Global Policy Spillovers: How Environmental Policies Propagate through Product Attributes

By: Koichiro Ito, James M. Sallee, and Andrew Smith

Context

Policies are generally assessed for the impact they have domestically, ignoring the worldwide impact in an increasingly globalized society. For example, when a government subsidizes fuel-efficient cars, typical analysts only count the emissions saved within that country’s borders. But this assumption breaks down in a world where the same multinational car company designs and manufactures cars sold in dozens of countries.

To take the example further, if a policy in Japan pushes Honda to engineer a more fuel-efficient Civic for Japanese consumers, does Honda redesign just the Japanese Civic—or does the more efficient engine also end up in the American one? The answer depends on a straightforward economic logic: it can be cheaper to apply one design across all markets than to maintain separate product lines. This paper introduces a name for this phenomenon—attribute propagation—and rigorously measures how large it actually is.

Research Design

The authors exploit a natural experiment: Japan’s 2009 fuel-economy subsidy, which gave consumers a rebate of roughly $700–$1,500 when purchasing a car whose fuel economy exceeded a government-set target. The policy created strong incentives for firms to improve the fuel economy of models sold in Japan.

The key observation is that many models sold in Japan: The Civic, Accord, Corolla were also sold in the United States, while many other Japanese-brand models were sold only in the U.S. This creates a plausible treatment and control group within the American market: Models sold in both countries (potentially affected by the Japanese subsidy through attribute propagation) versus models sold only in the U.S. (unaffected). The authors compared how the fuel economy of these two groups evolved in the U.S. after 2009. They then built a model of multinational car markets to capture how competing vehicles adjust in response, and they simulate what would have happened had Japan never enacted the subsidy.

Findings

Japan’s subsidy significantly improved the fuel economy of cars sold in the United States.

The subsidy in Japan led to an 8.65 percent improvement in the fuel economy of affected vehicles sold in the United States even though the subsidy had no formal jurisdiction over American sales. As the chart below illustrates, those cars sold in both countries (treatment) and those sold just in the U.S. (control) tracked each other closely before 2009, then diverged sharply afterward.

The carbon benefits abroad are four times larger than those at home.

The U.S. market is much larger and Americans drive far more miles per year (11,21 8 vs. 3,206 annual miles per vehicle) compared to the Japanese markets. These two factors amplify the environmental impact of Japan’s policy in the U.S. The Japanese subsidy reduced carbon by 0.75 megatons per year domestically and by 2.27 megatons per year in the U.S., meaning roughly three-quarters of the policy’s total climate benefit occurred outside Japan’s borders. Put another way, the combined carbon reduction in Japan and the U.S. was four times larger than the carbon reduction in Japan alone.

Closing Take-Away

This study suggests policymakers might often underestimate the impact of their own regulations. By focusing only on domestic impacts, they miss a potentially larger benefit that travels through multinational firms’ product design choices. This paper provides the first rigorous evidence that these “attribute propagation” effects are not just theoretically plausible—they actually occur. In the case of this study, a domestic fuel-economy policy implemented in Japan generated more than five times its domestic climate benefit once global impacts are counted.

The implications extend well beyond automobiles. The same logic could apply wherever multinational firms sell standardized or near-standardized products: pharmaceuticals, electronics, appliances, chemical formulations, etc. Policies in major regulatory markets (the European Union’s chemical rules, FDA drug approval standards), may be quietly improving products worldwide without receiving any credit for it. Accounting for attribute propagation could fundamentally change cost-benefit analyses of environmental, safety, and technology regulations.

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Campaigning for Extinction: Eradication of Sparrows and the Great Famine in China

Eyal G. Frank, Qinyun Wang, Shaoda Wang, Xuebin Wang, Yang You

Context

Degradation of ecosystems can negatively affect human wellbeing, with agriculture especially vulnerable because of its strong connection to its surrounding ecosystem. This study looks at the impact of the local extinction of the sparrow in China, and its role in inciting China’s Great Famine—the world’s most deadly famine, which led to tens of millions of people dying of starvation between 1959 and 1961.

