GDP Growth is Strong – Perhaps Too Strong

A.  Introduction

On April 25, the Bureau of Economic Analysis released its initial estimates of the GDP accounts for the first quarter of 2024 – what it calls the “Advance Estimate”.  These initial estimates of the growth of GDP and of its components are eagerly awaited by analysts.  While revised and updated in subsequent months as more complete data become available, it provides the first good indication of what recent growth has been.

In the first quarter of 2024, real GDP grew at an estimated annual rate of 1.6%.  This was viewed by many analysts as disappointing, as the average expectation (based on a survey of economists by Dow Jones) was for 2.4% growth.  And it was a deceleration in the rate of growth of GDP from 4.9% in the third quarter of 2023 and 3.4% in the fourth quarter.  The Dow Jones Industrial Average then fell by 720 points in the first half hour of trading (1.9%), with this attributed to the “disappointing” report on GDP growth.  It later recovered about half of this during the day.

One should have some sympathy for the commentators who are called upon by the media to provide an almost instantaneous analysis of what such economic releases imply.  But if they had examined the release more closely, the conclusion should not have been that economic growth was disappointingly slow, but rather that it has been sustained at a surprisingly high level.  After two quarters of extremely fast growth in the second half of 2023, some moderation in the pace should not only have been expected but welcomed.

The economy under Biden has been remarkably strong.  The unemployment rate has been at 4.0% or less for 28 straight months, and has reached as low as 3.4%.  Unemployment has not been this low nor for this long since the 1960s.  And an economy at full employment can only grow at a potential rate dictated by labor force growth and productivity.  The ceiling is not a hard one in any one quarter (labor utilization rates, and hence productivity, can vary in the short term), plus there is statistical noise in the GDP estimates themselves.  But growth in what is called “potential GDP” sets a ceiling on what trend growth might be.  And if the economy is at or close to that ceiling (as it is now), it can only grow over time at the pace that the ceiling itself grows at.

B.  Potential GDP

There are various ways to determine what potential GDP might be.  A respected and widely cited estimate is produced by the Congressional Budget Office (CBO), with figures on potential GDP for both past and future periods (up to 10 years out).  It is based on estimates of what the potential labor force has been or will be, accumulated capital, and technological progress.  In any given year, the CBO estimates reflect what GDP could be with the capital stock that would be available and the production that capital would allow, along with labor utilization at “full employment”.

The chart at the top of this post shows what real GDP per capita has been over the 11 years from the start of Obama’s second term (2013Q1) to now (2024Q1), along with the estimate by the CBO of potential GDP (expressed in per capita terms).  Not only is the economy now close to the potential GDP ceiling, it is a bit beyond it.  This is possible with the CBO estimates of potential GDP as they assume the labor market cannot sustain for long an unemployment rate of below roughly about 4.5% (which can vary some over time, based on the structure of the labor force).  Hence if actual unemployment is below this – as it is now and as it was for a period in 2019 – “potential GDP” as estimated by the CBO can be below actual GDP.  There are other factors as well, but the level of unemployment is the most significant.

This is also why actual GDP was below potential GDP from 2013 to late 2017 in the chart.  Unemployment was still relatively high in 2013 coming out of the 2008/09 economic and financial collapse.  As discussed in earlier posts on this blog (see here and here) limitations on government spending imposed by the Republican-controlled Congress slowed the recovery from that downturn and kept GDP well below potential for far too long.  This was the first time government spending had been cut following a recession since the early 1970s.  Federal government spending on goods and services fell at an average annual rate of 3.2% each year (in real terms) from 2011 to 2014.  In 2015 and 2016 it was finally allowed to grow, but only at a slow 0.3% per year pace on average.  Only after Trump was elected did Congress allow federal government spending to rise at a more significant rate – at 2.6% per year between 2017 and 2019 (and then by much more in 2020 due to the Covid crisis, by which time Democrats controlled Congress).

This lack of a supportive fiscal policy following the 2008/09 economic and financial collapse slowed the pace of recovery.  Unemployment fell only slowly, but did still fall, and reached 4.7% by the end of Obama’s second term.  The gap between actual and potential GDP diminished, and as seen in the chart at the top of this post, actual GDP has been close to potential GDP since 2018 (with the important exception of the 2020 collapse due to Covid).

The economy is now at – or indeed a bit above – the CBO estimate of potential GDP.  Although there may be quarter-to-quarter fluctuations – as noted above – going forward one cannot expect GDP to grow on a sustained basis faster than that ceiling.  And the CBO forecasts that potential GDP is growing at a 2.2% pace currently, with this expected to diminish over time to a 2.0% pace by 2030 and a 1.8% pace by 2034.  This is primarily due to demographics:  Growth in the labor force is slowing.

Real GDP grew at an average annual rate of 4.1% in the second half of 2023 (3.4% in the third quarter and 4.9% in the fourth quarter).  This is well above the CBO’s estimate of potential GDP growing at a 2.2% rate.  Some slowdown should have been expected.  Even with the 1.6% rate for the first quarter of 2024, real GDP has grown at an average annual rate of 3.3% since mid-2023.  It should not be surprising if GDP growth in the second quarter of 2024 comes in at a relatively modest rate, as the economy returns to the trend growth that potential GDP allows.

However, the initial indication from the Atlanta Fed’s GDPNow indicator is that GDP growth in the second quarter of 2024 will in fact be quite high at a 3.9% rate (in its initial estimate made on April 26 – the most recent as I write this).  If that turns out to be the case, it would not be surprising if the Fed becomes concerned with a pace of growth that is excessively fast.

C.  Other Indicators of an Economy Fully Utilizing Its Potential

One wants an economy that is fully utilizing its potential.  With full employment, one is not throwing away goods and services – as well as the corresponding wages and income – that labor and producers would be eager and able to provide.  But once an economy has reached that potential, it can only grow over time at the rate that that potential grows.  This pace is dictated by demographics (growth in the labor force) and growth in productivity.  While this will be a slower pace than what would be possible for an economy with underutilized labor and other resources – where a period of more rapid growth is possible by bringing into employment those underutilized resources – once one is at the ceiling one cannot grow on a sustained basis at a pace higher than that.  Trying to do so leads to inflation.

With this perspective, a number of observations come together from this release on 2024 first-quarter growth in GDP and its components:

a)  The 1.6% growth rate was viewed as “low”.  But as noted above, this followed exceptionally high growth, of 4.9% in the third quarter of 2023 and 3.4% in the fourth quarter.  One should have expected a slowdown.

b)  There is also evidence of the economy reaching its capacity limits in how the particular components of the GDP figures changed.  Keep in mind that GDP, while derived in these accounts from estimates of what was sold for final demand uses (consumption, investment, etc.), is still a measure of production, not just sales.  That is, GDP – Gross Domestic Product – is a measure of what is produced, produced domestically, and in “gross” terms (because investment is counted in gross terms rather than net of depreciation).

The reason this indirect approach to estimating production works is because whatever is produced and not sold will end up as an increase in inventories.  And this change in inventories is treated as if it were a final demand category.  It can be viewed as a form of investment (investment in inventories), and is included in the accounts as part of overall investment (i.e. it is added to fixed investment, which is investment in machinery and structures).

Furthermore, foreign trade is included in net terms:  exports less imports.  Part of what is produced domestically is sold for exports, while imports supply products that can be used to satisfy domestic demands.

