Defensive Investments and the Demand for Air Quality: Evidence from the Nox Budget Program and Ozone Reductions

58 Pages Posted: 3 Aug 2012 Last revised: 21 Feb 2014

See all articles by Olivier Deschenes

Olivier Deschenes

University of California, Santa Barbara - College of Letters & Science - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Michael Greenstone

University of Chicago - Department of Economics; Becker Friedman Institute for Economics; National Bureau of Economic Research (NBER)

Joseph S. Shapiro

University of California, Berkeley; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: August 2012

Abstract

Willingness to pay for air quality is a function of health and the costly defensive investments that contribute to health, but there is little research assessing the empirical importance of defensive investments. The setting for this paper is a large US emissions cap and trade market - the NOx Budget Trading Program (NBP) - that has greatly reduced NOx emissions since its initiation in 2003. Using rich quasi-experimental variation, we find that the reductions in NOx emissions decreased the number of summer days with high ozone levels by about 25%. The NBP also led to reductions in expenditures on prescription pharmaceutical expenditures of about 1.9%. Additionally, the summer mortality rate declined by approximately 0.5%, indicating that there were about 2,200 fewer premature deaths per summer, mainly among individuals 75 and older. The monetized value of the reductions in pharmaceutical purchases and mortality rates are each roughly $900 million annually, suggesting that defensive investments are a significant portion of willingness to pay for air quality. Finally, we cautiously conclude that the reductions in ozone are the primary channel for these reductions in defensive investments and mortality rates, which indicates that willingness to pay for ozone reductions is larger than previously understood.

Suggested Citation

Deschenes, Olivier and Greenstone, Michael and Shapiro, Joseph S., Defensive Investments and the Demand for Air Quality: Evidence from the Nox Budget Program and Ozone Reductions (August 2012). NBER Working Paper No. w18267. Available at SSRN: https://ssrn.com/abstract=2123007

Olivier Deschenes (Contact Author)

University of California, Santa Barbara - College of Letters & Science - Department of Economics ( email )

UC Santa Barbara
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National Bureau of Economic Research (NBER) ( email )

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IZA Institute of Labor Economics ( email )

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Michael Greenstone

University of Chicago - Department of Economics

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Becker Friedman Institute for Economics ( email )

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National Bureau of Economic Research (NBER)

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Joseph S. Shapiro

University of California, Berkeley ( email )

HOME PAGE: http://joseph-s-shapiro.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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