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

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 bilevel approach: at the upper level, authorities set road taxes and scheduled line subsidies, while at the lower level, carriers 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 bisection algorithm for the upper level and an Adaptive Large Neighborhood Search (ALNS) for the lower level. Our results show that optimally setting the subsidy and tax can reduce the driving distance by up to 15% 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. We found that an additional budget provides a better trade-off between minimizing distance and transportation costs than solely increasing the subsidy level for the partial subsidy policy. In a Berlin, Germany, case study, we find that up to 2.9% reduction in driving distance can be achieved 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. • Recycled tax as scheduled line subsidy can increase freight modal shift. • A full subsidy is provably an optimal policy. • Optimal tax and subsidy reduce the driven distance by up to 15%. • Partial subsidies benefit modal shift with limited budgets. • Time window is a limiting factor to the modal shift.