To save on gasoline, for example, drivers reduced miles traveled by 4 percent in 2008 compared to a year earlier. But drivers could have saved even more: they still had to pay the same amount for auto insurance, even though the likelihood of being involved in an accident decreased as they drove fewer miles.

A bill just introduced in the Washington State Senate would fix that disparity by encouraging firms to price auto insurance based on miles driven rather than in a lump sum amount per year. The idea is called “pay-as-you-drive” auto insurance.

This paper addresses this central challenge for the United States. We begin by discussing the economic downturn and financial turmoil facing the country and how policymakers should respond to both boost our economy in the short-run and also build the foundations for long-term competitiveness. Second, the competitiveness agenda is motivated by, and must therefore be responsive to, at least three changes in the fabric of the global economy: the increase in global integration; the attendant shift in economic power to rising powers such as Brazil, China and India; and the realization of the existential threat that climate change poses. Finally, we lay out the fundamentals of a competitiveness agenda through descriptions of specific policy proposals by leading experts on how to invest more robustly in infrastructure, people, ideas and green transformation.

A better approach is simple and obvious: pay-as-you-drive (PAYD) auto insurance. With PAYD, insurance premiums would be priced per mile driven. All other risk factors will still be taken into account, so a high-risk driver would pay a greater per-mile premium than a low-risk driver. With insurance costs that vary with miles driven, people would be able to save money by reducing their driving, and this incentive would lead to fewer driving-related harms. PAYD would also be more equitable because it would eliminate the cross-subsidization of insurance costs from low-mileage to high-mileage drivers.

Given these potential benefits, there has been increased interest in California recently in encouraging PAYD insurance. This paper is intended to help policymakers and the general public understand and evaluate the potential impact of PAYD in California. It is based on a recently-released study of PAYD in the United States, “Pay-As-You-Drive Auto Insurance: A Simple Way to Reduce Driving Related Harms and Increase Equity,” published by the Hamilton Project at the Brookings Institution.

In California, we find that:

PAYD would result in an 8 percent driving reduction from light-duty vehicles.

Estimated gross annual social benefits from an 8 percent driving reduction total $10.8 billion based on current driving levels, and $21.1 billion based on 2020 projections.

The California state government would save $54 million annually based on 2006 data and $60 million annually based on 2020 projections.

PAYD would generate 7 to 9 percent of the total CO2 reductions needed to meet California’s emissions targets for 2020.

Nearly two-thirds (64 percent) of households in California would have lower premiums under PAYD. The average savings for that group would be $276 per vehicle per year (in 2007 dollars).

Low-income drivers would benefit especially. Every household income group making less than $47,500 (in 2001) saves on average. Even in higher income groups, a majority of households are better off.

For every ethnicity, a majority of California households would save money with PAYD, contrary to the claims of some groups that PAYD would disproportionately impact certain ethnic groups.

Because geography is a key risk-factor, a roughly equal proportion of rural (62.4 percent) and urban (64.2 percent) California households save money with PAYD.

In short, PAYD represents a win-win policy. What is good for drivers, in this case, is also good for society.

In this discussion paper, we propose and evaluate a simple alternative: pay-as-you-drive (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. We estimate driving would decline by 8 percent nationwide, netting society the equivalent of about $50 billion to $60 billion a year by reducing driving-related harms. This 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. Unlike an increase in the gas tax, PAYD would save most drivers money regardless of where they live. We estimate almost two-thirds of households would pay less for auto insurance, with each of those households saving an average of $270 per car.

Despite the large social benefits from PAYD, there are currently several barriers to its widespread adoption, including the cost to monitor miles traveled and some state insurance regulations. In order to facilitate the spread of PAYD, we propose a three-part strategy. First, states should pass legislation permitting mileage-based insurance premiums. Second, the federal government should increase the funding available to PAYD pilot programs by $15 million over five years. Finally, since the monitoring costs may exceed the expected benefit of PAYD to insurance firms but are much smaller than the social benefit, the federal government should offer a $100 tax credit for each new mileage-based policy that an insurance company writes, to be phased out once 5 million vehicles nationwide are covered by PAYD policies. In short, PAYD represents a win-win policy. What is good for drivers, in this case, is also good for society.