Making Safety a Market

In early 2008, my father’s minivan spun off a mountain road
in our home state of Colorado. Fifty years before that, his father, a racecar
driver, was also killed by an intoxicated motorist.

These stories are hardly exceptional. In 2013, 32,719
Americans died in car accidents—and more than 1.2 million people worldwide. That’s
more than infectious diseases like malaria or dengue fever. An additional 20-50
million were injured. Yet, even as we rush to find a cure for parasites and
viruses, automotive fatalities are too often regarded as an incurable condition.
But today a host of technologies exist
that could make driving safer—reducing the impact of crashes or preventing them
altogether.

Autonomous vehicles, connected cars that talk to each other,
and new active safety features are all potential lifesavers. Unfortunately, bureaucratic
command and control regulations set in places like Washington, DC reduce the
likelihood that safety-oriented innovations from Silicon Valley and Detroit
will ever make it into the hands of consumers. This shouldn’t be the case. Quite
the opposite: smart regulation should be used to champion innovation and drive
these technologies to market.

Perhaps the most powerful and efficient tool to accomplish
this goal would be a “synthetic market” for safety. Synthetic markets employ
market incentives to either curtail harmful actions (e.g. pollution) or encourage
desirable ones (e.g. innovation). Synthetic markets boast some big success
stories, including the phase-out of lead gasoline in the 1980s, where producers
traded a shrinking number of lead credits until the toxic chemical was gone. The 1990 Clean Air Act
Amendments targeted acid rain and lung ailments by trading a shrinking number
of credits for noxious emissions from power plants. US federal fuel economy
standards allow automakers to buy and sell
efficiency credits amongst themselves, and California’s zero emission
vehicle program sparked a global revolution in automotive technology by forcing
automakers to accrue
credits awarded for selling electric vehicles.

Today, automotive safety is a prime candidate for just this
kind of system. Cars are already one of the most regulated sectors in the
modern economy. Safety rules cover everything from braking systems,
to rearview mirrors, to hood latches, windows, headlights and hoses. Yet motorists still perish in droves.

A government-brokered market for “safety credits” could
transform how carmakers approach issues of life and death. Currently, regulators
focus on crash tests and physical damage to test dummies inside cars. But today’s
technologically dynamic and data-rich environment allows for a more holistic,
decentralized approach that could save lives. The required data already exists,
because police and insurance companies record it every time there is a major
accident.

America’s automotive death toll is 11 fatalities per billion
miles driven. That’s higher than many other developed countries—about 50
percent higher than in Germany. Better urban and vehicle design must be part of
the solution. But a more creative market-driven approach could be a
game-changer. It would reward manufacturers for achieving fewer fatalities than
average by awarding them safety credits. 

Underperforming manufacturers would
have to buy credits from those who exceed industry averages. Ideally, credits
would account for both vehicle occupants (e.g. the crash test dummies) and for those
in other cars as well as pedestrians and cyclists. In this way, the market could
incentivize real-world safety. (If a head-on collision with a Humvee is more
likely to kill than a similar crash involving a Prius, that should be taken
into account.)

These markets are not foolproof. Regulation is tricky
business and some synthetic markets have not been very successful. For instance,
the EU’s cap and trade program for carbon has struggled—weighed down by a
compendium of political compromises and weak financial incentives. But many
other synthetic markets, like the parsimonious market embedded within George
H.W. Bush’s Clean Air Act Amendments of 1990, have impressive track records. Reductions
in U.S. power plant pollutants saved 160,000 lives,
13 million lost workdays, and 1.7 million asthma attacks in 2010 alone, at
a fraction of projected costs. The US EPA estimates the benefit to cost ratio
of these amendments is about 30 to 1. California’s zero emission vehicles
mandate is another world-leading success story. Individual consumers often
don’t have the information needed to make rational choices. Even when we are
well informed, we frequently make irrational decisions. By requiring
sophisticated private-sector actors to make informed decisions about what is
and is not cost effective, these markets efficiently channel the power of these
enterprises toward social goals and deal with the information failures that
often afflict consumer markets.

Safety credits would not eliminate all of the prescriptive
elements of automotive regulation, but they would change the mindset of manufacturers.
Auto companies would be rewarded for anything that improved safety: deploying
new technology, training drivers or whatever else—so long as it was effective.

There would be two other important benefits to this system.
First, regulators could use their prescriptive power to make declining numbers
of injuries and deaths a priority by tightening the threshold for receiving
credits. They could also provide an objective metric by which to measure the
much-touted safety benefits of autonomous cars—and perhaps incentivize their
deployment.

Over the coming decades as artificial intelligence and computers
turn our cars into robots, we will need to rethink the automotive regulatory compact.
As we do, it makes sense to embrace the power of data and markets and apply them
to society’s advantage. A synthetic market could go a long way toward promoting
safety-minded innovation and allowing all of us to drive better, safer cars in
the not-so-distant future.