Optimal taxes and subsidies to incentivize modal shift for inner-city freight transport

TL;DR

This paper develops a bi-level model to optimize taxes and subsidies for inner-city freight transport, demonstrating that full subsidies effectively promote modal shift and reduce driving distances, with practical case study insights.

Contribution

It introduces a bi-level optimization framework for policy design in freight modal shift, including heuristic solution methods and empirical validation with a Berlin case study.

Findings

Full subsidies are optimal and cost-effective for modal shift.

Optimal policies can reduce driving distance by up to 12.5%.

Increased scheduled line frequency enhances modal shift.

Abstract

With increasing freight demands for inner-city transport, shifting freight from road to scheduled line services such as buses, metros, trams, and barges is a sustainable solution. Public authorities typically impose economic policies, including road taxes and subsidies for scheduled line services, to achieve this modal shift. This study models such a policy using a bi-level approach: at the upper level, authorities set road taxes and scheduled line subsidies, while at the lower level, freight forwarders arrange transportation via road or a combination of road and scheduled lines. We prove that fully subsidizing the scheduled line is an optimal and budget-efficient policy. Due to its computational complexity, we solve the problem heuristically using a bi-section algorithm for the upper level and an Adaptive Large Neighbourhood Search for the lower level. Our results show that optimally setting subsidy and tax can reduce the driving distance by up to 12.5\% and substantially increase modal shift, albeit at a higher operational cost due to increased taxes. Furthermore, increased scheduled line frequency and decreased geographical scatteredness of freight orders increase modal shift. For the partial subsidy policy, we found that an additional budget provides a better trade-off between minimizing distance and transportation costs than solely increasing the subsidy level. In a Berlin, Germany, case study, we find that we can achieve up to 2.9\% reduction in driven distance due to 23.2\% scheduled line usage, which amounts to an increase of multiple orders of magnitude, despite only using a few stations for transshipment.