Air pollution, the invisible killer

Click to read the report
Click to read the report

Today’s post, marking World Environment Day,  is from OECD Secretary-General Angel Gurría

Air pollution has become the biggest environmental cause of premature death, overtaking poor sanitation and a lack of clean drinking water. According to the WHO, more than 3.5 million people are being killed each year by the air that they breathe in urban areas, and the number is rising. Air pollution now kills twice as many people as HIV/AIDS. That’s the stark message from the latest OECD report, The Cost of Air Pollution: Health Impacts of Road Transport.

There is an economic price to pay too. One of the tools used to quantify the costs associated with air pollution is the Value of Statistical Life (VSL), which estimates the value people attach to avoiding premature death from pollution. VSL can thus illustrate relative benefits of different policy options in terms of their effects on people’s wellbeing. On the basis of this methodology, the report shows that the cost of deaths and illness from air pollution increased by about 10% between 2005 and 2010, reaching USD 1.7 trillion in OECD countries alone.

To put such a huge number into perspective, let’s take the case of Germany, where our report was launched. Here, the economic costs of deaths from air pollution were about USD 150 billion in 2010. That’s the equivalent of half of Germany’s general government health expenditure.

Two of the most prevalent and dangerous forms of air pollution are particulates and ozone. Fine particulate matter (PM) can enter the lungs and help to spread harmful substances through the body. Nitrogen oxides (NOx) react with sunlight to produce ozone and contribute to the formation of particulates. These air pollutants may have various health impacts including asthma, lung cancer, respiratory problems and heart disease. Older people are especially vulnerable, so population ageing increases the number of people at risk.

Road transport is responsible for roughly half the air pollution in OECD countries, and up to 90% of that is from diesels. Almost all OECD countries tax diesel less than gasoline, except the UK, US and Switzerland. There is no environmental justification for this. Diesel is responsible for more local air pollutants such as NOx and PM than gasoline, although volatile organic compound (VOC) emissions from gasoline-driven vehicles can also contribute to smog. Diesel also causes higher CO2 emissions per litre of fuel than gasoline.

True, you can drive farther on a litre of diesel than a litre of gasoline, but the benefits of the greater fuel efficiency are entirely captured by the private driver. And to the extent that higher fuel efficiency makes driving cheaper, there is an incentive to drive farther, as the evidence tends to show.

In many countries, the majority of new cars coming onto the market are diesels – which, in spite of gradually stricter vehicle emission standards, contribute to aggravate local air pollution. The data provided by car manufacturers tends to underestimate real-world emissions, especially diesel vehicles. There are important differences between the test-cycle emissions of air pollutants that vehicle emission standards regulate and real-world emissions of the same substances from the vehicles in question.

In China, India and many other countries, a shift to diesel is compounding an upward trend in emissions as vehicle growth outpaces the adoption of tighter emission limits. Some of the worst air pollution is taking place in fast-growing cities like Beijing and New Delhi. China has one fifth of the world’s population but accounts for nearly two-fifths of the global death toll linked to outdoor air pollution. India has far fewer air pollution-related mortalities, but deaths from ambient air pollution are rising quickly – around 12% from 2005 to 2010.

What can be done? The OECD has used the VSL methodology to estimate what people in different countries would be willing to pay to avoid deaths caused by air pollution. Governments can use this information to determine the stringency of the measures that should be applied to reduce pollution. The new estimates indicate that people are willing to pay more for clean air than previously thought.

Currently, drivers pay to enjoy personal mobility, but not for the damage they do to other peoples’ health. People want governments to do something about this because they are powerless to solve the problem by acting individually. Governments on the other hand know that if they take action, they will impose costs on car manufacturers and drivers. But if they do not, the “cost” of illness and premature death falls on the general population. The VSL allows governments to weigh up both sets of costs.

Estimates of VSL vary among countries: generally the richer the country, the more people will be willing to pay to avoid death, simply because they have more disposable income they can use to reduce their risk of death from air pollution. As a result, the VSL in countries like China or India is lower than in OECD countries. This does not mean that life is worth less in those countries, but rather that people are not able to pay more to reduce the risk of death.

The benefits of well-designed measures to reduce air emissions should easily outweigh the costs. One very obvious measure would be to remove any incentives that favour the purchase of diesel over gasoline cars. A further tightening of vehicle emission standards should also be considered, combined with measures that make test-cycle emissions more similar to emissions under normal use. Measures should also be identified to help mitigate the impact of air pollution on vulnerable groups, such as the young and the old.

