sourced locally; however, today different parts are built in
different locations, many not even in the same country.
This case study began by attempting to speculate on what life would be like with a significant
reduction in road haulage transport driven by environmental concerns, but in many respects
it has failed to do so because such a scenario is simply outside of current terms of reference. In
other words,it cannot be contemplated.Road haulage will never be replaced;however,any move
to significantly reduce the reliance on the mode will have to be done over a very long period of
time and will come at a very high cost (in terms of living standards). In many respects it would
be akin to returning to the 1930s, the only problem however is that the global population is far
larger today than it was then, hence effectively a 1930s transport system could not support
today’s population, never mind at current living standards.
AN ECONOMIC MODEL OF TRANSPORT AND POLLUTION
The effect that transport has on the environment can be studied by the use of an economic model
(see Figure 9.3). In the figure the horizontal axis measures the level of transport activity and its
related pollution, which is assumed to be directly related to the level of transport activity. This
could relate to an airport and the number of aircraft and passengers who use the airport over a
period of time. Since transport can be seen as a derived demand, as outlined in Chapter 3, then
transport activity can be firmly linked to the level of economic activity. The vertical axis measures
the costs and benefits, both to transport and society.
Marginal private benefit (MPB) measures the additional benefits, in terms of satisfaction
received by the road user or airline passenger from undertaking journeys, or road haulier, cargo
Figure 9.3 An economic model of transport activity and pollution
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handler or airport authority in terms of profitable activity. The marginal external cost curve
(MEC) measures the additional environmental cost of transport activity, in terms of air pollution,
noise and so on. If the transport user/sector is not constrained in terms of their level of activity
then they will consume or provide an amount equal to TA1. This means that the area under the
MPB curve, represented by A + B + C will be maximised. At that level of activity (TA1) however
there are external costs in terms of the impact of the emissions detailed above of B + C + D. The
optimum level of pollution, therefore, is achieved at a scale of transport activity TA2, where the
MPB = MEC. If the transport user operated at a level of activity above TA2 then the additional
environmental costs would be greater than the additional benefits accrued from undertaking the
transport activity. This represents what is termed a ‘welfare loss’ to society, whereas at a level of
transport activity below TA2 the opposite is true. Here the MPB is greater than the MEC and as
such, activity should be allowed to increase to TA2, in order to take account of these additional
benefits. Note further, however, that continuous production above level TA2 will result in a
significant negative impact upon the environment. As can probably be gathered from Figure 9.3 the
benefits accrue to the road user or airline passenger in terms of moving between destination A and
B for work or leisure activities, or to road hauliers, bus operators, airport operators or the like in
terms of profitable activity. The costs (MEC) in terms of airport pollution and so on are not
incurred by the same group. For example, aviation activity is likely to lead to profit for the airport
operator, but the costs are incurred by those who live in the vicinity of the airport and who suffer,
in particular from the noise and air pollution, not simply from aircraft but also the surface access
traffic. These can be viewed as external costs since transport users or organisations do not
normally include them in their decisions as to what output level to produce. The costs are actually
incurred by third parties who are not involved in the transport activity but who suffer from the
‘spill over effects’. In terms of our airport example, the first two parties are the airport operator
(the producer) and the airline and airline passengers (the consumers).
There are a number of policy options which can be considered as a means of addressing the
issue of the environmental impact associated with road and air transport.
It is important to state that the options detailed below are by no means exhaustive but provide
an indication of possible measures, namely a bargaining solution, a tax-based solution, the role
of tradable permits, the setting of standards, technological change and the encouragement of
alternative modes of transport that can be considered. These options need to be considered as part
of a package of measures, although note that we have already seen some of the impacts such actions
may have in Case study 9.3.
Bargaining
The basis of this particular approach is that if property rights are assigned then bargaining will
occur naturally between the various parties that suffer from or are the source of external cost, the
externality, and the optimum level of pollution will be the result. Based on Figure 9.3 the two
parties are airline operators and the airport who generate environmental pollution and those who
suffer in terms of that pollution, namely those who live close to the airport. The notion of
bargaining is based on the idea that if property rights are assigned to either of the two parties, thus
giving the airline operators or airport the right to pollute or to those who are affected by the
pollution to clean air, then via bargaining agreement will be reached so that pollution is reduced.