In 1958, China included the sparrow in its “Four Pests Campaign,” which aimed to improve agricultural activity and human health by eradicating flies, mosquitoes, rats and sparrows. While the other pests were targeted because of public health concerns, sparrows made the list because it was thought they were eating grain crops. However, while adult sparrows do eat grains, they also feed their fledglings insects, making them a predator to crop-damaging pests. The government ignored scientific advice and successfully drove sparrows to local extinction within two years.

There is anecdotal evidence that China experienced large crop pest outbreaks following the collapse of the sparrow population, with environmental historians long arguing that the sparrows’ collapse played a role in forming the conditions that gave rise to the Great Chinese Famine. This study provides quantitative evidence.

Research Design

The study uses newly-digitized data on historical agriculture production for rice, wheat and sweet potato crops, as well as demographic mortality and population data. Because data on the sparrow population did not exist during the study period, the researchers use a proxy for sparrow population levels in the form of a habitat suitability score for each county and province. This score combines data on current observations of sparrows with the environmental features in each county to quantify the degree to which a habitat is suitable for sparrows. The researchers compare how counties that were more suitable for sparrows differed from counties that were less suitable before and after the Four Pests Campaign began in 1958.

Findings

Rice and wheat crops declined in counties more impacted by the killing of sparrows.

Rice and wheat crops are grown above ground, making them more vulnerable to pests. While counties more suitable for sparrows had similar rice and wheat production compared to counties less suitable for sparrows before the Four Pests Campaign, that changed after the sparrows began being eradicated. The counties thought to have a higher sparrow population initially saw a 5.3 percent decline in rice yields and an 8.7 percent decline in wheat yields after the sparrows were killed, likely due to an increase in pests such as locusts in those counties.

Farmers grew more crops and substituted vulnerable above-ground crops for below-ground sweet potato crops in more effected counties.  

To make up for failing crops, farmers could have substituted the failing crops for crops less vulnerable to pests, and they could have grown more crops. The study found the farmers in counties thought to have been most impacted by the loss of the sparrows did both.

While above-ground crops declined during the Four Pests Campaign, crops grown below ground—such as sweet potatoes—flourished in counties thought to have had high sparrow populations because they were less vulnerable to the pests that were likely on the rise in these areas. This indicates that farmers substituted their rice and wheat crops for sweet potato crops to mitigate the risk of their food being eaten by pests. Additionally, farmers didn’t just substitute above-ground crops for below-ground crops, they also expanded the amount of land they cultivated in the more effected counties. Both results are consistent with historical context. In 1960, the Chinese government permitted farmers to cultivate more land and grow sweet potatoes for their own consumption to cope with the famine.

The government further exacerbated the impact of the famine in areas thought to have had large sparrow populations by requiring farmers in these counties to sell more of their crops.

In counties thought to have previously had high sparrow populations—counties already suffering the worst crop losses—the government required farmers to sell more of their crops, leading these communities to have less food for themselves and worsening the famine. The government redistributed food in this way because it believed, contrary to widespread scientific advice at the time, that sparrow eradication had boosted agricultural output in these counties, when the opposite was true. As China’s Vice Premier Tan Zhenlin said in 1960, “the achievement of the FPC is more than clear; sparrows have mostly been eradicated, crop yield has been growing steadily, we have already greatly alleviated the negative impacts of sparrows on agricultural production.”

Death rates increased and birth rates decreased in the counties most impacted by the sparrow killings. The impacts peaked in 1960, the worst year of the Great Famine.

Because counties most impacted by the sparrow collapse experienced both a decline in agricultural production, and, at the same time, were required to sell more of their crop yields, they likely experienced a higher degree of food shortages. The data supports this. While mortality and fertility trends were similar in high-sparrow and low-sparrow counties prior to the killing off of the sparrows, the trends began to divert in 1958. Mortality spiked in the high-sparrow counties in 1960—the peak of the famine—and birth rates likewise dropped.

The eradication of the sparrow was responsible for nearly 2 million lives lost during the Great Famine.

Using back-of-the-envelope calculations, the study found that the sparrow killing can account for 19.6 percent of the national crop yield reduction during the Great Famine. The study also estimates that the sparrow eradication led to the loss of nearly 2 million lives, and reduced fertility counts by nearly 400,000 between 1959 and 1961. This is equivalent to 0.307 percent of the total national population, and 6.49 percent of the total death count during the Great Famine.

