The Unseen Costs of Blue Skies: Pollutant Substitution and Biodiversity Loss

Incomplete performance metrics distort incentives. Exploiting the staggered roll-out of China’s national air monitoring network, we document a pollutant substitution effect: PM₂.₅ fell significantly, yet O₃ surged. We trace this to strategic behavior: facing binding PM₂.₅ targets, local governments prioritized abatement of particulate precursors while neglecting ozone precursors. Critically, this was not a benign trade-off. Although the policy reduced PM₂.₅-attributed deaths, the policy-induced O₃ surge increased O₃-attributed mortality and reduced biodiversity (measured by bird abundance). Conservative estimates suggest these costs reduced the policy’s net benefits by approximately 23.8%. Our findings highlight the hidden social costs of narrow performance targeting.