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If the property rights were assigned to the airline/airport operator then in terms of Figure 9.3
the level of transport activity would be TA1, with profit maximised and no account given to those
affected by emissions. It would however be in the interest of those suffering from the emissions to
pay the polluter if they agree to reduce their level of activity and thus their level of pollution. In
this situation the sufferers would pay as long as it was less than the value of the pollution from
which they would otherwise suffer. The bargaining solution states that payment would be made
to the airline/airport operator by those that are suffering so long as it is below the valuation of
the damage they incur. In terms of Figure 9.3 therefore the sufferers may be willing to offer the
polluters a maximum amount of C+D, which represents the total external cost incurred by the
sufferer as a result of the transport activity TA2−TA1. The airline/airport operator would have
been prepared to reduce their scale of activity from TA1 to TA2 for an amount no less than C, an
amount which represents the total profit gained from activity undertaken TA2 to TA1. As such,
there is a basis for ‘bargaining’ between the two parties. For this option to work, the amount paid
by the sufferers would be somewhere between C and C+D, and as might be expected the amount
actually paid will depend on the relative strength of the two parties involved.
If on the other hand the ‘property rights’ were to be assigned to the sufferers, who therefore
have a right not to be affected by aviation pollution, that is a right to clean air or no noise, then the
airline operators and thus the airport would have to cease operation, thus being at point 0 in the
figure, with no airline or airport activity or related pollution. In such a situation the polluters may
find it to their advantage to offer the sufferers compensation that allows them to undertake activity
and its related pollution. The polluters would offer compensation so long as it is less than the
private benefits they receive from undertaking their activity. In terms of Figure 9.3 it would be
worth the polluters offering the sufferers an amount equal to B or a little more, so that they could
operate and obtain profit of A, or a large portion of A. Any activity beyond TA2 would not be
sensible since the amount of compensation paid would outweigh the satisfaction received.
The result would therefore be the optimum level of pollution, at TA2. Under either scenario
economists such as Coase (who developed the idea of bargaining) reveals that assigning property
rights can result in bargaining which brings about an optimum solution.
There is however an issue of equity, which varies greatly depending on which of the two
scenarios is adopted. In addition whilst the theory of bargaining seems relatively straightforward it
may not be possible to adopt such an approach when addressing traffic-related pollution. There are
a number of issues raised when considering the bargaining solution which would seem to favour
the ‘polluter pays principle’.
᭿ Those affected by pollution will often find it difficult to organise themselves. This is certainly
the case in terms of those who suffer from transport-related pollution, since there may be so
many individuals they will find it difficult to coordinate their activities and thus may not be
able to offer the appropriate monetary amount in order to induce polluters to reduce their
level of activity.
᭿ Those who suffer from pollution may not have sufficient funds to compensate those who
pollute for the cost of reducing pollution. As such, the optimum level of pollution consistent
with a level of activity TA2 will not be attained.
᭿ Certain individuals who suffer from transport-related pollution or noise may be reluctant to
contribute to the monetary payout to the polluter, not because they are unconcerned about
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the situation, but because they assume others will take responsibility and they will reap the
benefits without paying a penny. They can be termed ‘free-riders’.
᭿ If polluters were aware of the fact that they would have to make payments to sufferers then it
is likely they would curb their activities or would encourage research and development into
more environmental friendly technology, such as quieter aero engines.
The success of the bargaining solution depends in part on the numbers involved, and even with two
parties an agreement is not automatic. As such, the government may resort to alternative methods
of dealing with the problem.
A tax-based solution
This would involve setting a price which places a monetary value on the environmental costs of
transport using taxation and imposes these upon the polluter. Such a solution is likely to reduce the
demand to travel and therefore the environmental impact.
In terms of the economic model in Figure 9.4, then, if an environmental tax of t (known as
a Pigouvian tax, which is a tax imposed upon an externality) is imposed on the transport user/
operator/polluter it has the effect of shifting the MPB curve to MPB−t. The tax would be paid on
each unit of pollution and the transport operator would now maximise their marginal private
benefits at a level of activity equal to TA2. If the transport operator undertook a level of activity
between TA2 and TA1 then the benefits received (in terms of profit) would be less than the amount
of tax paid.
Using an environmental tax is a way of internalising the external cost and the tax of t can be
viewed as the optimum tax.