Closing Take-Away

In 1960, three years after the initiation of the Four Pests Campaign and following the nationwide killing of approximately 2 billion sparrows, the central government realized their importance and removed them from the list of Four Pests, replacing them with bedbugs. Given that sparrows had already become locally extinct in most parts of the country, there are claims that in order to reboot the sparrow population the Chinese government had to import 250,000 sparrows from the USSR. After the sparrow returned, rice and wheat crops gradually returned to pre-Four Pest Campaign productivity.

The findings provide empirical evidence for the long-held notion that the eradication of sparrows—a decision pursued despite widespread scientific warning—contributed to the Great Famine. The study shows how the eradication of the sparrows reduced food production and led to a surge in mortality. Further, a rigid procurement system failed to adjust the distribution of food, instead exacerbating the local food shortages. More broadly, it underscores how ignoring scientific advice in favor of political expediency can lead to disastrous policy outcomes.

From an environmental standpoint, the study underscores the importance of preserving ecosystems. Although modern governments rarely enact extermination programs on the scale of the Four Pests Campaign, many species remain at risk of local or functional extinction. The study shows that, given the intricate interdependencies within ecosystems, even localized losses of key species can severely disrupt food production and human wellbeing. Striking a balance between societal needs and ecological sustainability requires that policymakers heed scientific insights—ensuring that short-sighted measures do not inadvertently undermine the very ecosystems upon which human survival depends.

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International Spillover Effects of Air Pollution: Evidence from Mortality and Health Data

Air pollution poses a significant threat to human health. One challenge countries encounter in reducing air pollution is that some of it may be caused by sources in neighboring countries and be carried over borders. This is the case in South Korea, where westerly winds carry pollution from China during the fall and winter months. In this way, countries like South Korea may not have full control over the pollution hurting their citizens.

The authors employ recent advances in atmospheric science to collect data on the hourly particulate matter (PM2.5) pollution trajectories from China to South Korea. They combine these trajectory data with hourly particulate pollution in China and South Korea and estimate how the transboundary pollution from China effects particulate pollution in South Korea. They then connect these data with mortality and emergency room visit data in South Korea to quantify the health impacts of transboundary air pollution.

Energy Saving May Kill: Evidence from the Fukushima Nuclear Accident

by Guojun He and Takanao Tanaka, American Economic Journal: Applied Economics

Decades of research show the vast consequences of climate change, such as the threat to our freshwater supply, endangerment to coastal areas, and reducing agricultural and food production. Excess mortality caused by extreme weather is considered to be one of the most devastating. For example, it is estimated that the mortality cost alone could account for about 70 percent of the total damages in the U.S. by the end of the 21st century.

Two strategies have been developed to reduce and manage these growing risks. First, countries aim to reduce greenhouse gas emissions, which includes reducing energy consumption. Second, countries are working to adapt to climate change, which includes mitigating exposure to extreme weather such as through air conditioning. But adaptation measures—like air conditioning—requires the use of more energy. And, as temperatures become more extreme, more energy will be needed to adapt.

The Fukushima nuclear accident in 2011 offers a case study to investigate the role of energy use in protecting people’s health. Following the nuclear accident in 2011, Japan gradually shut down all of its nuclear power plants, causing a countrywide power shortage. In response, the government launched large-scale energy-saving campaigns to reduce electricity consumption. For example, energy-saving targets were set that required different regions to reduce summer electricity usage by as much as 15 percent. The government paid particular attention to reducing the usage of air conditioning because it is the largest contributor to residential electricity consumption in Japan.

The researchers explored the impact of these energy-saving campaigns. Did people take action to reduce consumption in their own lives? And, what impact did reducing consumption have on mortality
rates?

