U.S. Congress Joint Economic Committee; Chairman, Sen. Charles Schumer; Vice Chair, Rep. Carolyn Maloney

WEEKLY ECONOMIC DIGEST: Deciphering the G-8 Greenhouse Agreement

July 14, 2008

ECONOMIC NEWS: Weak Dollar Helps and Hurts

Trade deficit narrows as the weak dollar spurs exports.  The U.S. Department of Commerce reported that better-than-expected exports lifted the trade balance in May, narrowing the trade deficit in goods and services to $59.8 billion on a seasonally adjusted basis.  Exports rose by 0.9 percent from April and were driven largely by demand for industrial supplies and materials as well as automotive vehicles and equipment.  The trade balance has steadily improved since February, in real seasonally adjusted prices, in part because of the declining dollar exchange rate.

Import prices continue to surge.  The U.S. Department of Labor reported that import prices rose 2.6 percent in June.   The U.S. Import price index has increased 11.9 percent since January 2008, and 20.5 percent since June 2007.   (See Chart)  The price of petroleum imports has risen 78.6 percent from June 2007, and the price of other imports has increased by 7.3 percent over the same period.   The upward trend in world demand for commodities, including oil, and the decline in the exchange rate of the dollar have contributed to these price changes.

Fed and Treasury provide support to Fannie and Freddie.  Concerns about the financial status of
Fannie Mae and Freddie Mac, the two government sponsored entities that are central to the mortgage loan market,  caused the Federal Reserve and the Treasury Department to announce a support plan over the weekend.  The Federal Reserve  will allow Fannie and Freddie to borrow emergency funds at the discount window, should such lending prove necessary.  The Treasury will ask Congress for the authority to inject capital into the two firms, through the purchase of preferred stock, should additional capital be needed.

SNAPSHOT: Deciphering the G-8 Greenhouse Agreement

On July 8, the Group of Eight (G-8) industrialized nations -- the United States, France, Britain, Russia, Germany, Italy, Canada, and Japan -- agreed to seek through United Nations negotiations "at least a 50 percent reduction in global [greenhouse gas] emissions by 2050" to reduce the risk of climate disruption.

The economic implications of the agreement will also depend crucially on how countries share responsibility for meeting the target, both by undertaking domestic reductions and by financing reductions abroad.  The G-8 committed to "move towards a low-carbon society" and noted that all major economies must commit to tacking climate change, including non-G8 countries such as China and India.  Although the US historically has been the largest emitter, economists predict that the vast preponderance of growth in carbon emissions is likely to come from the rest of the world, especially large industrializing countries such as China and India.   But developing countries argue that since the industrialized countries are responsible for most of the build-up of the gases in the atmosphere, industrialized countries should bear most of the burden of the emissions reductions necessary to protect the climate.  Resolving these issues will involve negotiations beyond the scope of the G-8 agreement.

In its current form, the agreement omits several crucial terms that will determine its ultimate effect.  The agreement is silent about the baseline against which emissions reductions would be measured.  It also does not identify the share of reductions to be undertaken by individual countries, and it omits emissions limits before or after 2050.  These missing terms will be crucial in determining the actual effects of the agreement.

One way economists analyze an agreement such as the G-8 commitment is to compare its goal to what would happen in the absence of the agreement.  This means forecasting global emissions assuming that countries do not take special measures to reduce the risk of climate change and comparing this projection to the agreed target.  The chart above shows world carbon emissions from fossil fuels through 2100.1  (See Snapshot) Carbon dioxide is the primary culprit in climate global warming, and most of it comes from burning fossil fuels.

The effort necessary to achieve a 50 percent reduction in emissions depends importantly on the baseline for those reductions.  The chart shows that a 50 percent reduction in carbon emissions relative to the base projection would limit world emissions to about 6.9 billion tons of carbon each year, compared to projected emissions of 13.6 billion tons per year in 2050 without climate policy.

If the target were set relative to current or historical emissions level – as was done in the Kyoto Protocol– the agreement would require greater emissions reductions.  For example, the chart shows that a limit of 50 percent of the year 2000 carbon emissions would require a reduction of 10.4 billion tons per year relative to the projection.  Environmentalists have argued for reduction targets relative to emissions in 1990, a yet more ambitious formulation.
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1 The data derives from a set of modeling exercises conducted last year for the U.S. Climate Change Science Program (the CCSP).  The curves are the world and US reference scenarios using the MiniCAM model developed by Pacific Northwest Laboratory.  The emissions include carbon from fossil fuels and industrial processes such as cement.

 

WEEK AT A GLANCE

DAY RELEASE
Tuesday, Jul 15 Producer Price Index (June 2008)
Advance Monthly Sales for Retail and Food Services (June 2008)
Wednesday, Jul 16 Consumer Price Index (June 2008)
Industrial Production and Capacity Utilization (June 2008)
Meeting Minutes of the FOMC (June 25)
Thursday, Jul 17 Housing Starts and Building Permits (June 2008)
Friday, Jul 18 Regional and State Employment and Unemployment (June 2008)

ECONOMY AT A GLANCE

The Economy at a Glance

Jun

May

Apr

Mar

Q2 2008

Q1 2008

Q4 2007

Q3 2007

2007

2006

2005

Economic Activity

 

 

 

 

 

 

 

 

 

 

 

Real GDP (% growth)

 

 

 

 

n.a.

1.0

0.6

4.9

2.2

2.9

3.1

Unemployment (% of Labor Force)

5.5

5.5

5.0

5.1

5.3

4.9

4.8

4.7

4.6

4.6

5.1

Labor Productivity Growth (%)

 

 

 

 

n.a.

2.6

1.8

6.0

1.8

1.0

1.9

Labor Compensation Growth (%)

 

 

 

 

n.a.

3.0

3.4

3.1

3.4

3.1

3.3

CPI-U Inflation Growth (%)

n.a.

7.4

2.4

3.7

n.a.

4.3

5.0

2.8

2.9

3.2

3.4

Core CPI-U Inflation Growth (%)

n.a.

2.4

1.2

2.4

n.a.

2.5

2.5

2.5

2.3

2.5

2.2

Sources:    Bureau of Economic Analysis, U.S. Department of Commerce;  Bureau of Labor Statistics, U.S. Department of Labor.

Notes:        Except where otherwise noted, values in the table represent percent changes at seasonally adjusted annual rates. Productivity is real output per hour worked in nonfarm businesses.  The Employment Cost Index is for civilian workers in government and business. Core CPI-U inflation is the percent change in the CPI-U excluding food and energy as reported by the Bureau of Labor Statistics.   The designation “n.a.” denotes that data are not yet available.

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