The sectoral and regional economic consequences of outdoor air pollution to 2060

Abstract

This paper provides an assessment of the costs of inaction of outdoor air pollution in the coming decades, focusing on the market impacts relative to additional health expenditures, changes in labour productivity and crop yield losses. The results show that the global economic costs of outdoor air pollution gradually increase to 1% of global GDP by 2060, with highest GDP losses in China, the Caspian region and Eastern Europe. These economic consequences stem from a combination of exposure to high concentrations, aging population and relatively high pollution-related health expenditures that crowd out other consumption and savings. While the direct costs of these market impacts grow more or less at the same pace as total economic activity, the indirect economic costs induced by these impacts become increasingly significant over time. Numerical results are more sensitive to the specification of the feedbacks to the economic model than to the parameter values used in calibrating the impacts; the most optimistic specifications lead to significantly lower costs of air pollution, but qualitative conclusions on the sign of effects and ordering of regional consequences are robust. Non-market damages, especially the welfare losses from premature deaths, are potentially an order of magnitude larger than the market damages that this paper focuses on, but those do not directly affect the economy. These findings on the costs of inaction of outdoor air pollution underline the need for policy action that would reduce the health and environmental impacts as well as lead to economic benefits.