Market Forces

Farmers’ bottom lines at risk as growing conditions change

This blog was originally posted on EDF’s Growing Returns.

Iowa currently finds itself in a “Goldilocks climate,” with just the right measure and timing of humidity, rainfall and heat that help make the state a national leader in corn and soybean production. However, new research shows that climate change threatens to upset this balance.

Small shifts in rainfall and temperature can have considerable impacts on crops and farmer livelihoods. To better understand how these shifts could impact farmers, Environmental Defense Fund partnered with K·Coe Isom, an agricultural accounting and business advisory firm, to produce an in-depth report that quantifies the potential localized economic impacts from these shifts that Iowa corn and soy farmers could face as soon as the next 10 to 20 years.



Millions of dollars at stake in Iowa alone

Researchers found that farmers could see statewide gross farm revenues reduced by as much as $4.9 billion over the course of a decade — a loss of 3.6% of Iowa farm revenue from sales of corn, silage and soy.

Because with climate change agricultural prices are likely to rise, relative to without climate change, the impact to gross farm revenues from yield impacts will be offset to some degree by higher prices. Additional research is needed to understand how much agricultural regions like Iowa stand to offset yield losses through climate change-induced price increases.

With this caveat on unknown price increases, nearly every county in Iowa could experience decreases in gross farm revenues with losses of more than $50 million in almost half of the state’s counties in that same timeframe, and losses of more than $100 million in some western counties that are projected to experience higher yield reductions than the rest of the state.

Reductions in revenue would likely imply reductions in capital investment and off-farm spending. As a result, Iowa’s annual economic output could be reduced by between $367 million and $733 million, causing a statewide loss of 1,270 to 2,530 jobs, and reduce annual state revenue collections by $4 million to $8.3 million.

“A less desirable choice for the next generation”

The analysis drills down further by modeling how these crop yield impacts might affect a real representative family corn and soybean operation in central Iowa. The researchers obtained financial data for the farm, including harvest, sales and capital expenditure data, and modeled the impact of projected yield reductions on farm revenue over a five-year period (2014-2019).

When the anticipated crop yield declines from climate change were retroactively applied to the past five years, researchers found that the family farm would have lost between $50,000 and $90,000 in revenue per year, equaling a total potential loss of $360,000 over the five-year period.

As the farm owner observed, this reduction in revenue would have also made “returning to the farm a less desirable choice for the next generation,” and would have been “especially hard on those families newest to farming.”

Near-term solutions to avert economic loss

Much can be done to address climate change and minimize the financial impacts on farmers, and this report identifies a few ways federal, state and local governments can help mitigate emissions and help farmers further adapt to climate change.

Public funding and private sector programs can incentivize management practices that limit greenhouse gas emissions, improve soil health and build resilience in agriculture. For example, the federal crop insurance program could incorporate incentives for farmers that adopt practices that reduce crop yield risk.

Additionally, public funding could support the development of climate-resilient seed varieties, improvements to nutrient management and other climate adaptation strategies. Investing additional funding in Iowa’s public university systems to assist with the creation of practical, publicly available research could also help farmers put these strategies into practice.

Iowa’s farmers have adapted to changing farming conditions in the past, but climate change poses a more significant shift that requires a proactive response. Policymakers can help ensure farmers have the resources they need to withstand the growing risks posed by climate change and to protect the livelihoods and revenues that make Iowa a global agricultural leader.

For more information, download the full report.

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Building North-South cooperation to fight the ‘tragedies’ of climate change

This post draws from a chapter for a book I wrote in 2020: “Overcoming the tragedy of distance – cooperating with our friends’ friends” in Living with the Climate Crisis ed. Tom Doig. Bridget Williams Books, Wellington, New Zealand 

I believe that finding ways to work more intensively and effectively with people with very different resources, cultures and life experiences is critical to rapid global decarbonization.

For me, the unprecedented challenge from climate change is that most mitigation has to occur in countries with fewer resources. Key high-emitting countries such as India, China, Indonesia and Brazil, as well as smaller countries such as Laos, Ethiopia, and Peru are all projected, in business as usual forecasts, to have rising emissions as they develop.

These countries have strongly competing priorities, as they also need to address poverty or resolve internal conflict. They are unlikely to mitigate greenhouse-gases fast enough without help. Yet, to stabilize the climate, those countries and all others must reduce their emissions to net zero and the faster the better.

