How Much Will People Pay For Clean Air?
Study examines the willingness to pay for reforms to reduce pollution in emerging economies.
Air pollution leads to about 6.5 million deaths each year, making it the world’s fourth-largest threat to human health. Because emerging economies have some of the highest levels of pollution, they also face the highest risks. Impacts to health and life expectancy have spiraling effects on the labor market, holding back economic progress. But how much do people in emerging economies really value clean air? The answer is: a lot, but it also depends income, according to a new study that looked specifically at one of the world’s worst polluters— China.
“We found that average Chinese households substantially value clean air, but also that how much they value it depends greatly on how much money they earn,” says Koichiro Ito, an assistant professor at the Harris School of Public Policy and researcher at the Energy Policy Institute at the University of Chicago. “Understanding these factors can help regulators decide which reforms and regulations would be most effective.”
In one of the first estimates looking at how much people are willing to pay for clean air in emerging economies, Ito and his coauthor Shuang Zhang from the University of Colorado measure demand for air purifiers—the main way households can take reducing air pollution into their own hands. On average, people are willing to pay $5.46 to remove one microgram per cubic meter of pollution out of the air they breathe for five years. But, as one might expect, higher-income households are willing to pay more than lower-income households to keep their air clean, ranging from paying $15 (for higher-income households) to nothing at all (for lower-income households).
To get their results, Ito and Zhang took advantage of a policy that subsidized coal-based central heating for people living north of the Huai River. The policy created a condition where people living north of the river experienced significantly higher levels of pollution over the course of decades. This allowed the researchers to observe how people respond to long-run exposure to air pollution. Along with air pollution and demographic data, Ito and Zhang collected data on monthly air purifier sales, monthly average prices paid and detailed product attributes such as effectiveness in reducing pollution.
“If households value clean air, then they would buy air purifiers that effectively reduce indoor air pollution, and the people experiencing the worst pollution would be more likely to buy them,” Zhang says. “Our analysis shows that to be the case. We saw a substantial increase in the purchase of air purifiers in northern cities suffering from the highest levels of pollution compared to the south.”
Ito and Zhang found that on average Chinese households are willing to pay $190 to remove the amount of fine particulate matter pollution (PM10) caused by the Huai River policy over five years.
“Having a barometer for people’s willingness to pay for clean air can help leaders determine which policies are most effective in improving welfare,” Ito says. “This is especially important knowledge to have in emerging economies where there are limited resources and the greatest need for effective ways to reduce pollution.”
In China, Premier Li Keqiang declared a “war against pollution” in 2014 and the country has since proposed various reforms including tougher fines on polluters, upgrading coal-fired power plants to cut pollution, and reforming the Huai River policy. Ito and Zhang use their analyses to do a back-of-the-envelope calculation of the effectiveness of the Huai River reforms, which were set into motion in 2005 when the Chinese government and World Bank introduced household metering and consumption-based billing in certain northern cities. With these reforms, households would be able to control their heating and pay for only the heat they consumed. Prior to that, how much heat households received was controlled by their apartment building and they paid a set cost.
Using their analysis on people’s willingness to pay, Ito and Zhang determine that the heating reforms are cost effective and expanding the program to other northern cities could enhance household welfare.
“This is just one example of how our estimate of people’s willingness to pay for clean air can be used to examine the welfare impacts of a range of energy and environmental policies in emerging economies at a critical time,” Ito says. “It sheds light on the degree to which citizens prioritize economic growth over environmental regulations—a subject of constant debate and importance in emerging economies and beyond.”