Our report provides us all with a “wake-up call”. We have important evidence of the scale of the problem. We now need to work together to tackle it. We literally need to design better policies for better, and longer, healthier lives.

Useful links

Managing our natural resources: can we do more with less? (OECD Insights blog)

OECD work on climate change

OECD work on material resources, productivity and the environment

OECD work on resource productivity and waste

OECD work on biodiversity, water and natural resource management

Managing our natural resources: can we build more with less?

Click to see full size
Click to see full size

Tomorrow June 5th is World Environment Day. In today’s post Peter Borkey of the OECD Environment Directorate looks at how we use and manage natural resources.

I’m continually amazed at how our planet has a way of keeping things in balance. Of course we know there are limits but nature’s cycles go on maintaining an environment capable of sustaining life. Natural resources and the raw materials they provide are part of this balance. They are also the basis of our economies.

As the illustration at the top of the article shows, materials used in construction like sand and gravel account for the largest share (36%) of OECD materials consumption in weight. You won’t be surprised that fossil energy carriers such as oil, coal and natural gas are next at 26%; while biomass for food and feed (20%), metals and metal ores (11%), wood (3%) , and industrial minerals (2%) make up the balance.

Unfortunately for the planet’s balancing act, the more of these materials we consume, the more environmental pollution we cause. We see that extraction, production and processing, use and final disposal can cause problems such as water and air pollution from mining operations, carbon emissions from material transport and processing, and pollution from product use, landfill and incinerators for final disposal.

Globally, the extraction of material resources continues to grow, closely following economic growth, but I’m glad to say we are seeing some signs of “decoupling” between the two. In OECD countries, the growth of material extraction and use is slowing down while GDP continues to grow. Material consumption peaked at slightly above 18 tonnes per capita in 1980. Since then there has been a slow reduction to 17 tonnes per capita today. That may sound like very slight progress, but over the same period economic output (as measured by GDP) has doubled. We use 45% less material for each unit of economic output, a real improvement in resource productivity.

Put simply we are doing more with less, but overall we are still using more material. The sheer scale of this increased output means that environmental pressures are not falling – in fact they have continued to intensify in many areas, leading to a doubling of material consumption at the global level since 1980. Per capita OECD material consumption remains large, and is about 60% higher than the world average. In fast developing countries like China and India, material consumption is rapidly increasing, albeit starting from a much lower base than in the OECD. Global increases in material consumption intensifies competition for resources, sometimes contributing to volatile prices, and generally resulting in increased material consumption globally.

To balance these distressing worldwide statistics, several countries have been showing us how the worrying trends can be reversed. For example, Germany, Italy and Japan have succeeded in decoupling material consumption from economic growth in absolute terms and diminished their overall domestic material consumption. They have recognised that with the right policies, based on the 3Rs (reduce, reuse, recycle), waste is not something to be discarded, but a resource that can be fed back into the economy. Efforts in municipal waste management (10% of total waste) and recycling have been central in contributing to this success, but we all need to make a bigger effort in sustainable waste and materials management.

Here is how a range of actors can make further efforts in sustainable waste and materials management:

Governments can encourage resource productivity, through fees for the use of resources, charges for environmental damage, or by supporting longer product lifespans such as through increased legal minimum warranty periods. For example, in 2010, increasing the lifespan of mobile devices by 50% would have avoided the generation of 50 million end-of-life mobile devices in the US alone, reducing waste by one­‑third.

The private sector (with the right incentives) can identify new business models linked to improved resource efficiency of production processes and realise that “less material” can mean “more value”. You may be one of the millions to have used car sharing (US) or a car club (UK) to rent a vehicle to escape for the day, or even to go and do the shopping. The streets of Paris are now full of Autolib vehicles. Another example that increases efficiency is chemical leasing where instead of selling a chemical a company provides the service that the chemical delivers, but keeps ownership of the chemical with the opportunity to recycle and reuse it.

Consumers need to be more aware of the role that every one of us can play and contribute through better product choices and behaviour. As my grandfather used to preach: “think globally, act locally”. Correctly separating household waste already contributes to minimising our material footprint but we still need to do better.

The OECD is helping member countries with the statistics, analysis and policy advice on how we can all make it easier for the planet to maintain the balance so that humans can continue to build, grow and prosper while using less natural capital.

