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Drive Less, Pay Less: Win-Win for Consumers and Climate

As tens of thousands gather in Copenhagen to hammer out innovative strategies for cooling the planet, here's a carbon-cutting idea consumers can rally behind: Car insurance based on the miles you drive.
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As tens of thousands gather in Copenhagen to hammer out innovative strategies for cooling the planet, here's a carbon-cutting idea consumers can rally behind: Car insurance based on the miles you drive.

Drive less and you pay less -- and the smaller your carbon footprint.

It's called Pay-As-You-Drive (PAYD) and it was a hot topic at the National Association of Insurance Commissioner's Climate Risk Summit in San Francisco last week.

PAYD can save consumers an average $270 per vehicle insured, according to the Brookings Institution. What's more, if it were deployed in all 50 states, PAYD could reduce total U.S. greenhouse gas emissions by 2 percent. That may not sound like much but it translates to a whopping 99 million tons of CO2 per year.

PAYD also offers significant benefits for taxpayers, to the tune of $50 billion per year, according to the Brookings Institution. Fewer cars on the road means less traffic congestion, fewer hospitalizations from both traffic injuries and smog-related illnesses, and smaller expenditures on emergency services.

Though PAYD is popular in Europe, Israel and Asia, few insurers in the United States offer it, forcing most Americans to buy car insurance much like you would buy dinner at an all-you-can-eat buffet. Once you've made the purchase, you may as well gorge.

Imagine if you didn't pay for gas at the pump, but paid for it every six months based on the average driver's gas usage. That's basically how traditional car insurance is priced, and it offers no incentive to cut down on driving. For the average driver who clocks less than 15,000 miles a year, the all-you-can drive approach to auto insurance is like pouring dollars down the drain.

Texas -- are you surprised? -- offers the nation's only true PAYD insurance. Dallas-based MileMeter sells policies for 6 months at a time. Drivers purchase 1,000 to 6,000 miles to start and can buy more miles at anytime online. MileMeter customers pay 25 to 75 percent less than they would with a traditional insurance plan says the company's CEO Chris Gay.

While other insurers offer partial PAYD insurance such as mileage-based discounts, these plans typically don't offer more than a 15 percent discount.

Gay founded MileMeter in 2004 because he was frustrated with his limited choices for auto insurance.

"Traditional auto insurance policies are vested in the status quo," says Gay. "More than half the market is being overcharged and under-served. Why should those who are driving less because they take public transportation, carpool or are simply environmentally savvy have to pay the same price for auto insurance as the rest of the market?" And consumers are already accustomed to paying for only what they use in other aspects of life--like electric utilities, he says.

If you're wondering why PAYD hasn't caught on in the U.S. as it has in other countries like the Netherlands, the U.K., South Africa, Canada and Japan, the simple answer is profitability.

For most property insurers selling policies for both homeowners and auto insurance, about two-thirds of their revenue comes from their auto product lines. Auto insurance in essence subsidizes the more volatile homeowners insurance market.

Policymakers, however, are beginning to nudge insurance companies in the right direction. A dozen states include it as an effective means for lowering transportation emissions in their state climate action plans, including Arizona, Colorado, Maryland, Maine, Minnesota, New Hampshire, New Mexico, North Carolina, Pennsylvania, Rhode Island, Virginia and Vermont.

More importantly, insurance commissioners are getting on board. Earlier this year, California's insurance commissioner passed regulations that, when fully implemented, will give Californians access to PAYD policies.

As Joel Ario, Commissioner of Pennsylvania Department of Insurance, puts it, "Pay-As-You-Drive is a good example of how insurance can provide a real incentive for consumers to undertake climate friendly behavior." Ario backs voluntary implementation of a standard for rating PAYD policies that was unveiled by Ceres, NRDC and a diverse group of environmental and transportation organizations at last week's Climate Risk Summit.

Mike Kreidler, the insurance regulator for Washington state, said he thinks consumers are going to have to demand the money-saving policies. But he said, "I would make a prediction that over the next 10 years, you're going to see this phased in."

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