|
|
An Economic Perspective on Climate Change Policy
American Council for Capital Formation
October 1995
By Dr. Margo Thorning
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% |
|
| 1The 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. |
| 2Personal saving is comprised of household
saving and private unincorporated enterprise. |
| 3The 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% |
|
| 1The 1995 figures included in this average reflect
only the first and second quarters. |
| 2In the 1960-80 period the United States sent more
capital abroad than it received; thus net inflow was negative during
this period. |
| 3Net 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. CO2
emissions. 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.
|
