This week, Daniel Raimi talks with Nicholas Z. Muller, an associate professor at Carnegie Mellon University. Muller discusses the findings of a paper he recently published with coauthors, “Fine Particulate Matter Damages and Value Added in the US Economy,” which measures the health damages from air pollution in various economic sectors in the United States relative to their economic contribution, as measured by traditional metrics such as gross domestic product (GDP).
Raimi and Muller discuss how these emissions trends have changed over time, which parts of the economy account for the most pollution, and related implications for environmental policy.
Listen to the Podcast
Top of the Stack:
- “Fine Particulate Matter Damages and Value Added in the US Economy” by Peter Tschofen, Ines L. Azevedo, and Nicholas Z. Muller
- The Sixth Extinction by Elizabeth Kolbert
- Impossible Whopper at Burger King
The Full Transcript
Daniel Raimi: Hello and welcome to Resources Radio, a weekly podcast from Resources for the Future. I’m your host Daniel Raimi.
This week, we talk with Dr. Nicholas Muller, a professor at Carnegie Mellon University. Along with coauthors, Nick recently published a paper that measures the health damages from air pollution in the United States, and looks at how those damages compare with traditional economic metrics like gross domestic product. It’s a fascinating piece of work—one that tells us a lot about the harm that some economic activities impose relative to their contribution to the economy. I’ll talk with Nick about how these trends have changed over time, which parts of the economy account for the most pollution, and what this all means for environmental policy.
Stay with us.
Okay. Nick Muller from Carnegie Mellon university. Thank you so much for joining us today on Resources Radio.
Nicholas Muller: My pleasure.
Daniel Raimi: So we're going to talk today about what's sometimes called green accounting, and a recent paper that you've authored with coauthors in the Proceedings of the National Academy of Sciences. But first like to ask you the same question that we ask everyone who comes on the show, which is how did you get interested in energy and environmental policy issues?
Nicholas Muller: Sure. So ultimately I think it stems to the fact that during my childhood, my family vacation on the Great Lakes in Canada, in the same spot every year, and what that did was to—number one, instill an appreciation of the natural environment. Just being outdoors, not having, you know, technology and devices to entertain you. And also, the appreciation of that particular environment, the Great Lakes and just the open expanse, and fishing and stuff like this.
But going back to the same place every year made it clear that the environment around us was changing—maybe in terms of water levels at the Great Lakes, or changes in industrial pollution levels. And you know, as a family we would observe these things and talk about these things. And so perhaps that's the root cause of my interest in matters environmental. I will say that during graduate school I was trained in economics, and what was really interesting to me were situations in which the assumptions that lead many economists to suggest that markets are an efficient allocation mechanism. When those assumptions break down and we have market failures—and in particular, thinking about market failures related to the environment and natural resources are some of the most interesting problems to work on, some of the most challenging problems, frankly—and that was really inspiring to me as far as a place to direct my energies.
Daniel Raimi: Yeah, that's so fascinating. And you know, it's directly relevant to the work that we're going to talk about today—how to account for those market failures, and sort of think about incorporating them into the measures that we use to evaluate standards of living and economic well-being and things like that. So let's talk a little bit about the background of what's usually called green accounting. If there are other terms please share them with us, because this is a relatively new area for me. So when we think about economic well-being, the most common metrics that people use, the ones we hear on the radio are things like, you know, of course domestic product, gross national product, per capita income, and measures like that.
So what's the concept or idea behind green accounting, and why might it be an improvement on these more traditional measures for assessing human well-being?
Nicholas Muller: Sure. So gross domestic product and measures like that, when you think about it in the broadest perspective, are really an amazing achievement. Back in the late twenties and early thirties, policymakers in the US were dealing with a very large and well known disruption that is the Great Depression. And they didn't have, in some sense, data to inform their decisionmaking in the way that we do today. And maybe some of your listeners might forget that. And so during the early thirties, FDR commissioned economists to try to come up with some systematic measurements that would allow him and his associates to make better decisions. And those metrics ultimately became what we think of now as gross domestic product or GDP.
