Pollution Profiteering: Monetizing Air Quality

Air pollution has a significant economic impact on countries worldwide, with costs arising from healthcare expenditures, environmental damage, lost ecosystem services, and reduced workforce productivity. In 2018, the global economic cost of air pollution was estimated at $2.9 trillion, equivalent to 3.3% of the world's GDP. Countries like China, the United States, and India bear substantial costs due to air pollution, with China facing an estimated $900 billion annual bill. Air pollution control measures, such as the Clean Air Act in the United States, have proven to be cost-effective, improving economic welfare and growth rates by reducing pollution-related illnesses and absenteeism among workers. Additionally, clean air initiatives can drive economic growth, as seen in the EU, where clean air action has contributed an additional €50-60 billion annually to the economy since 2014.

Air pollution costs and economic growth

Air pollution is responsible for a range of economic costs, from healthcare expenses associated with pollution-related illnesses and deaths to environmental damage and lost ecosystem services. Poor air quality has also been linked to decreased workplace productivity, lower tourism, and lower crop yields.

The economic costs of air pollution are significant. Research estimates that air pollution costs the global economy $2.9 trillion annually, corresponding to 3.3% of the world's GDP. In 2018, it was linked to 4.5 million deaths, 1.8 billion workdays lost, 4 million new cases of child asthma, and 2 million preterm births. The total annual cost of air pollution in China is estimated at $900 billion, while the US and India face costs of $600 billion and $150 billion per year, respectively. These costs represent a significant percentage of each country's GDP.

However, the economic benefits of improving air quality and mitigating air pollution far outweigh the costs. Research shows that for every $1 invested in air pollution control and mitigation, there is a $30 benefit in reduced healthcare costs and increased productivity of healthier, longer-living citizens. High benefit estimates have reached up to 90 times the cost. In Europe, reducing fine particulate matter emissions by 25% would incur costs of €1.2 billion annually, but the economic benefits would be significantly greater.

Some countries have successfully decoupled their economic growth from air pollution emissions, demonstrating that economic development can occur without environmental degradation. For example, some high-GDP countries in North America and Europe have achieved falling fossil fuel emissions alongside economic growth. Additionally, countries like Tajikistan and Uzbekistan have achieved high GDP growth with decreasing fossil fuel use, likely due to their focus on agriculture and tourism.

Implementing clean air initiatives and technologies can boost economic growth. For instance, clean air action in the EU has resulted in economic gains of €50-60 billion annually since 2014. Furthermore, federal policies promoting low-carbon industries and clean energy technologies can create millions of jobs while reducing emissions and improving air quality.

Environmental regulation and profits

Environmental regulations have been shown to have a positive impact on both the economy and profits. While environmental regulations impose costs on firms, affecting productivity and location, the benefits to society from such regulations appear to be much larger than the costs of compliance. Environmental regulations have greatly improved air and water quality, especially in areas that were the most polluted before regulation.

The Clean Air Act in the US, for example, has shown that it is possible to build an economy and create jobs while cutting pollution to protect the health of citizens. Between 1970 and 2019, aggregate emissions of common air pollutants dropped by 77%, while the US gross domestic product grew by 285%. Total private sector jobs increased by 223% during the same period. The Clean Air Act has also created market opportunities that have helped inspire innovation in cleaner technologies, in which the US has become a global market leader.

Similarly, a study by Albrizio, Kozluk, and Zipperer (2014) found that an increase in environmental stringency is associated with a short-run increase in productivity growth, which translates into permanently higher MFP levels. However, the study also found that all effects tend to fade away within less than 5 years, and that less productive firms see negative effects, possibly because highly productive firms are better able to profit from changes required by environmental regulations.

Another study examining the effect of the European Union Emissions Trading System (ETS) on total factor productivity (TFP) found that the ETS significantly increased the productivity growth of technologically advanced firms but had the opposite effect on less technologically advanced firms. This suggests that environmental regulations may raise the overall rate of innovation of regulated firms rather than simply redirecting innovation toward clean and away from polluting technologies.

Overall, while environmental regulations may impose some costs on firms, the economic benefits associated with air pollution mitigation and environmental protection appear to outweigh these costs, leading to improved economic welfare and economic growth rates.

Healthcare costs and air pollution

Air pollution is a major public health concern, contributing to a high burden of disease and causing short- and long-term health effects. It is the leading environmental cause of early death, responsible for 5% of all deaths globally and an estimated 40,000 premature deaths each year in the UK alone. The health impacts of air pollution include respiratory and cardiovascular conditions, exacerbation of pre-existing conditions such as asthma, and increased mortality. These adverse health outcomes result in increased healthcare costs for individuals and societies.

