Many of the ways to reduce greenhouse gas emissions will require major changes in behavior and/or impose serious costs. However, there is one mechanism that could lead to substantial reductions in emission with no cost: pay-as-you-drive auto insurance.
The basic point is simple. With current policies, most people will pay the same amount for their insurance whether they drive 500 miles or 50,000 miles. However, their risk of being in an accident is clearly greater the more miles they drive. If we can have insurance prices reflect the increased risk, it would mean both better insurance pricing and giving people a substantial disincentive to drive.
The impact would be large. The average cost of insurance per mile driven is close to 8 cents. This means that if insurance were paid on a per mile basis, for a car that gets 20 miles to a gallon, pay-as-you-drive insurance would provide the same disincentive to drive as a $1.60 a gallon gas tax. This can easily lead to reductions in gas consumption and greenhouse gas emissions from the auto sector of 10 percent or more.
The great part is that it doesn't even raise driving costs on average, it just makes a fixed cost - the annual insurance premium - into a per mile cost. Since people will now presumably drive less and therefore have fewer accidents, they should actually end up paying less on average for insurance.
I first wrote about this a decade ago with my then colleague at the Economic Policy Institute, Jim Barrett. Others had written about pay as you drive even earlier, such as Patrick Butler with the National Organization for Women, Daniel Khazzoom at San Jose State University, Todd Littman at the Victoria Transport Institute and Aaron Edlin, now at Berkeley. The reason for mentioning pay-as-you-drive insurance now is being discussed in the mainstream of the economics profession. Two researchers affiliated with the Brookings Institution recently wrote a piece touting the merits of pay-as-you-drive insurance.
This is great news. It means Congressional staffers and potential White House political operatives can now take the idea seriously. Environmental groups, who are more fearful of new ideas than global warming, may also be persuaded to consider it as a policy option. Now that a pillar of intellectual establishment like Brookings has certified the respectability of pay-as-you-drive insurance, it means it is at last a viable political option.
It's great to see the Brookings crew can occasionally pick up a new idea. Of course, pay as you drive is very safe, as new ideas go, since it doesn't threaten any powerful interest groups. Insurance companies can make just as much money selling pay-as-you-drive insurance as selling their current polices. The oil companies may be unhappy, but they can no more prevent pay-as-you-drive insurance than they can stop people from driving more fuel-efficient cars.
It would be interesting to see if the Brookings gang could ever be persuaded to examine some policy proposals that actually did ruffle some powerful feathers. For example, this group of hard-core "free traders" has never been interested in freer trade in the area in which the United States stands to benefit the most, health care. If our trade policies made it easier for foreign doctors to come to the United States, or US citizens to take advantage of high-quality, low-cost care abroad, the potential gains would be enormous. Of course, free trade in medical care would hurt the insurance industry and highly paid medical specialists; that's a lot more difficult than going after textile and autoworkers and the other losers from recent trade agreements.
Speaking of protectionism, how about considering more efficient alternatives to patent-financing of prescription drug research? Without government-imposed patent protection, we would pay less than $50 billion a year for drugs that now cost us $250 billion a year. If direct funding for research sounds too radical, how about just paying for the clinical trials where the worst industry abuses occur? But this proposal would anger the pharmaceutical industry.
In a year in which the big Wall Street banks have been driven to the edge of bankruptcy or beyond, by executives who have pocketed tens of millions of dollars in compensation, one would think economists might be concerned about the obvious agency problem in the system. Perhaps, they would try to rein in a sector of the economy that is clearly out of control, imposing a small financial transactions tax that could raise more than a trillion dollars over the next decade. This one would upset the financial industry, which happens to be a big source of money for the Brookings crew.
No one expects a pillar of the intellectual establishment like Brookings to be a major source of cutting-edge ideas. It is encouraging that they can occasionally pick up an idea that has been developed on the fringe, like pay-as-you-drive insurance. It's too bad the power of major industry lobbies makes this such a rare occurrence.