Question

Suppose an increase in air pollution causes capital to wear out more rapidly, doubling the rate of depreciation. How would this affect economic growth?

Answer 1

The three different market impacts of pollution are: reduced labour productivity; increased health expenditures; and crop yield losses. They all contribute to a projection of GDP that's below the projection that excludes the pollution feedbacks on the economy (Figure 6). At the worldwide level, the results of labour productivity and health expenditure impacts still increase significantly relative to GDP. In contrast, agricultural impacts are relatively stable over time in percentage of GDP, i.e. in absolute terms these impacts grow more or less at an equivalent speed as GDP.

The effects of the three different impact categories cannot just be added up to calculate an overall effect of the market impacts of pollution on economic process as there are interaction effects that require to be taken under consideration . In theory, these interaction effects are often both positive and negative. In the projection with all impact categories, the general GDP loss is larger than the sum of the three individual losses. At the worldwide level this effect is minor (less than 0.1% of GDP in 2060), except for the foremost affected regions, it can increase GDP losses more significantly.

It is possible to attribute a price to non-market impacts, like the premature deaths and therefore the costs of pain and affected by illness, using estimates of willingness-to-pay (WTP) based on direct valuation studies. The welfare costs of the premature deaths caused by pollution are calculated using the worth of a statistical life (VSL). This is a long-established metric, which can be quantified by aggregating individuals’ WTP to secure a marginal reduction in the risk of premature death over a given timespan. The VSL values used are calculated employing a reference OECD value of 2005 USD 3 million then using benefit transfer techniques to calculate country-specific values following OECD (2012). This is done on the idea of country-specific income adjustments, with an income elasticity of 0.8 for high-income countries, 0.9 for middle-income countries and 1 for low-income countries