Every breath you take: How subsidy reform can make our air cleaner

Air pollution is a global crisis, affecting more than nine out of 10 people worldwide, with levels of fine particulate matter (PM2.5) exceeding the World Health Organization’s safe threshold.

Air pollution not only affects health but also has significant economic implications, reducing labour productivity, cognitive performance and agricultural yields.

Fossil fuels are a major source of PM2.5 pollution and governments spend over $600 million annually on fossil fuel subsidies, money that could be tapped to help solve the problem.

If you are reading this in New York, London, Beijing, Delhi or Nairobi you are likely breathing air that exceeds the WHO’s safe threshold of air pollution, which is set at 5 µg/m³ for PM2.5 (fine particulates). Nine in 10 people around the world live in regions where the quality of air exceeds this safe threshold. And in some areas, pollution concentrations are 20 times higher and on the rise.

More people are affected by air pollution today than ever in history. It claims more li
ves than all forms of war and violence combined and is linked to a host of respiratory and cardiovascular diseases, including asthma, bronchitis and lung cancer. It is also the leading environmental risk to health, causing seven million premature deaths each year.

Air pollution is no longer just a health issue or an environmental problem. It has become a significant economic problem that undercuts the promise of prosperity that rising gross domestic product (GDP) may bring. High air pollution concentrations have been shown to reduce labour productivity, diminish cognitive performance and lower agricultural yields.

A recent study from the Organisation for Economic Co-operation and Development using state-of-the-art statistical techniques estimates that a 10% increase in PM2.5 concentrations in Europe causes a 0.8% reduction in real GDP. The implication is that policies to reduce air pollution would contribute positively to economic growth and are warranted on economic productivity grounds. In regions with po
orer air quality, such as Asia or Africa, the benefits of reducing air pollution will be even larger.

The sources of air pollution are diverse and vary regionally. But one culprit stands out for its ubiquity and outsized role. Fossil fuels contribute more to PM2.5 air pollution globally than any other single source. Not only is fossil fuel use pervasive but it is also heavily subsidized. Governments spend well over $600 million each year on fossil fuel subsidies – money that could be tapped to help solve air pollution and other development challenges.

These subsidies promote fossil fuel use, penalize the transition to cleaner fuels, and add to already excessive public deficits. Worse, they are also distributionally regressive since wealthier households consume more fossil fuels and capture more of the subsidy.

Encouragingly, there is a credible and under-appreciated solution for this. Reforming and repurposing fossil fuel subsidies would bring immediate environmental, economic, and health benefits. However
, this will undoubtedly be challenging, as consumers accustomed to subsidy-deflated, low energy prices will strongly oppose reforms that increase the cost of fuel.

Conversely, support from potential beneficiaries of clean air will be more muted as the health benefits are uncertain, often unknown and accrue in the future. This asymmetry in public perception and support has meant that once introduced, subsidies are usually hard to eliminate.

But subsidy reform is possible. Policymakers should avoid acting hastily, which can be counterproductive and has often triggered dissent, protest and reversal. Carefully considered reforms that have been successful and lasting have shared two common principles.

Compensate those who may lose from subsidy removal and oppose the reform. A subsidy can be repurposed to compensate the losers and promote more benign activities, such as switching to cleaner production methods or fuels. It may also mean that it is necessary to compensate wealthier households as the inevitable pri
ce to pay for a reform that would generate benefits for poorer households and the common good.

Information is key for successful reform. Air pollution’s health and economic effects are often hidden and difficult to identify. For instance, the carcinogenic consequences of exposure may take decades to emerge, making causal attribution complex and uncertain. Credible information is pivotal in catalyzing the demand for environmental change.

Transparency and disclosure have preceded most of the major environmental policy changes of the past few decades. It was the shifts in public opinion generated by Rachel Carson’s celebrated volume Silent Spring on the indiscriminate use of pesticides that led to the formation of the US Environmental Protection Agency and the Clean Air Act.

Likewise in China, public information on air and water pollution and environmental violations at manufacturing plants has been pivotal in creating the enabling conditions for change. The corollary is also true – casting doubt on the integ
rity of information will drain support for change.

Complementary policies for reducing air pollution

Subsidy reform will be more effective in tackling air pollution if implemented with complementary policies. A variety of approaches have been trialed, with varying degrees of success.

The most common are ‘command-and-control’ policies that decree a fixed standard or technical requirement. A familiar example is an emission standard for vehicles that legally limits the type and amount of air pollutants that a vehicle can emit.

Technology-based standards require specific production methods or pollution abatement technologies. Such approaches have had mixed success and have been less successful in developing countries where non-compliance is widespread due in part to limited enforcement capacity.

Approaches that recognize economic incentives and make polluting behaviours less attractive have been more successful. One such example is ‘cap-and-trade’ schemes, where the government sets an emissions cap in the fo
rm of an allowance to pollute a certain amount.

Companies may buy and sell these allowances, and this establishes an emissions price which creates incentives to reduce pollution and sell the unused allowance. Such schemes are not new and recent experiences in China and India show they can also be successful in less developed country contexts. Policy experimentation will be essential to develop solutions that target the lower hanging fruits of pollution control.

The global extent of air pollution and the evidence of its impacts make it critical that governments prioritize clean air as not just a public health problem but also a key economic challenge. While the problem is worsening through much of the world, there are notable examples of success which demonstrate that solutions are available and affordable.

The most striking example of success is China which has reduced air pollution by over 40% in a decade since declaring a ‘war against pollution’ in 2014. Los Angeles, London and Tokyo, among other big cit
ies, once all suffered from severe smog but have all successfully tackled the menace of air pollution effectively.

Reducing air pollution will bring untold benefits to both people and the planet, boosting economies, improving citizens’ health and revitalizing our environment. By accelerating much-needed action on subsidy reform, we can provide more resources to people, improve their quality of life and set the course towards a dignified life on a livable planet.

Source: World Economic Forum