Real GDP. The primary measure of macroeconomic performance of the U.S. economy is real Gross Domestic Product (GDP). This measures the market value of all production in the economy, adjusted for inflation. It is also a measure of the total income of U.S. residents. Real GDP growth is projected to average 2.1% over the next 25 years compared to 2.8% over the previous 25 years. Population. A significant cause of this slower growth in GDP is the expectation that population growth will be slower over the next 25 years (0.8% per year) compared to population growth during the previous 25 years (1.0% per year). Although population growth remains steady, labor force participation rates begin to level off, reducing the potential expansion path of the economy early next century. Inflation. After accelerating in the 1970s and early 1980s, inflation has slowed significantly in recent years. Even with a long-lived expansion, inflation has remained moderate, despite increases in some commodity prices. Although the economy is close to full employment, changes in the labor market have prevented any significant acceleration of real wages. WEFA projects inflation to stabilize in the long run at a rate near 2.8%. The absence of a major exogenous shock, such as another energy crisis, should permit inflation to remain in check, particularly as central banks have become committed to controlling inflation as a long-term goal. Employment. Slower long-run increases in the labor force indicate slower long-run employment growth in the future. Total civilian employment will rise at an average annual rate of 1.3% from 1995 to 2005, moderating to 1.0% for the rest of the forecast period. Total establishment employment will increase 33%. This growth is significantly slower than that recorded in the previous 25 years. The cumulative increase in employment between 1970 and 1995 was an astonishing 65%. Manufacturing's share of total employment will continue to decline GLOBAL WARMING: THE ECONOMIC COST OF EARLY ACTION over the forecast period, falling to 10.6% in 2020. The broad service sector will generate an increasing share of employment growth, accounting for over 85% of employment growth from 1995 to 2020. Productivity. Productivity increase for the U.S. economy has been disappointing since the early 1970s, measuring just 1.1% per year. In part, this reflects the disturbances of the oil shocks of the 1970s and 1980s. Continued growth in investment should allow for slightly faster productivity growth. Non-farm business productivity growth should average 1.2% per year over the next 25 years, slightly faster than the recent trend. Real GDP per Person. Over the next 25 years, the productivity growth will contribute to income growth measured at the individual level (i.e., disposable income) and at the aggregate level (i.e., GDP per person). After 2000, real GDP per person is forecasted to grow at approximately 1.1% per year. Slowing economic growth has become a significant political issue. The outlook provides some assurance that the rate of decline has been arrested. Real GDP Per Person: Compound Annual Growth Rates After 2000, real GDP per Growth in vehicle sales Consumption. Long term, consumption spending is primarily determined by the growth of real permanent income, demographic influences, and changes in relative prices. Consumer spending as a share of GDP has increased since the early 1980s, reaching 68.0% in 1993. Consumer spending should maintain its share of the overall economy over the forecast horizon, growing 2.2% per year through 2005, and 2.0% longer run. Autos. The outlook for light vehicle sales calls for a slowdown in the rate of increase relative to past performance. Vehicle sales growth averages only 0.9% over the next 25 years, reflecting population growth. Although GLOBAL WARMING THE ECONOMIC COST OF EARLY ACTION A competitive value of the dollar and strong rest-ofworld growth will make exports one of the fastest rising components of GDP. Energy is a crucial resource, which affects all sectors of the economy. Revaluing energy resources reduces longrun economic performance. Higher energy prices lead to increases in all other prices in the economy. the number of vehicles per person has increased significantly in the past 20 years, the US is approaching a saturation point. Housing. The long-term outlook for housing is based on demographic factors. Underpinning the demand for housing is the growth in the number of households, which is projected to increase faster than population. Non-Residential Fixed Investment. The prospects for business (nonresidential) fixed investment are positive. Business is striving to reduce the labor portion of total costs and enhance productivity growth in order to remain competitive in international markets. Real business fixed investment is projected to rise annually by 3.9% from 1995 to 2005, and 2.6% longer term. International Trade. The improvement in the US's real unit labor costs relative to the rest of the industrialized world will promote export expansion and an improvement in the U.S. net export position. A competitive value of the dollar and stronger rest-of-world growth (relative to U.S. growth) will make exports one of the fastest rising components of GDP. Real exports are projected to expand 5.4% from 1995 to 2005, slowing to 4.0% after 2005. The Economic Cost of Limiting Carbon Emissions: Increasing the Cost of Energy Lowers Economic Growth Energy is a crucial resource, which affects all sectors of the U.S. economy. Individuals use energy for transportation, for basic needs such as home heating, cooking, and lighting, and for other uses such as telephones, computers, televisions etc. In the commercial and government sectors, energy is used in schools, hospitals, retail establishments, and for mass transportation. In