Location Key to Pollution’s Real Cost

From an economic standpoint, air pollution has something oddly in common with real estate, according to Robert Mendelsohn, Edwin Weyerhaeuser Davis Professor of Forest Policy at F&ES.

“It’s all about location, location, location,” he says. “Just as where a house is located makes a big difference in its value, a polluter’s location can make a huge difference in terms of the economic consequences of its emissions.”

To help prove that point, Mendelsohn and Nicholas Muller, an assistant professor of economics at Middlebury College who earned his Ph.D. at F&ES in 2007, recently estimated that an extra ton of a single pollutant, sulfur dioxide (SO2), spewed from a power plant in, say, parts of the New York metropolitan area would cost society 50 times more than that same ton emitted in the rural Pacific Northwest. Most of that cost involves harm to human health, although the two economists also con-sidered other factors, including the known damage that pollution can do to crops, forests and man-made materials.

“We’re proposing a third revolution in air pollution control.”
Robert Mendelsohn

Other researchers have documented various ways that location matters when it comes to air pollution emissions. But in a detailed analysis published in the December 2009 issue of The American Economic Review, Mendelsohn and Muller looked at the costs of that location-specific damage in a new way. Their research not only has provided more clarity about just how large economic disparities in air pollution damage can be from one location to another, it also offers a rationale for using that knowledge to sharply reduce the costs of pollution in an economically efficient way, with benefits dramatically outweighing cleanup costs.

Mendelsohn and Muller propose a new era in pollution regulation that recognizes, as Muller puts it, that “just as different goods have different prices, pollution emissions in different places have different costs. Our approach would improve air pollution control by recognizing the heterogeneity of these costs.”

The approach would maintain, at mini-mum, current air quality standards for all areas. But it would add a market-based program of tradable credits, designed to effectively compel polluters that do the most harm to pay the highest costs. The idea is to provide clear economic signals to induce an electric utility to, say, switch from a dirtier fuel to a cleaner one or locate a power plant downwind and farther from a major metro area, rather than upwind and closer, whenever the overall benefits notably outweigh the costs.

Just considering one pollutant from one major source, SO2 from power plants, their article estimates that the net savings (benefits to society minus extra pollution control costs) from improved, economically targeted pollution control would be as high as $7 billion to $8 billion annually. If SO2 control was expanded to all of the roughly 10,000 emitters of the compound, savings could reach as high as $20 billion per year. Add in other air pollutants and the number could soar much higher.

The bottom line for targeting reductions based on location, says Muller, is that “improvement in health damage, in par-ticular, far outweighs the abatement costs.” He adds that the approach could be applied not only to multiple air pollutants but to water and land pollution as well, yielding many billions in additional savings.

Comprehensive nationwide air pollution regulation in the United States began with passage of the Clean Air Act in 1970. The new law recognized that air pollution crossed boundaries, making it difficult for states to regulate pollution individually. The act led the federal government and the states to establish standards for ambient air quality and to mandate end-of-pipe technologies (such as scrubbers and catalytic converters) or pollution limits for emitters based on their size. That first wave of regulation is often called “command-and-control,” because it dictates what each firm should do.

Capping pollution certainly brought cleaner air and clear benefits. For instance, a 2009 analysis in The New England Journal of Medicine estimated that the partial cleanup in fine particulates (the tiniest components of soot) between 1980 and 2000 alone led to a five-month increase in life expectancy in 51 large U.S. cities.

Revisions to the Clean Air Act in 1990 introduced a new regulatory approach. In an attempt to limit the cost of controlling SO2, the main component in acid rain, Congress that year introduced the concept of adding a market-based mechanism—the nation’s first cap-and-trade program—aimed at utilities that burned coal and other fossil fuels. The program set a nationwide cap limiting U.S. utilities’ annual SO2 emissions to 10.2 million tons. Each emitter was awarded permits for each ton of emissions that it would be allowed under the cap. Utilities that found it economical to reduce emissions below their allowances could sell unused allowances to emitters that found it more difficult. Congress reasoned that market forces would tend to drive utilities to clean up pollution where it was most cost-effective to do so.

The approach turned out to be more effective than anyone predicted. Not only did the program push emissions below the cap, but the federal Office of Management and Budget has estimated that the cost amounted to between $1.1 billion and $1.8 billion, only 20 to 30 percent of the Environmental Protection Agency’s initial projections. By 2002, The Economist was hailing the program as “probably the greatest green success story of the past decade.”

The United States later introduced a more limited cap-and-trade scheme to help control another class of pollutants, nitrogen oxides (NOx), emitted in several Eastern states. Mendelsohn and Muller dub cap-and-trade—this second wave of air pollution control—the “cost-effective” approach.

“There are always going to be some questions of equity when you employ criteria based on economic efficiency.”
Nicholas Muller

Their recent article proposes a sweeping new modification, introducing a pollution abatement regime that is not only cost-effective, but also much more economically efficient.

“We’re proposing a third revolution in air pollution control,” says Mendelsohn.

