Like many environmental problems facing the world today, the specter of global warming is a multi-faceted issue; because human beings contribute to the production of greenhouse gases in so many different aspects of their lives, there’s no simple blanket solution.  The most successful strategies will inevitably be the ones that address each method of pollution separately.  For the energy generation and industrial sectors, many sources consider a cap-and-trade plan to be the best solution, as it imposes monetary penalties on polluters and monetary incentives to cleaner companies based on market models that are inherently efficient.

Transportation, however, which accounts for the largest share of America’s greenhouse gas emissions—some 27% of the total heat trapping gasses created—would be far more difficult to regulate in such a fashion.  With more than 250,000,000 registered passenger vehicles as of 2006, a cap-and-trade system targeted to individual drivers would be nearly impossible to manage, and, with private citizens far less closely monitored than large corporations, immensely prone to corruption.  Still, though, the massive carbon footprint created by personal vehicles needs to addressed in some way.

A recent study conducted by the Bookings Institute’s Hamilton Project has arrived at a novel solution to the problem: pay-as-you drive car insurance. While laws in every state mandate that all registered cars be insured, insurance rates are set based on driving history and demographics such as age, gender and location—with no consideration given to miles driven.  But by charging a per-mile rate for auto insurance, insurers could effectively incentivize reduced driving habits; the study estimates that the driving reduction over lump-sum insurance could be as high as eight percent.

This situation offers tremendous advantages over other driving reduction solutions.  Unlike an increased gas tax, which would penalize all drivers, the study found that per-mile insurance would end up saving money for two-thirds of consumers, at an average of $270 per car, while leaving the extremely high mileage drivers accountable for the ozone, smog, VOCs, and global warming pollution their driving habits create.  The total savings to society are estimated at an impressive $50 billion to $60 billion dollars.

While I love the way this plan functions using efficient market mechanisms, it’s not completely perfect. Unlike a gas tax, it creates no direct government revenue for developing less carbon-heavy infrastructure, such as mass transit, or government research grants for developing cleaner technologies. In fact, because it will initially result in lost revenue for insurers, it will likely require large government subsidies at first to appease industry lobbyists.

The plan will also have a fairly limited impact on overall heat trapping gas emissions, effecting overall reductions of only two percent in carbon dioxide, and only four percent in oil consumption.  Still, in conjunction with other measures, such as improved CAFE Standards, wider adaptation of fuel-efficient cars, and the development of commercially viable zero-emissions vehicles, pay-as-you-drive insurance could drastically decrease the negative impacts of transportation on the environment, on both a global and local level.

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Photo by Flickr user Jay Peeples