January 10, 2015
Earlier in the week I took the environmental movement to task for its lack of interest in pay by the mile auto insurance. I consider it a major failing because this one should be a relative freeby in the effort to reduce greenhouse gas emissions.
In contrast to a carbon tax or cap and trade mechanism, it doesn’t raise the price on average, it just changes the incentive structure. And in doing so, it can have a large impact in reducing driving. If the average insurance policy costs $1,000 a year, and people drive 10,000 miles on average, then this converts to a fee of 10 cents a mile. If a car gets 20 miles per gallon, shifting to pay by the mile insurance would have the same incentive effect in reducing driving as a $2.00 a gallon gas tax.
Also, unlike a carbon tax, which is really bad news for the oil and coal industries, insurers could still make plenty of money with pay the mile insurance. The only real obstacle for them is inertia. After all, why should they change the way they sell insurance just to save the planet?
And, pay by the mile also has the great advantage that insurance is regulated at the state level. This means that if the enviros concentrated their forces on a green-friendly state, they should be able to win support for pay by the mile policies. And, with adverse selection going the right way (low-mileage, low accident drivers go into the pay by the mile pool, driving up the cost of conventional policies), it shouldn’t be too hard to quickly get most of a state’s drivers into pay by the mile policies. If one state could go this route and substantially reduce miles driven, then others could follow.
Anyhow, several people wrote comments and e-mails complaining that the environmentalists have in fact been pushing for pay by the mile insurance. I can’t say I’m aware of everything enviros do, but anything they do on pay by the mile certainly is not as visible as something like the effort on the Keystone pipeline. (Which is worth opposing.)
Mark Brucker, one of my correspondents, sent along a list of relevant pieces for those who might be interested:
http://www.researchgate.net/publication/228427253_The_Impact_of_Pay-As-You-Drive_Auto_Insurance_in_California
The Impact of Pay-As-You-Drive Auto Insurance in California
Jason E. Bordoff and Pascal J. Noel1
The Hamilton Project, The Brookings Institution
Draft: July 21, 2008
Jason E. Bordoff (2008) Pay-As-You-Drive Car Insurance, Brookings Institution (www.brookings.edu/articles/2008/spring_car_insurance_bordoff.aspx).
Jason E. Bordoff and Pascal J. Noel (2008), Pay-As-You-Drive Auto Insurance: A Simple Way to Reduce Driving-Related Harms and Increase Equity, The Brookings Institution (www.brookings.edu); at www.brookings.edu/~/media/Files/rc/papers/2008/0417_payd_bordoff/0417_payd_bordoff.pdf.
Aaron S. Edlin and Pinar Karaca Mandic (2001), The Accident Externality from Driving, University of California, Berkeley (http://works.bepress.com/aaron_edlin/21).
A 2006 paper from the Journal of Political Economy, co-authored by Pinar Karaca-Mandic, on the accident externality from driving.
?“Per-Mile Premiums for Auto Insurance,” a chapter from the 2003 book Economics for an Imperfect World: Essays in Honor of Joseph E. Stiglitz.
http://www.econ.berkeley.edu/~edlin/
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