The use of this kind of measure is based on the notion of the ‘polluter-pays principle’, with the
polluter being responsible for the cost of measures to reduce pollution.
There are a number of advantages and disadvantages with the use of an environmental tax on
the transport user/operator.
Figure 9.4 Imposition of an environmental tax
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Advantages
᭿ With an environmental tax, then, the road or air transport user or airport/airline operator
has to pay a price for the pollution caused. As such, the polluter has an incentive to reduce
their level of activity to the optimum level of TA2 in Figure 9.4.
᭿ The introduction of an environmental tax allows the transport user/operator to decide how
they will respond, unlike the use of a standard which sets a particular limit.
Disadvantages
᭿ There may be difficulties in establishing the optimum tax of t, although in reality the aim
may be to get as close to the optimum as possible. If the tax is underestimated then it may
lead to a problem as illustrated in Figure 9.5 below.
᭿ There are often political difficulties when introducing a new tax, say with a passenger tax
on airline users. There may be resistance in that the belief is that the tax will be raised
above t in Figure 9.4 once it is introduced – the tax being seen simply as a revenue-raising
measure.
In Figure 9.5, if the optimum tax rate t is established then there is no problem. This may
not however be the case. The tax rate could have been set too low, say at t1 and this could be
problematic. At a tax t1 then the level of transport activity would be TA3 and this would
equate with an external cost of b which is higher than that at the social optimum of c. This
may be acceptable, but if the MEC were to rise more sharply as with MEC2 then the MEC
would be significantly larger at a, which may be far more problematic. What this scenario
illustrates is that small miscalculations can result in far larger deficits.
᭿ It could be argued that the transport user is penalised twice. First by virtue of the fact that
the level of transport activity has been reduced from TA1 to TA2 in Figure 9.4 with the
resulting loss in profit given by the triangle TA1TA2b, and second by having to pay tax equal
to the area TA20ab.
Figure 9.5 The problem with underestimating the optimum tax rate
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Case study 9.4 Fuel tax
A fuel tax increase can be seen as a somewhat crude method for dealing with the problem of the
environmental fall-out from transport. Their impact in the short run may be slight other than
provoking a very short-term knee-jerk reaction to the increase in price. In the longer term
however it could influence the choice of vehicles with a smaller engine capacity and a
reconsideration of either the place of employment or residential location.In terms of Figure 9.6
following a rise in the price of fuel from P1 to P2 in Figure 3 the demand in the short run may
reduce from Q1 to Q2, a movement from point a to point b along the short run demand curve
(DSR), as motorists use their car less. In the long run demand could reduce further to point c on
DLR with a quantity Q3 through the purchase of vehicles with smaller engines or because of the
relocation of households to be nearer their work.
Clearly, the objective of fuel tax is not environmental even though as stated by the Royal
Commission on Environmental Pollution (1994) that:
᭿ The amount of tax paid varies with the environmental cost with the amount of fuel
duty used in the main proportional to the amount of CO2 emitted and (for any given
vehicle) is closely reflected in the quantities of other substances emitted.
᭿ It is simple to administer, it costs little to collect, is difficult to avoid or evade, and can
easily be modified.
᭿ Road users have discretion about how to respond: road users may respond either by
reducing the number or length of their journeys or by reducing their use of fuel in other
ways, such as switching to a smaller or more fuel-efficient vehicle or driving in a more
fuel-efficient way.
Figure 9.6 The potential impact of an increase in fuel prices
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Tradable permits
The idea behind tradable permits is that polluters are presented with a number of ‘permits’ which
allow them to emit a particular level of CO2. The number of permits which exist clearly limits the
amount of emissions. The permits are tradable in that they can be bought and sold to other
polluters who are participating in the particular tradable permits scheme. The basis of such a
scheme is that those organisations who are able to achieve a lower level of emissions are then able
to sell their superfluous permits to organisations that are not able to meet the emissions target set
and are therefore forced to buy permits to emit if they do not want to curtail their activity.
The tradable permits market is illustrated in Figure 9.7. The body responsible for setting the
level of pollution will issue a number of permits in line with a predetermined level of pollution,
such as Qp, which at the level of demand would give a market price of Pp. If there is an increase in
demand and thus a shift in the demand curve to the right then clearly the equilibrium price will
increase. Figure 9.8 illustrates how the market operates in a hypothetical situation, with two airline
operators A and B. In the figure airline operator A emits 100 thousand tonnes of CO2 annually, and
airline operator B emits 80 thousand tonnes of CO2 annually. MAC refers to the marginal
abatement cost curve and represents the additional cost to each airline operator of abating pollution.