Models by EDF(2019, pp. 200-232) and IETA(2019) suggest that we could double the amount of global carbon dioxide mitigation to 2035 with no extra cost if richer countries can support emerging and developing countries effectively, but that’s hard. ‘International trading’ of mitigation, where richer countries, or their companies, support developing countries to reduce their greenhouse gas emissions, has long been a goal, but it has not yet lived up to its promise.

We will all benefit if we can resolve this together. I also think those of us with more resources owe it to poorer countries to help; they are the most vulnerable to climate change, to which they have contributed little. It seems deeply unfair to also expect them to bear the full burden of their transition to net-zero.

Tragedies of climate change

Humans however often struggle with cooperating and sharing with people who are far away from them, in either a physical or social sense. I struggle to empathize with people in India whom I will never meet, but who will need support when they replace coal-fired power plants with renewables as India moves toward net-zero emissions. I don’t think I’m alone in this and I imagine they feel the same about people like me who are not taking rapid action on climate change even when we can afford it.

Is our fundamental problem in mobilizing resources to support developing country decarbonization this “tragedy of distance?”

“Tragedies” are situations where we humans are brought down by our own flaws. These tragedies make climate change particularly challenging to address.

The “tragedy of the commons” suggests that if we can’t exclude people from use of a common resource, we are doomed to destroy it through overuse. For example, the fish stock in a particular area isn’t destroyed because people can’t see what is happening, but because if others are going to over-fish, whatever one individual does, it is in each individual’s personal interest to go fishing while the fish are still there. They feel they can’t protect it. That’s a self-fulfilling prophecy.

The “tragedy of the horizon” suggests that individual and collective myopia and selfishness lead us to take actions now although they will cause our future selves and future generations to suffer. The phrase was coined by Mark Carney (Former Governor, Bank of England) for climate change, but another classic example is most countries’ inability to invest enough of the wealth that they extract from non-renewable minerals, like oil, to sustain their citizens’ well-being in the future. Again, we can see this coming but struggle to avoid it.

These tragedies are not inevitable. Some communities solve them impressively (e.g., the many examples from the work of Nobel Prize winner Elinor Ostrom and her colleagues, or Norway’s Sovereign Wealth Fund). Others find partial solutions. New Zealand avoids the worst problems of overfishing by limiting catches through the Quota Management System, a system which, though imperfect, has now lasted for more than thirty years. Humans also have relatively good ‘institutions’ for making intergenerational decisions. Families tend to have strong bonds for at least a couple of generations. We may not make “efficient” decisions for our own future selves and our descendants, but we do, generally, care.

Climate change is an issue where all tragedies—of distance, of the commons, and of the horizon—are fully engaged. Climate change is global and cumulative, with extremely long-term, long-lived impacts. Although it is now clear that people alive today are already experiencing the impacts, the major benefits from our mitigation actions today will be experienced not by older people like me, but by our children and grandchildren.

We have worked hard for nearly thirty years to build institutions at the international, national and local level to coordinate mitigation efforts. We need to keep doing this. Despite our lack of obvious success so far, we have made considerable progress. However, these approaches depend very much on a hierarchical approach. That approach is appealingly elegant and logical in responding to a global problem, and is a critical part of the solution, but it’s not working fast enough. And having only one coherent institutional approach is inherently fragile.

We need both coordination and cooperation

United Nations climate agreements try to replicate the success of economic institutions in managing human activity. However, in contrast to institutions that aim to address climate change, many international economic institutions, such as those that govern commerce and banking are essentially addressing a coordination problem. Their success is not easily replicated when dealing with a global cooperation problem like climate change.

Maybe the approaches of more traditional and Indigenous societies have something to offer us as a complement. These societies have broad networks of relationships that extend into the natural world and rely on these and shared belief systems rather than institutions to manage goals and conflicting interests. Traditional ways of thinking of Māori, the Indigenous people of New Zealand, contrast strongly with the hierarchical assumptions about how humans relate to each other and the natural world, “the Great Chain of Being,” common in much contemporary Western thought.

Can we harness shared belief systems and existing North-South relationship networks and reduce the tragedy of distance? Could that help us build deep collaborations among small groups of countries to support the large-scale transfers of resources needed for efficient global climate action?

