A burning issue: Calculating the cost of the haze

23 September 2019

Published by https://www.todayonline.com/

The return of the haze after a three-year break has been met with collective groans in Singapore, with the unhealthy air making going outdoors uncomfortable for many and risky for some.

We know that the haze is more than just unpleasant, presenting very real health consequences. Yet quantifying the hard financial and economic impact of the haze remains challenging — and, as a result, so does incentivising and galvanising a response to tackle it.

In a study at NUS Business School, working with colleagues from other faculties in the university, we set out to examine the effect of haze pollution on behaviour by Singaporeans and visitors during the last major haze crisis to hit Singapore in 2015.

Specifically, we looked at the effects of risk avoidance — in other words, the financial impact of steps that people took to avoid their exposure to the haze.

The 2015 crisis saw air pollution levels in Singapore reach record levels, with the 24-hour Pollutant Standards Index (PSI) on some days soaring well above 400. Any reading above 300 is considered “hazardous”.

Using data from water and power utility consumption, as well as room rates from the hotel industry, measured against 24-hour PSI readings, we found the haze had a significant influence on daily activities.

For example, a 100 per cent increase in the PSI was associated with an average increase of 14.3 per cent in hourly water consumption. When the PSI spiked by 500 per cent, reaching the “very unhealthy” or even “hazardous” levels, hourly water usage increased by up to 71.5 per cent.

The bulk of this increased water consumption was concentrated on weekday nights and weekends, implying that households responded to the haze by staying indoors at home during off-work and off-school hours and avoided outdoor excursions to avoid exposure to polluted air.

Likely factors causing the increased water use include more household cleaning and personal hygiene behaviour caused by exposure to the haze.

Looking at monthly power consumption data for public and private residential housing throughout 2015, we found further evidence of risk avoidance behaviour. Most significantly, a 100 per cent increase in the 24-hour PSI reading led to an average power consumption increase of 7.9 per cent, whilst a spike in the PSI to “very unhealthy” levels caused electricity use to climb 39.5 per cent.

This is likely as a result of increased use of domestic air conditioners, fans and air purifiers.

Furthermore, the data showed that this consumption behaviour persisted for some time after the worst bouts of haze, with the elevated usage lasting for two months after the haze had completely dissipated.

This habit formation effect is, in itself, economically significant. Previous studies have shown that energy conservation programmes initiated by the Government have achieved some success — albeit at a relatively minor level.

For example, my own study on government campaigns showed an average legacy saving of 1.6 per cent in consumption in the post-campaign months.

These modest saving rates pale in comparison to the surge in power consumption caused by even a relatively mild incidence of haze.

All told, we estimate in our study that for a month-long haze incident, increased water usage would total S$14.82 million at current rates for moderate haze and up to S$74.11 million in the case of severe haze. For power usage, the figures would be S$4.03 million and up to S$20.13 million respectively.

In a further branch of our study, we found the haze also had a significant impact on travellers visiting Singapore — an important pillar of the Singapore economy.

Tracking data on daily hotel room prices and occupancy rates against daily PSI readings we found that when pollution levels double, average hotel room rates declined by between 1.54 and 1.99 per cent per cent depending on hotel category. This amounted to a loss for the industry of just over S$200,000 per day, or roughly a tenth of the sector’s annual revenue.

These discounts reflect the declines in demand by foreign visitors, implying that risk avoidance behaviour caused by the haze was not just a factor for residents, but also for foreigners cancelling visits to Singapore and adding a further significant cost to the economy.

In 2019, we are seeing an unprecedented level of fires around the world — from the Amazon Basin to central Africa, Siberia, Indonesia and eastern Australia, where a record numbers of intense fires have broken out well before the normal peak of the annual fire season.

Global awareness and anger over forest fires have likely never been higher, particularly when it comes to the impact on the environment, wildlife and on human health.

Yet despite the outrage and much heated political talk, tackling the root causes of the problem remains as elusive as ever.

A few years ago, Asean nations set the goal of making the region haze-free by 2020. The thickening pall looming once again over our heads makes achieving that aim seem depressingly unlikely.

Action to solve the haze issue requires incentives to change behaviour and the most powerful incentive is monetary.

Hopefully, studies like ours that quantify the real economic impact of the haze will add pressure on those in a position to find an effective and lasting regional solution to the problem.

It can also help governments and policymakers to justify the usage of public funding in taking preventive and protective measures against the haze.

For whilst finger-pointing and blame-gaming might score short-term political points, the signs are that it has done little yet to truly clear the air.


Sumit Agarwal is Low Tuck Kwong Distinguished Professor and Head of the Department of Finance at the National University of Singapore (NUS) Business School. He is also the author of Kiasunomics. The opinions expressed are those of the writer and do not represent the views of NUS.
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