The Unassuming Economist

From a new working paper by Myunghyun Kim:

“This paper studies international transmission of U.S. monetary policy shocks to commodity exporters and importers. After first showing empirically that the shocks have stronger effects on commodity exporters than on importers, I then augment a standard three-country model to include commodities. Consistent with the empirical evidence, the model
indicates that an expansionary monetary policy shock to the U.S. increases the aggregate output of commodity exporters by more than that of importers. This is because the increased U.S. aggregate demand triggered by the shock leads to greater U.S. demand for commodities and higher real commodity prices, and thus the exports of commodity exporters increase relative to those of commodity importers. Furthermore, I show that if commodity exporters’ currencies are pegged to the U.S. dollar, then the U.S. monetary policy shocks have stronger spillovers to commodity exporters and importers. In the event that the U.S. becomes a net energy exporter, the shocks will have weaker effects on commodity exporters and stronger impacts on importers.”

From Conversable Economist:

“If carbon capture and storage was cheap and easy, it would be a technological fix for the issue of climate change. It’s not that simple, of course. But along with a range of other technologies and policies, carbon capture and storage can be part of the answer. In the Global Status of CCS 2018, the Global CCS Institute provides an overview of this technology (download requires free registration). The tone of the report is boosterish and upbeat about the technology–but it’s also full of facts and case studies and background about efforts currently underway.

Here are some main points:

When the Intergovernmental Panel on Climate Change develops scenarios for how the world economy limit carbon in the atmosphere in the next few decades, a major expansion of carbon capture and storage is baked into those forecasts. 

“In October 2018, the Intergovernmental Panel on Climate Change (IPCC) released its highly anticipated Special Report on Global Warming of 1.5 °C (SR15), reinforcing the role carbon capture and storage technology must play in beating climate change. … Significantly for CCS, it made the point that any remaining emissions would need to be balanced by removing CO2 from the air. CCS was acknowledged in three of all four pathways IPCC authors used to reach 1.5°C and was singled out for its ability to: `play a major role in decarbonising the industry sector in the context of 1.5°C and 2°C pathways, especially in industries with higher process emissions, such as cement, iron and steel industries.'”

There are a number of reasonably large-scale CCS facilities in operation, but they have naturally tended to pick the approaches that are already cost-effective. The question is whether CCS will spread into a much broader array of uses. 

There are now 43 commercial large-scale global CCS facilities, 18 in operation, 5 in construction and 20 in various stages of development. … The first-of-a-kind commercial CCS facilities addressed in this report have already been in operation for years, mostly in industrial applications. They are “low hanging fruit”  in terms of deployment – natural gas processing, fertiliser, ethanol production where CO2 capture is an inherent process of productions. There is still a swathe of industrial applications crying out for CCS application. There is also a wave of new innovations such as hydrogen with CCS, direct air capture, CCS hubs and clusters that need to be deployed. …”

Continue reading here.

From VoxEU:

“The Industrial Revolution has been of vast benefit to humanity, but it came at the cost of a global explosion in anthropogenic emissions of greenhouse gases. The UK was the first country into the Industrial Revolution. Now it is one of the first countries heading out, with annual CO2 emissions per capita back below the levels of the 1860s. This column presents an econometric model of UK emissions over the last 150 years to establish what has driven them down and reveal the impacts of important policies, especially the Climate Change Act of 2008. Even so, large reductions in all the UK’s CO₂ sources are still required to meet its 2050 target of an 80% reduction from 1970 levels.

The Industrial Revolution began in the UK in the mid-18th century for reasons well explained by Allen (2009). With antecedents in the scientific, technological, and medical knowledge revolutions from two centuries earlier across many countries, the UK was the first country to industrialise on a large scale. The consequences are startling: 250 years later, real income levels per capita are about seven-fold higher (https://ourworldindata.org/economic-growth shows even greater changes in other countries), many killer diseases have been tamed, and longevity has approximately doubled. As Crafts (2002) showed, the average individual would be unwise to swap their life now for that of even one of the richest people several centuries ago; the Industrial Revolution and its successors have been of vast benefit to humanity.

An unintended consequence has been an explosion in atmospheric carbon dioxide and other greenhouse gas emissions. These are by-products of energy production, manufacturing, and transport (all about a quarter of emissions), with agriculture, construction and waste removal creating most of the rest. Although the UK’s first electricity generating power station in 1868 was hydro driven, coal-fired steam-driven power stations were introduced by 1882 and have since produced most of its electricity. The paleo-record over the last 750,000 years of intermittent ice ages shows atmospheric CO₂ levels of between 180 parts per million (ppm) and 300ppm, but these levels now exceed 400ppm. The increases in atmospheric CO₂ recorded since 1958 at Mauna Loa (Sundquist and Keeling 2009) are clearly anthropogenic in origin (e.g. Hendry and Pretis 2013). The climate change induced by increased greenhouse gases has potentially dangerous implications, highlighted by Stern (2006) and recent IPCC reports, leading to the agreement in Paris at COP21 to seek to limit temperature increases to less than 2 Centigrade, and “to pursue efforts to limit it to 1.5C’’.  Much remains to reduce CO₂ emissions towards the net zero level that will be required to stabilize temperatures at any level. Meinshausen et al. (2009) analyse the difficulties of even achieving 2C, but renewable technologies offer hope of at least further large emission reductions.