As can be seen operator A’s curve is flatter than operator B’s, thus abatement is more costly
for B than it is for A, and as such there is a basis for trade in permits to take place between the two
operators.
Without the existence of the permit scheme, then, 180 thousand tonnes of CO2 would be
emitted, namely 100 thousand tonnes from operator A and 80 thousand tonnes from operator B. If
the body responsible for setting CO2 emission targets wanted to see a 50 per cent reduction then
this could be achieved by issuing 90 tradable permits. Allocation of those permits is an issue, but if
they were issued based on previous emission levels, then operator A would receive 50 (one for
each thousand tonnes) and operator B would receive 40 (also one for each thousand tonnes).
Clearly the merits of allocation can be debated, but if this were the case then operator A would
reduce its emissions to 50 thousand tonnes, and operator B to 40 thousand tonnes.
In order to conform to the reduced emissions levels, there will be a cost involved for both
airlines, and this is known as the marginal abatement cost. This would include all aspects involved
Figure 9.7 The market for tradable permits
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in conforming to the new standards as a consequence of the tighter restrictions placed on pollution
levels. Say therefore that for airline operator A the total cost of cutting its emissions from its
previous level of 100k tonnes to its ‘new’ level of 40k tonnes was £100m, then that would
represent its marginal abatement cost (MAC). Furthermore, if we know the level of emissions at a
zero MAC and at a level of 40k tonnes, then assuming a linear relationship we can sketch out the
marginal abatement cost curve (MACC) for firm A. This is done on the left of Figure 9.8. Note
however that in practice this would be a curve, and concaved towards the origin – hence as the
level of pollution needed to be reduced by ever greater amounts, the relative increase in the
marginal abatement cost would increase by far greater relative values. However, to return to our
example, if we assume that the cost to airline operator B to reduce emissions from its current
level of 80k tonnes down to its allocated permits of 40k tonnes to be £180m, again this represents
its marginal abatement cost. By applying the same logic as above then again we can draw the
marginal abatement cost curve for operator B, which is shown on the right of Figure 9.8 as MAC2.
Due to the difference in the marginal abatement costs facing the two firms, there would thus be a
basis for trade between the two operators. For example, say in the following time period operator
B wished to increase its emissions (due to the profitability attached to them – see Figure 9.1) by
5k tonnes to 45k tonnes, then reading off the MACC it would be willing to pay up to £150m in
order to do so. At that level, however, the MAC to A is £110m in order to bring its emissions down
by 5k from the previous time period. It is therefore worthwhile for A to cut its emissions to 45k as
the revenue they would earn from the sale of the excess permits (in this case 5k) to B would be in
excess of what it would cost them in additional abatement costs. This is because B will buy these
permits because the price will be lower than its own abatement costs at that level of emissions. The
net difference between the two values therefore (£150m v £110m) represents the basis for the
trade. This process of exchange will continue until the two MAC’s are equal to each other.
Referring to Figure 9.8 this would occur with the price of permits at £120m, hence operator A
would emit 40k tonnes of CO2 and operator B 50k tonnes of CO2.
Figure 9.8 The operation of a tradable permits scheme
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There are a number of issues that require careful consideration when developing a tradable
permit scheme. First, how are the permits allocated? In terms of the hypothetical situation
outlined above the allocation of permits was undertaken on the basis of current emission levels,
each receiving 50 per cent of those levels. Companies however may have successfully reduced their
levels of pollution, by investing in new technology and as such they are penalised for this by
receiving a lower number of permits. An alternative measure could be equal numbers of permits
to each participant, but the weakness of this is that they may differ in terms of the amount of CO2
they currently emit. Second, should permits be freely allocated or should they be auctioned?
Third, what should be the overall number of permits in circulation? It could be the case that the
supply is greater than would be ideally liked simply so that company acceptance of the scheme is
gained. Fourth, it is possible that a number of participants may corner the market in permits,
making it difficult for new companies to enter a sector. If this situation developed it would act as a
barrier to entry and could be seen as anti-competitive. Fifth, there are administrative costs
involved in a scheme of this type, registering and monitoring ownership of the permits. Finally, a
tradable permit scheme allows the owner of the permits the right to pollute, a permit to emit
pollutants and this is possibly a strategy that can be questioned.
