A self-consistent method to assess air quality co-benefits from U.S. climate policies

Abstract

Air quality co-benefits can potentially reduce the costs of greenhouse gas mitigation. However, whereas many studies of the cost of greenhouse gas mitigation model the macroeconomic welfare impacts of mitigation, most studies of air quality co-benefits do not. We employ a U.S. computable general equilibrium economic model previously linked to an air quality modeling system and enhance it to represent the economy-wide welfare impacts of fine particulate matter. We present a first application of this method to explore the efficiency and distributional implications of a Clean Energy Standard (CES) and a Cap and Trade (CAT) program that both reduce CO2 emissions by 10% in 2030 relative to 2006. We find that co-benefits from fine particulate matter reduction (Formula presented.) completely offset policy costs by 110% (40% to 190%), transforming the net welfare impact of the CAT into a gain of (Formula presented.) billion 2005$. For the CES, the corresponding co-benefit (Formula presented.) is a smaller fraction (median 5%; 2% to 9%) of its higher policy cost. The eastern United States garners 78% and 71% of co-benefits for the CES and CAT, respectively. By representing the effects of pollution-related morbidities and mortalities as an impact to labor and the demand for health services, we find that the welfare impact per unit of reduced pollution varies by region. These interregional differences can enhance the preference of some regions, such as Texas, for a CAT over a CES, or switch the calculation of which policy yields higher co-benefits, compared with an approach that uses one valuation for all regions. This framework could be applied to quantify consistent air quality impacts of other pricing instruments, subnational trading programs, or green tax swaps. Implications: Policies that reduce CO2 emissions can also reduce PM2.5 (particulate matter with an aerodynamic diameter <2.5 μm), yielding unintended economic benefits. Using an integrated assessment model linking policies and emissions to a consistent treatment of costs and co-benefits, we find that PM2.5 co-benefits offset the costs of reducing CO2 through Cap and Trade (CAT) in the United States. An equivalent Clean Energy Standard is more costly, and its higher PM2.5 reductions offset up to a tenth of its costs. Most co-benefits accrue to eastern states, and interregional differences and indirect economic effects shift those gains further to New York and New England. Economy-wide co-benefits reduce the costs and shift the distributional impacts of U.S. carbon policies.