how about getting rid of travel cards on oyster card, so that there was always an incentive to walk or cycle? the cost of a single journey could be reduced to compensate somewhat. i guess the downside would be that some people who always had to use public transport would have to pay slightly more, and it would work out cheaper to occasionally drive rather than use public transport.
but to me it seems wrong that any journey should be free - there should always be an incentive for walking/cycling, even if you have a travelcard...