Thursday, June 25, 2009 3:00 PM
A Smog Index for the economy?
David Berman
Your humble scribe works in Toronto, a city that is normally pretty smoggy this time of year. However, as we approach the end of June, there has been just one smog-alert day declared so far, despite stifling 30-degree temperatures on Wednesday.
Admittedly, it is early in the summer. Still, we couldn’t help but wonder if the recession is working some wonders on the air quality in Toronto and elsewhere in North America.
Is there a correlation between economic activity and the environment? More important to investors, should you sell on smog (top of the market) and buy on clear skies (bottom of the market)?
First, we checked out the number of Toronto smog alert days in previous years: 29 in 2007, 13 in 2008. In other words, the recent trend has been declining steadily in lockstep with the regional economy (about 50 per cent of smog is due to industrial activity in the United States).
Next comes evidence from the Energy Information Administration correlating at least some economic activity to energy consumption. According early estimates from the EIA, energy-related carbon dioxide emissions in 2008 fell 2.8 per cent, which is by far the biggest decline since 1990.
High energy prices contributed to the decline, given that the price of crude oil spiked to a record $147 (U.S.) a barrel last summer, encouraging some drivers to leave their cars at home – but the EIA also pointed to the fact that U.S. gross domestic product fell 6.3 per cent at an annualized rate in the fourth quarter.
But while economic activity can have an impact on the number of smog days, it is not the only ingredient in smog.
“There are a lot of factors, and they interact,” said Robert Stavins, an economics professor at Harvard University and director of the Harvard Environmental Economics Program.
For one, there have been more stringent environmental policies over time, and new capital stock will reflect these policies and result if fewer pollutants. As well, there are so-called compositional changes in economies. In many parts of the United States, for example, has been shifting over the past 30 years from heavy industry to lighter industry to manufacturing to services.
And then there are weather patterns. Dave Yap, senior science advisor for air quality and meteorology at the Ontario Ministry of the Environment, said that Ontario smog patterns are largely tied to flows from the United States.
“Weather is a very big driver,” he said. “This year, we’ve had more cooler and wetter weather, and the flows haven’t necessarily been in the right direction.”
In short, there is no economic indicator here to determine whether economic activity has topped out or hit bottom. As Mr. Stavins pointed out, there are more direct indicators to measure that.
