How harmful is air pollution to economic development? New evidence from PM_2.5 concentrations of Chinese cities

In recent years, haze pollution has frequently shrouded most regions of northern and eastern China. Air pollution has drawn increasing attention at home and abroad. However, the potential negative impacts of environmental pollution on economic development have long been ignored. Considering the possible effect of economic growth on environmental pollution, the conventional ordinary least squares (OLS) estimation may suffer from endogeneity biases caused by possible bilateral causality. In this paper, using city-level panel data for the period between 2013 and 2015, the influence of PM_2.5 concentrations on per capita GDP is estimated through a carefully designed simultaneous equations model for the first time. To control for fixed effects, a series of time dummies and region dummies are also introduced. The estimation results indicate that haze pollution indeed has a significantly negative impact on economic development. On average, as of 2015, when other conditions are equal, an increase of 5 μg/m³ in PM_2.5 concentrations may cause a decrease of approximately 2500 yuan in GDP per capita. In addition, the results suggest that sustainable economic growth may help reduce PM_2.5 concentrations, which in turn benefits economic development.