Defensive Investments and the Demand for Air Quality: Evidence from the NOx Budget Program
74 Pages Posted: 17 Jul 2012 Last revised: 7 Jun 2016
Date Written: June 1, 2016
The demand for air quality depends on health impacts and defensive investments that improve
health, but little research assesses the empirical importance of defenses. We study the NOx
Budget Program (NBP), an important cap-and-trade market for nitrogen oxides (NOx) emissions,
a key ingredient in ozone air pollution. A rich quasi-experiment suggests that the NBP decreased
NOx emissions, ambient ozone concentrations, pharmaceutical expenditures, and mortality rates.
Reductions in pharmaceutical purchases and mortality are valued at about $800 million and $1.5
billion annually, respectively, in a region covering 19 Eastern and Midwestern United States;
these findings suggest that defensive investments account for more than one-third of the
willingness-to-pay for reductions in NOx emissions. Further, the NBP’s estimated benefits easily
exceed its costs and instrumental variable estimates indicate that the estimated benefits of NOx reductions are substantial.
Keywords: willingness to pay for air quality, cap and trade, ozone, pharmaceuticals, mortality, compensatory behavior, human health
JEL Classification: H4, I1, Q4, D1
Suggested Citation: Suggested Citation