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.