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THE ECONOMIC CONSEQUENCES
OF OUTDOOR AIR POLLUTION
Elisa Lanzi OECD Environment Directorate FEEM Venice, September 1 2016
• OECD’s CIRCLE project
• Overview of the air pollution report
• Methodology
• Main results
• Conclusions
2
Structure of the presentation
THE OECD’S CIRCLE PROJECT
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• Two key objectives: – Quantify how changes in environmental quality, climate
change, degradation and scarcity of natural resources affect the economy, and prospects for long-term growth (costs of inaction)
– Assess benefits, as well as trade-offs, associated with policy responses to these environmental challenges (benefits of policy action)
• Regional and sectoral quantitative approach where possible, coupled with more general insights where needed – Market impacts: production function approach
– Non-market impacts: valuation approach
4
The OECD CIRCLE project
CIRCLE project themes
Climate change
Air pollution
Land-water-energy nexus
Water
Biodiversity and ecosystems
Resource scarcity
5
Report published in 2015
Report recently published
Report to be published of this year
Scoping paper to be published this year
Scoping paper published in 2015
Scoping paper published in 2015 and further work planned for the next biennium scarcity
AIR POLLUTION REPORT
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– Health impacts
• Mortality
• Morbidity: illness (especially respiratory and cardiovascular diseases)
– Other impacts
• Agriculture
• Biodiversity and ecosystems
• Buildings and cultural heritage
• Visibility
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Impacts of air pollution
– The impacts of air pollution on health and the environment have economic consequences (e.g. through labour productivity changes)
– Economic feedback effects best captured in a general equilibrium framework, which considers direct and indirect effects
– Some economic costs cannot be calculated in a general equilibrium framework (e.g. mortality)
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Economic consequences
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Disutility of
illness
Mortality
Market costs
Direct costs
Indirect costs
Labour productivity
Health expenditures
Direct costs
Indirect costs
Agricultural yields
Direct costs
Indirect costs
No
n-m
ar
ke
t c
os
ts
Health costs
Types of costs
- Mayers and van Regemorter (2008): air pollution feedbacks in Europe (GEM-E3 model)
- Utility is derived from consumption, leisure and health status
- Vrontisi et al. (2016): benefits of air pollution policies in the EU (GEM-E3 model)
- Simpler approach, similar to what done for climate change in PESETA
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Previous studies (I)
- Studies with the EPPA model
- Health incorporated in the EPPA model as a consumption tradeoff between healthcare and leisure expenditures
- Matus (2005; 2011): costs of air pollution impacts and benefits of policies in China
- Matus et al. (2008): air pollution health effects in the US
- Nam et al. (2009): welfare loss from air pollution in Europe
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Previous studies (II)
- Global study
- Calculate market costs in a general equilibrium framework
- Following Vrontisi et al. (2008) and existing work on climate change
- Calculate non-market costs separately based on results from valuation studies
-> overview of both aspects and types of costs
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Chosen approach
METHODOLOGY
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Methodological steps
Effects of air pollution impacts on economic growth to 2060
• ENV-Linkages model Economic activity
• ENV-Linkages model • Emission coefficients from IIASA’s GAINS model Emissions
• EC-JRC’s TM5-FASST model Concentrations
• Impacts on crop yields with TM5-FASST model • Health impacts using functions based on GBD Biophysical impacts
• Economic feedbacks using ENV-Linkages model • Non-market costs calculated based on results of
valuation studies Economic costs
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• Computable General Equilibrium (CGE) model
• Multi-regional, multi-sectoral
• All economic activity is part of a closed, linked system
• Simultaneous equilibrium on all markets
• Structural trends, no business cycles
• Dynamics
• Solved iteratively over time (recursive-dynamic)
• Capital vintages
The ENV-Linkages model
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25 regions and 35 sectors
The ENV-Linkages aggregation
Agriculture Manufacturing
Paddy rice
Wheat and meslin
Other grains
Vegetables and fruits
Sugar cane and sugar beet
Oil seeds
Plant fibres
Other crops
Livestock
Forestry
Fisheries
Paper and paper products
Chemicals
Non-metallic minerals
Metals n.e.s.