And you know, as long as that metric or that measurement of performance has been around, economists have known that it's incomplete. And it's incomplete in many ways, but the literature has really focused on three areas; the value of leisure time, the value of home production, and environment and natural resources. And so against that backdrop, green accounting really works on obviously the third area. And it's in principle working towards a more comprehensive measure of economic performance or output, and looking across time, in growth, by including the value of, on the one hand, environmental pollution damages that escape the boundaries created by GDP. That is, these damages can extend into non-market impacts. And also green accounting explores the value of natural resources, in place. And by that I mean, when we have standing forests, GDP tends to include the value of those forests when they get used—that is, cut down—and green accounting says, no, wait a minute, there are other services that the forests are actually producing. And so that's a nice way to think about the difference in perspective between the two.
Some of the earliest work in green accounting was done in the early 1970s by now two Nobel Prize-winning economists, James Tobin and Bill Nordhaus, both at different times at Yale. And that paper really laid out, in some sense, the research agenda—it provided estimates of the value of these different components of what was missing. But it was really, in some sense, primitive although very insightful. It was primitive in the techniques they had back in 1973, to look into some of these issues empirically.
Daniel Raimi: Right. Yeah, that's really helpful, that perspective. And as you mentioned, you know, really some of the most accomplished economists, have sort of realized and advocated for a long time that incorporating some of these measures is useful and would help us get a better sense of the economy at large, and accounting for things that are outside of markets. But to my knowledge, green accounting hasn't really been adopted widely across the United States or other nations. Can you speak to that issue and why you think it might be, that we haven't seen these measures incorporated at large scales?
Nicholas Muller: Sure.
On the one hand—again, the long view, thinking back to that initial work by Nordhaus and Tobin in the 70s—there were empirical obstacles, measurement of some of the values that would be key ingredients in an extended set of green accounts. Measuring those values is frankly very hard. On the one hand, there are actually the approaches that economists use to derive monetary values for things like recreation experiences, or aesthetics, existence values for different species. And those, those remain quite hard. On the other end of the spectrum, in terms of thinking about steps to incorporate green accounting, we have, like the work that that was just published in the article we're talking about today, we have pollution damage measurements that in addition to the valuation metrics, there are environmental modeling steps that have matured greatly in the interim between 1973 and today.
So for instance, if we're thinking about the impacts of pollution emitted by a power plant, we need to know something about where that pollution goes, what it might turn into along the way. Some of the chemistry involved, who or what is exposed to it, their response in terms of perhaps elevated health risks, and then ultimately what is the value of those impacts. So there are empirical challenges all along the way in the modeling chain. And you know, it's nice to be able to say here in 2019 we've really made great progress in some of those empirical steps that allow us to now have really pretty rigorous estimates of the damage for some of these pollutants. Of course, uncertainties remain as they always will with any modeling exercise. But we've made a lot of progress. We're now in a position where we can credibly report to policymakers what these values might be, and have a serious discussion about extending the existing accounts to include the green accounts.
There's another side to this though, and that is vested interests. Firms in certain industries may not want environmental accounts to be officially on the books. For example, think about firms that own or consume large quantities of pollution-intensive fossil fuels—they may not want to have their value added, in a sense, be net of the pollution damage that their productive activities cause, which is not a statement about their production activities not having value, just that the existing accounts mismeasure that net value when one takes into account pollution damage. So really the obstacles are two-fold. There's a historic, practical measurement, empirical set of obstacles, and there's the sort of, the status quo way of doing things. It most certainly makes more sense for folks who might have a lot to lose if we moved towards a comprehensive system of green accounts.
Daniel Raimi: Yeah, absolutely. And so let's get into some of the research now that we've already referenced it. So the paper that we're going to talk about is, as I mentioned, in PNAS and it's called “Fine Particulate Matter Damages and Value Added in the US Economy.” And it's a paper you've offered with with your colleagues—please correct my pronunciation of their names if I mess them up—Peter Tschofen and Inês Azevedo. And so you measure something called gross external damages from PM 2.5—regular listeners of the show know about PM 2.5—it's a fine particulate matter of measures 2.5 microns or less. So you measure this particular kind of pollution and assess the health damages from it across different sectors of the economy. So writ large, how do these gross external damages from PM 2.5 compare with the traditional measure of GDP that we've been talking about and how has that changed over time?