There are a number of advantages however with a scheme of this type:
Advantages
᭿ A tradable permit scheme affords the companies that participate flexibility in terms of the
way in which they address the reduction in their emissions. Do they reduce emissions by the
manner in which they operate or do they purchase permits?
᭿ Environmental taxes require polluters to pay for emissions, something they once undertook
for free. As such, it might be politically easier to get companies to agree to a tradable permit
scheme, since a new ‘marketable’ permit has been created.
᭿ A tradable permit scheme is cost effective in that incentives are provided to address emission
levels since lower abatement costs will allow permits to be sold whereas higher abatement
costs require permits to be purchased.
᭿ Unlike a Pigouvian tax which needs to estimate the cost of the pollution, with tradable
permits it is the market (in tradable permits) that will find the optimum price.
The EU is operating what it calls an Emissions Trading Scheme (ETS), a scheme which is seen as a
major economic instrument in addressing greenhouse gas (GHG) emissions. The scheme seeks
to make sure that companies operating within specific sectors which are responsible for GHG
emission, reduce their emissions or buy permits from other participants within the scheme with
lower levels of emissions. The scheme commenced in January 2005 initially covering carbon
dioxide (CO2) emissions. The first phase ran from 2005 to 2007 covering companies of a certain
size in sectors including energy (with activities such as oil refinery and coke ovens), production and
processing of ferrous metals, the mineral industry (including cement, glass and ceramic bricks),
pulp and paper. Overall in the region of 10,000 installations are included covering in the region of
50 per cent of the EU CO2 emissions. Participants, or what are called installations, obtain their
allowances (or permits) for free from the EU member states. The second phase began in 2008 and
runs until 2012 and a number of non-EU member countries have joined. It is expected that the UK
Treasury will auction off a percentage of their ETS permits rather than is currently the process of
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issuing them to companies based on their current emission levels. To date aviation has not been
included in the ETS even though it represents 3 per cent of carbon dioxide emissions in the EU.
The reason for this has been concern over the impact inclusion would have on the sectors’ ability
to compete in international markets. Aviation is however going to be included in the EU ETS from
2012.
The setting of standards
Whilst not an economic instrument, it is important to introduce the notion of setting standards,
since these form a major part of environmental policy and can have a considerable impact on the
economics of transport. Polices such as the requirement for an annual vehicle inspection for road
trucks and private vehicles (with the latter known as the MOT test in the UK) and vehicle exhaust
emissions tests or limits on noise from aircraft come under this category.
Setting a standard of S1 would achieve the optimum level of transport activity TA2 in
Figure 9.9. If achieved this would result in the optimum level of pollution. Clearly as with taxation
it could be the case that the standard has been incorrectly set. It could be too harsh, thus a point to
the left of S1, or too lenient, a point to the right of S1. Not only does the standard have to be set
correctly but the penalty for not meeting the standard has to be established. The optimum penalty
will be Penalty 1, for if a penalty such as Penalty 2 were to be set then the polluter would be
tempted to pollute up to TA3 because the penalty (if ever administered) would be less than the
level of additional satisfaction obtained between TA2 and TA3.
Technological change
This can take a number of forms. First, transport emissions of carbon monoxide have been reduced
through technology-related initiatives such as cleaner fuels with reduced carbon content, cleaner,
more efficient car engines and electrified public transport. Catalytic converters fitted to petroldriven
cars have reduced emissions in pollutants such as nitrogen oxide and benzene and in the UK
new cars are 10 per cent more fuel efficient, on average, than they were 10 years ago. In addition,
Figure 9.9 Setting a standard
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in the UK, by 2010 as part of the Renewable Transport Fuels Obligation 5 per cent of fuel sold in
the transport sector will have to come from renewable sources.
Second, technological advances have improved the ways in which individuals can make choices
about transport modes, through in-car information and real-time information at public transport
stops.
Third, through video conferencing meetings can be undertaken without the need to travel. This
is also another aspect of technological change which leads to a reduction in transport emissions.
