Fossil Fuel Prices and Air Pollution: Evidence from a Panel of 133 Countries

Abstract

Fossil fuel combustion is a major contributor to urban air pollution, which in turn can lead to negative health outcomes. While the relationship between fuel prices and consumption has been extensively documented, the knock-on impact on air quality is less studied. Detailed knowledge on the price-pollution channel is valuable in designing effective pollution reduction measures. This paper analyzes the impact of gasoline, diesel, and coal prices on air pollution in 133 countries over a 19-year period. The dataset combines prices, consumption, country-specific variables, and annual average fine particulate matter concentrations in each country’s capital city. Using the common correlated effects estimator, the analysis finds a robust negative relationship between gasoline and diesel prices and particle concentrations. A US$1 increase in the average annual retail price of these common transport fuels is associated with at least a 22.2 microgram per cubic meter decrease in annual average fine particulate matter concentrations. In contrast, there is no significant effect for coal, which is often used in power generation and industrial applications, making it less responsive to short-term price variations. Overall, the results are in line with earlier studies, as price increases are correlated with improved urban air quality for transport fuels.