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Was it Worth It? The Benefit-Cost of Air Pollution in China

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Introduction

My brother sent me a link for Under the Dome and asked me what I thought of it. Under the Dome is a brave documentary on how China’s policy of develop at any cost is costing the people it is meant to benefit. It is made by Chai Jing, a former investigative journalist of CCTV (the State-owned TV network), and was originally hosted on the People Daily’s (another State-owned media organ) website until the Chinese Government ordered its removal. What I find most interesting about the documentary is how personal it is: this documentary rams home the point that the cost of environmental pollution is deeply personal, not an ideological preoccupation of the rich, Western global elite.

Environmental impacts have been depicted as a rich world obsession. But we can see in China that the people most affected are ordinary people, not the elite of the business and political cadres. Ultimately, people will suffer the costs of pollution. The costs to people are the result of environmental degradation and should be weighed against the economic benefits of development in public policy analysis. This blog post will ask the question, was all the air pollution worth it?

How Much is Air Pollution Costing China?

According to the World Bank and the Development Research Center of the State Council (China’s highest policy-making body) report on Urban China, air pollution costs China $US100-300 billion per year. From this report, it isn’t clear what makes up this number. Does it just represent health expenditure? Or is it a measure of the loss in economic value from shorter lives? It is just a measure of the public or private expenditure? This last point is important because economic liberalisation has witnessed a shifting of health costs from the government to individuals and (to a limited extent) to insurers.

To my mind, I’m interested in how much it would cost in terms of medical treatment. To me, this is a more tangible estimate of the cost of air pollution than using such concepts as the ‘value of statistical life’. While important in providing a complete measure of the cost of preventable risks, such measures are highly contested. I think governments and individuals are more likely to implement change if they can see a benefit for themselves.

How Much Does it Actually Cost the Government?

I have decided to chance my arm with estimating the cost of air pollution in China. Keep in mind these are very rough estimates drawn from public sources. My methodology is quite simple: multiply the medical expense of premature death from air pollution (Y) by the excess mortality figure (Z). Algebraically, it is simply Y x Z = X, where X is the health expenditure cost of air pollution. My assumptions for this exercise are as follows (with link to the sources):

The results of this rudimentary analysis are presented in the table below:

Cost (2013 ¥) CN¥ USD
High Scenario
-Private ¥ 17,038,986,112 $ 2,726,237,777
-Public ¥ 13,940,988,637 $ 2,230,558,181
Total for High Scenario ¥ 30,979,974,749 $ 4,956,795,959
 
Low Scenario
-Private ¥ 11,927,290,278 $ 1,908,366,444
-Public ¥   9,758,692,046 $ 1,561,390,727
Total for Low Scenario ¥ 21,685,982,324 $ 3,469,757,171

Source: author’s calculation.

In the high scenario, medical expenses from premature deaths caused by air pollution is estimated to cost nearly $US5 billion, or0.05% of 2013 GDP. Conversely, for the low scenario, the cost is still around $US3.5 billion or 0.04% of 2013 GDP. On an annual basis, the cost of air pollution seems manageable.

Note, these are based on current estimates of excess mortality. Deaths from air pollution causes are expected to increase, especially as it affects children. Other authors estimate the excess mortality rate is actually higher, at 1.2 million. We would expect excess mortality to grow over time. How much, is not clear.

What are the Benefits?

The benefits of China’s economic growth are staggering and have been well-documented. 500 million people have been lifted out of poverty. Between 2012 and 2013, China added $US1 trillion to its GDP.

Unfortunately, the key driver of China’s economic growth in the past was cheap energy using highly polluting fossil fuels such as brown coal. According to Chai Jing, the quality of fossil fuel is lower than in other large economies. Furthermore, fuel standards are also low because the standards are set by China’s State-owned oil and gas oligopolists because environmental regulators don’t ‘get’ the industry. There could be an opportunity to reduce the pollution-intensity by switching to cleaner fuels and raising standards. To some extent, this is already occurring.

