In this fascinating study the authors present a way of including the costs of air pollution (sulfur dioxide, nitrogen oxides, volatile organic compounds, ammonia, particulate matter, and CO2) into the standard set of national accounts used to calculate gross domestic product (GDP) and other national economic indicators.
With this approach a price for coal or natural-gas generated electricity can be calculated that includes the cost of air pollution including such things as impacts on human health, decreased timber and agriculture yields, reduced visibility, accelerated depreciation of materials, and reductions in recreation services.
For example, the study finds that when these impacts are included the cost of coal generated electricity increases by 60 % in states relying on coal. This could make coal uncompetitive with other sources of electric power.
Including air pollution in national economic accounts
National economic accounts cover activities that are included in market activities. For example, The annual input-output accounts (I-O accounts) measure productive activity occurring in the economy by measuring by industry, the total value of output by commodity and the use of such commodities as an input to each industry’s production process. Gross domestic product (GDP), probably the most quoted economic statistic, can be computed using the I-O accounts.
In the generally used system of national accounts external activities such as pollution that do not participate in a market are by definition excluded. In regulated industries, firms often already engage in some abatement. In this case some costs are already included in the existing national accounts. However, damages from any remaining emissions are not incorporated into the accounts.
This study presents a framework to integrate external damages, referred to as gross external damages (GED), into the system of the national economic accounts. It only looks at market activities, so that for example, pollution from households (homes and cars), which is a non-market activity, is not counted. In this framework air pollution becomes another cost of doing business. This approach allows a social price of coal or natural gas to be calculated that reflects the social cost of air pollution from each energy source.
Cost of air pollution in the United States
- sulfur dioxide (SO2)
- nitrogen oxides (NOx)
- volatile organic compounds (VOCs)
- ammonia (NH3)
- fine particulate matter (PM2.5)
- coarse particulate matter (PM10–PM2.5)
- CO2 (for electric power generation only)
to the physical and economic consequences (social costs) of these emissions on society. This paper takes the position that emissions should be valued by the damage they cause. With this assumption the pollution caused by each industry are included in the national accounts as both a cost and an (unwanted) output.
Using empirical estimates of the marginal damages (in effect, the prices) associated with each emission in every county in the Unites States, the contribution of air pollution damages to national accounts by industry have been calculated for the United States. The GED reported in this study is the annual damages from emissions in the year 2002. The analysis of greenhouse gases is an exception because they are calculated as the present value of future damages from 2002 emissions.
The study estimates that aggregate pollution damages, GED, from the market sector for all industries in 2002 were $184 billion. The study breaks this down by sector and by industry and in addition to GED calculates the GED as a percentage of the total market value for each industry, referred to as GED/VA. The sector with the largest GED is utilities with a GED of $63 billion of damages, about 34 percent of the total damages produced by market activity.
(It should be notes that pollution from households (homes and cars), which reflects nonmarket activity, is not included in the $184 billion. To put this is context emissions from light duty cars and trucks produced over $37 billion in air pollution damage and residential combustion of fossil fuels and wood generated $17 billion in damages in the year 2002.)
For the electric power industry, the damages from CO2 emissions are included in the gross emissions, referred to as GED*. The CO2 share of GED* for coal-fired generators is between 5 percent and 40 percent. Although coal-fired plants generate a great deal of CO2, they generate greater damages due to other pollutants such as SO2. Emissions of CO2 have the largest percent impact on the damages from natural gas–fired power plants (40 percent to 90 percent) because natural gas–fired power plants generate very small amounts of other pollutants.
In 2002, residential consumers of electricity paid an average market price of 8.4 cents/kwh. Residential electricity prices vary by the primary fuel type used in electricity generation.
In states that primarily rely on coal-fired power, residential electricity prices averaged 6 cents/kwh. The average GED*/kwh of coal-generated electricity is 60 percent of the average residential retail price of electricity in these states. The costs associated with air pollution significantly increases the social cost of coal generation to 9.6 cents/Kwh vs 6 cents/Kwh. An increase of this magnitude could make coal uncompetitive compares to other sources of electricity.
In states that rely primarily on natural gas, residential electricity prices averaged 11 cents/kwh. The average GED*/kwh of natural gas–generated electricity is 5 percent of the average residential retail price of electricity in natural-gas states. The social cost of natural gas generation is 11.5 cents/kWh.
Details of the calculation
The Air Pollution Emission Experiments and Policy(APEEP) analysis model is an integrated assessment economic model of air pollution for the United States. The APEEP model connects emissions of six major pollutants to the physical and economic consequences of these discharges on society. The effects included in the model calculations are adverse consequences for human health, decreased timber and agriculture yields, reduced visibility, accelerated depreciation of materials, and reductions in recreation services. In addition, for the electric power generation sector, damages from carbon dioxide emissions are also calculated.
APEEP employs the US EPA national emission inventory of air pollution emissions in the United States, along with an air quality model to calculate the resulting air pollution concentrations across the country. Using detailed, county-level inventories, the model determines exposures to these emitted pollutants, and APEEP computes the resulting physical consequences by relying on dose-response functions. Finally, the model expresses these physical effects in monetary terms using standard estimates of the value of mortality and morbidity risks. APEEP generates national concentrations, exposures, and damages,
The US EPA national emission inventory of air pollution emissions includes 10,000 emission sources representing a complete inventory of all anthropogenic sources of these six pollutants in the United States. The inventory reported in 2006 is the most recent USEPA inventory and measures emissions in 2002. The 2002 inventory includes 656 large point sources (individually documented facilities). The inventory also includes area sources from vehicles and stationary ground sources aggregated by county for the entire contiguous United States. The emissions are identified by a North American Industry Classification System (NAICS) industry code.
One of the important results of the damage estimates is that most of the damages due to exposures to air pollution result from human health effects, specifically premature fatalities. To count human exposures, APEEP contains an inventory of populations in each county subdivided into 19 age groups. The population is divided by age because age is a key determinant of human health effects.
Translating the health effects into economic losses requires determining an economic value for premature mortality. A key assumption is the magnitude of the value placed on mortality risks. This study values mortality risks using evidence from both revealed preference studies and stated preference studies in the literature. Specifically, the study uses a value of a statistical life (VSL) of $6 million per premature mortality. This figure represents the mean of 28 studies reviewed by the USEPA and it is used by the agency in their analyses of the benefits and costs of the Clean Air Act.
Gross external damages (GED) are defined as the marginal damages of emissions(the price) times the total quantity of emissions. If the polluter receives the permits without cost, GED is the correct measure of the omitted environmental costs of that industry. If, however, the polluter pays for the pollution (either by buying permits or through pollution taxes), the costs of the pollution would be part of the firm’s cost of production under standard accounting principles. To avoid double counting, the costs of the permits should be subtracted from GED to obtain net external damages,
CO2 emissions have been calculated for the fossil fuel electric power generators by the Energy Information Administration (EIA). Several studies have estimated the global damages per ton of 2002 emissions as a present value of future damages, also referred to as the social cost of carbon. The study uses the value of $27/tC as the most probable estimate with $6/tC as a lower bound and $65/tC as an upper bound. It is expected that as concentrations of CO2 increase in the atmosphere, the social cost of carbon will increase.