Do Downtown Traffic Bans Choke Local Business?

Some cities try to clean up their act by limiting cars in the core. A new study finds reasons for optimism
Alan Morantz
Painting that warns the vehicles of the entrance to the downtown area of Madrid ("Madrid Central").

The essentials

  • Large cities institute a variety of policies to limit or eliminate downtown traffic in an effort to reduce congestion and greenhouse gas emissions.
  • Many of these policies have been shown to be effective in reducing pollution. But some have argued that local businesses suffer when customers travel less often to ban-affected areas.  
  • A recent study based on Madrid’s low-emission zone shows that sales at storefront shops from consumers outside the area dropped by almost nine per cent. But the value of the retailers’ online sales increased by 12 per cent, essentially offsetting the storefront losses.

In the late 1800s, big cities like London and New York City were powered by horses, tens of thousands of them plodding on any given day. There were horse-drawn carts and drays, horse-drawn carriages, horse-drawn buses, even horse-drawn streetcars on rails (or “horsecars”). All those horses generated more than power: in New York City, residents had to deal with millions of pounds of horse manure each day. The problem got so bad that, in 1894, The Times predicted that, “In 50 years, every street in London will be buried under nine feet of manure.”

Well, it never got to that point. New technology, in the form of electric streetcars and gas-powered vehicles, gradually made horse transport obsolete. Now, it’s motor vehicles that are forcing big cities to deal with a different sort of emission—not manure but carbon dioxide and other greenhouses gases. 

London, Stockholm, Singapore and a handful of other cities have established congestion pricing that requires drivers to pay a toll to enter the city core. London recently added an Ultra-Low Emissions Zone levy on top of the congestion charge on the worst-polluting vehicles. In Mexico, the right to drive on certain days depends on whether a driver’s licence plate ends in an odd or even number. Beijing has instituted a lottery for new licence plates. Oslo closed off certain streets in its central district entirely.

Studies have shown that tolls are an economically viable way to reduce traffic congestion and emissions. Stockholm’s system of tolls cut traffic by 20 per cent and reduced air pollution by 12 per cent. A recent study of London’s experience found that congestion pricing reduced pollution and traffic, but increased pollution from diesel vehicles (which were exempt from the congestion pricing).

Toll story

For every public policy, however, there are winners and losers. It has long been a concern that limiting vehicular traffic into central districts would hurt local businesses. Business interests have argued that customers travel less often to ban-affected areas and consequently spend less money. Such concerns may be justified. A study that looked at one large retailer within the congestion charging zone of London, for example, indicated that tolls were responsible for a drop in sales of between six and eight per cent.

But what has been lacking is a more nuanced understanding of the impact of driving restrictions on local commerce. Until now. A recent study by Ricard Gil of Smith School of Business, with colleagues Jose Enrique Galdon-Sanchez (Universidad Pública de Navarra), Felix Holub (University of Mannheim) and Guillermo Uriz-Uharte (University College London), examined whether driving restrictions in the centre of Madrid caused lower revenues in local establishments.

The researchers focused on a low-emission zone known as Madrid Central. Started in November 2018, Madrid Central is considered one of the most effective plans in the European Union for reducing greenhouse gases. With the exception of residents, their guests and delivery vans, traffic in Madrid Central is restricted to electric or hybrid vehicles (additional exceptions are based on the emission category of vehicles).

To mine for insights, the researchers pulled data from a number of sources. For environmental effects—traffic congestion and pollution—they used data from the European Environmental Agency and the city of Madrid. 

What they found mirrored what has been observed in other cities with vehicle restrictions in city centres. The number of cars per hour in Madrid Central decreased by almost 15 per cent and the concentration of nitrogen dioxide dropped by 16 per cent. These effects were not seen in other parts of Madrid.

The bigger challenge was analyzing how the driving ban affected retail spending in Madrid Central. For that, they drilled deep into a dataset on credit-card spending at the zip code level for both buyers and sellers. That transaction-level information allowed them to measure the flow of consumer spending between all zip codes within the Madrid metropolitan area. They could estimate the impact of consumers travelling to Madrid Central to do their shopping relative to the shopping of these same consumers in other areas of the city.

The findings of their research (which was done pre-COVID) tell a somewhat surprising and promising story. As some feared, sales at these bricks-and-mortar shops from consumers outside the area dropped by almost nine per cent, suggesting that retailers bore some of the brunt of the policy to restrict traffic. But the value of their online sales increased by 12 per cent, essentially offsetting the storefront losses. Faced with the inconvenience, consumers simply substituted sales channels, at least for those local retailers offering an e-commerce option.

The bottom line is that there was no statistically significant impact on total revenues or number of transactions due to the Madrid Central initiative. 

There is a potential takeaway here for urban policy makers considering congestion tolls, licence plate lotteries or targeted vehicle bans. Given that these policies have the potential to change how consumers behave, the researchers note, small businesses within affected areas may need help in transitioning to an e-commerce platform to make up for potential losses at their physical stores.

As for the future of Madrid Central, success may not be enough to save it. In July 2020, a court ruled that the low-emission zone should be discontinued because it was approved without a proper public disclosure process or an economic impact report. The judgment made the now ruling party in the municipality happy: conservatives had been energetically scornful of the Madrid Central concept from the start. 

But they may want to think twice: if Madrid Central is discontinued, 815,000 tickets issued in the zone would be cancelled and the city would be deprived of CDN$62 million. Even more compelling is the proven success of Madrid Central in making the city more liveable and healthier for its 6.6 million residents. Says Smith’s Ricard Gil: “If you think of the health-care costs and congestion issues related to traffic in a city like Madrid, the positive impact of this initiative is substantial.”

Smith School of Business

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