Useful links

OECD work on material resources, productivity and the environment

OECD work on resource productivity and waste

OECD work on biodiversity, water and natural resource management

Small firms are bigger than you think

The world's biggest employer started here
The world’s biggest employer started here

Today’s post is by Chiara Criscuolo of the OECD’s Science Technology and Industry Directorate.

In September last year, Universum Global published a list of the world’s 50 most attractive employers in business and engineering, based on a survey of 200,000 students. Well-known multinationals top the list, since they seem to respond best to the students’ desire for market success, professional training and development, and secure employment. As Universum CEO Petter Nylander says, “This might come as a surprise as there is a view of Gen Y valuing more corporate social responsibility, a friendly work environment and flexible working conditions”.

Another surprise would be if they all got hired by their favourite firm. Google, Coca-Cola, Ernst & Young and the rest are certainly huge companies, but if you have a job, the chances are you work for a small or medium-sized enterprise (SME). SME’s employ 63% of the workforce in OECD countries and they are also the source of much turbulence: they contribute for three-quarters of total job destruction as well as job creation, according to new data from the OECD’s DynEmp (Dynamics of Employment) project.

With employment high on the agenda of governments everywhere, we looked at which firms were the ones creating those jobs to see what lessons we could learn from the successes and failures.

The full results are in a report we’ve just published, The Dynamics of Employment Growth: New Evidence from 18 Countries, but one of the most interesting trends to emerge is thatyoung SMEs (firms no more than five years old) have been the most dynamic job creators over most of the past decade and across the 18 countries we analysed. These firms only represent on average 17% of employment, but they contribute more than twice as much to job creation (42% of the total). Of course not all young firms survive and not all the jobs created are “permanent”. However, young SMEs account for only 22% of all job destruction, making them net job creators. This was the case even during the Great Recession, despite the fact that younger firms were hit harder than older ones.

Micro start-ups are particularly dynamic, and a small number of them far outperform all other firms in their category. While only 5% of micro start-ups overall grow to employ more than 10 workers after 3 years, this small minority accounts for 37% of all jobs created by micro start-ups.

Our findings on the importance of young firms are encouraging, but there is some bad news in the report too. While young SMEs “punch above their weight” as far as employment creation is concerned, the share of start-ups has been steadily decreasing over the past decade. This is in line with recent evidence from the United States that pointed to a significant decline in business dynamism over the past 30 years.

In a dynamic economy, the disproportionate contribution of young firms to job creation is a reflection of what’s sometimes called the “up-or-out” dynamics. Young firms either go “up”, resulting in higher than average growth rates after they get started, or they go “out”, with the entrepreneurs responsible perhaps re-emerging with a new start-up soon afterwards.

But this varies widely across countries, with some characterised more by “stay-and-stall” rather than “up-or-out”. For example, when you compare the situation internationally, the size of start-ups when they enter the market is much the same (although there are some differences of course). But after a few years, we begin to see a significant change, and it’s the change in the size of firms over time as they evolve from start-up to young firm to older business that explains the differences between countries. For example, an older manufacturing business in France is half the size of one in the US on average, even though start-ups in France are somewhat larger than in the United States.

Young firms are more likely to experiment with disruptive technologies and business models and this experimentation may be particularly important during periods of extensive technological change, when the success of new business models and applications may only become apparent through testing in the market. We used firm-level data from different countries to examine the extent to which innovative firms (firms seeking patents) attract the resources they need to implement new ideas and bring innovations to market. Despite concerns about the decline in business dynamism mentioned earlier, the extent to which capital flows to patenting firms in the United States is twice as large as in France and Germany, and four times as large as in Italy.

Government policy can play a role in encouraging start-ups to experiment and grow, but it can be hard to get the right balance between the interests of the various actors involved in creating and promoting young firms. For example, lenient bankruptcy regimes enable firms to experiment with risky technologies, but if creditors feel they are too exposed to risk they may not be willing to lend money. There can also be unintended consequences of what seems a good policy at first sight. The most striking example is generous fiscal incentives such as tax breaks to encourage R&D. You would think this would help boost dynamism, but in fact such incentives are correlated with less dynamism in R&D intensive sectors, suggesting that R&D fiscal incentives may protect incumbents and slow down the reallocation of resources towards more innovative entrants.

Practically all the companies that attracted students in Universum’s survey were SMEs and start-ups at one time, some only a few decades ago. In the next phases of our work, we’ll analyse in more detail how national policies and other factors affect entrepreneurship, experimentation and the growth of firms. We’ll also try to gain a better understanding of the link between employment dynamics and economic growth and productivity.

Useful links