For example, an analysis done by the International Council on Clean Transportation found that the compliance cost of raising fuel standards was estimated to add less than 1% to the cost of a passenger car. The benefit-cost ratio was found to be over 20:1. It would seem to be a reasonably attractive investment for the Chinese Government to raise fuel standards for passenger vehicles.

Was it Worth It?

This is a tough question. If I look at it from a purely utilitarian view and looking back, yes it was worth it. The people of China have opportunities and resources that weren’t possible 30 years ago. Now ordinary people can aspire to a standard of living that seemed like a fantasy to the previous generation.

But that is an incomplete analysis and doesn’t take in account the expected increase in excess mortality from air pollution into the future. It would seem the costs are manageable, thanks to China’s economic growth. The question now is whether the Chinese Government are able to fully enforce their laws and compel private industry and lower levels of government to clean up their act. While prosperity has created a stronger central government, it has also has created powerful vested interests to maintain the status quo of toothless environmental regulation. This risks undermining the future prosperity of China by rendering their cities unliveable. It would be an interesting time to see if the Chinese Government can stiffen their environmental regulation and improve environmental quality. So, if we include consideration of the future, it would be worth it if the Chinese Government can use that prosperity to improve the environmental quality of their cities to a less dangerous level.

Anyway, that’s what I think.


6 Comments

  1. One significant unknown is the degree of ecological chaos nature must inflict to regain atmospheric equilibrium. The cost to human capital could be enormous.

    • arthurchha says:

      Yes, that’s true. I didn’t project the future costs mostly because of lack of projections of how excess mortality caused by air pollution will develop.

  2. Jack Fensterstock says:

    This kind of overly simplistic analysis is dangerous and only emboldens those who value economic development at any cost.

    • arthurchha says:

      As simplistic as my analysis was, I did explicitly compare the costs with the benefits. If the benefits from economic development were lower, than my analysis would have absolutely rejected China’s economic development strategy.

      • Jack Fensterstock says:

        Irrespective of the cost for mortality and how these factors are quantified, what about other costs such as those associated with chronic illness and lost productivity? Then there is also the cost to the economy due to shutdowns or reduced levels of activity on high polluting days. [For example, look at the costs that were estimated for the forced ‘blue sky’ days for APEC and when the IOC visited.] These reductions are not rare events.
        Note that the plants that cause air pollution are also typically polluters of other media such as water and land. Here the costs are associated with chronic illnesses, creation of cancer villages, poisoning of the food supply, need to import food and become reliant on foreign countries, etc.
        What about societal costs such a the flight of highly successful entrepreneurs, skilled expatriate executives who decline postings to cities such as Beijing, reduction in tourism, need to relocate people from dead zones, and increasing discontent on the part of the Chinese public?
        The bottom-line is that on one hand, your analysis is incomplete because it does not consider a complete spectrum of costs and on the other hand the simplistic approach ignores the reality that it does not fully account for the environmental risks to public health as well as to the environment per se.
        I am sure that you are aware that the literature is replete with studies that have tried to do similar analyses as well as regulatory processes that seek to balance the costs of environmental control against economic benefits. They take years to develop and undergo much peer review. They are not ‘back of the envelope’ analyses. So again, while I do not doubt your sincere attempt to frame the issue as well as to elicit a healthy intellectual conversation, the end result is that being too simplistic can be dangerous when it comes to serious matters having to do with the protection of public health and the environment.

        • arthurchha says:

          You are right that ideally all possible costs and benefits should be included in a rigorous benefit-cost analysis. However, my point is that from a Chinese policy-makers’ perspective, the cists (thus far) are manageable. This is because bureaucrats, like any one else, focuses on how their performance is measured and in this case it would be the health costs vs economic growth. Worryingly, the government is actually shifting more health costs to ordinary people which actually reduces the government’s incentive to manage the social costs of health pollution. So yes, my analysis is incomplete but it is probably closer to the policy-makers’ objective function than what economic theory would assume. If this current incentive structure persist, unfortunately the problem would get worse. Maybe it will be more useful to the Chinese government to provide solutions on the cause of this incentive problem rather than to keep on telling them they’re doing a bad job?

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