I tend to eat too much when I pay a fixed price to dine in a restaurant that offers an all-you-can-eat deal. In contrast, at the same restaurant, when I have to order food a la carte, I tend to eat much less. I suspect this is true for most Americans. In this simple truth lies an important lesson about how we might fight global warming.
This phenomenon is largely the result of a warming effect caused by the increasing emissions of greenhouse gases-primarily carbon dioxide-into the earth’s atmosphere. Every time we drive our cars, we burn gasoline, emit more carbon dioxide into the atmosphere, and thereby contribute to the global warming problem.
One way of dealing with this problem would be to levy a gasoline tax that will ultimately decrease dependence on fossil fuels and conserve energy. Indeed, such fuel taxes are widely used in many European nations. This notwithstanding, the problem in the United States is that high gasoline taxes are too unpopular and therefore unlikely to become law in the foreseeable future. This brings me to the subject of automobile insurance.
The way automobile insurance in this country is structured today resembles the all-you-can-eat scenario described earlier. That is, drivers who are similar in most respects pay approximately the same premiums whether they drive 3,000 miles or 30,000 miles a year. This happens even though both greenhouse gas emissions and accidents tend to increase with the number of miles driven.
Just as people tend to eat too much when they do not bear the full cost of the extra food, they also tend to drive too much when they do not bear the full cost of the extra miles driven. In addition to higher accidents and greenhouse gas emissions, this increased driving also results in higher congestion, lower air quality and increased dependence on oil.
Recent economics research shows that it would make a lot of sense to structure automobile insurance premiums so that they reflect a pay-as-you-drive principle. In other words, insurance companies would be required to offer premiums on a per-mile driven basis and not on a per-year basis.
To see how such a scheme would work, consider drivers who currently pay $500 a year in premiums and who drive 5,000 miles a year on average. Instead of charging these drivers $500 a year, an insurance company might charge them 10 cents per mile driven. In this situation, the average driver would continue to pay $500 per year. However, if a driver cut his driving in half, he would save $250 a year. In contrast, if this driver were to double his driving, then his payment would double from $500 to $1,000. The key point is that such a scheme would provide a strong incentive to individuals to reduce their driving.
In addition, such a scheme should be politically acceptable because unlike a gasoline tax, it would not increase the total cost of driving. Specifically, it would save money for those who drive less than the average and it would shift the cost to those who do most of the driving and hence contribute most to the problems mentioned above. A recent study by the Brookings Institution shows that a pay-as-you-drive premium scheme would reduce carbon emissions by some 126 million tons, lessen the cost of premiums for roughly two-thirds of all households and yield social benefits of about $51.5 billion. Therefore, it is ideas of this sort and not summer gas tax holiday proposals that ought to be part of a serious national energy policy.
Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology; these views are his own.
06/20/2008 (C) Rochester Business Journal