Harper's Magazine, June 1, 2006
The world must reduce its consumption of fossil fuels in order to avoid the worst effects of global warming. This will require many long-term and expensive measures to promote alternative fuels and conservation—and consequently, many major political battles.
But there is one thing we could do now that would change how people consume gasoline. We could switch from the current way in which people pay for auto insurance to a pay-by-the-mile system. Such a switch might reduce annual gasoline consumption by as much as 10 percent, without raising the cost of insurance for an average driver. The key is to change the way that people view the cost of driving their car.
Currently, auto insurance is viewed as a fixed expense. People pay the same amount for their insurance no matter how much they drive. This means that when someone is comparing the cost of driving to work with the cost of carpooling or public transportation, they won't factor in the cost of insurance, because they will pay the same whether they make any particular trip or not.
This would change if drivers paid for insurance by the mile. Taking rough numbers, the average person drives her car around 10,000 miles a year and pays a bit less than $1,000 each year for insurance. This means that the cost of insurance is approximately 10 cents per mile. If for each mile they drive drivers paid 10 cents for insurance, then on average they would pay the same amount for insurance as they do now—but they would have much more incentive to cut back their driving.
So, for instance, a driver who was considering carpooling to avoid a 40-mile roundtrip commute to work could save herself $4 a day (more than $800 a year) in insurance costs by carpooling under the pay-by-the-mile system. Many trips that make sense under the current insurance payment system would not make sense with a pay-by-the-mile system. It would discourage driving in the same way that a large gas tax would discourage driving, except that—on average—no one will pay more for insurance.
Pay-by-the-mile insurance can also be adjusted to preserve the existing risk-based system. A wreck-prone teenager may have to pay 20 cents per mile for insurance, while a middle-aged parent with a spotless record may pay 5 cents per mile.
Pay-by-the-mile insurance would have the greatest impact if it were implemented nationally, but since insurance is regulated at the state level, individual states could take action on their own. For example, states could offer a small incentive (a $200 per year tax credit, say) for each pay-by-the-mile insurance policy. Oregon began doing this last year. They are other ways to promote pay-by-the-mile policies, but in some cases states just have to remove obstacles to pay-by-the-mile insurance. State regulators must explicitly approve the type of insurance policies that insurers offer, and in many states current regulations would not even allow pay by the mile policies.
The federal government could also step in to promote pay by the mile insurance by mandating odometer readings with each annual car inspection (as many states already do), then reporting the mileage reading to insurers to facilitate enforcement. States could also increase penalties for tampering with odometers.
The insurance industry will likely oppose any shift, not because they can't make profits on pay-by-the-mile policies, but rather because they don't feel like changing what they are doing. But that doesn't mean it's impossible—in fact, Progressive Auto Insurance has been experimenting with pay-by-the-mile policies, and in southern California, AAA offers a graduated pay-by-the-mile policy that is somewhat like the one I'm proposing.
So yes, insurers would incur some one-time costs by changing their billing policies. But after they switched they would make just as much money, while carbon emissions and our dependence on foreign oil would be significantly reduced. And while getting greenhouse gas emissions down to sustainable levels will require the development of new technologies and, most likely, substantial taxes on the use of fossil fuels, pay-by-the-mile insurance is something that could be done now—and that should have been done yesterday.
Economist Dean Baker is the director of the Center for Economic and Policy Research. His most recent book is The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer, available as a free, downloadable e-book and in paperback. He blogs at Beat the Press.