Is it better to think about transfers to support mitigation in developing countries as primarily about establishing networks of relational contracts, and the strong communication and trust that supports them, rather than centralized carbon commodity trading systems where all have to trust one system?

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How can economics contribute to decarbonizing power markets?

Electricity system operators balance supply and demand precisely at every moment of every day through market design grounded in economic principles. As the share of variable renewable resources like wind and solar electricity on our electricity system increases, system operators, policy makers and energy market regulators are facing new questions on how to design the rules governing our electricity market to support decarbonization of our energy system.

Christopher Holt, PhD student in agricultural and resource economics at the University of Maryland, recently published an EDF Economics Discussion Paper, in which he reviews these new questions in wholesale electricity market design and identifies a number of areas where economic research can help inform decision-makers to facilitate decarbonization.

Chris wrote this paper during a summer pre-doc fellowship at EDF and Kristina Mohlin, who hosted Chris during the fellowship, recently chatted with him about his paper and his experience as a pre-doc fellow at EDF.

Kristina: What was your starting point for this pre-doc fellowship?

Chris: State and local leaders have been setting ambitious decarbonization targets. More recently, President Biden has pledged to make US electricity production free of carbon by 2035. My starting point was to try and understand how electricity market practitioners are working to change and refine the sophisticated set of rules governing wholesale markets, so that these targets can be met.

During my time at EDF, I spoke with industry representatives, policy makers, external economists, and other stakeholders at policy meetings, conferences, through video chats, and over countless cups of coffee. I also learned a lot by chatting with the highly talented folks internal to EDF. These conversations alerted me to many gaps in the applied economics literature, which I then described in the paper.

Kristina: One defining characteristic of electricity markets is that consumers do not respond to wholesale price fluctuations in real time. How can markets be designed to enable and encourage price-responsive demand?

Chris: California’s Demand Response Auction Mechanism (DRAM) is a promising example of how market design can reward innovation that encourages response to prices at the individual user level. This mechanism, still in its pilot form, allows companies to bring together demand across a group of electricity consumers, e.g. by coordinating power drawn from their appliances. The aggregator can then curtail demand when electricity is scarce at a minimal loss to consumers, who may be compensated for their agreement to participate. Wholesale market prices are kept low by way of the curtailed demand, benefitting all consumers of electricity (not just the participating ones). This is a “win-win”: lower prices for consumers and a profitable return for the aggregator. Importantly, this arrangement would not exist without the wholesale market design.

While the incentives are powerful, getting the design right is not easy. Projects like DRAM have a long way to go before they are approved for permanent integration into market operations—which is exactly why additional research is needed.

Kristina: Another key defining characteristic of electricity markets is that electricity is not storable. How will utility-scale storage affect market operations?

Chris: Yes, storage is not yet available at large scale, but this seems likely to change in the near future. The Federal Energy Regulatory Commission’s landmark Order 841 is intended to facilitate the participation of storage resources in energy markets. Some firms have already begun to complement variable renewable generation assets with large-scale battery technologies, and industry forecasts suggest major cost reductions for batteries in the near future. When storage technologies are deployed at scale, short-run market operations will require a new set of rules, which must be guided by economic research.

Kristina: Could you explain to our readers what this has to do with decarbonization?

Chris: Both price responsive demand and storage are closely tied to decarbonization because they allow consumers to buy electricity when it is cheap and clean rather than when it is expensive and carbon intensive (this is most apparent when there is a price on carbon). Electricity from wind and solar is essentially free once investment costs have been incurred and the plants have been built. Currently, when electricity is scarce, carbon-intensive peaker plants are needed to maintain reliability. These peaker plants, which are also relatively expensive to run, are increasingly needed to complement the variability of renewables, e.g. when the sun goes down in California, or the wind stops blowing in Texas. Unlocking price responsive demand and introducing storage capacity will reduce the need to rely on peakers.

Kristina: How will long-run investments be affected by increased participation of electric storage and price-responsive demand?

Chris: Changes to demand-side price response and the storability of electricity have crucial implications for how firms plan to invest in new generation assets and retire old plants. If consumers are able to pre-empt the high prices associated with peaker plants, why invest in peaker plants at all? Storage may bring benefits in helping to reduce emissions, but will firms be incentivized to invest in it? Regulators in New York, for example, have set considerable storage capacity targets. Experts suggest many ways to reach such targets and to ensure that more storage capacity indeed translates to decarbonization (carbon pricing is central among them).

