How Extensive are Air Pollution Spillovers? An Application to China’s Manufacturing Productivity
47 Pages Posted: 24 Jun 2019 Last revised: 4 Sep 2019
Date Written: June 24, 2019
The extent of trans-boundary pollution spillovers versus local effects is a necessary input in evaluating centralized versus decentralized environmental policies. We develop an estimation approach allowing for a flexible relationship between pollution and outcome as a function of distance. To estimate causal effects, it uses a mixed two-stage least squares method that combines high-frequency (daily) pollution with low-frequency (annual) outcome data. This avoids using annual pollution data which is vulnerable to inter-regional common shocks and insufficient variation. We apply the approach to 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 output by CNY 4,613 and an increase at 50 kilometers by CNY 535. The spillovers decline quickly to CNY 83 at 600 kilometers and then slowly to zero at about 1,000 kilometers. Our approach is easily adapted to compare spillover and local effects for other outcomes.
Keywords: air pollution; spillovers; productivity; environmental costs and benefits; mixed two-stage least squares; regional coordination
JEL Classification: D62; Q51; Q53; R11
Suggested Citation: Suggested Citation