London’s Congestion Charge and its Effects on Office Rents
By Mathias Schläffer*
Modern cities enjoy many benefits connected to dense population and proximity of firms, but also face negative effects of agglomeration. In an urban context, external effects of traffic like noise and air pollution, or traffic congestion are some of the most significant issues for policy makers.
Inefficiencies arising from congested roads have sparked economic research for several decades now, but so far, no real-world application was ultimately successful in combining ideal economic efficiency with public acceptance. In theory, congestion charging leads to the situation that everyone pays for the costs their trip imposes on others. In reality however, this policy instrument is not very popular since it leads to a financial transfer from consumers to the government. London is one of the most famous examples of a large city introducing an inner city congestion zone. The policy required a strong political effort and met resistance from the public and the commercial sector inside the congestion zone. But not only residents and shops are affected by such a road toll, also firms are affected by a change in their accessibility. The effect on firms within the congestion zone could – in theory – be ambiguous. Monetary costs of the charge decrease accessibility on one hand, but higher travel speeds inside the congestion zone could offset these effects and lead to easier access for workers or traffic flows between firms
In my thesis, I have investigated whether office locations in the congestion charge zone become more attractive. Locations’ attractiveness is measured by investigating office rents. With several years of data before and after the introduction of the charge, I use a difference-in-difference approach to investigate if the congestion charge had a direct effect on firm rents. This methodology seeks to identify differences in price trends over time that can be ascribed to the introduction of the congestion charge as the sole causal connection.
A comparison of the development of office rents in the whole congestion zone with areas outside might be biased due to different locational trends. By reducing the distance between locations in the comparison, the possibility of divergent rent trends due to differences in characteristics of the investigated areas are reduced. Therefore, areas close to each other on both sides of the boundary are selected. The benefits of the charge (increased travel speed) can only be experienced for distances travelled within the congestion zone, so that locations close to the boundary experience less of these benefits, while facing the full monetary costs of the charge. The introduction of the charge therefore could have ambiguous effects at the core of the congestion zone, but distinct negative effects close to the boundary.
The research found no significant effect of the congestion charge at the boundary, and likewise no statistically significant effect for different distances to the boundary. Furthermore, no anticipation effect preceding the introduction of the charge have been found. The absence of effects could have several reasons. First of all, the policy had many exemptions from the charge for residents, local firms or environmental friendly vehicles. Additionally, the public transport system in London is highly important for commuting flows and experienced strong investments accompanying the introduction of the charge. Any negative effect of the charge might have been offset by improvements to the public transport system. The congestion pricing policy can therefore not be isolated for its sole effects. Lastly, firm-to-firm interactions have many possible channels and physical traffic flow could be substitutable with other forms of interaction. A comparison with other examples of road tolls in the future has to answer if the lack of effects is due to robust agglomeration effects of firm which are independent of road pricing schemes or if the package of infrastructure policies in London led to a neutral result where the isolated instrument might have resulted in a significant impact on the accessibility of firms. In any case, there is no evidence that firms’ productivity, as measured by office rents, is hampered by the introduction of the congestion charge.
*Mathias Schläffer is currently working as a junior researcher at the Department of Spatial Economics, Vrije Universiteit Amsterdam. Mathias holds a bachelor degree in Business Administration and Economics from Humboldt University Berlin and a master degree (Cum Laude) in Spatial, Transport and Environmental Economics from Vrije Universiteit Amsterdam. Mathias’ thesis can be downloaded here.