The difficult task of guiding efficient long-run investment is further complicated when an electricity system spans political jurisdictions with differing policies. The simple fundamentals of electricity market economics are of value here, reminding us that proper pricing is often the key to efficiency—pricing that reflects resource scarcity, the value of quickly dispatchable resources and demand response, and the harm imposed by carbon pollution. Through my EDF pre-doc fellowship, I found that we need new research to connect these classic fundamentals to the new challenges associated with scaling up renewables.

Kristina: Finally, what would you like to tell other PhD students who have the opportunity to apply for an EDF pre-doc fellowship about your experience at EDF?

Chris: The pre-doc fellowship is a great way to focus in on the questions you might want to address in your dissertation. My job market paper was inspired in large part by my time at EDF. Having access to the network of experts that the fellowship offered was an ideal way to become more familiar with certain areas and overcome the steep learning curve associated with my field. EDF also values their alumni—I have continued to keep in touch with folks I met through the fellowship and attend EDF workshops. Overall, I would highly recommend the fellowship!

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Barriers to tapping the potential of carbon markets for agriculture

An EDF analysis of carbon credits for rice growers shows great climate and cost-savings potential, but is that enough for farmers to participate?

In 2015, rice became the first crop for which agricultural carbon credits were valid for compliance in the California cap-and-trade system. Unfortunately, as of September 2020, no compliance credits have been generated. A newly released report by EDF explores the reasons why.

In the U.S., agricultural greenhouse gas emissions comprise approximately 10% of the economy-wide total emissions. The share of emissions from agriculture is larger for non-CO2 GHGs, making up approximately 78% of the U.S. total for nitrous oxide and 38% for methane.

Policymakers are eager to find mitigation opportunities in the agriculture sector, best evidenced by the bipartisan Growing Climate Solutions Act, which seeks to enable voluntary credit markets for producers to mitigate climate change.

As both policymakers and producers eye the potential of the agriculture sector to grow climate solutions, it’s worth taking a closer look at both the opportunities and the challenges that must first be addressed to tap this potential.

A case study of carbon credits for rice

EDF’s work on agricultural carbon credits began in earnest in 2007 after receiving the first of several U.S. Department of Agriculture grants to investigate how to bring agricultural emissions reduction credits to market. The objective was to design crediting systems that achieve the dual benefits of reducing GHG emissions while also providing meaningful revenue opportunities to landowners.

An EDF discussion paper summarizes some of the underlying analytics of these efforts for a series of crops and geographies. One specific example from the paper — rice in California — highlights both the carbon- and cost-saving opportunities associated with conservation practices like bailing and drainage, and the challenges associated with agricultural credits as a viable abatement measure.

The opportunity: Lowering costs and emissions

Rice is a GHG-intensive crop. It emits twice the amount of emissions per calorie as wheat, three times that of maize, and accounts for 5-20% of global methane emissions. EDF’s research focused on the nation’s two most intensive rice production regions — California’s Sacramento Valley and Mid-Southern U.S. These regions produce 26% and 72% of the domestic rice supply, respectively.

Our analysis began by using a biogeochemical model, DeNitrification-DeComposition (DNDC), to assess the abatement potential for current (baseline) practices and other lower-GHG alternatives in the California rice region. This led our scientists to discover a fairly large overall mitigation potential of more than 0.6 MMt-CO2e-100/year, or approximately 15%, of overall California rice emissions.

We then developed estimates of abatement costs by practice through cost budgets and consultation with agronomists. Combining this with the GHG modeling yielded the following marginal abatement cost curves (one for each practice).

Marginal Abatement Cost Curves for Rice Practices in California. Abbreviations: N (number of fields); WF (winter flooding of rice paddies); NWF (no winter flooding). WF/NWF practices follow a 60/40% distribution, historically, and play a role in determining the scale of achievable reductions.

These graphs illustrate that for all but one practice there are negative abatement costs with averages ranging from -$29.45/acre to -$0.45/acre, suggesting potential savings for farmers from implementing practice changes. For yields, the DNDC model projected that yields would remain relatively unchanged, aside from dry seeding, for which growers would experience an average 4.5% decrease.