When an economy is operating at or close to potential GDP, one can expect final demands to be increasingly met by drawdowns of inventory (or less of an increase in inventories compared to before) plus a decline in the net trade balance (less exports and/or more imports).  Each can supply product to meet final demands when domestic production is constrained because the economy is operating at close to the ceiling.

One sees both of these in the 2024Q1 figures.  While inventories still rose (by $35 billion, in 2017 constant prices), they rose by less than they had in 2023Q4 (when they rose by $55 billion).  Thus, while GDP includes the change in inventories as one of the demand components along with consumption and other investments, the change in GDP will be based on the change in the change in inventories.  (See this earlier post on this blog.)  And that fell in 2024Q1, as inventory accumulation – while still positive – was not as high as it had been in the previous quarter.  That change in the inventories component reduced GDP growth by 0.35% points relative to what it would have been had domestic production been such that inventory accumulation would have matched what it had been in the preceding quarter.  That it did not can be a sign that domestic production is being constrained by capacity.

Similarly and more importantly, the net trade balance fell.  While exports grew slightly (0.1% of GDP) imports rose by much more (1.0% of GDP), and hence the net trade balance fell by 0.9% of GDP.  This is consistent with domestic production being constrained by an economy that was already at full employment and could not immediately produce much more, and hence with demand that was increasingly met by net imports.

The changes in the net trade balance and in net inventory accumulation totaled 1.2% of GDP (before rounding).  That is, production (GDP) would have had to increase by 2.8% rather than 1.6% to supply domestic purchasers of final (i.e. non-inventory) product.  But with production constrained by capacity limits, the economy had to import more and limit inventory accumulation to less than before.

I should emphasize that this is not a bad position to be in.  One wants an economy operating at full capacity.  But when the economy is operating at full capacity, there will be limits on how much can be supplied domestically.  And as noted before, one cannot expect growth going forward – on average and recognizing there will be period-to-period fluctuations – to exceed the rate at which potential GDP can grow.

c)  Another indication of an economy reaching its potential ceiling is what is happening to prices.  This is more disconcerting.  Price deflators are estimated as part of the GDP accounts in order to convert (deflate) the nominal estimates of the various GDP components into estimates of what the real changes were.  While people focus on changes in real GDP and its components – and properly so – some may not fully realize that the data the BEA collects on production and sales are all in nominal money terms.  It is not really possible for producers to report anything else.  The BEA then converts those nominal money figures to changes in real terms by applying price indices to “deflate” the nominal figures – hence the term “deflator”.  The BEA obtains those price indices – tens of thousands of them – separately, primarily from the price surveys carried out by the Bureau of Labor Statistics.

The initial estimates of the GDP accounts released on April 25 indicated that the price deflators for both overall GDP and for the Personal Consumption Expenditures (PCE) component of GDP demand rose at higher rates than in the preceding several quarters.  The GDP deflator rose in the first quarter of 2024 at an estimated annual rate of 3.1% and the PCE deflator at a rate of 3.4%.  The PCE deflator receives special attention as it is the primary measure of inflation that the Fed focuses on as it considers what monetary policy to follow.  The Fed pays attention to much more as well, of course, but the PCE deflator is special.  And the Fed target for the PCE deflator is 2.0%.

The annualized rates for the GDP and PCE deflators were at 1.6% and 1.8%, respectively, in the fourth quarter of 2023.  They had been generally coming down since mid-2022, and had averaged 2.2% and 2.3% respectively in the final three quarters of 2023.  The increase in the first quarter of 2024 was therefore of some concern, especially when coupled with the other indications (discussed above) that the economy is now at or even above the potential GDP ceiling.

But it is also important to keep in mind that – as often said – one period’s figures do not constitute a trend.  There have been, and will be, quarter to quarter fluctuations.  But the increase in the price deflators from below the Fed’s 2.0% target to a level a good deal higher, coupled with the other indications of an economy operating at or close to capacity, is something to watch.  And it suggests that the Fed is likely to remain cautious and not reduce interest rates from where they now are until they find out more about what is happening to prices.

D.  The Federal Fiscal Deficit is Large

Finally, while not part of the report on the GDP accounts, it should be noted that the federal fiscal deficit remains extremely high.  Recent figures on the Federal Government’s fiscal outlays, receipts, and deficit, expressed here as a share of GDP in the periods, are as follows:

Federal Government Fiscal Accounts

GDP shares

Receipts

Outlays

Deficit

FY2023

16.5%

22.7%

6.3%

CY2023

16.5%

23.0%

6.5%

FY2023 H1

15.4%

23.7%

8.3%

FY2023 H2

17.5%

21.8%

4.3%

FY2024 H1

15.6%

23.1%

7.6%

The GDP shares are calculated from the dollar figures reported in the Monthly US Treasury Statement for March 2024, coupled with the GDP estimates of the BEA.  The Monthly Treasury Statements are definitive in that the reported dollar figures up to the current month rarely change later (although forecasts for the full budget year of course may).  Note also that the reported monthly figures are not seasonally adjusted but are rather the actual fiscal receipts and outlays for the period, while the GDP figures are seasonally adjusted.

In a period of full employment, these deficit figures are all high.  As was discussed in an earlier post on this blog, while high fiscal deficits may well be necessary and appropriate when unemployment is high, one should balance this with lower deficits when the economy is at full employment – as it is now.  The fiscal deficits need not be zero, but a good rule of thumb is to aim for a deficit of perhaps 3% of GDP and no more than 4% of GDP in an economy that is at full employment.  At such deficits, the government debt to GDP ratio will be stable or falling over time, which can then balance out the times when the appropriate policy is to allow for a higher deficit in an economic downturn in order to support a recovery.

The math is simple.  As of March 31, 2024, the total federal debt held by the public was $27.5 trillion (as reported in the Monthly Treasury Statement).  Nominal GDP in 2024Q1 was $28.3 trillion (at an annual rate).  The debt to GDP ratio was thus 97.3% (before rounding), or close to 100%.  If, going forward, one should expect trend growth of about 2% per year in real GDP, inflation of 2% (the Fed’s goal), long-term Treasury interest rates of 4% (i.e. 2% inflation and a 2% real rate of interest on longer-term securities), then a debt to GDP ratio of 100% will stay at 100% if the federal fiscal deficit is 4% of GDP.  The debt ratio will fall with a lower deficit and rise with a higher deficit.

But despite being at full employment, the federal fiscal deficit was 7.6% of GDP in the first half of FY2024.  That is well above the 4% level needed to keep the debt to GDP ratio from rising further.  However, It is not clear whether the deficit has been trending higher or lower.  While the 7.6% deficit in the first half of FY2024 was higher than the 6.3% deficit in FY2023 as a whole, and substantially higher than the 4.3% deficit in the second half of FY2023, it is less than the 8.3% deficit in the first half of FY2023.  There is likely a significant degree of seasonality in the fiscal figures.  But under any reasonable scenario, the deficit will be well above 4% of GDP again this fiscal year.