Nicholas Muller: Sure. So in our most recent year for which we have the data necessary to do the modeling exercise that was conducted for the paper—that is 2014—we find that the gross external damages amount to about four or five percent of GDP, which might not sound like much, but it's really a pretty big number. That number, the 5 percent number is of course subject to assumptions that one makes in the models about various key parameters, you know, how much are damages valued, how sensitive are humans to exposure to PM 2.5. We certainly go to the literature to find appropriate choices for those parameters, but I just note that there are other ways to do this that can make that 5 percent number either go up or down. Generally as a long-term trend, PM 2.5 and associated damages have fallen in the US precipitously since the 1970s.
So we did not estimate that in the paper we're discussing. In some of my additional work as a sole author, I've found that the share of GDP contributed by PM 2.5 damage was much, much higher back in the 70s, I suppose as as one might one might guess. And not coincidentally, the Clean Air Act, our primary set of regulatory tools in the US, was passed in 1970 and really implemented meaningfully throughout the 70s. So I think those two things are certainly related. I will note that when I have looked at the pollution monitoring data for years, more recent than 2014—now your listeners should note that that is not the full modeling exercise that Tschofen and Azevedo and I conducted, it's just looking at the air pollution monitoring network in a collection of cities in the US—I find a disturbing trend that the PM 2.5 levels have started to go up after a decade of continuous decline in both 2017 and 2018. So I want your listeners to know that our research finds a promising declining trend in damages. We look forward to doing the damage accounting exercise for more recent years when the emissions data are released. But the most current data we can find suggests air pollution levels have started to tick up for the first time in quite a while.
Daniel Raimi: That's interesting. And just to put some numbers on the trends that you identify in the paper, the gross external damages from PM 2.5 in 2008—you find at about 6 percent in 2008, about 4.6 percent in 2011, and then declining to 4.2 percent in 2014. But as far as you know, 2014 is the most recent year for which the full set of data is available. In the paper, you note that a relatively small number of economic sectors contribute a large share of these damages— these PM 2.5 emissions and the associated damages. Can you talk about those economic sectors, and which of them might offer some of the best opportunities for near-term emissions reductions?
Nicholas Muller: Sure. We find this result is associated with damages from the agriculture sector, the utility sector, the manufacturing sector, and transportation. And again, as you stated, those sectors together contribute just 20 percent of GDP, and they contribute 75 percent or three quarters of the total air pollution damages that we track. If we were to think about the value that those sectors contribute to economic performance, it's important to note that we as authors of the paper are not arguing for the elimination of, you know, the agriculture sector or utilities or anything of the sort. What we're merely doing is saying, here's a way that you can characterize the value added that those sectors contribute to the US economy. And when you build in some of these extra-market or non-market impacts costs that they confer on the population, their value added really changes appreciably, especially agriculture and utilities.
From the point of view of policies and additional abatement opportunities, I think the first thing I would want to say is, we've made a lot of progress—we, the US—in improving our air quality over the 40 to 50 years that the Clean Air Act has been in place. And I would argue that it is a very bad idea to relax or not enforce the current standards that we have in place that have been in some sense very much hard won. And I'm thinking about things like fuel economy and the vehicle fleet, or relaxing some of the ambient standards or not enforcing some of the ambient standards for PM 2.5. I think let's work—at least initially—on maintaining our current goals as stated, statutorily and administratively. Secondly, I would note that the agriculture sector is a really interesting place to think about additional abatement, because traditionally—at least the way I think about this—traditionally we think about air pollution control from smokestacks and tailpipes. And agriculture really offers different opportunities, in the sense that we might consider changes in the composition of fertilizer, which contributes to emissions of ammonia, which contributes greatly to the damages that we're measuring in that sector.
We also might think about differences in the intensity of fertilizer used based on some of the damages that we’re estimating. And then additionally, animal wastes that are produced in the course of producing livestock are also important contributors. And if there are ways that we can manage that waste in a way that's more cognizant of the air pollution impacts from those production activities, that would be great. It also speaks, in a more broad sense, to how we as consumers think about the composition of our menus or the composition of our diet, right? If we're more aware of these upstream costs associated with the production of livestock for food, then we may decide to change our habits, or we may need nudges in the form of public policy to help us do that.
