An Economic Prespective of Climate Change Policy

Introduction

Over the past decade and a half, the ACCF Center for Policy Research has sponsored groundbreaking research on tax and environmental policies to encourage capital formation. The Center has also underwritten a series of innovative studies on the impact of environmental policy on U.S. capital costs, investment, and economic growth.

The Center’s September 1995 symposium, “An Economic Perspective on Climate Change Policies” presented, for the first time, a forum focused on how alternative policies to address climate change would impact both U.S. economic growth and concentrations of carbon dioxide (CO2) in the atmosphere. The rationale for the symposium is that policies and plans to restrict CO2 emissions are receiving increased attention in the international community as well as in the United States. The 1992 Rio de Janeiro conference produced the Framework Convention on Climate Change, which 160 nations signed. In Berlin in March 1995, the Conference of the Parties to the Framework Convention on Climate Change met and set up a process that would “aim to elaborate policies and measures” as well as “to set quantified limitation and reduction objectives within specified time frames, such as 2005, 2010, and 2020, for greenhouse gas emissions by sources and removals by sinks.” This process is to be completed six months prior to the Conference of the Parties currently scheduled for the third quarter of 1997.

A major reason for analyzing the economic impact of climate change policies under discussion is that stringent near-term actions to reduce U.S. emissions will, as demonstrated in the research presented at the ACCF Center for Policy Research’s recent symposium, reduce U.S. saving, investment, and economic growth with little or no benefit in terms of global CO2 emissions or concentrations in the atmosphere.

U.S. Economic Growth, Saving & Investment Lag

Between 1963 and 1994, real U.S. gross domestic product (GDP) increased at an average rate of 3.1 percent per year. The average growth rate of 3.1 percent over the past thirty years marks an important point: growth over the 1963-1972 period averaged 4.2 percent compared to a relatively slow 2.6 percent over the past two decades.

Investment spending in the United States in recent years compares unfavorably with that of other nations as well as with our own past experience. From 1973 to 1992, gross nonresidential investment as a percent of gross domestic product (GDP) was lower for the United States than for any of our major competitors (see Table 1). The U.S. net saving rate during the same period is also low relative to other countries, averaging 4.6 percent compared to 19.0 percent in Japan, 10.6 percent in Germany, and 7.5 percent in Canada.

Table 1 Saving and Investment as a Percent of Gross Domestic Product, 1973-1992
United States Canada Japan France West Germany United Kingdom
SAVING
Net saving1 4.6% 7.5% 19.0% 8.7% 10.6% 4.4%
Personal saving2 5.8% 7.6% 11.7% 6.3% 8.2% 3.5%
Gross saving (net saving plus consumption of fixed capital)3 17.5% 19.1% 32.9% 21.2% 22.9% 15.8%
INVESTMENT
Gross nonresidential fixed capital formation 13.9% 15.1% 24.2% 15.5% 14.8% 14.2%
Gross fixed capital formation 18.3% 21.5% 30.3% 21.0% 20.7% 17.8%
 

 

  1. The main components of the OECD definition of net saving are: personal saving, business saving (undistributed corporate profits), and government saving (or dissaving). The OECD definition of net saving differs from that used in the National Income and Product Accounts published by the Department of Commerce, primarily because of the treatment of government capital formation.
  2. Personal saving is comprised of household saving and private unincorporated enterprise.
  3. The main components of the OECD definition of consumption of fixed capital are the capital consumption allowances (depreciation charges) for both the private and the government sector.
Source: Derived from National Accounts, Vol. II, 1973-1985 and 1980-1992, Organization for Economic Cooperation and Development (OECD), 1987 and 1994 eds. Prepared by the American Council for Capital Formation Center for Policy Research, April 1995.

 

Even more disturbing is the fact that net business investment in this country has in recent years fallen to only half the level of the 1960s and 1970s. Net private domestic investment averaged 7.2 percent of GDP from 1960 to 1980; since 1991 it have averaged only 3.4 percent (see Table 2). The U.S. net domestic saving rate, a key determinant of U.S. investment, has also fallen sharply, from an average of 7.6 percent in the 1960-1980 period to only 2.2 percent in the 1990s (see Table 2). While larger federal budget deficits are part of the reason for the saving rate’s decline, personal and business saving rates have also declined. U.S. saving and investment rates must be increased if we are to create better jobs, increase living standards, and help the United States retain its leading role in world affairs.

Table 2 Flow of U.S. Net Saving and Investment
(percent of GDP in current $)
Average 1960-1980 Average 1981-1985 Average 1986-1990 Average 1991-19951
Net private domestic saving 8.2% 7.2% 5.1% 5.3%
State and local government surpluses 0.4% 1.2% 0.9% 0.4%
Subtotal of private and state saving 8.6% 8.4% .9% 5.7%
Less: federal budget deficit -1.0% -4.1% -3.2% -3.4%
Net domestic saving available for private investment 7.6% 4.3% 2.7% 2.2%
Net inflow of foreign saving2 -0.4% 1.2% 2.4% 1.2%
Net private domestic investment 7.2% 5.5% 5.1% 3.4%
Personal saving 5.1% 5.6% 3.4% 3.5%
Net business saving3 3.1% 1.6% 1.7% 1.8%
 
  1. The 1995 figures included in this average reflect only the first and second quarters.
  2. In the 1960-80 period the United States sent more capital abroad than it received; thus net inflow was negative during this period.
  3. Net business saving = gross private saving – personal saving – corporate and noncorporate capital consumption allowance.
Source: Department of Commerce Bureau of Economic Analysis, National Income Accounts. Update prepared by the American Council for Capital Formation Center for Policy Research, September 1995.

 

Conclusion: Climate Change Policies for Growth and Stabilization

Given the need to increase U.S. economic growth, policymakers should weigh carefully the pros and cons of near term reductions in U.S. CO2emissions. The consensus of the scholarly research on the costs and benefits of emission reduction presented at the ACCF Center for Policy Research’s forum is that stabilization of CO2 concentrations in the atmosphere should be a gradual process which would take place over the next 75 to 100 years. As Jae Edmonds and Marshall Wise of Battelle Pacific Northwest Laboratories point out in the study released at the Center’s forum, minimizing the economic burden to society of reductions in CO2 emissions will require three distinct but related stages. First, from 1995 to 2020, carbon emissions should be allowed to rise approximately as forecasted. Second, from 2020 to 2050, emissions growth would rise very slowly, then level off as new energy technologies gain widespread use. Third, from 2050 to 2100, emissions would decline to 1990 levels as carbon-emitting technologies are phased out.

Adopting a climate change policy such as that advocated by Edmonds and Wise would both enhance U.S. and global economic growth and lead to long-term stabilization of carbon concentrations in the atmosphere.