The issue facing the Democrats is that every time over the past more than 40 years that they have cut the fiscal deficit during their term in office, the subsequent Republican administration has then increased it – through a combination of tax cuts and expenditure increases.  Comparing fiscal years (and avoiding recession years given their special nature, and based on data from the CBO), the fiscal deficit under Ford in FY1976 was 4.1% of GDP.  Carter brought that down by FY1979 to just 1.6% of GDP.  Reagan tax cuts and expenditure increases then raised the deficit to 5.9% of GDP in FY1983, and it was 4.5% of GDP under Bush I in FY1992.  The fiscal accounts then moved into a surplus under Clinton following the steady and strong growth in real GDP during his presidency, reaching a surplus of 2.3% of GDP in FY2000.  On taking office, Bush II at first advocated tax cuts because the economy was strong and the fiscal accounts were in surplus, but then after the downturn a few months after taking office, Bush II promoted tax cuts because the economy was weak.  The tax cuts did go through, and with fiscal revenues falling as a share of GDP while expenditures rose, the fiscal deficit reached 3.4% of GDP in FY2004 – a huge shift of 5.7% points of GDP from where it was in Clinton’s last year in office.

With the economic and financial collapse in 2008 in the last year of the Bush II presidency, the deficit rose to 9.8% of GDP in FY2009 in Obama’s first year.  This stabilized an economy that had been in freefall as Obama took office (with the sharpest downturn since the Great Depression), but as noted above, subsequent cuts in government spending then slowed the full recovery.  Eventually the economy did recover, and the fiscal deficit was reduced to 2.4% of GDP in FY2015 and a somewhat higher 3.1% of GDP in FY2016 when federal government spending was finally allowed to grow, albeit modestly.

Taxes were then once again cut under the Republican presidency of Trump, and despite an economy at full employment, the fiscal deficit rose to 4.6% of GDP in FY2019.  It then exploded with the Covid crisis, to 14.7% of GDP in FY2020 and 12.1% in FY2021, before falling under Biden to 5.4% of GDP in FY2022 and 6.3% of GDP in FY2023.

So what should be done?  This is not the place for a full analysis, but broadly, fiscal revenues as a share of GDP are low in the US.  Total tax revenue (including by state and local governments) is lower in the US than in any other high-income member of the OECD with just one exception (Switzerland), with US tax revenues more than 6% points of GDP less than the OECD average (in 2022).  A post on this blog from 2013 – now perhaps out of date – showed that the federal government debt to GDP ratio would have fallen sharply – rather than increase – in the years then following if the Bush II tax cuts had been allowed to expire in full at the end of 2012.  The figures would be different now, but the basic point remains that both compared to other high-income nations and to the historical record, the US suffers from a chronic fiscal revenue problem.

A reasonable target for federal fiscal revenues might be 20% of GDP – the same share of GDP as in FY2000.  That would be an increase of 3.5% of GDP from the 16.5% collected in FY2023.  Taxes collected in the US would still be less – as a share of GDP – of all but two of the higher-income OECD members (Australia and Switzerland), and also far less than the OECD average.

There are also always some fiscal expenditures that could also rationally be cut (but where there is always disagreement on which), but even with no cuts in expenditures, revenues of 20% of GDP in FY2023 would have brought the deficit down from 6.3% of GDP to 2.8%.  And as discussed above, a deficit of 2.8% of GDP would be expected to lead to a downward trend over time in the government debt to GDP ratio.

One option to get fiscal revenues back to around 20% of GDP would be simply to bring back the taxation rules of that year.  They were not excessively burdensome – the economy was performing well at the time with solid GDP growth and low unemployment.  But better would be to introduce true tax reforms, such as ending the disparities in the tax system where different forms of income are taxed differently (as discussed, for example, in this earlier post on this blog).  The most significant such disparity is that income from wealth (which is, not surprisingly, mostly held by the wealthy) is taxed at lower rates than income from wages.  But with Republicans in control of Congress, such a reform would never be passed.

E.  Summary and Conclusion

The economy is at full employment and is producing at or close to the ceiling allowed by its productive potential.  Going forward, one should not expect growth in real GDP to be greater than the pace at which this ceiling grows.  There may well be quarter-to-quarter fluctuations around this, as the ceiling is not absolute (labor utilization can vary) plus there is statistical noise in the GDP estimates themselves, but over time one should expect – and indeed welcome – growth that averages what that ceiling grows at.  The CBO estimates that potential GDP is growing at a rate of about 2.2% per annum currently, and expects this to fall over time to a 2.0% rate by 2030.

The 1.6% rate of growth in the first quarter of 2024 should be seen in this light.  Real GDP had grown at rates of 4.9% in the third quarter of 2023 and 3.4% in the fourth quarter, and a slowdown from such a pace should not only have been expected but welcomed.

Indeed, there may be a concern that GDP growth has been too rapid since mid-2023.  Even with the 1.6% growth of the first quarter of 2024, growth has averaged 3.3% since the middle of last year.  And there are signs in the GDP accounts themselves of an economy producing at capacity.  Inventory accumulation slowed relative to what it was before while the foreign trade balance fell as imports rose substantially.  The deflators for GDP and for Personal Consumption Expenditures also rose – to annualized rates of 3.1% and 3.4% respectively – after following a downward trend since mid-2022.  This is, however, an increase for the deflators for just one period at this point, and one should not assume until there is further evidence whether this marks a change in that previous trend.

For an economy at full employment, the current size of the fiscal deficit is a concern.  At full employment one should be aiming for a deficit of below around 4% of GDP in order at least to stabilize and preferably reduce the government debt to GDP ratio.  But in FY2023, the deficit was 6.3% of GDP.  The US has been facing chronic deficit issues for decades now – a consequence of the tax cut measures pushed through by Reagan, Bush II, and Trump.  A reasonable goal now would be a tax reform that removes the distortions from taxing different types of income differently, with rates then set to obtain fiscal revenues of around 20% of GDP – an increase of 3.5% points of GDP compared to the revenues collected in 2023.  The tax rates on income from wealth would rise from the preferential rates they now enjoy, while the tax rates on income from wages (and other “ordinary income”) might well fall.

Even with such an increase, fiscal revenues collected would still be well below the OECD average, and below that of all but only two of the higher-income OECD members.  In contrast, cuts in expenditures (as was done, as a share of GDP, during the presidencies of Carter, Clinton, and Obama), are likely to be followed in the next Republican administration with another round of tax cuts.

Inflation in the US Would Meet the Fed Target of 2% if Calculated as Europe Does

No price index is perfect.  Assumptions need to be made on what to include and how to include it.  Based on those decisions, the resulting price indices (and hence inflation rates) can differ and differ significantly.  And this can affect policy.

In this context, it is interesting to compare what inflation would be when calculated as the US does for the widely followed consumer price index (CPI), or if it were calculated according to the standard followed in the European Union for what it calls the harmonized index of consumer prices (HICP).  Both are reasonable measures, but the resulting inflation can be quite different, as seen in the chart above.  With the CPI, the Fed may conclude inflation is still too high – above its 2% target.  But calculated as Europe does, one could conclude that inflation is now too low.

This short post will look at the differences and the primary reasons for them.  There are lessons to be learned.  In particular, it is important to understand what lies behind various statistical measures – including, but not only, any measure of inflation – and not blindly focus on just one when arriving at policy decisions.  The Fed in general does, and the Fed’s Board has an excellent staff to advise on developments in the economy.  But the media often does not consider such distinctions.