Watering Down Environmental Regulation in China

Guojun He, Shaoda Wang, Bing Zhang; Quarterly Journal of Economics

Key Takeaways:

1. After growing social unrest to improve China’s worsening pollution, the central government began aggressive reforms starting in 2003. Included in this era of reforms was a target-based system to improve water quality. The central government installed several hundred state-controlled water monitoring stations along the major national river trunks and used the water quality readings to help determine the promotion of local government officials.
2. Water monitoring stations can only capture emissions from upstream, giving local officials the incentive to enforce tighter regulations on polluters immediately upstream of stations, while shirking on their responsibility to reduce pollution coming from their downstream counterparts. The researchers used this spatial disparity to quantify the effects of environmental regulation on the country’s entire manufacturing sector.
3. The study found that local officials more heavily enforced regulations on polluting firms that were monitored, with firms located immediately upstream of a station being 24 percent less productive and emitting significantly less pollution than their downstream counterparts. The productivity loss was mainly driven by upstream polluters investing more in abatement equipment to meet tighter regulations. The upstream-downstream gap in productivity existed only in polluting industries and did not emerge until the central government started to link water quality readings to political promotions.
4. These estimates suggest that environmental regulation led to significant economic costs for China. A 10 percent reduction in pollution led to a 3 percent drop in productivity for China’s polluting industries. Taken together, China’s efforts in reducing water pollution led to a total loss in industrial output of more than 800 billion Chinese yuan over the eight years studied.
5. Further, the study found that the higher the political incentive to local officials and the more difficult it was for them to manipulate the monitor readings directly, the more significant the gap in productivity between upstream and downstream firms.
6. The study provides a timely assessment of the central government’s efforts in leveraging high-powered political incentives to fight pollution. It demonstrates a clear misalignment between the national policy goal and local bureaucratic incentives as local leaders prioritized “water quality readings” over “actual water quality,” as the well-intentioned policy had aimed.

Straw Burning, PM₂ and Death: Evidence from China

Guojun He, Tong Liu, Maigeng Zhou; Journal of Development Economics

Key Takeaways:

1. Straw burning on agricultural land can be a major source of seasonal air pollution in some parts of the world, particularly developing countries dependent on agriculture.
2. The study investigates the impacts of agricultural straw burning on particulate air pollution and mortality in China, and finds that 10 additional straw fires within 50 km of a county center will lead to a 7.6 percent increase in monthly particulate pollution (PM2.5) levels and a 1.6 percent increase in mortality in Chinese counties. Two-thirds of the deaths are caused by cardiorespiratory diseases.
3. Those who are more vulnerable and are more intensively exposed to the straw burning smoke are more likely to die due to straw burning. Straw burning impacts rural and poor populations the most, suggesting better socioeconomic conditions can mitigate the impact of air pollution on mortality. Further, nearly 80 percent of the deaths were among people over 60 years old, and males account for around 58 percent of deaths.
4. In evaluating China’s straw recycling subsidy policy, the study shows that providing subsidies to farmers incentivized them to recycle, which reduced air pollution by 7.3 percent and averted about 18,900 premature deaths.
5. The benefits of subsidizing straw recycling—figured to be about 55 billion Chinese yuan (around 7.85 billion USD)—are substantially larger than the costs—at most 2.6 billion Chinese yuan each year (around 367.6 million USD). Other countries facing similar particulate pollution problems from straw burning may also benefit from a similar subsidy policy.

The Short-term Impacts of COVID 19 Lockdown on Urban Air Pollution in China

Guojun He, Yuhang Pan, and Takanao Tanaka; Nature Sustainability 

Key Takeaways:

1. Overall, the Air Quality Index (AQI) improved by 22 percent and particulate pollution (PM2.5) improved by 24 percent.
2. Compared to cities without formal lockdown policies, locked down cities saw their AQI and particulate pollution levels both
   decline by 17 percent.
3. Compared to the previous year, cities not locked down saw a 7 percent decrease in particulate pollution and a 5 percent decrease in the AQI, suggesting that the disease preventive measures matter for air quality in cities even without formal lockdown.
4. The effects of the lockdowns on air pollution were greater in cities with a larger economy, greater industrial activities and traffic, and
   higher demand for coal heating.
5. Even with significant restrictions on daily life and commerce, pollution levels in China were still four times greater than what the World Health Organization considers safe. The study confirms that traffic, industrial and coal heating systems are important sources of air pollution and highlights the necessity to better control emissions from these sources moving forward.

