Can Clean Insurance Fend Off Global Warming?

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Dean Baker
Truthout, Aug. 9, 2006

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Al Gore's new film, "An Inconvenient Truth," has helped to focus public attention on the danger of global warming. It is good news that more people are now aware of the problem, but the real question is what are we going to do about it?

Well, if Gore produces a sequel, the hero could be a car insurance salesperson. To stop global warming, we will have to radically reduce our consumption of fossil fuels. This will not be easy, but there are some easy places to start, and car insurance tops the list.

The basic story is simple. People currently buy car insurance on an "all you can eat" basis. No matter how much you drive, you pay pretty much the same amount for your auto insurance. (Some insurers offer modest low mileage discounts, but these discounts are generally small relative to the cost of the policy.) Therefore, drivers have little incentive to take into account the cost of their insurance when they decide whether to drive their car.

In fact, the risk of an accident does increase if people drive more miles. This means that insurance would more accurately reflect risk, if the price of an insurance policy were proportional to the number of miles driven. In other words, if you drive twice as many miles, you pay twice as much for insurance. Switching from the current "all you can eat" insurance pricing to a pay-by-the-mile system would also have the advantage that it would give people an incentive to avoid driving.

The arithmetic is straightforward. The average insurance policy costs just under $1,000 a year, and the average car is driven close to 10,000 miles a year. This would translate into a pay-by-the-mile fee of 10 cents a mile. This is the amount that drivers would save by not driving. For example, a worker living in the suburbs who could avoid a 50 mile round-trip commute by car-pooling would save $5 for every day that she didn't drive.

Savings of this sort would likely have a considerable impact on driving. If an average car gets 20 miles a gallon, a 10 cent a mile insurance charge would have the same impact on driving as a $2.00 a gallon gas tax. The big difference in this story is that pay-by-the-mile insurance doesn't raise insurance costs on average at all. In fact, people will save money if they are low mileage drivers, and everyone will be able to save money if they can find ways to drive less. This sort of "clean insurance" policy would seem to be a relatively painless way of bringing about large reductions in greenhouse gas emissions.

The switch to pay-by-the-mile insurance will be somewhat more complicated than I just described. It would be important to preserve differential pricing based on driving history - a wreck-prone teenager would pay a higher per mile charge than a parent with a perfect driving record - and the accident risk in rural areas is much lower per mile than in inner cities. But these issues can be resolved. The key point is that clean insurance presents an opportunity to bring about large reductions in driving, without any increase whatsoever in average costs.

In fact, the shift to pay-by-the-mile insurance presents extraordinary political opportunities, since insurance is regulated at the state level. It is not necessary to fight for years to get Congress to act, states can move one at a time. State governments could mandate a shift to pay-by-the-mile policies, or more likely provide a modest tax credit to kick start the switchover, as Oregon has already done. They could also assist with enforcement, for example by requiring mandatory odometer readings at annual car inspections. These mileage numbers would in turn be reported to the insurer.

State governments could also attempt to amplify the effect of pay-by-the-mile policies by assessing car registration fees to a pay-by-the mile basis. If the annual registration fee is $100, this can be switched over to a fee of 1 cent a mile. This would give people even more incentive to reduce their driving.

Stopping global warming and reversing the effects of past emissions of greenhouse gases will require massive changes in the way that the country and the world consume energy. Many of these changes are likely to be quite difficult. However, changing the way we price insurance should be a very simple first step. There are no obvious losers in this story, and the planet could be a big winner.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.