In a cost-benefit analysis of improving air quality, the fundamental reason for remediation of air pollution is to avoid health repercussions.The level of health cost caused by air pollution could directly affect the priorities of the decision-making of air pollution control. A key question is how to evaluate the economic loss of premature death. This paper focuses on the estimation of the value of statistical life and discusses whether there is an underestimation of the health cost of air pollution in China's environmental policy analysis.

Estimating the Health Burden of Premature Death: International Experience

Air pollution can make the population uncomfortable and make it difficult to work and study, resulting in economic losses. Long-term exposure to air pollution can lead to premature death and other serious health burdens.

Value of Statistical Life (VSL) is an economic concept and widely used to quantitatively assess the health burden of premature death resulted from air pollution. VSL measures the amount of money that people are willing to pay in order  to reduce the minimal risk of death[1]. Internationally, there are mainly two methods to gain the data and evidence for the economics of VSL. One is market decision-making mechanisms, including the income-risk relationship model, which can reveal the value of avoiding the marginal deaths risk through implicit human behaviors. Another tool is the survey method, such as Contingent Valuation (CV), which surveys Willingness to Pay (WTP) through narrative preference and choice experiment[2]. In general, the income-risk relationship model approach is superior to the approach of CV, as the former is based on the actual behavior of the transaction, while CV method is based on the assumptions of the interview and there are many that affect the accuracy of the expression.

Table 1 is taken from a comparative study on the VSL estimation  in 11 countries and regions, and most of the studies used the income-risk relationship model[3]. Roughly, the US, Japan and Switzerland have the highest level of VSL, while Taiwan, Korea and India have lower levels of VSL.

There is a basic consensus that the VSL is most affected by the level of economic development and per capita income, with VSL usually being higher in developed countries than in developing countries and regions. The information of Table 1 also basically supports this view.

The Significance of VSL Valuation in the Cost-Benefit Analysis of Public Policy

Estimated VSL has a strong practical significance. To evaluate and analyze one environmental policy, it is necessary to use the valuation of VSL, in order to calculate the outcomes of this policy with Cost-Benefit Analysis (CBA). This will be helpful in choosing between different policy options in more transparent procedures.

However, a VSL valuation, which can be used in a CBA study, needs a large number of empirical research support. Such empirical research in China is still relatively rare, and the gap between existing empirical studies is huge, with minimum VSL of 250,000 and maximum of 1.7 million[4].

In this case, the Human Capital Approach is considered an alternative due to its lower bound of VSL valuation[5]. In the study of the health burden caused by environmental pollution in China, the World Bank and the State Environmental Protection Administration (SEPA) issued an influential report in 2007 called "The Burden of Pollution in China" (hereinafter referred to as the World Bank report).  In terms of VSL valuation, this report uses the WTP survey method and the Adjusted Human Capital (AHC) method based on Shanghai and Chongqing. In the following, considering 2015 as the reference year, I will discuss the VSL valuation level in Shanghai, with the reference of the AHC method in this report.

Using AHC to Estimate VSL: Shanghai and the Country

The adjustment of human capital approach is a way to value the prevention of premature death from a society perspective, which applies to everyone and assumes the value of each life loss the same as the annual per capita GDP of the whole society.

In the World Bank report, the average number of life lost is 18 years[6]. And according to Shanghai Municipal Bureau of Statistics, its GDP per capita is 103,100 yuan (2015)[7].

If we assume that Shanghai annual GDP per capita growth rate in 2015-2033 is 5% and the discount rate is also 5%, then

We can also use this method to estimate the health burden of premature death in the whole country.

Using the AHC Method to Estimate the VSL Problem

As mentioned above, with the approach of human capital, we usually obtain a lower limit. If such estimation is applied in environment policy making, there is the risk of underestimating the health costs from air pollution.

Estimating the VSL with the human capital approach requires the following parameters: the average annual GDP per capita, the average number of years of life loss, the average annual growth rate of per capita GDP and the discount rate. As China has a similar average life expectancy compared to the countries in Table 1 (except India)^[11], the greatest factor influencing the VSL valuation with the human capital approach, is the per capita GDP level.

We have listed the per capita GDP of these countries and regions in 2015, and compared the VSL valuations in Table 1, resulting in Table 2.  As mentioned earlier, the differences in the calculating methods in VSL valuation essentially cause the large gap in A / B ratios. It can be seen in the highly developed countries, the VSL (the labor market method) is about 100 times the level of per capita GDP ^[12]. In comparison, as mentioned in the third section, China's VSL with human capital approach was 996,000 yuan (about 143,000 US dollars), while China's per capita GDP in 2015 was 55,000 yuan (about $ 8,000). The ratio between the two is 18. It can be seen that the VSL valuation based on the labor market is much higher than the VSL valuation based on the human capital approach.

Conclusion

This paper discusses the main method of evaluating the health burden of premature death: VSL. It shows that the VSL value based on human capital approach, which is adopted in China, could be much lower than the VSL values based on labor market method. As a result, the lower limit of the VSL valuation is likely to lead to an undervaluation of the severity of air pollution when the policy makers try to quantify the health costs of air pollution. Therefore, China’s environmental policy makers should take into account international experience and consider using the labor market approach to estimate VSL.

References

[1]World Bank (WB)., State Environmental Protection Administration (SEPA). Cost of Pollution in China: Economic Estimates of Physical Damages. 2007, p67.

[2]Viscusi, W.K. "The Value of Life". Discussion Paper No. 517. The Harvard John M. Olin Center. 2005. Available at: law.harvard.edu/programs/olin_center/

[3]Ibid.

[4]World Bank (WB)., State Environmental Protection Administration (SEPA). Cost of Pollution in China: Economic Estimates of Physical Damages. 2007. p69. Table 4.1 Estimates of Value of a Statistical Life in Chinese Studies.

[5]World Bank (WB)., State Environmental Protection Administration (SEPA). Cost of Pollution in China: Economic Estimates of Physical Damages. 2007. p67.

[6]World Bank (WB)., State Environmental Protection Administration (SEPA). Cost of Pollution in China: Economic Estimates of Physical Damages. 2007. p77. Appendix A.1 Average Life Years Lost due to Air Pollution.

[7]Shanghai Municipal Bureau of Statistics. 2015 年上海人均 GDP 首次突破 10 万 大关 [ 2015 Shanghai per capita GDP exceeded 10 million Mark for the First Time]. Economic network, Available at: http: //www.ceweekly.cn/2016/0301/142852.shtml

[8]Wang Shuxiao, 长三角区域霾污染特征、来源及调控策略 , [Characteristics, Sources and Control Strategies of Haze Pollution in the Yangtze River], Science Press, 2016, Table 8 The Number of Premature Deaths Caused by PM2.5 in Each City in the Yangtze River Delta and Its Monetization Valuation, p225.

[9]World Bank, "China's per capita GDP 1960-2015 and 2014 per capita Life Expectancy", Available at: http: //data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=CN&view=chart; http: //data.worldbank.org/indicator/SP.DYN.LE00.IN

[10]"China's 'Airpocalypse’ Kills 350,000 to 500, 000 Each Year". Available at: http: //www.telegraph.co.uk/news/worldnews/asia/china/10555816/Chinas-airpocalypse-kills-350000-to-500000-each-year.html

[11]According to the World Bank Development Index, China's life expectancy is 79 years. The countries and regions listed in Table 1 have a life expectancy between 79-84, with the exception of India.

[12]The effect of the difference in the present value of the dollar in different years is ignored. If the per capita GDP of 2015 is converted into the present value of US $ 2000, the ratio of A / B will be significantly higher than 100.  

Author : Zhao Ang