Future Plans for Carbon Insurance Premiums in California

Published: Thu 19 Nov 2009

Wendy Blair - Staff Writer

Environmentalists and economists agree that companies are very likely to begin shifting their carbon risk, or the financial penalties they pay for pollution, to someone else's balance sheets in the near future by using the concept of insurance. When that risk transfer occurs, consumers can expect product prices to reflect this new reality.

India, China, and other growing new economies contend that countries like the United States achieved prosperity by using up the ozone and now have to shoulder a lopsided share of the burden to rectify the problem, at least for a few years. One proposal expected to emerge during the global climate talks in Copenhagen in December is for industrialized countries, such as the European Union and the United States, to purchase insurance for the effects of climate change that are likely to happen to developing countries. Proponents argue that this insurance scheme is a fair way to bridge the divide between rich and poor nations that may weaken future global deals.

Environmental insurance premiums will probably be cheaper than other types of aid or compensation, but as with any cost absorbed by companies and governments, they will be passed on to consumers and taxpayers. Corporations and governments are both trying to be more transparent about such expenses by including them as surcharges. For example, the state of California is toying with the idea of instituting car insurance that drivers pay for at gas pumps. Pay-at-the-pump insurance would then be based on how frequently drivers use the highway system and how much carbon dioxide they contribute to the atmosphere. The surcharge would remind them of these factors every time they filled up their tanks. A so-called "carbon insurance premium" would be tacked on as a fuel pump surcharge so consumers must pay the true cost of operating their cars with regard to all pertinent risks, including the driver's contribution to climate change and the increased risk of car accidents.

Major auto insurance companies like Progressive, Allstate, and State Farm are considering the idea of carbon insurance and already offer discounts on premiums for policyholders who drive less than the average annual mileage. However, these discounts are currently based on the honors system, so a true carbon, or usage-based, insurance plan would necessitate the installation of technology in the vehicle to corroborate the driver's habits. Current research from the Brookings Institution revealed that pay-as-you-drive auto insurance would give drivers an incentive to combine trips and cut back on fuel usage in other ways, which would save roughly $270 annually per vehicle and reduce oil consumption by four percent.