Tuesday, September 6, 2011

Muller, Mendelsohn and Nordhaus on National Environmental Acounts

The new issue of the American Economic Review showed up in my mailbox this afternoon. It includes a fascinating article by Nicholas Z. Muller, Robert Mendelsohn and William Nordhaus on "Environmental Accounting for Pollution in the United States Economy." Here is the abstract:
This study presents a framework to include environmental externalities into a system of national accounts. The papers 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.
It should be noted that the fact that an industry's total air pollution damages exceeds its value added does not imply that the industry should not exist. As the authors duly note, if externalities were internalized, prices would change. However, damages in excess of value added does indicate that those industries are under-regulated; that is, at current levels of regulation, marginal damages from pollution emissions still exceed marginal abatement costs.

Several countries, including Japan and the UK, already incorporate environmental damage into their national accounts. It's about time the US did likewise. This article provides valuable insights into how the federal government might do so.

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