However, there was a dramatic drop in the UK’s per capita emissions of CO₂ by 2017 to below the levels of the 1860s – the country first into the Industrial Revolution is one of the first out. On 22 April 2017, Britain went a full day without turning on its coal-fired power stations for the first time in more than 130 years, and on 26 May 2017 it generated almost 25% of its electrical energy from solar. The UK’s CO₂ emissions are now just half of their peak level in 1970. How was this reduction achieved?

UK CO₂ emissions

The data from 1860 on UK CO₂ emissions, fossil fuel volumes, and the ratio of CO₂ emissions to the capital stock are shown in Figure 1. While other greenhouse gas emissions matter, CO₂comprises about 80% of the UK total, with methane, nitrous oxide, and hydrofluorocarbons (HFCs) making up most of the rest in CO₂ equivalents. However, various fossil fuels have different CO2 emissions per unit of energy produced and depend on how efficiently fuels are burnt, from an open fire through vehicles, to a gas-fired power station.”

 

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From a VoxEU post by David Jacks, and Martin Stuermer:

“There is a lack of consensus on the importance of various drivers of long-run commodity prices. This column analyses a new dataset of prices and production for 15 commodities, including metals, agricultural goods, and soft commodities, between 1870 and 2015. Demand shocks due to rapid industrialisation and urbanisation have driven a substantial amount of variation in commodity price booms. While demand shocks have gained importance over time, commodity supply shocks have become less relevant. 

Understanding the drivers of commodity price booms and busts is of first-order importance for the global economy. A significant portion of real income and welfare in both commodity-consuming and commodity-producing nations hinges upon these prices (Bernanke 2006). They vitally affect the distribution of income within particular nations as the ownership of natural resources varies widely, potentially setting the stage for civil conflict (Dube and Vargas 2013). And the long-run drivers of commodity prices have serious implications for the formation and persistence of growth-detracting and growth-enhancing institutions (van der Ploeg 2011).

But for all this, outside spectators – whether they are academics, the general public, the investment community, or policymakers – remain divided in assigning the importance of various forces in the determination of commodity price booms and busts. Understanding which shocks drive these events and how long they persist is important for the conduct of macroeconomic policy, formulating environmental and resource policies, and, perhaps most importantly, investment decisions in the resource sectors of the global economy.

While the literature on modelling oil markets has examined a handful of booms and busts since the early 1970s (e.g. Kilian 2009, Kilian and Murphy 2014), our analysis of commodity markets is based on a new dataset of real prices and output for 15 grains, metals, and soft commodities from 1870 to 2015 (Jacks and Stuermer 2018). Unanticipated changes in world demand affect all commodity prices simultaneously. Throughout history, aggregate commodity demand shocks due to rapid industrialisation and urbanisation have driven commodity price booms. China’s recent effect on commodity markets is, thus, not a new phenomenon.

Commodities in the long run and identifying price shocks

A new dataset encompassing global output and real prices for 15 commodities – barley, coffee, copper, corn, cotton, cottonseed, lead, rice, rye, steel, sugar, tin, tobacco, wheat, and zinc – has been assembled covering the past 145 years (see Figure 1) and representing in excess of $2.5 trillion in annual gross value of production in 2015. The commodity markets selected exhibit characteristics that make such long-run analysis feasible: a high degree of product homogeneity, long-standing evidence of an integrated world market, and no indication of sudden changes in how the commodity is used. Thus, they have desirable characteristics that commodities such as crude oil or iron ore have only gained relatively recently.

 

Figure 1 Booms and busts are not new phenomena

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From a new IMF working paper by Manoj Atolia, Prakash Loungani, Helmut Maurer, and Willi Semmler:

“The Integrated Assessment Model (IAM) has extensively treated the adverse effects of climate change and the appropriate mitigation policy. We extend such a model to include optimal policies for mitigation, adaptation and infrastructure investment studying the dynamics of the transition to a low fossil-fuel economy. We focus on the adverse effects of increase in atmospheric CO2 concentration on households. Formally, the model gives rise to an optimal control problem of finite horizon consisting of a dynamic system with five-dimensional state vector consisting of stocks of private capital, green capital, public capital, stock of brown energy in the ground, and emissions. Given the numerous challenges to climate change policies the control vector is also five-dimensional. Our solutions are characterized by turnpike property and the optimal policy that accomplishes the objective of keeping the CO2 levels within bound is characterized by a significant proportion of investment in public capital going to mitigation in the initial periods. When initial levels of CO2 are high, adaptation efforts also start immediately, but during the initial period, they account for a smaller proportion of government’s public investment.”