Defensive Investments and the Demand for Air Quality: Evidence from the NOx Budget Program

Summary:

• The benefits that came with using a cap-and-trade market to reduce ground-level ozone pollution were at least twice the cost to polluters.
• The researchers discovered the NOx Budget Program, a cap-and-trade market for nitrogen oxides (NOx), significantly decreased emissions of NOx air pollution, and consequently high-ozone days, by 40 percent.
• The cap-and-trade market decreased the use of medications, saving people $800 million per year, and reduced premature mortality, valued at about $1.3 billion a year. The elderly disproportionately benefited.
• Overall, the study found that the benefits from reducing 1 million tons of NOx are about $2.6 billion. The research additionally points to substantial benefits from reducing ground-level ozone pollution.
• More broadly, the study has produced the first large scale evidence on the relationship between medications or so-called ‘defensive expenditures’ and pollution. This finding opens up a new category of benefits from pollution reductions generally and therefore has important implications for determining the stringency of environmental regulations.