Costs of Climate Policy when Pollution Affects Health and Labour Productivity. A general Equilibrium Analysis Applied to Sweden

Much of the debate over global climate change involves estimates of the direct costs of global climate change mitigation. Recently this debate has included the issue of ancillary benefits. These benefits consist mainly of health improvements. Although it is generally acknowledged that air pollution affects respiratory health, and that valuations of these impacts make up a significant proportion of the damage costs of air pollution, these impacts are often neglected when evaluating the costs of climate policy. Since reducing greenhouse gases has the effect of also reducing other pollutants affecting human health and labour productivity these effects should be taken into consideration. The analysis incorporates a linkage between air pollution and health effects into a general equilibrium model for Sweden through a theoretical consistent framework. Results from recent Swedish concentration-response and contingent valuation studies are used to model direct disutility and indirect health effects that negatively affects the productivity of labour. The costs of feedback effects on health and productivity are compared in three different scenarios for attaining the Swedish carbon dioxide target with alternative projected emission levels in the baseline scenario as well as alternative harmful emission levels. Results show that not including feedback effects could mean overstating the costs of climate policy. The magnitude of these effects are, however, very sensitive to projected emission levels and to the judgement of harmful emission levels.