In Europe, legislation requires transparent and non discriminatory rail access charges based on the principles of the short run marginal social cost although mark ups are permitted where necessary to meet financial requirements. Current legislation states that environmental costs should not be charged for unless they are charged for competing modes. However, moving forward to a fully internalization scheme of transport external costs is highly desirable to give appropriate cost incentives to the market and promote sustainable development. The Railex research project, funded by the Spanish Ministry of Economy and Competition, aims at producing the required knowledge to set environmental charges for railways.

Based on the Railex project findings, this paper presents a pricing scheme to internalize noise and pollution costs into railway charges for the European network and it is applied to Spanish railways as an example. The charging scheme is intended to be practical and so both the marginal external costs estimates and the implementation and transaction costs of the charging system are taken into account. Also, special care has been taken in charging only external costs that are attributable to railway undertakings.

To calculate both noise and pollution external costs a clustered bottom-up approach is adopted. In the case of noise costs, state-of-the-art noise valuation methods have been deeply reviewed and numerous hedonic pricing and stated preferences results are compared and applied to the Spanish context together with heath costs. On top of that, the CNOSSOS-EU noise prediction model is applied as a reference to estimate rail noise marginal impacts. Regarding pollution external costs, the Impact Pathway Approach (IPA) methodology is adopted and implemented considering the Spanish railway and energy production system. Finally, several sensitivity analyses are performed in order to evaluate the effect of input uncertainties on the pricing scheme.