The chart at the top of this post shows the 6-month rolling average percentage changes in prices (at annualized rates) for the period from December 2020 through to January 2024.  Both measures are for the US, and both are calculated by the Bureau of Labor Statistics (BLS) based on the same data on prices that the BLS collects.  The CPI data can be found here, while US inflation based on the HICP methodology as calculated by the BLS can be found here.  The BLS notes that its calculations of US inflation based on the HICP methodology are carried out outside of the “official production system” (as it calls it), and are more in the nature of a research project.  But the BLS uses the same underlying data for the HICP measure as it uses for its regular CPI calculations.

The HICP methodology was developed as Europe moved to greater monetary integration, culminating in the creation of a common currency – the euro – as well as the European Central Bank (the ECB).  The ECB has – similarly to the Fed – the objective of targeting a 2% rate of inflation.  For this, it obviously needs to know what inflation is in the Eurozone.  But the member nations of Europe that came together to adopt the euro as a common currency (currently 20 nations) had each long had their own way of estimating inflation within their countries, with various methodologies used.

A common approach needed to be adopted, and starting with regulations issued in 1995, the participating nations agreed to what was labeled the “harmonized index (or indices) of consumer prices” (HICP).  The statistical agencies of the EU member countries would follow that common methodology, and report their results to Eurostat for aggregation across the countries to a euro-wide index of inflation for use by the ECB.  The HICP is now used also for international comparisons of inflation, and it is in this context that the BLS prepares its HICP inflation index for the US.

There are a number of differences between the approaches used for the HICP and for the CPI that lead to the differences in the inflation rates seen in the chart above.  The key ones are:

a)  The HICP only includes prices of goods and services where there are direct monetary expenditures.  The CPI, in contrast, includes estimates of what the implicit costs are of certain services where there are not such direct expenditures.  The most important of these are the services provided in owner-occupied homes.  The CPI assumes that rents are implicitly being paid at rates similar to what is being paid by those who actually do rent.  As was discussed in a post on this blog from last May, the way rents are adjusted (where rental contracts are typically for a year) leads to a lag of up to a year in observed rental rates adjusting to pressures that affect rental rates.  As discussed in that post, this long lag has led to a divergence in observed inflation rates in the past year for the shelter component of the CPI in comparison to the CPI for all goods and services other than shelter.

Inflation in the shelter component of the CPI has been the primary cause of inflation remaining above the Fed’s 2% target.  Inflation in all goods and services in the CPI other than shelter moderated greatly in mid-2022 and has since fluctuated between zero and 2%.  But the shelter component of the CPI has kept the overall CPI at between 3 and 4% since mid-2022.  With the HICP leaving out the cost of shelter on owner-occupied homes (it includes it for those who rent), it is not surprising that inflation as measured by the HICP has been well below inflation as measured by the CPI.

b)  Also important to understanding the differing figures is that the HICP methodology does not include seasonal adjustments.  While seasonal factors can be important, adjusting the figures to reflect that seasonality is technically difficult.  The HICP methodology, as adopted by the EU, leaves it out.  This probably explains the low rates observed in the chart for HICP inflation seen in each of the six-month figures ending in December, with relatively high rates seen in each of the six-month figures ending in June.

Inflation as measured by the HICP will likely therefore go up in the coming months from the 0.0% rate observed for the six months ending in December 2023 and the 1.0% rate ending in January 2024.  Using a rolling 12-month average will mostly resolve such seasonality differences, and a chart of this will be examined below.  It shows 12-month rates for the HICP (both for the overall HICP and for a core HICP that leaves out food and energy) fluctuating around a 2% rate starting in June 2023 and continuing at least until now.

c)  There are a number of other technical differences, but these are likely less important for the issues being considered here.  For example, the HICP adjusts the weights used to calculate the overall HICP index (and its component sub-total indices) only once a year.  The CPI, in contrast, is what is called a chain-weighted index where the weights are changed each month to reflect changing expenditure shares.  But this is probably not terribly important as the weights do not change even year to year by all that much.

Also, the HICP – if one strictly followed the formal methodology – includes prices faced by the rural population.  But the BLS only collects price data from the major urban areas for the CPI, which means that the HICP for the US will only reflect urban prices.  That does, however, then mean that there will be less of a difference between the HICP as estimated for the US and the standard CPI for the US.  But it also then means comparisons of inflation across countries (where other countries include estimates for prices in rural areas) will not be as reliable.

Finally, the year-on-year inflation rates for the HIPC are of interest.  They have the advantage of mostly not being affected by seasonality issues (there can still be some seasonal effects, given how the seasonal adjustment algorithms work), but have the disadvantage of not capturing turning points in inflation trends as well.

The year-on-year rates for the US of both the overall HICP and the core HICP have been:

In terms of the year-on-year measures (12-month rolling changes ending on the dates shown), both the overall HICP and the core HICP have fluctuated at rates of between 1 1/2 and 2 1/2% since the 12-month period ending in June 2023.  It has remained within that narrow range for 8 months, or two-thirds of a year.  If the US measured inflation like Europe does, one would conclude that the Fed should now be allowing interest rates to fall from their current relatively high levels (aimed at reducing inflation) down to more neutral levels.

Inflation in the US as measured by the CPI remains above the Fed’s 2% target primarily due to inflation in the shelter component of the index.  But the behavior of the cost of shelter has been special.  This is in part due to the lag built into how the cost of shelter services is estimated for the CPI (due to reliance on estimates of rental-equivalent costs, as discussed in the post from last May cited above).  But there have also been other factors in recent years due to impacts arising from the response to the Covid crisis and then a rebound that came with the recovery from that crisis.  Those issues will be discussed in a subsequent post on this blog.

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Update – February 17, 2024

From comments I have received on this post, I see that some of the points should be clarified.  The basic message was clear enough:  That if the US were using the measure of inflation used in Europe, one would conclude that inflation is now at around the Fed taget of 2% and that the Fed should therefore consider allowing interest rates to fall back down to more neutral levels.  The primary reason why inflation in the US as measured by the CPI has remained above the Fed’s 2% target has been inflation in the cost of housing services (which is estimated based on the cost of rental equivalents).  And the estimates for housing are special, both due to lags in how rental rates are determined and special circumstances arising from the Covid crisis and the recovery from it.

The HICP measure used in Europe treats housing differently, as it measures the prices only of goods and services actually paid for, and not – as for owner-occupied homes – a service that follows from the ownership of the asset.  The US CPI treats the services of owner-occupied homes as if a rent were being paid to yourself, as the owner.  This leads to the not terribly intuitive situation where inflation in those implicit rents may be high – which is treated as if it were reducing your real income – but at the same time those rents are being paid to yourself – thus increasing your income.  That ends up as a wash.  But when we look at what has happened to real incomes as a consequence of inflation, we include the former (those implicit rents are reflected in the CPI) but leave out the latter (incomes are not adjusted for the implicit rents being paid to yourself).

In part for this reason, the European HICP measure of inflation leaves out those implicit rents.  But one should not say that the HICP is right and the CPI is wrong (or vice versa).  Rather, they are different and it is important to understand the difference.

In addition to the treatment of housing services, the HICP measure is not seasonally adjusted.  The CPI that is usually the focus of attention is seasonally adjusted.  I flagged this on the charts, but it likely would have been useful to have shown as well the not seasonally adjusted CPI series.  The charts become more cluttered, but one can then better see what the impact of seasonal adjustment (or the lack of it) has been.  And the not seasonally adjusted CPI is more directly comparable to the HICP.

