Costs of Air Pollution in the U.S.

What costs does air pollution impose on the U.S. economy? Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus tackle that question in the August 2011 issue of the American Economic Review. AER articles are typically available only by subscription to the journal, but their article, "Environmental Accounting for Pollution in the United States," is publicly available. I'll start here by summarizing some of their findings, and then backtrack to offer a quick overview of their methodology.

Total "gross external damages" the six "criterion" air pollutants in 2002--sulfur dioxide, nitrogen oxides, volatile organic compounds, ammonia, fine particulate matter,and coarse particulate matter--was $182 billion. Since GDP was about $10.5 trillion in 2002,  the cost of air pollution was a bit under 2% of the total."The effects included in the model calculations are adverse consequences for human health, decreased timber and agriculture yields, reduced visibility, accelerated depreciation of materials, and reductions in recreation services." This total does not include costs of carbon emissions, for which comprehensive sector-by-sector, place-by-place data are not available in 2002.


The sectors with the biggest air pollution costs measured in terms of "gross external damages" (GED) (counting the same six pollutants but again not counting carbon emissions) are utilities, agriculture/forestry, transportation, and manufacturing. If one looks at the ratio of gross economic damages to value-added in the sector, agriculture/forestry and utilities lead the way by far with ratios above one-third. Manufacturing has fairly high gross external damages, but the GED/VA ratio for the sector as a whole is only 0.01.

If one breaks down sectors into specific, here is a list of all industries that have either more than $4 billion in gross external damages from air pollution or a GED/VA ratio (gross external damages divided by value added) of more than 0.45. In particular, coal-fired power generation jumps off the list to me, with its very large GED and a GED/VA ratio of 2.2.

If pollution taxes or tradeable pollution permits were imposed, so that industry was required to take the social costs of pollution into account, the value of the gross external damages caused by air pollution would be reduced by about four-fifths.

Taking carbon emissions into account, which they do for the electric power industry, makes a relatively small difference to the harms of coal-fired plants, but a larger relative difference for natural gas power plants. Coal-fired power plants already have gross external damages of $53.4 billion, and adding the costs of carbon (priced at $27/ton of emissions) raises that total to $68.7 billion. However, natural gas power plants emit relatively small levels of the six "criteria" pollutants and have gross external damages of only $0.9 billion. For them, adding costs of carbon emissions nearly quadruples their gross external damages to $3.4 billion--and raises their GED/VA ratio from a worrisome 0.34 to an eyebrow-raising 1.30.



The methodology behind these estimates is quite reasonable, which means of necessity that it is also comprehensive and complex. The basic approach in this kind of work is to choose what you think are the most plausible estimates, but also to compare them with other data sources, other models, and other estimates, so that you can continually double-check the reasonableness of your choices.

They start with an inventory of all U.S. air pollution emissions published by the Environmental Protection Agency, covering emissions in 2002. It includes 10,000 emissions sources, including 656 point sources (individual facilities) and then area sources, like vehicles and other stationary sources, at the county level. The source of these emissions is distinguished by height--which affects their environmental costs--and also categorized by six-digit industry code. Thus, these authors use the Air Pollution Emission Experiments and Policy model to look at how these emissions spread. However, they cross-check this approach by looking at another model, the Community Multiscale Air Quality model. They look at particular studies for how each of these pollutants affects health and other costs--and compare their chosen studies to others that are available.
They use a value of a statistical life for an average worker of $6 million, but also do illustrative calculations using $2 million and $10 million.  The overall result is like building up a mosaic one tile at a time: even if you disagree with the placement or color of an individual tile here or there, the overall picture is persuasive.

To me, a lesson that emerges from these calculations is that the costs of air pollution and of burning fossil fuels are very high, both in absolute terms and compared to the value-added of certain industries, even without taking carbon emissions into account. Environmentalists who are discouraged by their inability to persuade more people of the risks of climate change might have more luck in reducing carbon emissions if they deemphasized that topic--and instead focused on the costs of these old-fashioned pollutants.