Willingness to Pay for Clean Air: Evidence from the UK

WillingnesstoPayforCleanAir:EvidencefromtheUK GiorgioMaarraoui,WalidMarrouch,FatenSalibaandAdaWossink WP/23/35 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2022 MON ©2022InternationalMonetaryFundWP/23/35 IMFWorkingPaperInstituteforCapacityDevelopment WillingnesstoPayforCleanAir:EvidencefromtheUK PreparedbyGiorgioMaarraoui,WalidMarrouch,FatenSalibaandAdaWossink*AuthorizedfordistributionbyAliAlichi IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:ThispaperuseslifesatisfactiondatatohelpthedesignofclimatemitigationpoliciesintheUnitedKingdom.Weassesstheeffectsoftheexposuretoambientpollutantsonlong-termlifesatisfactionandshort-termmentalhealthintheUK.WeestimateaugmentedCobb-Douglasutilityfunctionsusingpooledandrandomeffectsordinallogitmodels.ResultsshowthatincreasesinNO2,PM10andPM2.5significantlydecreasetheoddsoflong-termhappinessandshort-termmentalhealthintheUK.Thewillingnesstopayforcleanairisalsosignificantandincreaseswithlevelofeducation.Thesemeasurementsderivedcanbeusedasbenchmarksforpollutionabatementsubsidiesorpollutiontaxesandcanhelpinprojectingamorecomprehensiveassessmentofcostsandbenefits. JELClassificationNumbers: C23;C26;D62;Q51;Q53 Keywords: AirPollution;Happiness;PolicyValuation;ClimateChange,EnvironmentalPolicies;PollutionTaxes;PollutionAbatementSubsidies EmailAddresses: giorgio.maarraoui@postgrad.manchester.ac.uk,walid.marrouch@lau.edu.lb,fsaliba@imf.org,ada.wossink@manchester.ac.uk *TheauthorswouldliketothankAliAlichi,MartinSchindler,NathalieReyes,ZeinaHasnaandGregor Schwerhofffortheirvaluablecomments. Contents Abstract2 1.Introduction4 1.1BackgroundandMotivation4 1.2ObjectiveoftheStudy7 2.LiteratureReview8 2.1PreviousLiterature8 2.1.1NegativeEffects8 2.1.2Neutral/IndeterminateEffects10 2.2ContributiontotheLiterature10 3.TheoreticalModel11 4.Data12 4.1HouseholdData12 4.1.1DatasetDescription12 4.1.2SamplingDesign13 4.1.3Variablesused14 4.2PollutantsData17 4.2.1DatasetDescriptionandVariablesUsed17 4.2.2DescriptiveStatisticsandStylizedFacts17 5.EmpiricalModel18 6.ResultsandDiscussion20 6.1EffectsofLocalAirPollutantsonLifeSatisfaction20 6.2EffectsofLocalAirPollutantsonHedonicHappiness21 6.3TheRelativeMagnitudesofPollutantsonBothHappinessMeasures21 6.4TheRelativeMagnitudesofPollutantsandMajorLifeEventsonHappiness226.5TheHappinessPriceofAirPollution22 6.6TheEndogeneityofIncome23 7.Conclusion24 Appendix25 Bibliography45 ListofFigures Figure1:Trendmeanpollutantslevel2010-20195 Figure2:Meanofpollutantsbylifesatisfactionrank6 Figure3:MeanofLifeSatisfactionacrossdifferentgroups16 Figure4:Willingnesstopayacrossdifferentgroups23 Figure5:TheMarketforPollutionAbatement28 Figure6:PigouvianTax29 ListofTables Table1:SummaryoftheLiterature27 Table2:DescriptionofVariables29 Table3:SummaryStatistics31 Table4:DescriptionofPollutants32 Table5:Pollutants’Correlation32 Table6:PollutantsonLifeSatisfaction:RandomEffectsOrdinalLogit32 Table7:PollutantsonLifeSatisfaction:PooledOrdinalLogit34 Table8:PollutantsonLifeSatisfaction:RandomEffectsOrdinalProbit35 Table9:PollutantsonHedonicHappiness:RandomEffectsOrdinalLogit36 Table10:PollutantsonHedonicHappiness:PooledOrdinalLogit38 Table11:PollutantsonHedonicHappiness:RandomEffectsOrdinalProbit40 Table12:PollutantsonLifeSatisfaction:PooledOrderedLogit(Standardized)41 Table13:PollutantsonHedonicHappiness:PooledOrderedLogit(Standardized)43 Table14:TheMarginalRateofSubstitution(MRS)betweenHappinessandPollutants:HeterogeneityDifferences44 1.Introduction 1.1BackgroundandMotivation ThispaperuseslifesatisfactiondatatohelpthedesignofclimatemitigationpoliciesintheUnitedKingdomItestimatesthewillingnesstopayofUKcitizenstoabateairpollution.AbatingairpollutionisnotanewissueintheUK.Eversincetheindustrialrevolutiontookitstollacrosstheglobe,theUKhasbeenincreasinglysheddingthelightonandtakingmeasurestocombatairpollution(EnvironmentalProtectionUK,2021).ThemajorlocalpollutantsintheUKincludeNitrogenDioxide(NO2)andbothkindsofParticulateMatter(PM2.5andPM10)1.ThelevelsofthesethreepollutantshavebeensignificantlyhigherthanthetargetssetbothnationallybytheUKgovernmentandinternationallythroughtheEUAmbientAirQualityDirective.Notsurprisingly,thehighlevelsofairpollutionimposesevererepercussionsonresidents’health(Harrison,2018).Infact,theEnvironmentalAuditCommitteeintheUKestimatesthevalueofthesehealthcoststorangebetween£8.5billionand£20.2billioneveryyear.Notonlydoesairpollutionincurhealthcostsontheeconomy,butitalsodecreasesproductivityofthelaborforce.Forinstance,aircontaminationwithpollutantsresultedinapproximatelya£2.7billionlosstotheUKeconomyduetodeclinesinproductivity(DEFRA,2015).Recognizingthatthecostsforai