This country is choking, metaphorically as well as literally, on the automobile. Buttressed by huge hidden subsidies and a 50-year low gasoline price, the car has distorted our land-use choices and pushed other transportation options into near oblivion. The individual cost of driving is so low that the societal costs -- of oil imports, air pollution, congestion and land use -- have become enormous. Just about everyone believes the country would benefit from a transportation system that offered alternatives. But how do we get there from here?
The obvious first step -- a hefty gasoline tax -- seems out of the question for now. Like all taxes, it is anathema. The United States is undertaxed relative to the services we want and need government to provide. But that's not what Americans believe, and it may be years before opinions change. On the other hand, regulations that ignore the price signal (which right now says that driving is cheap) won't work either.
This suggests that we should be searching for new ideas, measures that are neither taxes (direct or disguised) nor economically inefficient, bureaucratically burdensome regulations. Energy analyst Mohamed El-Gasseir has proposed one such exciting idea to the California Energy Commission called Pay as You Drive insurance.
The basic notion is simple. Automobile insurance premiums would be divided into two components, one that continues to be paid directly to an insurance company and another that is purchased gallon-by-gallon at the fuel pump. The latter payment -- about 70 percent of the total -- would cover insurance companies' costs of meeting claims for driving-related risks, namely liability, collision and medical insurance. The direct payment would pay for companies' overhead, commissions and profit and allow adjustments for age and gender differences in risk.
Gas stations would collect the premium payments and pass these along to the state government just as they now handle state gasoline taxes. The state government would pass the money through to the insurance companies based on each company's client share in the state. Insurance companies would continue to compete as they do now through differences in the direct payment component.
To see how this might work, consider California in 1987. In that year the average vehicle consumed 753 gallons of gasoline, and the average insurance premium was $554. Seventy percent of that amount, $390, purchased at the pump would mean that the apparent cost of a gallon of gas would rise by 52 cents. The real cost to an average driver would not change at all, but the economic signal would change dramatically. Drivers would have a much clearer sense of the true cost of driving and -- most important -- would be able to choose to lower those costs if they wanted to.
The apparent price increase would be a powerful inducement to reduce the number of miles driven. There would be more car pooling, van pooling, combining errands, using public transit and other means. People would consider buying a more efficient automobile when the time came. Doing either or both would lower the individual's cost and society's as well by reducing energy use, oil imports, air pollution and congestion. Over time this would mean less revenue to the insurance companies, but fewer miles driven would also mean fewer claims to cover. A state agency would periodically adjust the pump payment to keep the funds in balance and allow insurance companies a fair profit.
The benefits don't end there. The present auto insurance system almost ignores the fact that the risk of having an accident is directly related to miles driven. Drivers are not rewarded, as they would be under Pay as You Drive, for lowering their risk to the company by driving less. Indeed, having already paid for the full cost of insurance up front, there is even a subtle economic incentive to drive more.
In addition, the change would reduce the number of uninsured motorists, since few people would choose to pay 70 percent of the cost of insurance without any benefits when only 30 percent more would bring full coverage. It could also reduce or eliminate the cost of taxpayer-subsidized assigned risk pools in states where these exist. Thus in several different ways Pay as You Drive would improve both the equity and the economic efficiency of providing automobile insurance.
In most of America the cards are so stacked in favor of the automobile that nothing else can compete, even when congestion approaches the intolerable. When one or two of those cards are flipped, however, the results put the lie to those who gloomily insist that Americans will never leave their automobiles. Portland, Ore., for example, discovered this happy truth when it put a lid on downtown parking, thereby opening the way for its extremely successful light rail system. Given realistic choices, Americans are more flexible than we give ourselves credit for.
Our reliance on the automobile has grown so heavy that we are beset by paradox: cleaner cars but more pollution, higher fuel efficiency but rapidly growing oil use, more roads but greater congestion. Pay as You Drive insurance might be a clever way to escape this bind. On paper, at least, it offers motorists a choice and opens the market to other transportation options without taking on the vastly more difficult political task of asking motorists to pay more of the full social costs of automobile use.