Mileage-Based Auto Insurance Would Curb Global Warming, Researchers Say
By Scott Doggett, Contributor
Researchers seeking equitable alternatives to the lump-sum pricing practice of U.S. auto insurers may have stumbled upon a partial solution to global warming.
By linking payments to miles driven, the researchers suggested, motorists who do the greatest amount of driving each year would pay the most for insurance - all other things being equal - and those who drive the least would pay the least.
"Drivers who are similar in other respects - age, gender, location, driving safety record - pay nearly the same premiums if they drive 5,000 or 50,000 miles a year," Jason E. Bordoff and Pascal J. Noel wrote in a paper released today by The Brookings Institution.
"Just as an all-you-can-eat restaurant encourages more eating, all-can-drive insurance pricing encourages more driving," they wrote.
The current pricing system, as they see it, is inequitable because it forces low-mileage drivers to subsidize the insurance costs for high-mileage drivers, and low-income people drive fewer miles on average.
Their solution: pay-as-you-drive (or PAYD) auto insurance.
If all motorists paid for accident insurance per mile rather than in a lump sum, they would have an extra incentive to drive less, the researchers concluded. They estimated driving would decline by 8 percent nationwide, netting society the equivalent of about $50 billion to $60 billion a year, largely from reduced congestion and accidents.
But - and this is what really interests us - they also estimated the driving reduction would reduce carbon-dioxide emissions by 2 percent and oil consumption by about 4 percent.
"To put it in perspective, it would take a $1-per-gallon increase in the gasoline tax to achieve the same reduction in driving," they wrote. And unlike an increase in the gas tax, "PAYD would save most drivers money regardless of where they live."
Bordoff and Noel estimated that almost two-thirds of households would pay less for auto insurance, with each of those households saving an average of $270 per car.
Since insurance is priced in a lump-sum fashion, the researchers noted, a driver does not take the marginal cost of insurance into consideration when deciding how much to drive (the way she might consider the costs of fuel and maintenance, for example).
The result is that some of the miles she drives are not worth the marginal cost to her if she were actually to pay for insurance per mile driven, the researchers wrote. If she could pay for insurance by the mile and save that cost by reducing miles driven, she would do so and be better off by paying lower total premiums.
All these extra miles also impose significant costs on society, according to Bordoff and Noel. It's well known that burning fossil fuels in vehicles releases carbon dioxide, a heat-trapping gas that can remain in the atmosphere for more than 100 years and is the principal gas responsible for global warming.
What isn't as well known is the estimated impact of increased driving on traffic congestion. Urban traffic congestion in 2005 caused the average peak-period traveler to spend 38 extra hours in travel time, according to a 2007 study.
The number of urban areas with more than 40 hours of annual delay per peak traveler has grown from only one in 1982 to 28 in 2005. This wasted time costs the country $78 billion annually, the study showed, which is almost exactly the size of the entire U.S. federal transportation budget.
Given the power of the insurance lobby and the benefit to insurers to maintain the status quo regarding lump-sum pricing, is Congress likely to do away with the practice?
Probably not real soon, but as climate change takes an increasing toll on people's lives, maintaining the status quo in some industries will be increasingly difficult.
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- Scott Doggett July 28, 2008, 6:43 PM
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- Courts, Emissions, Fuel Economy, Legislation, Opinion
Funny. Every insurance company asks me where I live, where I work, and how far it is between. Insurance companies do a pretty good job of making sure that your payments reflect the risk. Now they want to use the global warming excuse to muck with the rates? Enough already!
Coming to think of it, they already include mileage because the distance between work and home is pretty much the indicator of the number of miles (and thus emissions) per year!
So I don't think there is the need for new charges......however, the principle that the one who drives more miles is a greater risk is a reasonable assumption.
Agree with previous comments. My insurance is based on mileage already as well. When I moved farther from work a couple years ago, my rates went up because of the increased distance.
It sounds like this article is suggesting an even greater disparity in insurance premiums between those who drive more and those who drive less, all other things being equal. That may seem "fair", but people will need at least several years to react. You can't just up and move closer to work tomorrow; these things take time. In the meantime that could place an undue burden on people who drive above-median miles to work.
According to the traffic studies I've read, traditional commuters only make up 10% of all vehicle trips, so it's not necessarily an accurate indicator of total miles travelled. Case in point - my wife works at home, yet we still put 12,000 miles/year on her car, while I drive to work every day, but only put 8,000 miles/year on mine.
norcalplanner,
If that's true and the average driver puts on 12,000 miles per year, commutes 1200 miles per year. Divide that by 50 weeks and by 5 days, you get 4.8 miles round trip (2.4 miles each way). As you can imagine, I have a difficult time believing that.
Personally, I drive 18 miles each way. Perform the math and that comes to 9000 miles per year. I probably put about 11000 miles on my car every year and some of those extra 2000 are for work (but not commuting). For me, it's more like 90%, not 10%.
I'm not completely discounting your point. For example, some people take public transportation or car pools. They certainly don't put commuter miles on like I do.
Wow!! This blog and the topic contained in this blog is awesome. I stayed more than 2 hours and got various information about mileage based auto insurance. Thanks for sharing this kind of topic.
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george
Great Auto Insurance