The chart at the top of this post then becomes:

The rolling 6-month annualized change in the CPI is shown here as calculated both from the seasonally adjusted series (in red, and as before) and from the not seasonally adjusted series (in black, and with diamond markers).  As noted in the text, the seasonally adjusted CPI (in red) has fluctuated in the relatively narrow range of 3 to 4% (annualized) since the six-month period ending in December 2022 (i.e. since mid-2022).  The not seasonally adjusted CPI (in black) has moved on a similar path as the HICP (which is not seasonally adjusted), but always above it – and generally about 1 to 2% points above it (since mid-2022).

Adding the CPI and core CPI series to the 12-month rolling average chart might also have been helpful:

While 12-month changes do not capture the turning points as well as 6-month changes do, the basic story remains the same:  Inflation fell sharply in the 12 months leading up to June 2023 (i.e. since mid-2022), but the US CPI measure has been well above what the European HICP measure would indicate inflation has been over this recent period.  It is also interesting to note that while the overall CPI has been (since mid-2023) about 1 to 1 1/2% points above the comparable overall HICP measure, the core CPI has been about 2 to 2 1/2% points above the comparable core HICP measure.

Why?  Again this can be attributed to how the cost of housing services is treated. The HICP measure leaves out the implicit rents paid on owner-occupied housing, but the CPI includes them.  In the overall CPI, shelter has a weight of 36% in the overall index, which is significant.  Food and energy have a weight of a little over 20% in the overall index.  Food and energy are excluded from the core index, so the remaining items have a weight of about 80%.  The weight of shelter in the core CPI will therefore be 36% of 80% = 45%.  With the cost of housing services rising at a faster pace than the cost of other goods and services, the higher, 45%, weight of housing services in the core CPI leads to the margin over the core HICP (where services from owner-occupied housing are left out and hence have no weight) being greater.  Thus the 2 to 2 1/2% margin of the core CPI over the core HICP rather than the 1 to 1 1/2% margin of the overall CPI over the overall HICP.

 

The Impact of Methane on Warming the Planet

A.  Introduction

One focus of the discussions at the recent UN Conference on Climate Change (COP28) in Dubai was on reducing the emissions of methane.  While emissions of carbon dioxide (which I will hereafter usually shorten to CO2) are the main reason for the increase in global temperatures since the Industrial Revolution, emissions of methane from human activities account for an estimated 30% of that increase according to the International Energy Agency (IEA).  This is even though CO2 emissions are far greater (in units of weight, e.g. in tons) than emissions of methane – about 100 times as much in 2021.  The reason is that methane is an especially potent greenhouse gas, where one will frequently see references to emissions of methane having “more than 80 times” the impact (over a 20 year horizon) of an equal weight of CO2, or “more than 20 times” the impact over a 100 year horizon.

But it may not always be clear to everyone what those ratios mean.  This post will discuss the concept, generalize it, and illustrate it through some notional calculations that while not precise, are probably within 10 or 20% of figures from a more elaborate model.  It will then discuss the implications of recognizing this far greater impact of methane than an equal weight of CO2 in the specific case of assessing the relative impacts of coal versus natural gas-burning power plants.  A small share of gas delivered to the power plant (where natural gas is primarily methane) will leak into the air, and this is, as we will see, highly significant although typically ignored.  The post will conclude with a discussion of the urgency required to address these issues, and on the longer-term impact on atmospheric warming from reducing methane emissions.

The basics are straightforward:  The molecular structure of methane (CH4) is such that the molecular bonds holding the atoms together vibrate (i.e. absorb energy, thus creating warmth) when exposed to radiation in the infrared wavelengths.  The same is true for carbon dioxide (CO2) but to a far lesser extent than for an equal weight of methane.  That infrared radiation mostly comes from the ground, after the ground is heated by sunlight and then re-radiates the heat back out in the infrared.

While each molecule of methane leads to far greater warming than each molecule of CO2, methane is removed from the atmosphere at a far faster rate than CO2.  Thus over time the proportion of methane to CO2 in the atmosphere from equal emissions of the two in some initial period will fall.  There will be less methane still in the atmosphere to absorb the infrared radiation from the ground and release it as heat.

We can fit the data we have on the relative impact on global warming of methane over 20 and 100 year periods (which are average figures over the periods) to arrive at a curve that will show the warming impact of methane compared to that of CO2 year by year, starting from the year of emission up to whatever desired – say 100 years.  A good fit is found when the relative impact of methane on global warming in the initial year is 150 times the impact of CO2.  This is shown in the chart at the top of this post.  From this chart, one can then calculate what the relative impact of methane would be for any individual year, as well as averages over any period chosen.

I should, however, note one simplification in this chart.  While the molecules of methane will lead to atmospheric warming such as shown in the chart, the response is not instantaneous. The full effect will take several years.  But to keep things simple I have ignored that lag and treated the warming that will eventually result as if it occurs immediately.  I am also not saying the chart, as fitted in this way, is precisely right in terms of the specific values, including for the value of 150 for the multiple in the initial year.  But an initial value of 150 leads to a curve that fits reasonably well with the information I have seen.  And the primary purpose is to illustrate the concepts: to develop an understanding of what it means to say, for example, that methane has more than 80 times the impact of CO2 on atmospheric warming over a 20 year horizon or more than 20 times the impact over 100 years.

Those are the basics.  The following section of this post will provide more detail on the data backing this up and the assumptions made.  I should make clear, however, that I am an economist and not a climate scientist.  I believe this has been done right, and it is based on estimates made by climate scientists, but simplifications have been made.  However, and as just noted, the primary aim is to clarify the concepts.

And what those concepts mean is important.  A focus on reducing emissions of methane as a core strategy to address global warming and consequent climate change is long overdue. Cutting back on methane emissions could have a significant impact in the upcoming decades, and those decades will be critical.  As noted in an earlier post on this blog, heat records have not only been repeatedly set in 2023, but have been shattered.  This must be addressed urgently, and there is much greater “bang for the buck” from cuts in methane emissions in the coming decades than from an equal weight of CO2.  And during this time, technology that reduces the cost of cutting CO2 emissions will only get better.

Furthermore, the time frame for the benefits of cutting methane emissions is not all that short.  Indeed, a unit cut in methane emissions in the initial period will always have a greater impact on global temperatures than a unit cut in CO2 emissions.  As we will discuss below, methane is broken down by a series of chemical reactions in the atmosphere and will end up as CO2 and water vapor.  That is, any methane emitted will eventually end up as CO2.  Hence there will always be a greater impact from cutting methane emissions than from cutting CO2, although the difference becomes small after a point.  However, at, say, 50 years, the impact (in the 50th year – not a period average) from cuts in methane in the initial period will still be 6 times greater than from an equal cut in CO2 emissions.

That leverage should not be ignored but rather should be central in the strategy to limit further deterioration in our climate.

B.  Calculating the Relative Impact from Cuts in Methane Emissions  

A molecule of methane (CH4) in the atmosphere will absorb far more energy in the infrared wavelength (the wavelength of heat) than a molecule of carbon dioxide (CO2).  This is because of the nature of the chemical bonds holding together the atoms in each molecule. Thus, per molecule (or more precisely, measured in terms of units of weight as their molecular weights differ), methane will absorb more infrared radiation coming up from the ground and then keep that heat trapped in the atmosphere rather than passed into space.  This is the greenhouse effect (first described in a basic form two centuries ago, in 1824, by Joseph Fourier).  It is a property of a number of gases.  CO2 and methane are just the two most important, given the tonnage of emissions we send up into the air each year.