These findings show great promise in terms of GHG abatement potential and cost savings for producers with minimal yield impacts (dry seeding aside). So, why aren’t growers already pursuing these practices? What barriers are getting in the way?

Three key barriers to entry

Our analysis identified a few potential barriers for farmers to generate carbon credits.

  1. Weak price signals

Understanding why growers are passing up potential cost savings from practices that reduce GHG emissions requires a closer look at farm economics. Adam Jaffe offers a useful typology for the various barriers to adoption, some of which I have identified below.

Putting the practice costs and yield impacts together, we can imagine a scenario where we have a carbon market in place and a carbon price of $10/ton (the California spot price at the time this work was carried out). In this instance, we’d find that with an average 0.7 ton/acre reduction, most rice growers would be looking at potential revenue from the market of approximately 0.5% of their overall crop sales revenue (typically $1,500/acre), or 2.6% of their net profit (approximately $250/acre), not including further potential gains from the negative abatement costs of certain practices and locations.

Unfortunately, in context of the overarching farm economics, this makes for a weak incentive.

If we now imagine a new scenario with a carbon price closer to today’s social cost of carbon ($42/ton), we find that the potential revenue from participating in the market rises closer to 2% of crop sales revenue and 11% of net profit. At this price, the incentive appears to be substantially more robust, which tells us that, from a social standpoint and with a strong price signal, the market could be viable. But as it currently stands, conditions are falling short of this potential.

  1. Large transaction costs

Another critical consideration for engaging in any market is transaction costs — for GHG markets in particular, monitoring, reporting and verification (MRV) costs.

Our analysis found transaction costs to be significant on a per-grower basis at approximately $14/acre for an average 1,000-acre California farm. At a market price of $10/ton, transaction costs are double the average expected return from carbon markets of $7/acre, providing a steep disincentive. Even with credits priced at the higher social cost of carbon ($42/ton), transaction costs would still equal nearly 50% of potential revenue, essentially cutting their expected financial gains in half.

Further economic modeling showed the importance of allowing a way to aggregate projects for MRV transations due to the very large third-party fees incurred to verify reductions. However, even if growers use aggregation as a means to cost-share, it will be critical to find ways to use technologies like remote sensing and automated data generation and analysis to streamline this process, realize savings and still guarantee accurate verification.

  1. Changing behavior is an obstacle in itself

Finally, behavioral factors represent a hurdle that cannot be ignored — the hidden additional cost of switching practices. This cost is difficult to quantify precisely, but we know from experience that behavior is hard to shift and farming practice changes typically require planning and close coordination with a number of consultants and business partners.

Understanding this, we performed a survey for corn and almond growers, asking how much participants in a carbon market would need to be paid to reduce fertilizer applications, and thereby decrease nitrous oxide emissions. To isolate the behavioral barriers, we designed the survey to encourage the farmers to assume no additional costs, risks or yield impacts.

Their responses ranged from $18-40/acre, when a representative farmer might only receive $7/acre in returns with a $10/t carbon price. This gap in the valuation likely represents factors such as personal or cultural values and aversion to risk and uncertainty that may be very difficult to overcome using market incentives alone[1].

Managing risk and risk perceptions is a challenge that must be addressed to see widespread uptake of mitigation practices.

Where do we go from here?

The agricultural sector has the potential to play a key role in contributing to national climate goals.

Crediting systems are just one tool to support this, but more research and pilot programs are needed to help overcome the barriers to entry, increase confidence in high-quality and cost-effective credits, and also evaluate and correct for potential inequities and injustices.

EDF is launching a new phase of research dedicated to this work, in addition to developing complementary finance and policy tools that correct for existing disincentives and inequities to create a more just and resilient food system.

With the right combination of tools in the toolbox, we can unleash the power of carbon markets to boost long-term resilience on the farm and beyond.

 

[1] It is important to note that all of the numbers depicted above represent averages, and there are certainly cases for which incentives are large at the individual level, and some growers may have zero or even negative switching costs, so many farmers have ripe potential for carbon market participation.

 

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Costs of climate change are rising: New research shows how local communities could be strained in the near-term

This blog post was co-authored with Nina Donaldson

Much of the existing research on climate change impacts focuses on end-of-century projections across nations, but this misses the very real costs that everyday Americans are already facing daily and will continue to face in the months and years ahead. Case in point today: While most Americans believe that climate change currently affects the U.S., only about a third of the adult population believes that local effects of climate change directly impact their personal lives.

