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The External Costs of Air Pollution and the Environmental Impact of the Consumer in the US Economy

Despite many years of environmental regulation, significant levels of air pollution are generated by the provision of goods and services in the United States. In 1992, approximately $180 billion of such damages occurred in the U.S. To reduce environmental damage, analysis tools such as Life Cycle Assessment (LCA) have been developed to better understand the total impacts of products and processes. These tools consider the effects associated with raw materials extraction, component fabrication, assembly, delivery, use, and disposition. However, these methods are hindered by the boundary problems and circularities that exist. We propose a solution to the boundary problem, a Leontief input-output (IO) model augmented by environmental impact information to determine the direct and total supply chain effects resulting from the production of the 500 commodity sectors contained in the Department of Commerce's 1992 IO table. The model considers environmental impacts externally to the basic Leontief framework. Toward this effort, we have generated a substantial data set linking releases of criteria pollutants and greenhouse gases with manufacturing activities in each sector. The result is an assessment, rather than an inventory, of environmental effects. The total air pollution releases found for each commodity are combined with a range of environmental damage valuation studies to estimate the external costs of these activities. We consider both the most polluting commodity sectors per dollar of output, as well as the sectors generating the largest external costs. Our results include the consideration of indirect (supply chain) effects as opposed to simply the direct effects from producing commodities. The production of electricity generates 34 cents of external costs per dollar cost, but the average commodity generates less than 4 cents. The results are also combined with the Consumer and Producer Price Indices as well as the Consumer Expenditure Survey to determine the external costs associated with buying and selling commodities. The average dollar spent by consumers generates about 3 cents of external cost, while producers generate 5 to 9 cents. The results show that the average American household's spending generates roughly 40 tons of carbon dioxide equivalent releases per year. Finally, using our data set of current emissions, and the findings above, we consider the effects of various policies to reduce emissions, including command and control and market-based initiatives. Market-based initiatives are projected to save billions of dollars in expenditures if enacted for sulfur dioxide, nitrogen oxides, and volatile organic compounds. In addition, if new regulations were set to reduce external costs, significant improvements over current levels would result.

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H Scott Matthews


Carnegie Mellon University


Lester Lave, Chris Hendrickson, Dennis Epple

Expected graduation


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