Daniel Raimi: Yeah. Great. That makes sense. And you know, for listeners who want to get a sense of the different contributions of these different sectors, figure two of the paper offer some really simple but really clear sort of measures and time trends for agriculture, utilities, manufacturing, and transportation. The most dramatic trend that you see in those figures is the steep reduction in sulfur dioxide emissions from the utility sector. And I imagine that's mostly the decline of coal-fired electricity generation in the US, is that right?
Nicholas Muller: It is. It's not only the decline in just how much electricity we're producing by burning coal, which is largely about the switch to natural gas. But it's also the fact that the remaining coal-fired power generators that we have, many of them are using flue-gas desulfurization or scrubbers, which removes SO2 from the waste stream quite a bit, to the tune of 80 percent or more. And so both of those market and regulatory forces are associated with or causing that steep decline in SO2 emissions.
Daniel Raimi: Yeah. Great. And that of course, again, brings us back to the Clean Air Act and the importance of policy measures to deal with some of these issues. So another really interesting sort of feature in the paper is this table that's a few pages in, table one of the paper. And what this table does is it shows the ratio of damages to value added across different sectors. So how much health damage is associated with a given sector, and how much value added is associated with that sector. So let's sort of compare in this simple metric across different parts of the economy. Can you talk a little bit about which economic sectors are most damaging relative to their economic contributions and which are the least damaging, and maybe how that's changed over time?
Nicholas Muller: Sure. It's an interesting question to ask. That is—what is most damaging? And by that I mean, how do we assess most damaging? One perspective might just be, well, you total up all the impacts and you get a GED number, a total damage number, and then you rank the sectors and say the one at the top is the most damaging. As an economist, my view is that's not quite right, because we need to remember that these sectors are there for a reason, and that is they're producing something of value, at least in principle, to the economy. And so we need to compare both. That is—we need to compare the external damages, the air pollution impacts from these sectors—and we need to say—okay, but at the same time, what is the monetary value of the products that those sectors are producing? And that really leads us to this GED to value added ratio that we report in that table.
From that perspective, it appears that animal production, livestock production, is the most damaging relative to value added in 2014. And it's the case that we estimate that the gross external damages from that sector are greater than their market value added. Now a cautionary note is that the fact that damages from that sector exceed value added does not suggest or should not suggest that we shut that sector down or ban production of this, that, or the other good. What it does tell me is that the regulatory apparatus, in so far as it's targeting air pollution and air pollution damages, is probably not stringent enough for that sector. We need to bring that ratio down. And this is an indicator of evidence that the regulatory stringency applied to that sector is apparently far too lax.
We also see evidence that sectors, or subsectors like waste management, are generating lots of damage relative to value added—these are things like incinerators. But what I would note there is that we need to think carefully about what value added is for the waste management sector. Because it's my contention that there are probably non-market health sanitation benefits associated with waste management that may not be in value added, which would make value added mismeasured in some sense in a different way. And that might inflate that ratio of damages from air pollution to value added for that sector.
Daniel Raimi: Right, so the measures that we're using here in this work may not account for the health and the health values of having clean homes, clean streets, clean parks and so on.
Nicholas Muller: Absolutely.
And maybe even water. I mean, that's certainly part of it. As far as trends, one of the most stunning, which speaks to the discussion we had a moment ago, is the GED to value added ratio for utilities from electric power generation, rather from 2008 to 2014, that ratio fell from 1.4 to 0.6 in just a six year period. And you know, electric power generation is not really a high growth industry, meaning most of the action in the change in that ratio is in damage reductions. And that, you know, is not perhaps surprising given what we reported in the first figure of the paper. But nonetheless, in this framing of this GED to value added ratio, that's a really, really stark change. It's also true that that other subsectors in that table are not changing very much.
And again, that speaks to the difference in both market forces and regulatory stringency targeted at power generation versus say agriculture and animal production, or rail transport and some of the others. In this framing, I’ll just conclude by saying that the least damaging sectors are often services, and in particular things like financial or insurance services, information technology, which is just a really interesting contrast in the sense of a long run comparison of what makes GDP in the US—[it] has changed a lot over time, not just within this six year period. We were a manufacturing based economy at one point in time, we’re now clearly not. And the implications of that in terms of damages and environmental impact and net value added are quite clear.