Can Technology Solve the Principal-Agent Problem? Evidence from China’s War on Air Pollution

Michael Greenstone, Guojun He, Ruixue Jia, Tong Liu

Key Takeaways:

1. The central government of China awards local officials who are able to achieve economic and social targets with incentives such as promotions. Such an incentive system can be effective in achieving targets, but also creates opportunities to underreport data that could stand in the way of achieving incentives—pollution data being one example.
2. In an effort to increase transparency and improve data quality, the central government installed an automatic pollution monitoring system that publishes air pollution information in real time to the public.
3. Comparing pollution data from before and after the installation of the technology, the researchers find that air pollution concentrations were significantly underreported by the local governments prior to the automation—reported pollution concentrations increased 35 percent immediately after automation. Importantly, satellite measurements indicate no change in true air quality before and after the installation.
4. Those cities with higher GDPs were less likely to underreport the data, while cities with high pollution levels were
   more likely to underreport the data.
5. With improved air pollution data indicating higher levels of pollution, individuals appeared to respond by taking greater measures to protect themselves from air pollution. Specifically, online searches—a high correlator for purchasing behaviors—tripled for “face masks” and increased by 20 percent for “air filters.” The implication is that the manipulated data led people to have a false sense of security and insufficiently protect themselves from air pollution’s dangers.
6. Improved data thanks to the automatic monitoring contributed to the Chinese government’s successful “war on pollution,” as well as individual efforts to protect against harmful pollution.

Mitigating the Air Pollution Effect? The Remarkable Decline in the Pollution-Mortality Relationship in Hong Kong

Guojun He, Chun Wai Cheung , Yuhang Pan; Journal of Environmental Economics and Management

Key Takeaways:

1. Hong Kong has among the highest per capita incomes in the world, but is also highly polluted. A significant portion of the pollution stems from the Pearl River Delta, a manufacturing hub northwest of Hong Kong.
2. Using air quality, weather, population, and mortality data, this study looks at the change in air pollution and cardiorespiratory deaths from 2000-2002—before a massive SARS epidemic in 2003—and compares it to the periods from 2004-2008 and 2009-2015.
3. The study finds that, on average, a 10-unit increase in the air pollution index (API) causes 1.77 percent more cardiorespiratory deaths each month, and the effect is larger among the elderly.
4. The effect of air pollution on cardio-respiratory deaths dramatically declined after 2003. From 2000-2002, increased air pollution led to a 3 percent increase in cardiorespiratory deaths. It had little to no impact during the more recent periods studied.
5. The researchers attribute the drop in cardio-respiratory deaths after the SARS epidemic to vast improvements in the medical system, and not to a drop in pollution itself or an increased awareness of pollution that could have led to a greater uptake of masks and air purifiers. Populations living closer to hospitals with emergency departments were less at risk of dying from pollution-induced cardio-respiratory diseases.

Willingness to Pay for Clean Air: Evidence from Air Purifier Markets in China

Koichiro Ito, Shuang Zhang; Journal of Political Economy

Key Takeaways:

1. Air pollution leads to about 6.5 million deaths each year and serves as a major impediment to economic progress. Emerging economies experience the highest levels and worst impacts of this pollution. With a clear link between air pollution, health problems and economic costs established, governments are now proposing and implementing ways to combat air pollution.
2. Optimal environmental regulations depend on the extent to which individuals value air quality improvements—that is, their willingness to pay for clean air. This study provides some of the first evidence for citizens’ willingness to pay for cleaner air in emerging economies.
3. The researchers used monthly air purifier sales, monthly average prices paid and detailed product attributes such as effectiveness in reducing pollution, combined with pollution and demographic data. They also took advantage of a natural experiment rooted in the Huai River policy, which subsidized coal-based central heating for people living north of the river.
4. The study found that pollution is 30 percent higher in cities north of the Huai River compared to cities in the south, and the market share for air purifiers with the strongest filters (HEPA)—which reduce almost all of indoor air pollution—is substantially higher in the north. This reveals that the higher the pollution the more likely people are to buy air purifiers that mitigate indoor air pollution.
5. From the data analysis, the researchers conclude that on average people are willing to pay $5.46 to remove one microgram per cubic meter (ug/m3) of pollution out of the air. But, how much people are willing to pay varies widely depending on their income, with a range of zero to $15.
6. People’s willingness to pay is a key barometer for policymakers trying to determine which rules and regulations are most effective in enhancing welfare. It further sheds light on the degree to which citizens prioritize economic growth over environmental regulations—a subject of constant debate and importance in both emerging and industrialized economies.