Macroeconomic Impacts

Given the relatively small price impacts projected in the Clear Skies and Carper 2-P and 3-P cases, the overall macroeconomic impacts are expected to be small. The impac ts are somewhat larger in the Carper 4-P cases. These policies will affect the economy thro ugh a complex set of interactions between elements of aggregate supply and demand, in conjunction with monetary and fiscal policy decisions. Households would be faced with higher prices for energy and the need to adjust spending patterns. Nominal energy expenditures would rise, taking a larger share of the family budget for goods and service consumption and leaving less for savings. Higher prices for energy would cause consum ers to try to reduce spending not only on energy, but on other goods as well. Thus, changes in energy prices would tend to alter both saving and spending streams. Energy services also represent a key input in the production of final goods and services. As energy prices increase, the costs of production rise, placing upward pressure on the nominal prices of all intermediate goods and final goods and services in the economy, with widespread impacts on spending across many markets. The ultimate effect will depend on opportunities for substitution away from higher-cost energy to other goods and services and the effectiveness of compensatory fiscal and monetary policy.

This section considers the impacts associated with three of the Carper cases: Carper 4-P High Offset, Carper 4-P Mid Offset, and Carper 4-P No Offset. These cases consider alternative availability of offsets, which will affect the ultimate cost of allowances. Figure 44 below shows both the cumulative sum of the actual GDP loss over the period from 2004 through 2025 and also the present value of this loss using a discount rate of 7 percent. The Carper 4-P High Offset case allows for the greatest use of lower-priced offsets and indicates that the impact on the economy using both measures is the lowest of the three cases, with a $150-billion cumulative loss of actual GDP and a present value loss of $77 billion. As the use of offsets is diminished, the aggregate cost to the economy rises. In the Carper 4-P No Offset case, the cumulative loss rises to $196 billion, with a present value loss of $101 billion. The Carper 4-P Mid Offset case falls between these two cases. While these losses may seem substantial, in terms of the cumulative sum (or present value) of actual GDP output over the same period in the Reference case, the impacts average between 0.05 and 0.07 percent of the aggregate output of the economy between 2004 and 2025.

These losses in economic output have an impact on employment in the aggregate economy (Figure 45). The average loss in jobs over the 2004 through 2025 period ranges between 51 thousand jobs in the Carper 4-P High Offset case to a maximum loss of 83 thousand jobs in the Carper 4-P No Offset case. For manufacturing, the loss ranges between 4 thousand and 8 thousand jobs. As with the loss in economic output, these losses are small, less than 0.1 percent of the respective average total employment over the period.