Instrument Overview
Charges and pricing for public action and services refer to policy mechanisms where city authorities impose fees for the use of urban assets or services (e.g. use of road space in city centres, water access, parking, or waste disposal) at rates designed to manage demand, reduce externalities, or fund public services. Unlike taxes, these are usage-based charges tied directly to consumption or behavior.
Why it matters for cities
Cities face congestion, pollution, strained infrastructure etc. Implementing charges to address adverse consequences of such actions would allow municipal governments to manage demand or restrict usage for scarce urban resources, reduce environmental impacts – such as air pollution or CO2 emissions, and raise revenues for reinvestment in sustainable infrastructure. This creates fiscal space for green urban upgrades while guiding behaviour toward less adverse and equitable outcomes.
Key features
- Targeted and conditional : Fees apply to specific behaviors (with adverse environmental/social impact) or services (usage of strained infrastructure)
- Pricing variations : Structures vary – fixed (cordon/area pricing), dynamic (time-of-day), distance-based, or a combination.
- Revenue recycling : Typically, proceeds are collected in a dedicated fund and used for public transport development, infrastructure improvements, or environmental initiatives
- Behavioral impact : Designed to change patterns – e.g. decrease car use, encourage modal shift, smooth peak demand (e.g. congestion charges)
- Equity mechanisms : Some schemes include subsidies or exemptions for residents or vulnerable groups.
Benefits & Challenges
Benefits
- Reduces congestion and emissions : e.g. London cut central traffic by approx. 30%, Milan’s Area C reduced vehicle entries by ~34%
- Supports sustainable mobility : Revenues generated through the charging system can be used to fund public transport or similar measures
- Improves safety and health : Reduced traffic results in lower accident rates, and reduced air pollution in densely populated areas.
Challenges
- Public opposition and political pushback due to perceived unfairness or higher costs for low-income users.
- High setup cost: Infrastructure, enforcement, and administrative systems can be expensive
- Equity concerns: Charges can disproportionately affect those without travel alternatives unless mitigated.
Use Case
The City of London introduced a congestion charges in 2003 after the city had suffered the worst congestion in the UK in the previous year (average traffic speed slower that 12 km/h). Initially, the scheme only partially covered areas of the city but have been growing over the years, now including the entirety of the City of London. The congestion charge has been increasing over the years and is now at a £15 daily charge if driving within the zone 7:00-18:00 Monday-Friday and 12:00-18:00 Sat-Sun and bank holidays. Additionally, all parts of London have been declared an Ultra Low Emission Zone (ULEZ), that requires vehicles to meet the ULEZ emission requirements. If those are not met, a daily £12.50 charge needs to be paid.
London’s congestion charge and ULEZ have delivered substantial environmental gains. Public support generally aligns with the city’s broader ambitions for cleaner air, though dissent persists in specific communities. However, London still faces ongoing congestion challenges, underscoring the need for integrated measures that complement zoning charges with infrastructure and alternative transport investments.
When to use it
Phases :
During the planning phase the feasibility should be assessed, considering the city’s climate action plan and most important changes that should be triggered through the scheme. Accordingly, pricing schemes should be designed. During the implementation it is important to appropriately monitor and communicate the charges to advertise for public understanding and acceptance. Later, it is important to manage the revenue flows, evaluate impacts (to emphasize the positive effects of the pollution/service charge), and adapt the pricing.
Applicable Sectors:
- Transport (e.g. congestion zones, high-emission areas)
- Utilities (e.g. waste charges)
- Public spaces (e.g. parking, event zones)
It is important to align charges with climate objectives, modal shift goals, and urban form planning, especially in dense urban cores where demand needs managing and resources are stretched.
References
- Road pricing is tackling congestion and pollution in cities | World Economic Forum (2021)
- Local Governments Climate Finance Instruments (2024, World Bank and UN Capital Development Fund, p.40 ff.) World Bank Document
- Congestion Charge (Official) - Transport for London (2025)
- Environmental Effects of the London Congestion Charge: a Regression Discontinuity Approach (2015, M. Perocco, Università Bocconi) hEART_2015_submission_114.pdf