the industrial sector, energy is used to produce metals, chemicals, glass, and oil products. Raising the price of energy by requiring that consumers and businesses purchase permits to consume energy results in a prolonged series of mini-shocks to the U.S. economy. These shocks cause major changes in production patterns and processes. As with the oil price shocks in the 1970s and early 1980s, inflation increases, economic activity is reduced, and unemployment rises. Following the Arab oil embargo in 1973, real GDP fell 1% and after the Iranian oil crisis, real GDP declined 2%. Limiting carbon emissions from the combustion of fossil fuels will affect the overall economy through higher energy prices, as the purchaser of fossil fuel pays for a permit to consume the fuel. Since energy is used in the production of all goods and services, all other prices rise as well. Energy prices are much higher, while all other prices are affected to a GLOBAL WARMING: THE ECONOMIC COST OF EARLY ACTION Some workers lose their Because the imposition of carbon limits is not bore equally by all countries — the developed economies face comparable energy price increases, but the developing countries do not-U.S. exports are relatively more expensive on the world market. lesser extent, depending on the energy content of that product. Higher prices impose a burden on the U.S. economy-workers and producers must adjust to an environment with radically different relative prices. Though the increment in the carbon permit rate might appear small each year, it imposes a rising burden on producers and consumers, necessitating an adjustment in behavior. For businesses, the rising price of energy (relative to other inputs) hurts their bottom line, discourages their use of energy and encourages the use of more energy-efficient capital equipment and some additional labor to produce their products. Businesses respond by shifting their use of energy, labor and capital, but the net effect is an increase in costs, which reduces U.S. wealth and competitiveness in the global economy. Consumers face an increase in the cost of energy, encouraging them to reduce spending on gasoline, electricity and natural gas. Some workers lose their jobs through a weaker economic environment, while other workers lose well-paying manufacturing jobs, and find only lower wage service jobs. All workers face a slowing in their real wage growth as workers compete for fewer professional jobs or accept lower-paying jobs. Although the govemment compensates workers for their increased energy expenditures, through a refund of the fees collected to consume carbon-based energy resources -total real disposable income falls due to reduced employment. In general, the economy is worse off the increase in energy prices pushes up inflation and raises interest rates. Higher interest rates reduce housing starts, vehicle sales, and business investment. The stock of housing, vehicles, and machinery and equipment is lowered because of the higher interest rates. With a lower level of productive capital stock, fewer people are employed and real gross domestic product (GDP) -the total output of goods and services is smaller. One key reason for the lower level of real GDP is reduced global competitiveness. Because the imposition of the carbon permit is not bome equally by all countries- the developed economies of the OECD face comparable energy price increases, but the developing countries do not-U.S. exports are relatively more expensive on the world market, while the price of many imported goods falls. As a consequence, exports are lowered dramatically, while imports are increased substantially. Real net exports the difference between total exports and total imports of goods and services — is significantly lower after the imposition of the policy to limit carbon emissions. Moreover, while business investment and consumer spending begin to adjust after 2010 to the shift in energy prices, there is no reason why exports and imports would adjust. Without a major depreciation in the value of the dollar, the worsened trade balance continues through 2020. GLOBAL WARMING: THE ECONOMIC COST OF EARLY ACTION Meeting the goal of stabilizing carbon emissions at 1990 levels results in a loss of 2.4% of baseline GDP by 2010, and a continuing reduction in real GDP from the baseline of 1.7% over the very long run. Measuring the Impact on Economic Growth of Stabilizing Real GDP. The level of real gross domestic product is 2.4% lower than Real GDP: Percent Difference Between the Carbon Stabilization Case and the Base Case The unemployment rate is higher-up by 12 percentage points in 2010, but only 0.3 percentage point higher in 2020. Inflation. Inflation increases, due to the imposition of rising energy permit costs. Initially, inflation is substantially higher- almost by a percentage point from 2000 through 2010. After 2010, the impact on inflation moderates, ultimately returning the index to baseline levels before 2020. This is true for producer price inflation, consumer price inflation, and the widest measure of inflation, the GDP chain price index. Employment Employment is lower, or alternatively, the unemployment rate is higher in the carbon tax simulation. Employment is 1.8 million lower, 1.3% below baseline, in 2010. After 2010, the drop in employment improves to about 0.4 million, or about a 0.3% decline relative to the baseline, by 2020. The unemployment rate is higher-up by 1.2 percentage points in 2010, but only 0.3 percentage points higher in 2020. Consumption. Consumers, reacting to lower real disposable income due to lower real wages and fewer jobs, cut spending. Consumer spending is down by 1.7% in 2010, or $108 billion ($1992), then recovers somewhat to be down only 0.4% by 2020. GLOBAL WARMING: THE ECONOMIC COST OF EARLY ACTION |