Autos. New light duty vehicle sales fall 2.4%, or 0.4 million by the year 2010 and are actually slightly higher by the year 2020 as delayed purchases makes the need for replacement of aging vehicles greater in the later years. Housing. Housing starts are down by 3.8% or 0.06 million by the year 2010 and recover by the year 2020 to 1.8% above the base case. GLOBAL WARMING: THE ECONOMIC COST OF EARLY ACTION Businesses begin to shift their investments towards more energy-efficient aquipment and structures upon the imposition of the tradable permits program. Government spending is not significantly different from the base case projection. Because only the OECD countries would pay the carbon permit fee, the largest impact is on international trade. The increase in imports and drop in exports accounts for $100 billion, or nearly 45%, of the decline in real GDP by 2010. Though the stock of housing is lower by 2020, there is increased need for new housing in 2020 due to reduced construction from 2001 through 2013. Non-Residential Fixed Investment. Upon imposition of the tradable permits program, businesses begin to shift their investments towards more energy-efficient equipment and structures. This shift in investment does not result in an increase in production since it is directed at lowering energy costs, rather than increasing capacity. Also, the mini-shocks from higher energy prices and the economy's weaker international competitive position, reduce the need and the ability to invest in the economy. At a second level, there is a price impact that varies by type of investment. For most equipment purchases, businesses evaluate the cost of buying the equipment against the price of hiring more workers to produce the necessary extra product. In the analysis, this resulted in a relative price improvement for equipment. For structures, the cost of the structure is compared to the output price. Hence, structures are affected by a drop in demand and a rise in price, while equipment purchases are affected by a drop in demand and lower relative prices. However, the demand for investment in equipment falls more sharply than structures, since equipment purchases are more sensitive to shifts in demand and price shifts than structures. By 2010, business equipment purchases are down by 3.1%, while structures are down by 1.8%. By 2020, both have recovered somewhat and are down by 1.2% and 1.1%, respectively. Government. Real govemment spending on purchases of goods and services remains very similar to the baseline projection. Because economic activity is lower and interest rates are higher in the simulation, the deficit is worse in the carbon limits simulation. By 2020, the deficit is $250 billion, compared to $202 billion in the baseline. International Trade. The largest impact is on international trade. Because only the OECD countries would pay the carbon permit fee, the price of imported goods from developing countries does not rise substantially, making their products more attractive. Imports from developing countries rise, while U.S. exports, which have become more expensive, fall. The increase in imports and drop in exports account for $100 billion, or nearly 45%, of the decline in real GDP by 2010. Although the other Annex I countries, along with newly developed economies like Mexico and South Korea, are expected to begin participation in the carbon reduction programs near 2020, their limited level of participation would not be expected to improve the performance of this segment of final demand. In the analysis, this segment of final demand does not recover by 2020, with net exports of goods and services in that year down by $214 billion. GLOBAL WARMING: THE ECONOMIC COST OF EARLY ACTION IV. Impacts on Consumers Percentage losses in real GDP can appear small, yet represent a cost to the economy of billions of dollars and a significant reduction in standards of living. Under the Administration's carbon abatement policy, real GDP would be 2.4% below the baseline 2010 estimate, and 1.7% below the 2020 estimate. Small Reductions in Economic Performance The primary measure of macroeconomic performance of the U.S. Economists analyze many indicators of economic performance. The most comprehensive measure of the effect of adopting a new policy such as the Administration's proposed policy to reduce greenhouse gas emissions – is the impact on real GDP. The impact on real GDP is generally measured in terms of percentage loss (or gain) in real GDP from a "baseline." The baseline estimate of real GDP is prepared assuming "business-as-usual” – no significant policy changes. Although percentage losses in real GDP can appear small, they can represent ■ costs to the economy of tens of billions of dollars, ■ a significant reduction in standards of living, and ■an increase in the price of all basic goods and services, such as food, housing and medical care. Revaluing Energy Resources Puts the Economy on a Lower Growth Path Real GDP (Billions of 1992$): Carbon Stabilization Case and Base Case GLOBAL WARMING: THE ECONOMIC COST OF EARLY ACTION |