Abstract:
This talk will motivate the measurement of monetary pollution damages by demonstrating that over the past 60-70 years, measures of economic growth and productivity in the U.S. have been significantly biased by omitting air pollution damages. After diving deeply into methods and data sources, the talk will explore applications consisting of economy-wide valuation exercises in the global economy. This application shows, among other findings, that trade patterns have resulted in significant shifts in the pollution intensity of output across developed and developing economies. In a second application, tools introduced during the talk are applied to firms in the S&P 500, demonstrating that in pollution-intensive sectors such as utilities and energy, firm value is significantly impacted when considering pollution damage.
Bio:
Nick Muller is the Lester and Judith Lave Professor of Economics, Engineering, and Public Policy at Carnegie Mellon University. Prior to Carnegie Mellon, he was on the faculty at Middlebury College since the fall of 2007. He is a Research Associate at the National Bureau of Economic Research in the Environment and Energy Economics program and the Conference on Research in Income and Wealth. He teaches microeconomics, environmental and natural resource economics, and energy policy. Broadly, Muller's research focuses on measuring pollution damage and market-based policy design. His current work focuses on: renewable energy systems, estimating air pollution and greenhouse gas damage from economic activity, the relationship between financial performance of companies and their measurable environmental performance, air pollution policy and municipal finance systems, and the use of distributional weights in benefit-cost analysis. Muller has published papers in general interest and field journals in economics as well as general interest and applied natural science journals.
Summary:
Focus: measuring the costs of pollution
Environmental accounting
Standard measures (e.g. GDP) are incomplete
Need to measure ecosystem services, costs of pollution, etc.
Firm Value and Performance
Need to account for the impact of corporate pollution on value of companies
Historical trends
Pollution in US has fallen during 20th century
E.g. particulate pollution (measured from collected bird specimens over 135 years) has
Followed business cycle (more business -> more pollution)
Dropped significantly since WWII
Damage due to air pollution went from 30% of GDP in early 20th century to 10% of GDP now
Improve GDP to incorporate air pollution
When air pollution was high the adjusted GDP was actually lower due to costs
More recently, adjusted GDP has grown more rapidly than normal GDP because of the dropping pollution costs
Damages from different industries vary
Agriculture is a persistent polluter
Power generation and transport are getting cleaner
Wildfires are a growing source of pollution
Can adjust corporate values to deduct for the cost of pollution per share
NRG - lots of coal power - negative value per share due to liabilities
Gross Domestic Product
Measures direct economic activity
Misses
Unpaid recreation
Unconsumed natural resources
Pollution damages
Rapidly changing values due to changes in technology (phones with changing capabilities, power generation with different cleanliness levels)
Gross External Damage: Sum (marginal damage * market price)
EVA = GDP - GED
Estimation of environmental damages
Integrated Assessment Models: AP4: https://nickmuller.tepper.cmu.edu/APModel.aspx
Economic Activity -> Emissions -> Air Quality Model -> Ambient Concentration -> Exposure -> Dose-Response -> Valuation
Emissions: US EPA inventories:
Pollutants: PN2.5 SO2, NOx, VOC, NH3
Greenhouse Gases: CO2, CH4, N2O
Sources: locations, specifications (effective height), industry
Air Quality Model:
Simple wind-driven gas dispersion using a Gaussian distribution plume shape
Focus on annual averages
AP4 model
PM2.5 became high on the West coast over the past 20 due to wildfires but lower on East coast due to retirement of coal power plants
Prescribed burn areas are easily visible due to their pollution impact, quantifies the benefit of collecting the material and either burning it with filtration or using it as an industrial feedstock
Pollution Exposure Impacts
Lower agricultural production
Accelerated depreciation of man-made capital
Acute and chronic illnesses
80-95% of impact is due to premature mortality
Using standard dose-response functions for various pollutants/damages
Valuation
Convert all damages into dollars
Value of a statistical life
Hedonic wage models related wage increase due to higher mortality risk
Surveys, etc. to ask people
Damages per ton
For each pollutant, source, damage
Add 1 ton of pollution, estimate change in dollar impact
Add up across all
Macroeconomic analysis
GDP has grown: 3x since 1960
Pollution has dropped
GEP has thus grown (4x since 1960) more than GDP
Value of Utility companies
Create lots of pollution relative to their market value
Value has grown in GEP terms, while their normal valuation has remained static
Overall, small subset of company are responsible for a disproportionately large fraction of damages relative to their value
Makes it possible to diversify portfolios across risk exposure to damages
Focus on different industries, avoid high polluters within each industry
International supply chains
GED/GDP has fallen by 10% over past 20 years
But this has been accomplished by moving pollution from rich to poor countries via trade
Shift of production into India and China has caused increase in GED/GDP