In the figures illustrated above it is hoped that technological change will have the effect of
reducing the gradient of the MEC curve.
Promotion of alternative modes of transport
This policy option involves encouraging alternative modes such as public transport, walking,
cycling, rail freight and shipping. The private car has the advantage of convenience and flexibility
whereas public transport tends to be confined to fixed routes. As will be seen in Chapter 12, much
the same applies with respect to road haulage in the carriage of freight in comparison to the other
available modes. Measures can be undertaken in order to make public transport more competitive
through things like dedicated bus lanes; however, as we have seen the options with regard to freight
transport alternatives to road haulage are far more limited and problematic.
Trams are in many respects a more environmentally-friendly, although expensive, alternative to
the private car. In recent years a large number of UK towns and cities and other European cities
have invested in the tram, such as Croydon, Manchester, Nottingham and Sheffield in respect of
Britain and Karlsruhe, Grenoble, Bordeaux and Genoa on the European continent. Improved
cycling and walking facilities are also seen as an important alternative to the private car. The aim of
providing alternatives to the private car is to reduce the gradient of the MEC curve in the figures
above.
CHAPTER SUMMARY AND REFLECTION
The aim of this chapter has been to highlight the link between the macro economy and the
environment and the impact of transport on that relationship. It has detailed a number of transport
emissions and the effect that they have in terms of individual health and on a more global scale. The
chapter has used economic theory in order to analyse the relationship between transport and the
environment. This has allowed various policy options to be studied. In terms of the bargaining
solution, although theoretically attractive, it raised a number of issues in terms of the practicalities
of implementation. The tax-based solution also raised issues not least in terms of establishing the
optimum tax although it would allow the transport operators/users to decide how they respond.
Tradable permits also allow flexibility and may also be politically easier for the market to accept.
The measure too has issues not least in terms of the allocation of merits, whether they should be
issued free or auctioned, their supply and administration. Alternatives, namely the setting of
standards, technological change and the promotion of alternatives, have also been examined.
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CHAPTER EXERCISES
Exercise 9.1 The use of an environmental tax
Use Figure 9.10 in answering the following questions:
a) If the transport activity carried on at TA1 following the imposition of a tax equal to t,then how
much tax would be paid by the polluter?
b) Why will the polluter reduce their transport activity level to TA2 from TA1 following the
imposition of an environmental tax?
c) What is the external cost saving to be made by reducing transport activity from TA1 to TA2?
d) What will be the implication if tax is set at a level greater than t?
e) Why is zero output unacceptable from an economic perspective?
Exercise 9.2 Trends and implications
Based on Tables 9.1, 9.2 and 9.3:
a) Outline the trends in terms of traffic at airports, the forecast for air traffic demand and
pollution emissions from transport and other end users.
b) In terms of Tables 9.1 and 9.2 what are the likely implications both at the local and
global level?
c) Based on the information to be found in Chapter 13 on forecasting the demand for transport
services, outline the difficulties inherent in forecasting air traffic demand.
d) Referring to Table 9.3,outline what you think are the reasons for the trends presented in terms
of road transport and civil aircraft.
e) What do you see as the advantages and disadvantages of the various options for addressing the
environmental impact of transport.
Figure 9.10 The use of an environmental tax
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Exercise 9.3 Is it really road haulage that is bad for the environment?
Reconsider Case study 9.3 and then attempt the following questions:
a) Who is responsible for the large increase in road haulage transport that has occurred over the
last 50 years?
b) How would we start to estimate the costs involved in reducing the level of road haulage by:
20 per cent of its current leveli
50 per cent of its current levelii
80 per cent of its current leveliii
Who would have to pay for these reductions?iv
c) In terms of the policy options for addressing the environmental impact of transport on the
environment outlined in this chapter, how would these be applied to road haulage? Note in
addressing this question, you should consider that what you do not want to produce is an
overnight collapse of the road haulage industry!
d) Of all of the substitution effects listed in the case study, probably the most far reaching
would be locational substitution. Outline the full implications of this effect, both in terms of
society and the economy.
e) This case only considered the impact of addressing a long-term modal shift at a national
level; however, in today’s global economy such unilateral action is simply not feasible. How
might long-term change be brought about internationally? (Note: you may wish to briefly view
the first part of Chapter 12 on the internationalisation of freight transport before considering
this issue.)
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