Trans-Boundary Air Pollution Spillovers: Physical Transport and Economic Costs by Distance

Abstract

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. To correct for the endogeneity of pollution, it uses a mixed two-stage least squares method that accommodates high-frequency (daily) pollution data and low-frequency (annual) outcome data and can improve efficiency. 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.

Keywords: air pollution; spillovers; productivity; environmental costs and benefits; mixed two-stage least squares; regional coordination

JEL Classification: D62; Q51; Q53; R11