Productivity Trends and the Cost of Reducing CO2 Emissions*

Abstract

Adequate control of CO2 emissions may require a significant increase in energy price, which in turn will create long-term economic costs. This paper explores the effects of long-term productivity trends in the U.S. economy and relates them to the cost of reducing CO2 emissions. Technology change has been negatively correlated with energy prices and positively correlated with materials prices. Thus, if all prices remain constant, expenditures on materials per unit of output will decline, and expenditures on energy per unity of output will increase. If energy prices increase, the rate of productivity growth will decrease. This trend will be very small, if measured on an annual basis, but eventually could be quite significant. A comparison with recent cost estimates of CO2 emission control suggests that this otherwise ignored productivity effect could be the largest component of a complete cost analysis.