Under their proposal, existing air quality standards would remain in place everywhere, but a redesigned system of tradable credits would provide polluters who do the most economic damage with a major incentive to do the most to reduce emissions. At the top of the list are polluters in or directly upwind of large metropolitan areas, where both the intensity and the costs of pollution tend to run highest simply due to high population densities. The regime could induce emitters to tighten controls wherever economic benefits clearly outpaced cleanup costs.

This more recent research has its earliest foundation in a limited analysis Mendelsohn completed 20 years ago of emissions at a single Connecticut power plant. In what he calls a “very basic” analysis, Mendelsohn determined that the economic costs of pollution would rise and fall sharply depending on where that power plant was located in-state, with the costs of damages lowest in more rural areas. To the contrary, “moving it closer to New York City would be a very bad idea,” he says.

“We used that as a conceptual launching point,” says Muller, who beginning in the early 2000s took the lead in vastly expanding that simple concept to include estimates of the multifaceted damage done from every known air pollution location in the United States. The project took nearly five years of detailed analysis and number crunching, he says. Called the Air Pollution Emission Experiments and Policy analysis model (APEEP) and published in 2007, the resulting product is a model that allows researchers to understand the damages caused by existing emissions in each U.S. county.

APEEP includes calculations for 10,000 U.S. locations that emit any of six major air pollutants: ammonia, fine particu-lates, coarse particulates, SO2, NOx and volatile organic compounds (VOCs). Ammonia, SO2 and NOx combine to form small particulates, which are particularly harmful to health. NOx and VOCs react in the atmosphere to produce ozone, which at ground level (as opposed to a beneficial ozone layer formed naturally high in the stratosphere) is harmful to both health and crops.

According to Muller, the next step was to organize the existing data in order to estimate damage. Muller tapped into a wealth of data from such diverse sources as the Department of Agriculture (crops grown by county), the EPA (pollution dispersion models), the epidemiology literature (mortality and morbidity effects) and the economic valuation literature (the value of small mortality risks).

Working from existing literature on the effects of air pollution concentrations on health, he was able to estimate location-specific rates of such pollution-related illnesses as asthma and bronchitis and of premature deaths, as well as yields of crops and board feet of timber diminished by pollution.

“As an example, if I was looking at the effect of ozone on soybeans, well, that’s been extensively studied. I could look at [a given increase in ozone levels] in a county in Illinois and plug in the effects on soybean yields of that change from the existing crop science literature.” The result would be a change in yields (bushels of specific crops).

The task of calculating and recalculating multiple damages for each pollutant, county by county, and relating them to emissions meant concentrated work that crossed multiple disciplines, from economics to atmospheric science, to public health sciences, to forestry and agronomy.

“For me the finished model really embodies the interdisciplinary spirit of the Forestry School,” says Muller.

There were other complications. Both economists admit that while valuing a bushel of soybeans is not controversial, estimating the costs of illness and premature death can be a contentious matter. For APEEP, they used various generally accepted existing economic models to produce a range of values. With human death and illness accounting for as much as 95 percent of total damages, their total calculation of gross annual U.S. damages in 2002 (from the most recent data then available) was notable no matter how conservative the illness and mortality models, ranging from $75 billion to $280 billion, or from 0.7 percent to 2.8 percent of the nation’s total gross domestic product.

The APEEP model served as a basis for the most recent study and helped confirm a hunch that a more economically efficient air pollution control regime, targeted at the highest-damage locations, could yield large net savings.

To show the magnitude of divergences in cost, Mendelsohn and Muller point out in their report that the economic benefit of eliminating one ton of SO2 in Hudson County, New Jersey, upwind of New York City, would do as much economic good as eliminating 50 tons of SO2 in a very rural place like Josephine City, Ore.

“We suspected that there would be a large gradient,” says Mendelsohn, “but we were surprised at how huge it turned out to be.”

A highly economically efficient emissions trading scheme would address that divergence. As an extreme example, that New Jersey county upwind of New York would earn 50 times more credit for each unit of pollution it eliminated than would a source in rural Josephine City that elimi-nated the same amount. Over time, pollution cleanup dollars would be spent where they do the most good, increasing the efficiency of regulations.

But what about equity? If one happens to live in a small town or rural America, does this approach imply that polluters will eventually relocate their emissions in ways that mean living with dirtier air?

“There are always going to be some questions of equity when you employ criteria based on economic efficiency,” says Muller. But he points out that the proposal begins with maintaining existing air quality standards everywhere. Since overall pollution levels would decrease substantially, he says “there isn’t going to be an area that experiences considerably more harm.”

So far, no policymaker has proposed reforming U.S. air pollution laws based on such an approach. However, the EPA has taken interest. It is providing the economists with funding to help expand their research over the next four years.

Then there are matters that the researchers intentionally haven’t yet integrated into their work, including the effects on electricity prices.

“I’d call this a sort of stylized experiment,” says Muller. “We’re hoping we’ve created an argument that will move discussions forward.”

Mendelsohn adds that, in any case, the research firmly established one simple basis for further discussion. “We’ve shown that the money you spend to protect the environment buys you a lot more value if you spend it wisely,” he says. “By spending wisely, you can get a lot more bang for your buck.”

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