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

57 Pages Posted: 24 Jun 2019 Last revised: 18 Aug 2020

See all articles by Shihe Fu

Shihe Fu

Xiamen University - The Wang Yanan Institute for Studies in Economics (WISE)

V. Brian Viard

Cheung Kong Graduate School of Business

Peng Zhang

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: June 24, 2019

Abstract

The economic costs of trans-boundary pollution spillovers versus local effects is a necessary input in evaluating 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. This avoids using annual pollution data which generally yields inefficient estimates. We apply the approach to 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 while the same increase in a city 50 kilometers away decreases it by CNY 16,248. The spillovers decline quickly to CNY 2,847 at 600 kilometers and then slowly to zero at about 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

Suggested Citation

Fu, Shihe and Viard, V. Brian and Zhang, Peng, Trans-Boundary Air Pollution Spillovers: Physical Transport and Economic Costs by Distance (June 24, 2019). Available at SSRN: https://ssrn.com/abstract=3408976 or http://dx.doi.org/10.2139/ssrn.3408976

Shihe Fu

Xiamen University - The Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 361005
China

V. Brian Viard (Contact Author)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China
86-10-8518-8858 (Phone)
86-10-8518-6800 (Fax)

HOME PAGE: http://english.ckgsb.edu.cn/faculty_content/brian-viard

Peng Zhang

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

HOME PAGE: http://pengzhang.weebly.com

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