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As EPA Smog Rule Takes Effect, New Research Shows Benefits of Regulating Ozone are Greater than Thought
First to link reduced pollution and medication expenses, finding benefits are significantly greater than the costs of regulations, and providing previously unaccounted benefits for cost-benefit analyses.
As the EPA's new rule requiring states and cities to limit smog-forming ozone goes into effect on October 1, new research shows that efforts to meet the standards amount to billions of dollars saved in avoided medication costs and premature deaths. The research is the first to provide a plausibly causal link between reduced pollution and medication expenses, allowing regulators to incorporate previously unaccounted benefits from reduced medication costs when assessing the benefits and costs of air quality regulations under the Clean Air Act.
“Our research shows that efforts to reduce ozone extend lifespans,” says co-author Michael Greenstone, the director of the Energy Policy Institute at the University of Chicago (EPIC) and Milton Friedman Professor in Economics, the College and the Harris School. “While previous research had suggested this, the especially novel finding here is that pollution reductions lead to significant reductions in the purchases of medications that protect people from becoming sick or even dying prematurely. We believe this is the first large-scale evidence on the relationship between medications or so-called ‘defensive expenditures’ and pollution and opens up a new category of benefits from pollution reductions generally. The implications for air pollution policy are potentially enormous.”
Greenstone and his colleagues, Olivier Deschenes and Joseph Shapiro, discovered the pollution-medication expenses-mortality link by studying real-world data from a cap-and-trade market for nitrogen oxides (NOx) that ran in parts of the Eastern United States after 2003. NOx forms ozone when exposed to the sun, and while the Clean Air Act has vastly improved air quality in the United States, ozone concentrations remain stubbornly high. Forty-percent of Americans live in areas that do not meet the ozone standards currently up for debate.
The researchers found that the NOx market reduced NOx pollution by 40 percent during the summer months, when ozone spikes. Average ozone concentrations dropped by 6 percent and high ozone days dropped by 40 percent. This drop in pollution in turn led to a drop in the use of medications, saving $800 million a year. It also led to 1,975 fewer deaths each summer, valued at about $1.3 billion a year.
“As people who lived within the market area breathed in less pollution, they spent less on medications while extending their life expectancy,” says Olivier Deschenes, a professor of economics at the University of California, Santa Barbara. “The trickle-down impact from capping pollution is extensive and life-altering. Prior to our study, they were factors that had not been assessed in a large-scale setting.”
Using these findings, the authors formed a generalizable metric that described the amount of medication costs and avoided premature mortality that would result from a reduction in NOx, a critical ingredient in ozone. From this, they discovered that each 1 million ton decrease in NOx emissions a year saves about $0.5 billion in medication expenditures, and roughly 3,100 premature summertime deaths with an estimated value of $2.1 billion in mortality benefits. In total, that’s about $2.6 billion in annual benefits from reducing 1 million tons of NOx. More broadly, the research points to substantial annual benefits from reducing ground-level ozone pollution.
In applying this new knowledge to the specific cap-and-trade policy that they studied, the researchers found that the medication savings alone are about what it cost to implement and run the market over its 5-year lifetime. In total, the benefits, about $9.6 billion, are at least twice the cost to businesses.
The general links between pollution, medication, and mortality could be extrapolated to other cap-and-trade programs, including several currently running in the United States. The most recent, the Cross-State Air Pollution Rule, started in May 2017 and controls NOx from power plants and other industrial sources in the Eastern United States.
“This is the first study that directly documents the health benefits of a cap-and-trade market for pollution,” says Joseph Shapiro, an assistant professor in economics at Yale University. “Cap-and-trade markets have been used to regulate water and air pollution, climate change, and many other environmental problems, and are one of the most important contributions of economic research to environmental policy. This will transform the way policymakers and analysts measure their costs and benefits.”
The study is forthcoming in the October issue of American Economic Review.