Cost of Excess PM2.5 and O3 Pollution in China: A Province Level Analysis

Abstract

In this study, we estimate the cost of excess PM2.5 and O3 pollution in China and explore how it differs by province. For the analysis, we develop an integrated assessment tool by extending the China Regional Energy Model (CREM-HE). In essence, CREM-HE is a computable general equilibrium model of the Chinese economy, where each province represents one region. The greatest merit of the model is that it explicitly represents the pollution-health linkage within a larger economic system, and can capture pollution-health effects that appear only years later and are cumulative over time. In our model, we enforce pollution, generated by fuel use in a fixed proportion, as input for production. The pollution generated then increases demands for the pollution-health services, required to reduce pollution-health effects associated with acute exposure to PM2.5 and O3, and the production of those services draws resources from the service sector and the labor pool, reducing the inputs available for other production sectors. Premature deaths due to chronic exposure are subtracted from the existing pool of labor, leading to direct labor and leisure loss from the mortalities and the related reduction of economic output. The model’s capacity for provincial level analysis is another great strength, in that the magnitude of pollution-health effects is a function of varied local conditions, and thus a large fraction of the effects remains local. We incorporate epidemiological evidence from the Chinese literature and surveyed data, given that recent empirical evidence does not support the region-neutrality assumption in epidemiological relationships. Our preliminary results show that PM2.5 pollution is estimated to cause substantial costs to the Chinese economy. For each year between 2007 and 2030, China’s consumption loss from excess PM2.5 levels is estimated to be 3.1-4.7% of the baseline level. If each province of China is assumed to meet the World Health Organization guideline level and its own Class I standards, the consumption loss is expected to decline to 3.1-4.7% and 3.1-4.7% of the baseline level, respectively. In terms of costs categories, around two thirds of the costs are from premature deaths due to chronic exposure to excess PM2.5 pollution. Cross-regional heterogeneity is also substantial. A large fraction of the PM2.5-caused economic loss occurred in Eastern China, where the nation’s population is heavily concentrated. In absolute terms, the costs were particularly large in Jiangsu, Shandong, Guangdong, and Zhejiang provinces. When the size of provincial economies is controlled for, however, the dominance of these populous provinces is less obvious, and several inland provinces, such as Chongqing, Shaanxi, Shanxi, Sichuan, and Inner Mongolia, show relatively high costs. This is mainly due to relatively high PM2.5 levels and fast labor productivity growth in these regions. (as of June 29, 2017, we are still testing the model’s O3-related module.)