Distance-Based Pricing
Mileage-Based Insurance, Registration and Taxes
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TDM
Encyclopedia
Victoria Transport Policy Institute
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Updated
March 7, 2007
This chapter describes various mileage-based vehicle fees.
Distance-Based Pricing (also called Pay-As-You-Drive, Mileage-Based and Per-Mile pricing) means that vehicle charges are based on how much a vehicle is driven, so the more you drive the more you pay and the less you drive the more you save. Such fees tend to be more economically efficient and fair than existing pricing practices (Market Principles). Converting fixed costs into distance-based charges (called Variabilisation, see INFRAS, 2000) gives motorists a new opportunity to save money when they reduce their mileage. Below are examples of distance-based vehicle charges:
Insurance
is one of the largest costs of owning a car, averaging about $750 per
vehicle-year. Insurance premiums are generally considered a fixed cost,
although the chances of having a crash increase with mileage. A simple and
effective way to make distance-based vehicle insurance is to prorate existing
premiums by mileage, incorporating all existing rating factors (Edlin, 1999;
Litman, 2001). With this system a $375 annual insurance premium becomes a 3¢
per mile fee, while a $1,250 annual premium becomes a 10¢ per mile fee. This is
called Pay-As-You-Drive or Per Mile insurance. It provides
several benefits: more accurate insurance pricing, increased insurance
affordability, a 10% reduction in total vehicle mileage, a 12-15% reduction in
vehicle crashes and insurance claims (it is particularly effective at reducing
crashes because it gives the highest risk motorists the greatest incentive to
reduce mileage), consumer cost savings (motorists are predicted to save an
average of $50-100 annually in net insurance costs), and significant reductions
in traffic congestion, road and parking facility costs and pollution.
This
means that vehicle licensing and registration fees are prorated by vehicle
mileage, so a $60 annual license fee becomes a 0.5¢ per mile charge, and a $240
annual license fee becomes a 2¢ per mile charge. Similarly, other purchase and
ownership fees, such as
Purchase
taxes average about $1,200 per vehicle. These could be converted to
distance-based taxes, which converts to about 1¢ per mile if paid over an
average vehicle lifetime, or 3¢ per mile if paid over the first four years of a
vehicle’s operating life (Greenberg, 2000).
Vehicle
leases (which account for approximately 30% of new vehicle acquisitions in the
Weight-distance
fees are a mileage-based road use charge that increases with vehicle weight.
This would range from about 3.5¢ per mile for automobiles up to 20¢ per mile
for combination trucks (FHWA, 1997; Road User Fee Task Force). This is a more
equitable way to fund roads than fuel taxes because it can more accurately
represent the roadway costs imposed by individual vehicles (T&E, 2000;
Haldenbilen and Ceylan, 2005).
Mileage-based
emission fees that reflect each vehicle’s emission rate would give motorists
with higher polluting vehicles a greater incentive to reduce their mileage, and
conversely, give motorists who must drive high mileage an incentive to choose
less polluting vehicles (USEPA, 1997; Sevigny, 1998). For example, in a
particular area an older vehicle that lacks current emission control equipment
might pay 5¢ per mile, while a current vehicle might pay 1¢ per mile, and an
Ultra-Low Emission Vehicle might pay just 0.2¢ per vehicle. This would probably
result in relatively large vehicle emission reductions, and modest reductions
in vehicle mileage (Emission Reduction Strategies).
|
Fixed
vehicle fees have about the same impact on vehicle traffic as the price of
refrigerators has on food consumption. Converting from fixed to
distance-based vehicle fees gives motorists a new opportunity to save money
when they drive less. |
Pay-As-You-Drive insurance can be implemented by insurance
companies as a consumer option (motorists would be able to choose whether to
pay by the vehicle-year, as they do now, or by the vehicle-mile). Legislation
to encourage or require insurance companies to offer Pay-As-You-Drive
pricing has been successful in
Other distance-based charges (registration fees, purchase taxes, weigh-distance fees, emission fees, etc.) would be implemented by state/provincial legislation. They could be part of an overall Transport Market Reform program.
A variety of Pricing Methods can be used to collect vehicle travel data, as summarized in Table 1.