However, methane does not linger in the atmosphere for as long as CO2 does.  The most recent (2023) report of the IPCC (6th cycle) estimates the “total atmospheric lifetime” of methane as being, on average, 9.1 years (see Chapter 6, page 636).  But a note on terminology:  In climate science, the term “lifetime” refers to what in other contexts is generally referred to as a “half-life”.  That is, at 9.1 years it is estimated that 50% of the methane emitted in year zero would have been removed from the atmosphere, with 50% remaining.

Methane is removed from the atmosphere relatively quickly as the CH4 molecules will interact with natural hydroxyl radicals in the atmosphere (OH molecules – note that water is H2O).  UV radiation from sunlight will spark a series of reactions that, in the end, lead to CO2 and H2O as the final products.  On average, 50% of the methane would have been broken down into CO2 and H2O in an estimated 9.1 years, but keep in mind this is an estimate and will vary based on various factors.  For example, solar radiation (and hence the UV radiation) is more intense in the tropics than in the polar regions, and hence the reactions will proceed faster in the tropics.  Also, the 9.1 year estimate incorporates only direct effects.  With certain indirect effects, the IPCC estimates the lifetime (half-life) is 11.8 years.  For the calculations here, I have only tried to set a rate of depletion that falls within this range.  A rate of depletion of 6.5% per year will do this, leading to an average lifetime of about 10 1/2 years.

Carbon dioxide (CO2), in contrast to methane, does not break down chemically.  Rather, it is only slowly removed from the atmosphere by various natural processes, including interactions with the world’s oceans (being absorbed by and re-emitted from the water), being absorbed by plant growth (trees), and over thousands of years being converted into calcium carbonate and other rock-like compounds through activities in the ocean.

These operate on very different time scales.  Thus while the IPCC in its first assessment report (in 1990) said that the lifetime of CO2 in the atmosphere is 50 to 200 years, it changed this to a range of 5 to 200 years in its 1995 and 2000 assessment reports.  By 2007 it changed this further to say it was more complicated, and that “About 50% of a CO2 increase will be removed from the atmosphere within 30 years, and a further 30% will be removed within a few centuries.  The remaining 20% may stay in the atmosphere for many thousands of years.” In a 2018 technical report (page 24) the IPCC was even less willing to provide a lifetime for CO2, saying: “Carbon dioxide does not have a specific lifetime because it is continuously cycled between the atmosphere, oceans and land biosphere and its net removal from the atmosphere involves a range of processes with different time scales.”

Thus while CO2 in the atmosphere does diminish over time, it does so only slowly and within a time frame that depends on circumstances.  For the calculations here, I assumed that there is simply a rate of depletion of 0.3% per year.  This reduces the amount of CO2 in the air by about a quarter after 100 years, and yields a lifetime (half-life) of 230 years.

The two benchmarks we then have to fit the curve are figures for the average impact of methane relative to CO2 over a 20 year and over a 100 year horizon:  the commonly cited multiples of “over 80” and “over 20” times the impact.  These too are, of course, estimates, and the estimates have changed over time.  Recent figures posted by various authorities place the ratios for the 20 year and 100 year average multiples to be 84 and 28, respectively, by the EU, or 81 to 83 and 27 to 30 by the US EPA, or 84 to 87 and 28 to 36 by the IEA.  A broader range can be found in the current Wikipedia entry for “Global Warming Potential”, with multiples varying from 56 to 96 for the 20 year average and 21 to 40 for the 100 year average, based on various studies and reports dating as far back as 1995.

Very importantly (and not always clear when the multiples are presented), these ratios are averages of what the global warming impact will be over 20 year or 100 year periods – not what the multiples would be at the 20 year point or 100 year point.  The multiple for any given year will vary year by year as methane (and to a far lesser extent, CO2) is removed from the atmosphere, starting from a high figure and eventually dropping to a multiple of 1.0 for methane (when all the methane has been converted through the reactions in the atmosphere into CO2 and water).

A question I had was how high this multiple would be for emissions in the initial year (ignoring the lag in the atmospheric response, as noted before).  While I assume there will be an answer to this somewhere in the climate change literature, I could not find it.  I therefore constructed the chart above, based on the figures just discussed for the rates of depletion of methane and CO2, and for the average multiples over a 20 year and a 100 year time horizon.

These assumptions yielded the curve shown at the top of this post, where at a multiple of 150 for the first year, and with the rates of depletion assumed (of 6.5% and 0.3% for methane and CO2), the 20 year and 100 year average multiples were similar to those found in the literature (i.e. within the range of uncertainty for those estimates).

From this chart, one can calculate that the average multiple over the first 5 years would then be 132, or a multiple of 114 over the first 10 years.  And the multiples for any given year can be read directly.  For example, while the 20 year average multiple is 87 in this chart, in just the 20th year itself the multiple would be a bit over 40.  And at the 100th year the multiple will be close to 1, even though the average impact over those 100 years will be for methane to have had 24 times the effect of an equal weight of CO2 released in the same initial year.

All these multiples – at least until one gets close to the 100 year mark – are large, and in the near term are huge.  The multiple itself is not the full story, of course.  One also needs to look at the cost of reducing the emissions of a ton of methane relative to the cost for a ton of CO2.  But at such multiples, one would still come out ahead even if it were far more expensive to reduce methane emissions than to reduce CO2 emissions.

Compounding the benefit, the cost of reducing methane emissions is often not high.  Indeed, it could be cheaper per ton.  Tightening up the pipes and fittings that carry the methane so that less leaks out often does not cost all that much.  As an extra benefit, one then can sell the methane that did not leak, and hence not spend what would otherwise be needed to pull it from the ground.

This also has important implications when assessing tradeoffs in, for example, the generation of electric power.  This will be discussed next.

C.  An Example of the Implications:  Burning Coal vs. Gas to Produce Power

The recognition that methane has such a dramatically greater impact on atmospheric warming than CO2 has a number of implications.  Most obviously, it implies that the world should be paying much more attention than is currently the case to activities that release methane. Hopefully, the agreements reached during COP28 will begin to remedy this.

As another example, consider the comparison that is often made between burning coal or burning natural gas (where natural gas is largely methane, and which I will treat here as the same as methane) in the production of electric power.  Gas, like coal, produces CO2 when it is burned.  They are both fossil fuels.  But the CO2 that is emitted from the burning of natural gas to produce power is roughly half that from the burning of coal for the same amount of power produced (i.e. per kilowatt-hour, or KWHr).  The actual ratio will vary based on the quality of the coal that is burned and the quality of the gas (as the heat contents of each will vary, depending on the specific source of supply), as well as on the efficiency of the respective power plants (coal burning plants are generally less efficient than gas plants at converting heat into power), but half is a good rule of thumb.  Because the CO2 produced from burning gas rather than coal is only about half as much, there has been much talk of natural gas serving as a “transition fuel” away from coal until totally clean production of power is possible.

