Thursday, January 02, 2014

Are Recessions Good for the Environment? Evidence from Greece

The conventional wisdom is that air quality improves during recessions as dirty factories produce less stuff.  Recent research from USC has documented that PM2.5 levels are rising in Greece as households whose real incomes are falling move down the energy ladder and consume lower quality, cheaper, dirtier fuels such as wood.  Alex Pfaff et. al. studied a household level environmental kuznets curve for energy in Pakistan but they were looking at a cross-section of poor, middle income and richer households at a point in time.  This Greece research examines a dynamic process as Greek households become poorer over time due to macroeconomic decline.   So, this is clear evidence of non-homethetic income effects.  As people become poorer (all else equal), they consume lower quality fuel and this creates more local pollution.

This Greece study highlights that the household sector is an important contributor to local pollution.  To do a good job studying the supply of urban pollution economists need to look at the;  transportation, household, industrial and power generation sectors and how their emissions evolve over time.   Given that households in Europe live in close proximity to other households (no sprawl), higher household levels of wood burning affect more local neighbors --- this means that the likely social costs of this privately beneficial action (burning wood for heating and cooking) is larger.

Finally, I should note that this blog post's claim ---- that recessions can have negative environmental impacts -- dovetails with my politics piece with Matt Kotchen.    As you recall, we use a state/year level panel data set of Google Insights to document that when state unemployment rates rise that searches for the term "global warming" decline. Our favorite explanation for this fact is that recessions lead households to focus on short term bread and butter concerns and to ignore medium risks such as climate change.  The U.S Congress understands this point and has been devoting no effort to passing carbon legislation. In this sense recessions mean that the median voter isn't in the mood to tackle "big" environmental challenges.  Given that many environmental challenges require government intervention, this finding immediately indicates that "recessions are bad" for mitigating key externalities.