Daniel Raimi: Yeah, that makes sense. So last question before we go to our Top of the Stack segment is, when you look across these different economic sectors and their health damages as well as their value added, do you see any particularly low hanging fruit for either the private sector or public policies to address emissions at low cost?
Nicholas Muller: So on the one hand, as a microeconomist I would just note that typically I don't think about businesses pursuing emission reductions as a primary objective. And so what we need to think carefully about there is, whether or not there are complementarities between profit maximization as their objective and emission reductions. And frankly, sometimes there are, when we have natural gas prices falling relative to coal prices, we've seen firms switch or increase the use of natural gas in their production processes, and therefore you have this sort of complementarity happening.
Daniel Raimi: Right. Plus renewables you know, also contributing to that.
Nicholas Muller: Absolutely. I would say though, that when we think about low hanging fruit or continuing to reduce emissions and improve the environment, what I would note is that when EPA, historically, and other scholars, have looked back at the Clean Air Act and assessed benefits of pollution improvements and costs associated with investments in pollution control, what they typically find are ratios of benefits to costs in excess of five or even ten to one.
So every dollar that's invested in pollution control, according to those studies, is leading to an additional five or ten dollars in human health and environmental improvement. And so what I would note then is, continuing to maintain, if not strengthen standards and to enforce existing standards, is not generally acting as a drag on economic performance, provided your measure of economic performance is inclusive of both the benefits which may extend beyond measures like GDP and the costs. And so, you know, if a five to one or a ten to one ratio is not low hanging fruit, I frankly don't know what it is. And so I would just argue fundamentally, what we really need to do is just maintain what we have, and then work at the margins on strengthening areas like, say agriculture, or perhaps some of the other transportation sub-sectors.
Daniel Raimi: Yeah, absolutely. That makes a lot of sense. So Nick, thank you so much again for talking to us about this research. It's really fascinating. I hope people will check out the paper and get a sense of its findings beyond what we've talked about today, because there's a lot more richness in the paper that that I think people can learn from. But let's go now to the last question that we ask everybody, which is, what's at the top of your literal or metaphorical reading stack that you'd recommend to our listeners? And I'll start us off with a—it's not really a reading or anything—but it's an eating. So we were talking a moment ago about livestock production and I decided to contribute a little bit to reducing pollution effects of livestock production by going to Burger King in order getting an Impossible Whopper, which is—they're a non-meat based Whopper, and I ate it and I haven't gone to Burger King and quite awhile, I'll say, so I don't really have a good baseline for comparison, but it was pretty good. I ate it and it was salty and you know, tasted like a burger. So it was good. I don't know if I'll do it again, but I probably wouldn't go to Burger King again anyway. So that's my little nugget for today. How about you Nick? What's at the top of your stack?
Nicholas Muller: On a recent vacation, my family and I listened to The Sixth Extinction by Elizabeth Kolbert. And that was a really eye-opening take on human intervention and natural systems going back really thousands of years. And I would encourage your listeners, if they have not read that, to pick that one up and take a read and really hold on, because it's pretty jarring.
Daniel Raimi: Yeah, that sounds great. I saw her give a presentation on that book a couple of years ago and it was, as you say, pretty stark and really compelling.
Well, once again Nick Mueller from Carnegie Mellon, thanks so much for joining us today on Resources Radio. It's been a pleasure.
Nicholas Muller: Thank you very much. Take care.
Daniel Raimi: You've been listening to Resources Radio. If you have a minute, we'd really appreciate you leaving us a rating or a comment on your podcast platform of choice. Also, feel free to send us your suggestions for future episodes. Resources Radio is a podcast from Resources for the Future. RFF is an independent nonprofit research institution in Washington DC. Our mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. Learn more about us at rff.org.
The views expressed on this podcast are solely those of the participants. They do not necessarily represent the views of Resources for the Future, which does not take institutional positions on public policies. Resources Radio is produced by Elizabeth Wason, with music by me, Daniel Raimi. Join us next week for another episode.