Fabricated metal products
Other manufacturing
Motor vehicles
Electronic equipment
Textiles
Natural resources and energy Services
Coal
Crude oil
Gas extraction and distribution
Other mining
Petroleum and coal products
Electricity (5 technologies*)
Land transport
Air transport
Water transport
Construction
Trade other services and dwellings
Other services (government)
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• Emissions linked to projections of economic activities in ENV-Linkages using data from GAINS
– Emissions from combustion linked to fossil fuel inputs in relevant sectors (e.g. power generation)
– Other emissions linked to output (e.g. chemicals)
• Pollutants – sulphur dioxide (SO2)
– nitrogen oxides (NOx)
– black carbon (BC)
– organic carbon (OC)
– carbon monoxide (CO)
– volatile organic compounds (VOCs)
– ammonia (NH3)
Emission projections
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• Impacts of air pollution depend on the levels of concentrations of pollutants in the air
• Calculating concentrations needs
– Downscaling from macro regions to local level
– Data on regional emissions and geographical variables (e.g. presence of urban areas in a certain region)
• Concentrations of particulate matter (PM2.5) and ground level ozone (O3) calculated with the EC-JRC’s TM5-FASST
Concentrations
• Concentrations are used to calculate impacts
– increased mortality (premature deaths)
– increased morbidity (number of sick days, hospital admissions…)
– changes in crop yields
• Health impacts are calculated based on the Global Burden of Disease (GBD)
– Uncertainty range reflects two specifications of the concentration-response function used
• Agricultural impacts are calculated using TM5-FASST
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Biophysical impacts
Baseline unit values (for OECD; USD, 2005 PPP exchange rates)
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Valuation of health impacts
Effect Cost element Value
Mortality, deaths Welfare cost 3 million
Chronic bronchitis in adults (new cases) Welfare cost 61,610
Healthcare cost 13,070
Productivity 0
Bronchitis in children (cases) Welfare cost 680
Healthcare cost 57
Equivalent hospital admissions Welfare cost 575
Healthcare cost 3,430
Restricted activity days Welfare 106
Minor restricted activity days Welfare 48
• Market impacts – Additional health costs
• Non-market impacts – Cost of premature deaths
– Costs of pain and suffering
Source: OECD (2016) “The Economic Consequences of Outdoor Air Pollution”. Based on Holland (2014)
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• Study economic feedbacks in ENV-Linkages (production function approach)
– Health expenditures • Cases of bronchitis in children
• Cases of chronic bronchitis in adults
• Hospital admissions
– Labour productivity • Linked to increasing number of work days lost
– Agriculture
• Reduced crop yields
Market costs
• The unit values for mortality, are based on the OECD VSL methodology
• The 2012 book Mortality Risk Valuation in Environment, Health and Transport Policies established a new method for calculating country-specific VSL based on income levels
• The 2014 book The Costs of Air Pollution combined estimates of mortalities caused by outdoor air pollution from the 2010 GBD study with VSL figures to find economic costs of almost USD 1.6 trillion in 2010 for OECD countries alone
22
Non-market costs: the VSL
RESULTS
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Projections of air pollutants emissions
Source: OECD (2016), The economic consequences of outdoor air pollution
(In
de
x w
rt 2
010)
Annual average total anthropogenic PM2.5 (µg/m3)
25
Concentrations of air pollutants
2060
2010
2030
2060
Source: OECD (2016), The economic consequences of outdoor air pollution
26 Nu
mb
er o
f d
eath
s p
er y
ear
per
mil
lio
n p
eop
le,
20
60
Premature deaths 2010: 3 million
Premature deaths caused by outdoor air pollution
Projection 2060: 6 – 9 million
Source: OECD (2016), The economic consequences of outdoor air pollution
27
Market costs: global GDP changes over time
(GD
P p
erc
en
tage
ch
an
ge
wrt
no-f
ee
db
ack b
ase
line
)
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
Health Expenditures Labour productivity Agriculture All
Source: OECD (2016), The economic consequences of outdoor air pollution
Market costs: direct and indirect costs
(GD
P p
erc
en
tage
ch
an
ge
wrt
no-f
ee
db
ack b
ase
line
)
Source: OECD (2016), The economic consequences of outdoor air pollution
-1.2%
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
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60
Direct costs Indirect costs
29
Regional market costs
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
Can
ada
Chi
le
Mex
ico
US
A
EU
larg
e 4
Oth
er O
EC
D E
U
Oth
er O
EC
D
Aus
. & N
ewZ
.
Japa
n
Kor
ea
Chi
na
Non
-OE
CD
EU
Rus
sia
Cas
pian
reg
ion
Oth
er E
urop
e
Bra
zil
Oth
er L
at.A
m.
Mid
dle
Eas
t
Nor
th A
fric
a
AS
EA
N 9
Indo
nesi
a
Indi
a
Oth
er A
sia
Sou
th A
fric
a
Oth
er A
fric
a
Wor
ld
OECD America OECD Europe OECD Pacific Rest of Europe & Asia LatinAmerica
MiddleEast &NorthAfrica
South and South-EastAsia
SubSaharan
Africa
Interaction effects Agriculture Labour productivity Health Expenditures
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
Can
ada
Chi
le
Mex
ico
US
A
EU
larg
e 4
Oth
er O
EC
D E
U
Oth
er O
EC
D
Aus
. & N
ewZ
.
Japa
n
Kor
ea
Chi
na
Non
-OE
CD
EU
Rus
sia
Cas
pian
reg
ion
Oth
er E
urop
e
Bra
zil
Oth
er L
at.A
m.
Mid
dle
Eas
t
Nor
th A
fric
a
AS
EA
N 9
Indo
nesi
a
Indi
a
Oth
er A
sia
Sou
th A
fric
a
Oth
er A
fric
a
Wor
ld
OECD America OECD Europe OECD Pacific Rest of Europe & Asia LatinAmerica
MiddleEast &NorthAfrica
South and South-EastAsia
SubSaharan
Africa
Interaction effects Agriculture Labour productivity Health Expenditures
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
Can
ada
Chi
le
Mex
ico
US
A
EU
larg
e 4
Oth
er O
EC
D E
U
Oth
er O
EC
D
Aus
. & N
ewZ
.