But this considers only the direct impact on atmospheric warming from the CO2 produced by the burning of the respective fuels.  There is also an indirect effect when one uses natural gas (methane) instead of coal, as that gas needs to be pulled out of the ground by wells and then delivered to the power plant by a pipeline network.  During this process of producing and then delivering gas from the wellhead to the power plant, some of the gas will leak.  Leaks release methane, and that methane has a far greater impact on atmospheric warming than CO2 has.

And there will always be at least some that leaks.  I once asked a natural gas specialist at the World Bank what leakage rate one might expect (as a percentage of the gas supplied).  He answered that all one can know for sure is that there will always be leaks.  But how much varies a lot.

Surprisingly, estimates for average leakage rates are not very good even for the US.  And they are far worse in many other countries.  One often sees rule of thumb figures of leakage rates of 2 or 3% in countries where the oil and gas sector is relatively well managed, but far more in countries such as, for example, an Iraq or a Russia.  The US EPA has an estimate that the leakage rate in the US is 1.4% of production, but a Stanford study using airborne sensors found the rate in fact to be 9% in the New Mexico half of the Permian Basin – one of the largest oil and gas fields in the world.  Also, a study published in the journal Science concluded that actual natural gas leakage in the US was on the order of 60% higher than the EPA figures (i.e. 2.3% rather than 1.4%).  This was primarily a consequence of a relatively small number of extremely large leaks resulting from abnormal operating conditions (i.e. accidents or equipment failures).

For the purposes here, I will assume an average leakage rate of 2% of the gas delivered.  I will also assume that the amount of CO2 produced directly from the burning of natural gas is half that from the burning of coal.

Based on these parameters, as well as the assumptions made as discussed above on how fast methane and CO2 are depleted from the atmosphere over time and on the relative warming impact of each, one can calculate what the overall atmospheric warming impact will be from burning gas or burning coal:

Note, importantly, that this chart shows the average warming impact for the periods from the year of the emissions (year zero) to the year shown on the horizontal axis.  That is, the warming impact shown above year 20, for example, is the average warming effect for the period from year 0 to year 20.  This differs from what is depicted in the chart at the top of this post, which provides the relative warming impacts only at the individual years and not over a period average.

Burning coal to produce some given amount of power is scaled to lead to an impact on atmospheric warming of 100 in the initial period.  This 100 can be viewed as 100 tons of CO2 being released, or simply as an index of 100.  That CO2 in the atmosphere then depletes or decays at a slow rate over time (assumed to be 0.3% a year, as discussed above), so there is a small reduction over time in the warming impact.  This is the line shown in blue.  As noted in the previous paragraph, the lines in this chart show the average over the periods of that warming impact (in essence indexed to 100 in year one) for the progressively longer time periods going out to year 100.  That is, the value shown at year 100 represents what the average warming impact would be from that release of CO2 in the initial period over the full 100 years.

The impact from the burning of natural gas (methane) instead of coal is shown as the curve in red.  In the initial year (year zero), there will be a release of CO2 from the burning of the natural gas itself to produce the given amount of power.  The warming impact from that would be 50 – i.e. half that of coal.  But some of the gas would have leaked along the route from the wellhead to the power plant.  Assuming a 2% leakage rate, there would have been a leak of 1 unit (or, if you want to be pedantic, a leak of 1.02 as one would need to start with 51 in order to get 50 at the plant – but I will ignore this).  Since methane has 150 times the warming impact of CO2 in the initial period (as derived earlier in this post), one needs to add 150 (from the leak of that 1 unit of methane) to the 50 from the CO2 directly produced by burning the gas, to get a total warming impact in the initial period of 200.

The year-by-year warming impact resulting from burning natural gas then falls over time:  at the depletion rate for CO2 (0.3% per year) for the CO2 produced when burning the gas, and at the depletion rate for methane (6.5% per year) for the methane that leaked during the production and delivery of the gas to the power plant.  While small, I have also added in the minor effect of the leaked methane slowly ending up as CO2 (and water vapor) after a series of reactions in the atmosphere.  The line in red in the chart is then the multi-year average impact from the sum of these three sources of warming for the periods from year zero to the year shown on the horizontal axis.

The first year warming impact (ignoring lags, as noted before) of 200 is double the warming impact of 100 in the initial period from the burning of coal.  That is, the initial impact from using gas is not half that from the burning of coal, but rather double.  And the average impact from the burning of gas remains greater than the impact from the burning of coal for 48 years – close to a half century – for the parameters assumed.  This will of course depend on those parameters, and the differences could be significant.  For example, if the leakage rate is 3% rather than 2%, the average warming impact from natural gas remains higher than that from coal for an almost 80 year period.

Thus while the warming impact from coal will eventually dominate and exceed that from burning natural gas, it will be many decades before that becomes true.  And the coming decades will be critical ones.

I must, however, hasten to make clear that this in no way should be seen as an advocacy for burning coal.  Coal is a dirty fuel in many different ways, and the CO2 released is only one of the pollutants produced by coal.  There is also particulate matter (soot), sulfur oxides (SO2 – produced from the natural sulfur in coal, and which is converted into sulfuric acid in the atmosphere), and various heavy metals as well as mercury (which can end up in the food chain and is extremely harmful to health, in particular to the developing brains of infants and children).  Coal is also dirty in how it is produced, whether through underground mines (often leading to black lung in miners) or on the surface in strip mines (resulting in moonscapes).  On top of all this, rain flowing through tailings at the mines can become acidic (from the sulfur content) as well as pick up other poisons, and then pollute our rivers and streams.

The term “clean coal” – promoted by some – is a misnomer.  While the many types of pollutants resulting from the production and then burning of coal can be mitigated to varying degrees provided one is willing to spend the funds required, that mitigation can never be 100%.  Coal is considered to be “cheap” by some, but this is only the case if one ignores the costs imposed on others not just from the global warming impact from the burning of that coal, but also from the impacts – often local – on the health of people directly exposed to the many pollutants produced by coal.

To be clear:  The point of this section is not that coal is good.  Rather, the point is that burning natural gas is pretty bad as well.

D.  The Near-Term Danger of Tipping Points

Limiting methane emissions thus has a far greater near-term impact on atmospheric warming than would result from a similar reduction in CO2 emissions – with a “near-term” that spans a half-century or more.  And the next several decades will be critical.

Global temperatures are rising, and in 2023 numerous records were not only set but were shattered.  Temperatures were especially high in the second half of the year (and in fact since June), with global average surface air temperatures setting records each and every month since June.

For 2023 as a whole, the Copernicus Climate Change Service (an agency of the European Union) estimated global average surface air temperatures were a record 1.48° Celsius above their average in the pre-industrial period.  While this is still only the results of one year – there are fluctuations year to year and it is the trend that matters – the trend is certainly upward and has reached or is close to a critical point.

As we have seen this past year, such temperatures have led not only to heat waves, but also droughts in some places and floods in others, stronger storms, and other such impacts from a changing climate.  But in addition, and perhaps even more worrisome, these rising temperatures threaten to lead the planet past a series of “tipping points” – with catastrophic consequences.

A “tipping point” in this context would be some impact on the planet that would be triggered by global temperatures rising above some threshold, with those impacts then close to impossible – or totally impossible – to reverse once underway.  An example would be deaths of coral reefs.  Coral reefs cannot survive water temperatures above some level, and once they are killed they are gone.  Even if water temperatures then recede for some reason, the coral reefs are dead and only a slow process of regeneration might be possible.

