A story on high-speed trains published in the Monday edition of this newspaper mentions an intriguing financing possibility. The ministry of railways is examining various ways to fund the construction of high-speed train networks between the major cities in the country. One unusual option the ministry is considering is the sale of carbon credits. The ministry will thus take advantage of the fact that trains are usually less polluting than planes and automobiles, and use it to create a unique financing opportunity. It’s a good idea.
It is generally accepted that trains are a more fuel-efficient means to ferry people and goods around the country, when compared to other modes of transport, especially planes. They have the lowest costs in terms of carbon emissions. But this mattered little till now. The world over, people and goods have been moving to alternatives on road and in the air.
That could change because of global attempts to control carbon emissions. It is worth asking whether environmental concerns will tilt the balance towards trains once again—especially if a new climate change deal, which is likely to replace the Kyoto Protocol in 2012, imposes high costs on polluting activities.
The economics of transport is faulty in this respect, which has resulted in warped incentives. Because they do not have to pay the bill for the costs they impose on the environment, cars and planes are in effect subsidized. It would be interesting to see what will happen in the years ahead, as cars and planes are slapped with a larger pollution bill, while trains get carbon credits that can be sold to generate extra revenue. (Of course, the need to pay for pollution is likely to bring a new fleet of fuel-saving cars and planes in the market.)
Will trains be back on the popularity tracks? Various governments are been investing in their rail networks. China, with its magnetic levitation trains in Shanghai and its new railway to Tibet, is the most relevant example for India. Even California, with its expressways and car culture, says it wants to build a new intercity train service. What’s more, some private investors are already talking about a potential rail renaissance. Two of the world’s smartest money managers, Warren Buffett and Carl Icahn, have already bought shares in US railway companies. Some hedge funds too are clambering on board.
A lot depends on the economics—and the pricing of externalities in particular. India has already seen the effects of the mispricing of costs in its transport sector, especially in the 1980s and early 1990s. The subsidy on diesel, which was paid for by charging higher prices on petrol, acted as an incentive for transferring freight from trains to trucks. That is now being corrected. But the way in which diesel subsidies helped boost one type of transport over the other shows how the lack of market pricing can distort a market.
One valid criticism of railways is that they depend on government largesse to survive. That could change. It is unlikely that each railway route will be profitable. But the planned high-speed trains, which will serve cities that are close to one another, like Mumbai and Ahmedabad, and Bangalore and Mysore, are likely to make money. There has been a lot of discussion in recent years about how the nature of intercity travel has changed. Better highways, more car ownership and the coming of discount airlines have ensured that more people prefer to travel between major cities by road or air. Trains have been losing their popularity, especially among the middle class.
But a new generation of high-speed intercity trains that subsidize tickets with the revenues from the sale of carbon credits and which carry passengers from one city centre to another in a couple of hours could change the nature of the transport game.
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