Pay-as-you-drive auto insurance

Dean Baker makes the case below. I think this is a good way of internalizing the external costs of driving, including CO2 emissions and other nasty stuff. And in the case of BC and a few other provinces, it would be easy to implement via public auto insurance monopolies.

In and of itself, however, I don’t think it gets us all the way there. It does not adequately address the peak hour congestions issues, which would probably require some additional form of congestion pricing. To be more effecive on the auto purchase side, it could be combined with fee-bate initiatives (that place a tax on purchase of guzzlers to pay for subsidies for the most fuel efficient vehicles) and regulations mandating zero emission vehicles in the future. Add some major public transit improvements and you are on your way to a more sane transportation policy.

If Environmentalists Cared About Global Warming…

By Dean Baker


January 29, 2007, Truthout

They would all be pushing for pay as you drive auto insurance. I know that insurance isn’t very cool or sexy, like some of the high-tech solutions for global warming. But pay as you drive insurance has the great advantage of being something that could in principle have a big impact beginning tomorrow, and it does not face massive political opposition. There is nothing else that comes close in terms of its potential impact on a short-term basis.

Just to restate the basics, currently people treat auto insurance as a fixed cost of driving. They pay pretty much the same for their insurance regardless of whether they drive 1000 miles or 20,000 miles. The cost of insurance simply is not a factor in the decision on how much to drive. If the cost of insurance were instead assessed on a per mile basis, it would on average come to about 9 cents a mile. This would provide the same disincentive to drive as a $1.80 a gallon gas tax for someone with a car that gets 20 miles per gallon.

There is no major technical or political obstacle to switching to pay by the mile insurance. Insurers could continue to assess different rates based on drivers’ accident history and other relevant factors. A mother with a perfect driving record may pay 5 cents a mile for her insurance, while a wreck prone teenager may pay 20 cents a mile. There will be problems with verification, but everyone is not exactly honest at present in dealing with their insurance companies. Verification problems can be overcome, or at least contained.

The insurance companies won’t want to switch from their current pricing system, but this is mainly just a problem of inertia. Companies that are profitable don’t want to be pushed to change their practices. However, this is not a case like the tobacco industry, where keeping people from getting cancer means shutting them down. There is no reason that insurers can’t make every bit as much money with pay as you drive policies as they do on the current system. Furthermore, insurers don’t have to be forced to switch. Most of the transition can be accomplished with modest incentives (e.g. $100 a year subsidy for pay as you drive policies).

It is important to realize how much is at stake on this. According to a recent study, switching to pay as drive policies would reduce driving by approximately 9 percent. This is a really big deal.

To see how important a 9 percent reduction in miles driven would be, let’s contrast it with a very optimistic political scenario, in which our political leaders begin to take global warming seriously. Suppose that a president is elected in 2008 who actually commits themselves to doing something about global warming. A strong measure might require a 50 percent increase in average fuel efficiency over a 5-year period. If such a measure passed in 2009, it would mean that the cars sold in 2014 would consume an average of 33 percent less gas than cars on the road today.

Of course, only a small portion of the car stock turns over in any given year. If we assume that 10 percent of the country’s fleet of cars (by miles driven), turns over every year, then after 3 years, we will have reduced the amount of fuel consumed in the auto sector by about 10 percent. This means that in this optimistic scenario (has any presidential candidate committed themselves to a major increase in auto fuel efficiency?), by 2017 we can attain the same reduction in greenhouse gas emissions as pay as you drive insurance can get us in a year or two.

In fact, since insurance is regulated at the state level, there is no reason that environmental groups can’t be pushing tomorrow on a state by state basis to get policies promoting pay as you drive insurance. National policy would be helpful, but nothing is stopping states from moving ahead immediately.

As more attention gets focused on global warming, the continued neglect of pay as you drive insurance becomes more difficult to understand. It obviously is not the whole answer. We will have to develop better technologies and alternative fuels, but it is a very simple and easy first step.

This is like a situation where we have a person who’s bleeding badly after being hit by a car. Of course, we want to get the victim to a hospital where a trained medical professional can deal with his wounds. But, most immediately, we have to stop the bleeding or the victim won’t live long enough to make it to the hospital. When it comes to global warming, pay as you drive insurance is a way to slow the bleeding, but unfortunately no one seems to give a damn.


  • I am inclined to agree that putting a price on each kilometer driven might induce people to drive less, although rising gasoline prices do not seem to have had this effect during the past few years.

    An important issue regarding the applicability of this plan to Canada is that auto insurance is significantly cheaper here, so the price per kilometer and the associated incentive would be lower than Baker projects for the US. Because rates tend to be lowest in provinces with public auto insurance, this plan would be least effective where it would be easiest to implement.

  • There is one other VERY large problem with this theory and that has to do with the number of male drivers. According to the stats that I recently read, female drivers would pay more per kilometer than male because it would be illegal to charge people per kilometer based on conditions that aren’t per kilometer. Right now male drivers get in more accidents than female driver by approx 20% (from the stats that I have read) BUT male drivers also drive approx 32% more kilometers per year, which means on a per kilometer basis men are actually safer drivers.

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