Japa
n
Kor
ea
Chi
na
Non
-OE
CD
EU
Rus
sia
Cas
pian
reg
ion
Oth
er E
urop
e
Bra
zil
Oth
er L
at.A
m.
Mid
dle
Eas
t
Nor
th A
fric
a
AS
EA
N 9
Indo
nesi
a
Indi
a
Oth
er A
sia
Sou
th A
fric
a
Oth
er A
fric
a
Wor
ld
OECD America OECD Europe OECD Pacific Rest of Europe & Asia LatinAmerica
MiddleEast &NorthAfrica
South and South-EastAsia
SubSaharan
Africa
Interaction effects Agriculture Labour productivity Health Expenditures
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
Can
ada
Chi
le
Mex
ico
US
A
EU
larg
e 4
Oth
er O
EC
D E
U
Oth
er O
EC
D
Aus
. & N
ewZ
.
Japa
n
Kor
ea
Chi
na
Non
-OE
CD
EU
Rus
sia
Cas
pian
reg
ion
Oth
er E
urop
e
Bra
zil
Oth
er L
at.A
m.
Mid
dle
Eas
t
Nor
th A
fric
a
AS
EA
N 9
Indo
nesi
a
Indi
a
Oth
er A
sia
Sou
th A
fric
a
Oth
er A
fric
a
Wor
ld
OECD America OECD Europe OECD Pacific Rest of Europe & Asia LatinAmerica
MiddleEast &NorthAfrica
South and South-EastAsia
SubSaharan
Africa
Interaction effects Agriculture Labour productivity Health Expenditures
(GD
P p
erc
en
tage
ch
an
ge
wrt
no-f
ee
db
ack b
ase
line
)
Source: OECD (2016), The economic consequences of outdoor air pollution
30
Non-market costs: mortality
2015 2060
OECD America 440 1100 - 1140
OECD Europe 730 1660 - 1690
OECD Pacific 250 680 - 710
Rest of Europe & Asia 1130 7730 - 9850
Latin America 80 470
Middle East & North Africa 110 1030 - 1180
South and South-East Asia 380 5300 - 9950
Sub-Saharan Africa 40 330 - 340
World 3160 18300 - 25330
OECD 1420 3440 - 3540
Non-OECD 1740 14860 - 21790
(Billions of USD, 2010 PPP exchange rates)
Source: OECD (2016), The economic consequences of outdoor air pollution
31
Non-market costs: morbidity
0
100
200
300
400
500
600
700
Ca
na
da
Ch
ile
Me
xic
o
US
A
EU
la
rge
4
Oth
er
OE
CD
EU
Oth
er
OE
CD
Au
s. &
New
Z.
Ja
pa
n
Ko
rea
Ch
ina
No
n-O
EC
D E
U
Ru
ssia
Ca
spia
n r
egio
n
Oth
er
Eu
rop
e
Bra
zil
Oth
er
La
t.A
m.
Mid
dle
Ea
st
No
rth
Afr
ica
AS
EA
N 9
Ind
on
esia
Ind
ia
Oth
er
Asi
a
So
uth
Afr
ica
Oth
er
Afr
ica
OECD America OECD Europe OECD Pacific Rest of Europe & Asia LatinAmerica
MiddleEast &NorthAfrica
South and South-EastAsia
Sub-Saharan
Africa
Illness Restricted activity days Hospital admissions
(USD per capita, 2010 PPP exchange rates, 2060)
Source: OECD (2016), The economic consequences of outdoor air pollution
32
Non-market costs
Mortality costs: USD 3 trillion in 2015
0
5000
10000
15000
20000
25000
30000
35000
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
Non-market costs (mortality and morbidity)
Bill
ion
s o
f U
SD
(20
10
, in
Pu
rcha
sin
g P
ow
er
Pa
rity
)
-> USD 18 – 25 trillion in 2060 Morbidity costs: USD 300 billion in 2015 -> USD 2 trillion in 2060 Source: OECD (2016), The economic consequences of outdoor air pollution
CONCLUSIONS
33
• The potential market costs of outdoor air pollution could reach a yearly GDP loss of 1% by 2060
• Higher costs in China, Caspian region and South East Asia
• Most market costs are health related (health expenditures and labour productivity)
• Indirect economic consequences as induced by the market impacts play an important role, which dominates morbidity impacts in the long term
34
Conclusions (I)
• The potential economic consequences of both market and non-market impacts are very large
• Specifically this report finds: – number of premature deaths (6-9 million by 2060)
– market costs (a yearly GDP loss of 1% by 2060)
– welfare costs (USD 18-25 trillion by 2060 for mortality impacts)
• Combined, the magnitude of the problem implies a strong call for policy action
35
Conclusions (II)
THANK YOU!
For more information:
www.oecd.org/environment/CIRCLE
www.oecd.org/environment/modelling