Yet another gasoline-saving idea is percolating through California: pay-as-you-drive insurance policies, in which rates would be based on how many miles a person drives in a year. (Variations of this policy are already available in 34 other states.) Drive less, pay less. Simple enough.
Dean Baker of CEPR has been flogging this idea for quite some time, estimating that pay-as-you-drive would essentially provide the same disincentive to drive as a $1.60-per-gallon gas tax—except that it wouldn't raise average driving costs at all. (Of course averages can obscure a lot: Rural drivers would likely see their rates go up quite a bit.) Now, I'm not sure the idea of putting an electronic monitor inside cars to monitor travel will be a hit, but, as an alternative, it doesn't seem overly invasive to have your odometer checked by an insurance agent.
One thing to note is that pay-as-you-drive mainly targets the negative externalities of driving (e.g., congestion and accidents), and only indirectly the externalities that come with burning gasoline (e.g., pollution, global warming). It certainly doesn't, by itself, create incentives for fuel efficiency or, I dunno, plug-in hybrids. Still, that's hardly a counterargument—it looks like a wholly sensible idea, though I'd be curious to know what the critics have to say.
You write that inevitably rural drivers will end up paying much more. In fact, our research shows that roughly two-thirds of households will save money under PAYD, with an average saving for those households of $270 per car—and we find that percentage is roughly the same for urban drivers and for rural drivers. So roughly two-thirds of urban drivers are winners and roughly two-thirds of rural drivers are also winners. The reason is that per-mile premiums are still risk-adjusted, and geography is a key risk factor, so those in rural areas where people drive greater distances will not be disproportionately impacted because their premiums will be determined relative to how many miles the average driver in their area drives. And it turns out that in both urban and rural areas, a minority of drivers are responsible for the majority of miles driven.
To be sure, some people will pay more for auto insurance under PAYD. But that higher premium just reflects the higher risk that they pose. Under the current system, the premiums of high-mileage drivers are being subsidized by low-mileage drivers—which is particularly inequitable since low-income people drive fewer miles on average.