Associate Professor of Strategy and Economics, Brian Viard, from Cheung Kong Graduate School of Business, Professor Shihe Fu from Xiamen University, and Professor Peng Zhang from The Chinese University of Hong Kong have developed an approach to measure cross-border pollution spillovers and their effects on manufacturing productivity.
The paper – “Trans-boundary air pollution spillovers: Physical transport and economic costs by distance,” published in the Journal of Development Economics in March 2022 – has major policy implications for cities around the world battling the effects of air pollution.
Ambient air pollution is estimated to have generated costs equal to 4.4% of global GDP in 2016. Low- and middle-income countries are particularly affected with 92% of all air pollution-related deaths estimated to occur there. Governments are struggling to implement strategies that will curb air pollution without stifling economic activity.
The paper’s author, Brian Viard, said, “A tricky problem that governments face is how to achieve coordination across different cities with the least economic damage. This is difficult because air pollution drifts so that when one city reduces its pollution not only that city benefits but its neighbors do also. Governments need to ensure that cities are rewarded for these spillovers. What we do in this paper is quantify how large these spillovers are and how far they extend in their impact on China’s manufacturing productivity. The government can use these estimates to assign the geographic scope of environmental regulation and the incentives provided to local governments to reduce pollution most efficiently.”
The economic costs of trans-boundary pollution spillovers versus local effects is necessary to evaluate centralized versus decentralized environmental policies. Directly estimating these for air pollution is difficult because spillovers are high-frequency and vary with distance while economic outcomes are usually measured with low-frequency and local pollution is endogenous. We develop an approach to quantify local versus spillover effects as a flexible function of distance utilizing commonly-available pollution and weather data. We estimate spillovers of particulate matter smaller than 10 micrograms (PM10) on manufacturing labor productivity in China. A one μg/m3 annual increase in PM10 locally reduces the average firm’s annual output by CNY 45,809 (0.30%) while the same increase in a city 50 kilometers away decreases it by CNY 16,248 (0.11%). This effect declines rapidly to CNY 2,847 (0.02%) for an increase in a city 600 kilometers away and then slowly to zero at 1,000 kilometers. The results suggest the need for supra-provincial environmental policies or Coasian prices quantified under the approach.
Shihe Fu, V. Brian Viard, Peng Zhang. “Trans-boundary air pollution spillovers: Physical transport and economic costs by distance” Journal of Development Economics 155, (March 2022)
Click here to watch the video interview with Professor Brian Viard.