The Environmental Benefits Mapping and Analysis Program–Community Edition (BenMAP-CE) is a tool used by the Environmental Protection Agency (EPA) to estimate the economic impact of air pollution on healthcare costs. BenMAP-CE considers the costs of hospital admissions, but a more comprehensive assessment should also include ambulatory and other care expenses. Research suggests that the healthcare costs associated with air pollution may be underestimated, and the benefits of reducing air pollution could be greater than previously thought.

Studies have found a positive correlation between air pollution and healthcare expenditure. In China, a 1% increase in industrial air pollution in a province increased healthcare spending in that province and its neighbours by 0.032% and 0.0072%, respectively. Additionally, a 1% increase in PM2.5 concentration was associated with a 2.942% rise in household medical expenditure. Research in the UK estimated that the total cost to the NHS and social care due to air pollution-related diseases between 2017 and 2025 would be £5.56 billion.

The impact of air pollution on healthcare costs is significant, particularly for low- and middle-income countries (LMICs). Cancer, chronic respiratory illnesses, and cardio-cerebrovascular diseases are the largest healthcare spending items linked to pollution, even in LMICs. However, these conditions have historically received less attention from governments and public health organizations than other sectors. The financial and health impacts of air pollution are substantial, and the costs of pollution-related illnesses are a burden for individuals and households, especially in LMICs, where medical treatment may be forgone due to financial constraints.

Addressing air pollution is crucial for improving public health and reducing healthcare costs. Local governments and policymakers should prioritize interventions that promote low or zero-emission areas. Understanding the local impact of air pollution on healthcare costs is essential for future policy planning and resource allocation to effectively tackle this issue.

Economic costs of air pollution by sector

Air pollution is responsible for a wide range of economic costs, which fall under various sectors. The costs include healthcare expenditures, environmental damage, and lost ecosystem services. In 2018, air pollution cost the global economy $2.9 trillion, corresponding to 3.3% of the world's GDP. This figure includes the costs of 4.5 million deaths, 1.8 billion days of work absence, 4 million new cases of child asthma, and 2 million preterm births.

The economic costs of air pollution are largely concentrated within a few sectors. The top four sectors responsible for the highest external damages are agriculture, utilities, manufacturing, and transportation, contributing just under 20% of GDP but over 75% of air pollution-related damages. For example, the agriculture sector caused $230 billion in damages in 2014, largely due to the lack of technology to reduce ammonia emissions across tracts of land. The utilities sector caused $150 billion in damages in 2014, a sharp decline from previous years due to the rise of cleaner energy sources and the retirement of some heavier manufacturing industries. The manufacturing and transportation sectors also saw modest decreases in damages, of 20% and 30% respectively.

Some countries have achieved a decoupling between their economic growth and air pollution emissions, indicating that a healthy economy can coexist with environmental protection. For instance, between 1970 and 2019 in the United States, aggregate emissions of common air pollutants dropped by 77% while the GDP grew by 285%. This reduction in pollution was achieved through the creation of market opportunities and the development of cleaner technologies, which also contributed to overall economic growth and job creation.

While broad mitigation policies exist, there is a lack of understanding of the economic consequences of air pollution control strategies. Certain cohorts, such as rural populations or those in regions of low socioeconomic status, may experience net economic losses due to high mitigation costs. However, the economic gains associated with improving air quality are significant, and the benefits of cleaner air outweigh the costs.

Clean air technology and economic benefits

Air pollution is responsible for a wide range of economic costs, from healthcare costs associated with pollution-related illnesses and deaths to environmental damage and lost ecosystem services. Poor air quality has also been linked to decreased workplace productivity and tourism, which impacts economies worldwide.

Research shows that the economic benefits of air pollution mitigation outweigh the costs by a significant margin, providing a strong case for investments in cleaner technology and the development of green industries. For instance, the economic gains associated with improved air quality have been found to outweigh the costs of implementing pollution control measures.

In the United States, the Clean Air Act has demonstrated that it is possible to build a thriving economy and create jobs while simultaneously reducing pollution. Since 1970, the US has witnessed a 285% growth in its gross domestic product and a 223% increase in total private-sector jobs, alongside a 77% decrease in common air pollutant emissions. The Clean Air Act has also fostered innovation in cleaner technologies, with the US becoming a global leader in this market.

The Clean Air Act has delivered substantial health benefits, including the prevention of premature deaths, respiratory problems, and hospital admissions, resulting in improved worker productivity and reduced medical expenses. These health improvements have positively impacted the economic welfare of American households, showcasing how cleaner air can drive economic growth and improve the quality of life for citizens.

Furthermore, the implementation of the Clean Air Act has encouraged the adoption of state-of-the-art emission control technologies in vehicles, trucks, and non-road engines, as well as modern pollution control technology in new plants and factories. These advancements have not only reduced air pollution but also contributed to the growth of the environmental technology industry in the US, creating market opportunities and supporting overall economic activity.

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