Defensive Investment and the Demand for Air Quality: Evidence from the NOx Budget Program and Ozone Reductions
(with Michael Greenstone and Joseph Shapiro)
NBER Working Paper No. 18267
Forthcoming, American Economic Review
The demand for air quality depends on health impacts and defensive investments that improve health, but little research assesses the empirical importance of defenses. We study the Nitrogen Oxides (NOx) Budget Program (NBP), an important cap-and-trade market for NOx emissions, a key ingredient in ozone air pollution. A rich quasi-experiment suggests that the NBP decreased NOx emissions, ambient ozone concentrations, pharmaceutical expenditures, and mortality rates. The reductions in pharmaceutical purchases and mortality are valued at about $800 million and $1.5 billion annually. Further, the estimated benefits of NOx reductions are substantial and the NBP’s estimated benefits easily exceed its costs.