And perceiving that threat on an individual level is a key motivator for pushing meaningful action.

While the impacts of climate change can sometimes feel abstract, the reality is that communities across the country are bearing the burden of climate damages here and now through heat waves, severe thunderstorms, wildfires, and flooding – to name a few – even if they are not making a direct connection themselves between those events and climate change. A new research series by Environmental Defense Fund underscores specifically where and how the potential costs could impact individual counties as soon as the next 20 years.

Behind the research

The Costs of Inaction research series draws on data from multiple sources, including a first-of-its kind study by Hsiang et al. 2017, developed through the Climate Impact Lab, which highlights climate costs and impacts from key sectors. Our research also draws from the Union of Concerned Scientists’ Underwater report and First Street Foundation’s Flood Factor data.

From these studies, we extract locally relevant data for several U.S. states projected to experience severe impacts, such as in Florida and Arizona. We examine an array of climate change impacts, including loss of property tax revenue from flooding, increased heat-related deaths, higher electricity costs, and declining crop yields. These represent only some of the detrimental effects that many already experience today and that we can expect to see worsen over the next 20 years and beyond.

International challenge, local costs

For example, Floridians already pay 13% more than the national average for electricity, but without ambitious action on climate, they can expect to see increases of more than 5% annually, paying up to an additional $122 on their electricity bills every year over the next 20 years. This will be especially straining on low-income households, which already spend roughly 10% of their income on electricity costs – three times the proportion of what the average household typically spends on electricity costs.

Arizonians will also face similar annual increases in their electricity bills to keep their homes cool as more extreme heat days occur. Exposure to extreme heat can be deadly, causing heat stroke, dehydration, and other serious issues. With two of the fastest-warming cities in the nation, Arizonians face an increasing threat, particularly in urban areas where dark pavement, buildings, and other structures that absorb heat make temperatures even hotter. In Maricopa County, home to Phoenix, a 64% increase in heat-related deaths could occur every single year over the next 20 years. This puts our children, elderly, and sick at great risk as well as those who lack access to air conditioning.

Mapping the costs

As part of this research series, EDF also created new interactive maps of Florida and Arizona that highlight the near-term costs of climate inaction, which allow the user to explore additional costs at the county level for these two states. These costs include estimated heat-related mortality (additional deaths per 100,000 people), electricity expenditure increases (estimated using a version of the EIA’s National Energy Modeling System (NEMS) both for businesses and individual households), and losses in crop yields and property tax revenue. All estimates assume a high emissions scenario in which fossil fuel-intensive economic growth continues and no ambitious climate action is pursued. These interactive maps are designed to allow local policymakers, advocates, and stakeholders to explore the impacts in their county.

EDF also commissioned an in-depth report from RTI International, a Raleigh-based research institute, to use these data to show how climate change impacts will impose significant costs on North Carolina’s residents and its economy. The report showcases the projected costs that eight major sectors of the state’s economy may face within the next 20 to 30 years if measures to curb climate-warming pollution are not taken.

EDF’s research series makes clear that the costs of climate inaction are being felt in our lifetimes and will only grow exponentially worse over time. It’s crucial we enact ambitious climate policy to mitigate the most severe impacts. To explore how climate change will impact your local community, visit the Cost of Inaction Research series.

 

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Why the value of reducing health risks in China is rising

This post is a collaboration with Yana Jin

Since 2013, the Chinese government has changed its approach to regulating pollution, including providing the public greater access to information about their own exposure. This increased visibility into pollution exposure can affect citizens’ perceptions of how pollution affects their own health, and their desire to avoid these negative health outcomes. Understanding this shift in perception can tell us not only about what’s happening in China today, but also how developing countries may react to greater information about pollution.

Yana Jin, EDF’s new High-Meadows Economics Fellow, recently published a study in the Journal of Environmental Economics and Management, in which she and coauthors estimate Chinese citizens’ willingness to pay (WTP) to reduce mortality and morbidity risk associated with air pollution exposure. Specifically, the authors estimate a Value of a Statistical Life (VSL) and a Value of a Statistical Illness (VSI) of RMB 5.54 million ($1.58 million) and RMB 0.82 million ($0.23 million), which are higher than earlier estimates in China.

