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

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.