Grant McDermott bio photo

Grant McDermott

Assistant Professor
Dept. of Economics
University of Oregon

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From the latest American Economic Review:

Environmental Accounting for Pollution in the United States Economy

By Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus

ABSTRACT

This study presents a framework to include environmental externalities into a system of national accounts. The paper estimates the air pollution damages for each industry in the United States. An integrated-assessment model quantifies the marginal damages of air pollution emissions for the US which are multiplied times the quantity of emissions by industry to compute gross damages. Solid waste combustion, sewage treatment, stone quarrying, marinas, and oil and coal-fired power plants have air pollution damages larger than their value added. The largest industrial contributor to external costs is coal-fired electric generation, whose damages range from 0.8 to 5.6 times value added.

Unless you're on a university server, you'll probably find that the article is gated. [Update - The working paper version is accessible here.] Fortunately, there are a number of good summaries available on the net. Bottom line: We severely underpay for the goods and services provided by major industries, given the measurable effect that air pollution from these industries has on human health and productivity.

Crucially, the environmental damages that drive these results have nothing to do with any kind of long-term climate change effects. They are simply the local damages that result from compromised air quality and are happening right now.

Lest it be unclear, this most certainly isn't about turning our back on coal (or even agriculture, another industry with a surprisingly high un-costed air pollution damages figure). Or markets in general. It is simply about trying to account for full costs and thinking about the best ways in which we can do that. That's all that good economics is about.