EDF’s Beia Spiller recently chatted with Yana about her paper and discussed the importance of the findings for policy making.

Beia: What does Value of a Statistical Life (or Value of a Statistical Illness) imply? Why do we need to put a value on human health?

Yana: The Value of a Statistical Life, VSL (or Value of a Statistical Illness, VSI) describes how much individuals are willing to pay to reduce the risk of premature death (or illnesses). Obviously, there is no market value for human health; VSL and VSI provide policymakers a common metric for valuing improvements in health outcomes.

Beia: How can VSL and VSI be used in policy making? What is the implication for environmental policy?

Yana: VSL and VSI provide a basis for conducting regulatory impact analyses and benefit cost analyses. For most environmental policies, the co-benefits of improved health outcomes dominate the total regulatory benefits (or the social cost of inactions). For example, in 2020 the total annual benefit of the Clean Air Act in the United States was estimated to be $2 trillion (in 2006 prices), more than 30 times the law’s total compliance costs; 90% of these benefits are due to reductions in mortality and morbidity attributable to ambient air pollution. This conclusion is based on an analysis using US-specific VSL and VSI estimates as part of the key parameters.

Extra attention is needed for VSI. Unlike premature mortality, which already receives lots of empirical attention, WTP for morbidity risk reductions is poorly understood in developing and developed countries. Solid VSI estimates can overcome the shortcomings of current alternative proxies in policymaking, such as the medical cost of illness and work day losses, which often undervalue the true social cost of non-fatal illnesses.

Beia: As you mention, estimates of the Value of a Statistical Life in the US (approx. $8-10 million) already exist. Why is it important from a policy perspective for this sort of analysis to be conducted for the Chinese population separately?

Yana: There is no one-size-fits-all VSL. Various factors influence VSL, including income and risk context of the affected population. Given that 92% of all pollution-related mortalities occur in developing countries, trying to draw conclusions for these populations from valuations in developed countries will involve substantial uncertainty.

Because the VSL is affected by both underlying air pollution levels and income, the VSLs will be different across China and the US. Furthermore, there are likely significant differences in the two populations’ understanding and awareness of the significance of air pollution’s impacts on health. For these reasons, we need studies based on the Chinese population and their specific setting to understand how they value risk reductions associated with improvements in air quality.

Beia: You find a much (almost 10x) smaller VSL in China than what has been estimated in the US. Does this mean that the Chinese morally value improvements in health less than populations in the US?

Yana: Not at all. Because the Chinese population currently has a much lower income than those in the US, their smaller household budgets constrain them from allocating the same amount of money to improvements in health. Though the difference in VSLs across countries seems huge right now, the VSL is highly elastic to per-capita income. This implies that as Chinese populations become richer, one can expect to see a sharp increase in Chinese VSL. Indeed, the VSL in the current study is already more than 10 times higher than early studies in the 1990s-2000s reported in China.

Beia: You test whether people have different willingness to pay to avoid specific illnesses (heart disease, stroke, or obstructive pulmonary disease) due to air pollution exposure, but find no significant differences across illness. Why is this an important policy question, and what would have been the implication for environmental policy had the opposite been true?

Yana: Whether the values across illnesses are different is of high policy relevance. For example, the risk of heart disease and stroke during extreme haze episodes is disproportionately higher than for other illnesses. If their associated VSI and VSL are also higher, this would imply that short-term policies that aim to curtail pollution spikes could be exceedingly beneficial, even though the transient effects do not reduce other more chronic, cumulative, long-term risks, which would only be affected by a steady decrease in annual average air pollution.

However, we find that the estimates are the same across illnesses. Therefore, policymakers can focus on the risk levels, and do not need to set illness-specific resource allocation priorities from the economic valuation perspective when managing air quality.

Beia: How could your VSL and VSI findings be used now?

Yana: Since 2013, the Chinese central government implemented its Air Pollution Prevention and Control Action Plan, investing 1.84 trillion RMB to improve air quality. This led to a significant drop in air pollution levels over the years in historically polluted Northern China, thereby generating marked health improvements. Our updated VSL and VSI can help to quantify and compare the observed health benefits with the costs of the policy that enabled these air quality improvements.

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