Table 1 Summary of Distance-Based Pricing Options (Pricing Methods)
|
Type |
Description |
Equipment Costs |
Operating Costs |
User Inconvenience |
Price Adjustability |
|
Odometer Audits |
Odometer readings are collected by certified odometer auditors, usually during scheduled maintenance |
Low |
Low |
Low |
Low |
|
VUDAR |
Vehicle operating hours are recorded by a small instrument installed in each vehicle. Data are transmitted annually at a special station. |
Medium |
Low |
Low |
Medium |
|
On Board Data Collection |
An electronic system in each vehicle tracks mileage. Data are transmitted monthly to a central computer, either automatically or by users. |
High |
Medium |
Medium |
Low-Medium |
|
GPS |
A GPS system is used to track the location of each vehicle. Data are automatically transmitted monthly. |
High |
Medium |
Low |
High |
This table describes various ways of measuring vehicle use for pricing purposes.
The table below shows the vehicle travel reductions predicted from mileage-based fees. The Transport Elasticities chapter provides additional information on the travel impacts of various price changes, and how to calculate the cumulative effects that result if several pricing strategies are implemented together.
Table 2 Travel Reductions Estimates (2001 US dollars)
|
Mileage Fee |
Travel Reduction |
|
1¢ |
-1.8% |
|
2¢ |
-3.5% |
|
3¢ |
-5.1% |
|
4¢ |
-6.7% |
|
5¢ |
-8.2% |
|
6¢ |
-9.7% |
|
7¢ |
-11.2% |
|
8¢ |
-12.5% |
|
9¢ |
-13.8% |
|
10¢ |
-15.2% |
(Deakin
and Harvey, 1997, Table B-21, updated to account for 30% inflation from 1991 to
2001)
Table 3 shows the impacts various distance-based fees would
have on vehicle travel. Not all of these charges apply to all vehicles (mileage-based
lease charges only apply to leased vehicles, and distance-based purchase taxes
might only apply to the first three or four years of a vehicles’ operating
life), and the rates for a particular vehicle would vary depending on many
factors.
Table 3 Travel Reductions Estimates (Litman, 2003)
|
Distance-Based Fee |
Per-Mile Fee |
Mileage Reduction |
|
Insurance |
6.0¢ |
9.7% |
|
Registration and Licensing |
1.5¢ |
2.7% |
|
Purchase Taxes |
1.0¢ |
1.8% |
|
Lease Charges |
5.0¢ |
8.2% |
|
Weight-Distance Fees |
3.5¢ |
5.9% |
|
Emission Fees |
1.5¢ |
2.7% |
This indicates that distance-based pricing could provide large reductions in vehicle travel. Distance-based insurance alone could reduce total vehicle travel by more than 10%, making it one of the most effective TDM strategies.
Table 4 Travel Impact Summary
|
Travel
Impact |
Rating |
Comments |
|
Reduces total traffic. |
3 |
Provides an incentive to
reduce vehicle use. |
|
Reduces peak period
traffic. |
2 |
Provides an incentive to
reduce vehicle use. |
|
Shifts peak to off-peak
periods. |
0 |
|
|
Shifts automobile travel to
alternative modes. |
3 |
Provides an incentive to
reduce vehicle use. |
|
Improves access, reduces
the need for travel. |
0 |
|
|
Increased ridesharing. |
2 |
Provides an incentive to
reduce vehicle use. |
|
Increased public transit. |
2 |
Provides an incentive to
reduce vehicle use. |
|
Increased cycling. |
2 |
Provides an incentive to
reduce vehicle use. |
|
Increased walking. |
2 |
Provides an incentive to
reduce vehicle use. |
|
Increased Telework. |
2 |
Provides an incentive to
reduce vehicle use. |
|
Reduced freight traffic. |
2 |
Some distance-based charges
apply to freight vehicles. |
Rating from 3 (very beneficial) to –3 (very harmful). A 0 indicates no impact or mixed impacts.
Distance-Based Pricing can provide the following benefits:
· Increased fairness. Distance-based fees can
more accurately reflect the insurance, road and pollution costs imposed by
individual vehicles. Current pricing tends to overcharge motorists who drive
less than average and undercharge those who drive more than average each year
in a price category. Since lower-income motorists tend to drive less than
average, this is regressive. (Small, Winston and Evans, 1989; FHWA, 1997).
