Fact of the Week: Air Pollution Negatively Affects a Society’s Inventiveness and Economic Output

Source: Felix Bracht and Dennis Verhoeven, “Air Pollution and Innovation,” Centre for Economic Performance: Discussion Paper no. 1817.

Commentary: In a 2021 article published by the London School of Economics and Political Science’s Centre for Economic Performance, Felix Bracht and Dennis Verhoeven studied 1,288 regions across Europe and found that decreasing the concentration of air pollutants with particulate matter less than 2.5 micrograms in diameter (PM_2.5) by 0.17 μg/m³—the average yearly reduction in Europe—leads to a 1.7 percent increase in patented inventions. It appears that pollution’s effect is small up to a certain level of PM_2.5 concentration as the effect was almost exclusively observed in regions with air pollution above the median level. The authors determined that the observed relationship cannot be accounted for by quantitative changes in R&D expenditures or personnel.

The authors estimate that this loss in inventiveness means that pollution’s harm to economic output is at least 10 percent greater than previously believed. The adverse effects of a loss of inventiveness on GDP usually go unrecognized since they are lagged and persistent. Moreover, this 10 percent figure is certainly an understatement of the true perverse effects since it does not account for lost knowledge spillovers and endogenous growth from innovation.

The authors suggest two potential mechanisms through which this relationship manifests. The first is that air pollution reduces the supply of labor in R&D services due to increased absenteeism and a reduction in hours worked—that is, a decrease in the supply of innovative labor. The second potential mechanism is that pollution may reduce R&D productivity by decreasing cognitive functioning—that is, a decrease in the productivity of innovative labor.