· Increased affordability. Converting to
distance-based costs could make vehicle purchase, leasing, insurance, and
registration more affordable by allowing motorists to decide how much driving
they can afford, as they can with most consumer goods (Litman, 2004). It allows
households to afford an extra vehicle that is seldom driven, such as an old
truck used for errands or a recreational vehicle.
·
Increased economic efficiency. Distance-based charges more accurately reflect motor
vehicle costs than existing pricing, and so increase overall economic
efficiency and productivity.
· Consumer savings. The average motorist is
predicted to save $50-100 per vehicle with distance-based insurance, and more
if other charges are distance-based. These savings represent the reductions in
insurance and roadway costs that result when motorists reduce their mileage.
They indicate that consumers value incremental financial savings more than
incremental vehicle use. These are true cost savings, not just economic
transfers.
· Reduced vehicle travel. Distance-based insurance
and registration fees are predicted to reduce vehicle travel by 10-15%, making
this one of the most effective TDM strategies currently proposed. This reduces
traffic congestion, road and parking facility costs, accident risk, pollution
emissions, consumer costs, and urban sprawl.
· Increased safety. Vehicle crashes should
decline even more than mileage (a 10% mileage reduction is predicted to reduce
crashes by 12-15%) because higher-risk motorists (who currently pay high
premiums per vehicle-year) would pay higher per-mile fees, and would therefore
have the greatest incentive to reduce their driving. If implemented at
throughout the
· Emission reduction. Distance-based fees would
reduce energy consumption and pollution emissions. Mileage-based emission fees
would provide particularly large tail-pipe emission reductions - a fee that
reduces mileage by 2% is predicted to reduce emissions by 4-16% (Deakin and Greig
Harvey, 1997, tables B.5 and B.10).
Distance-based pricing tends to provide consumer benefits, by allowing individual motorists a new opportunity to save money. Optional distance-based insurance pricing clearly provides net consumer benefits since motorists would only choose this price structure if they considered themselves better off overall. These consumer benefits are in addition to indirect benefits such as reduced congestion, crash risk and pollution emissions.
Converting vehicle purchase taxes to mileage-based fees would reduce the cost of new vehicle purchases while also increasing vehicle-operating costs. This could have the positive effect of shifting driving to newer, less polluting and safer vehicles, in addition to other benefits from reduced vehicle mileage.
Congestion and emission reduction benefits could be large.
Table 5 summarizes the results of modeling by Deakin and Harvey (1997) for the
year 2010. It indicates, for example, that in the
Table 5 Impacts of 2¢ Per Mile Fee, Year
2010 (Harvey and
Deakin, 1997, Table B.9)
|
Region |
VMT |
Trips |
Delay |
Fuel |
ROG |
Revenue |
|
Bay Area |
-3.9% |
-3.7% |
-9.0% |
-4.1% |
-3.8% |
$1,122 |
|
|
-4.4% |
-4.1% |
-7.5% |
-4.4% |
-4.3% |
$349 |
|
|
-4.2% |
-4.0% |
-8.5% |
-4.2% |
-4.1% |
$629 |
|
|
-4.3% |
-4.1% |
-10.5% |
-5.2% |
-4.2% |
$3,144 |
VMT = change in total vehicle
mileage. Trips = change in total vehicle trips. Delay = change in congestion
delay. Fuel = change in fuel consumption. ROG = a criteria air pollutant.
Revenue = annual revenue in millions of 1991 U.S. dollars. See original report
for additional notes.
Deakin and Harvey also modeled the effect of two types of emission fee, a per-mile charge based on the average emissions for each vehicle model and year, or a fee based on actual emissions measured when a vehicle is operating. Table 6 summarizes their results for the year 2010. This shows that the in-use pricing options has much greater emission reducing impacts, because it discourages driving of gross-emitting vehicles.
Table 6 Impacts of Emission Charges, in Year
2010 (Harvey and
Deakin, 1997, Table B.10)
|
Region |
Fee Basis |
VMT |
Trips |
Delay |
Fuel |
ROG |
Revenue |
|
|
Vehicle Model |
-2.2% |
-1.9% |
-3.5% |
-3.9% |
-5.4% |
$384 |
|
Bay Area |
Vehicle Use |
-1.6% |
-1.4% |
-2.5% |
-6.6% |
-17.7% |
$341 |
|
|
Vehicle Model |
-2.6% |
-2.3% |
-4.5% |
-4.0% |
-5.7% |