A recent major report produced by a group of more than 200 scientists and released just before the COP28 meetings examined 26 such possible tipping point events that may follow from our rising global temperatures, assessing each one for its likelihood, what would lead to it happening, and the consequences.  While most are of concern (and one can never know what others – not foreseen now by what we currently know – might also develop), the report highlighted five as of particular concern and urgency given where temperatures already are or are heading to:

a)  The melting of the Greenland Ice Sheet;

b)  The melting of the West Antarctic Ice Sheet;

c)  Widespread deaths of coral reefs;

d)  Widespread melting of permafrost;

and e)  Changes in the Subpolar Gyre circulation of ocean currents (located just to the south of Greenland).

There is, of course, a good deal of uncertainty about these and the other possible tipping points, including at what temperatures the processes will become effectively irreversible; what the feedback effects will be (with many of the tipping points inter-linked); and what the consequences will be.  The report is clear that there are such uncertainties, and provides (when they are able) estimates for the ranges involved.  It provides an excellent summary of what we know and our best estimates of what might develop as temperatures rise.

The tipping point for the melting of the Greenland Ice Sheet is at an estimated temperature increase of 0.8 to 3°C above the pre-industrial norm, with a central estimate of 1.5°C.  As noted above, at the 1.48°C temperature in 2023, we were already within round-off of this critical 1.5°C increase (although only – so far – for one year, and there is year-to-year variability).  The tipping point for the melting of the West Antarctic Ice Sheet is at an estimated increase of 1 to 3°C (with no central estimate provided).

This does not mean that once such temperatures are reached, the ice sheets will melt in full immediately.  Of course not.  As anyone knows when they put ice cubes in a summer drink on a hot day, it will take some time before the ice melts.  Furthermore, it is also not a steady process of continuous melting.  There is a seasonality, where ice builds up in the winter and melts in the summer.  The tipping point is reached when the ice that melts in the summer months exceeds how much ice will on average be built up in the winter, so that over time the ice sheet that has been there for tens of thousands of years will melt away.

This does take time, and at or close to the tipping point temperatures (should those temperatures remain and not rise even further) it may take hundreds of years or more before the ice sheets are completely melted.  But absent a sharp reduction in global temperatures from their critical values, the ice sheets will continue to melt and likely even accelerate the pace at which they do.  For example, soil that becomes exposed in some spots as the ice sheet melts will absorb more solar radiation than ice covered with snow, as white snow reflects sunlight.  This will accelerate the melting.

Should the Greenland Ice Sheet melt in full, global sea levels will rise by 23 feet for this reason alone.  This does not count any further melting from other sources – where there will of course be some such melting as well if the Greenland Ice Sheet is melting.  If the West Antarctic Ice Sheet also melts in full, then sea levels will rise by a further 10 feet, plus there will be the impact from at least partial melting of other sources.  Such sea level rises would inundate not only all of the globe’s coastal cities but also much other land near the coasts.

As noted, the only possibly comforting aspect in this is that the entire process – once the tipping point is passed – will likely play out over hundreds of years or more.  How long will depend on the path of global temperatures, as well as factors such as feedback effects and other aspects that are not yet well understood.  But there is also danger in this time frame, as an impact that will play out over hundreds of years is very easy to ignore.  And once the impacts become such that they can no longer be ignored, we will likely be well beyond any possibility that they could be reversed.  Complacency is a danger, and a huge one.

There are similar issues with the other tipping points examined and identified.  For the widespread deaths of coral reefs, for example, the report concludes the tipping point increase in global temperatures is somewhere between 1.0 and 1.5°C above pre-industrial temperatures, with a central estimate of 1.2°C.  As noted above, the world in 2023 was already at a 1.48°C increase in 2023.  Coral has already been dying.

Similarly, permafrost is melting, where for permafrost there is always a dividing line between it and soil not permanently frozen, with that dividing line moving northward as temperatures rise. And melting permafrost has major feedback effects as it leads to the release of both methane (from bacterial action that becomes activated) and CO2 (as what had been frozen will now dry out and burn in wildfires).

Finally, the rising temperatures as well as interaction effects resulting from the melting of the Greenland Ice Sheets (which releases fresh water, which then reduces the salinity of nearby ocean waters) will affect the operation and mixing of ocean currents.  A particular concern is the Subpolar Gyre south of Greenland, where changes in those currents can be expected to have major impacts on weather in the Northern Hemisphere, particularly in Europe.

The report concluded that if global temperatures are not stabilized at or below these critical levels (with tipping point temperatures that vary depending on the particular process assessed), a range of catastrophic impacts should be expected.  Thus there is an urgency to take steps to reduce the steady rise in global temperatures, and to the extent possible end or, preferably, reverse it.  Addressing methane emissions should be a priority for this, not to the exclusion of measures needed to address CO2 emissions but as a complement and one that could have an especially important near-term impact.

E.  Final Points and Conclusion

Addressing methane emissions therefore should be, and needs to be, a priority.  The coming decades will be critical, and reducing methane emissions by some amount has a far greater impact than an equal reduction of CO2 for periods stretching for decades.  But it is not always understood that there also will be important longer-term benefits as well.

There is a logical fallacy on this issue that some people fall into.  As discussed above, methane has a relatively short half-life in the atmosphere – about 9.1 years according to IPCC estimates when only direct effects are taken into account, or 11.8 years when indirect effects are included.  Some have therefore mistakenly concluded that control of methane emissions may not matter all that much, as methane in the atmosphere is depleted by natural processes relatively rapidly.  Hence, they conclude that the only permanent solution is to control CO2 emissions.

It is certainly true that CO2 emissions need to be controlled.  But the fact that the half-life of methane in the air is so much shorter than that of CO2 is an additional reason why methane should be a priority, not a reason to downgrade its importance.

First, take the case of CO2.  It will remain in the atmosphere for centuries – depleting only slowly.  Hence whatever CO2 that is released now will keep warming the planet for centuries. And should we eventually get to the point of net-zero CO2 emissions (as we need to do), that will essentially mean that there will be no additional warming of the planet from that point forward.  But neither will temperatures go down by much for centuries (unless some technology is developed that can actually extract CO2 from the air at a reasonable cost – but we are far from that now and it may well never be possible).

Contrast this with the case of methane.  As noted before, the IEA estimates that methane released into the air due to human activities accounts for approximately 30% of the increase in global temperatures we now observe compared to temperatures in the pre-industrial era.  The average global surface air temperature in 2023 was already 1.48°C above the pre-industrial average, as noted above.  While the Paris Accord sets the goal that global temperatures should not be allowed to rise by more than 2.0°C over the pre-industrial average by 2050 – and preferably not rise by 1.5°C – the world is already essentially at the 1.5°C line and there is little reason to believe the maximum 2.0°C goal will be reached either.

But suppose that methane emissions were dramatically cut.  Based on a 6.5% per year depletion rate of methane in the air (implying a half-life of about 10 1/2 years), one can calculate that after 30 years, only 13.3% of the methane emitted in the initial period will still be in the atmosphere as methane.  That is, 86.7% of it will be gone.  Using the IEA estimate that methane accounts for 30% of the increase in global temperatures since the pre-industrial period (and assuming this would remain the case in the scenario where temperatures continue to rise), then if methane emissions were somehow – magically – cut to zero immediately, then after 30 years global temperatures would be reduced by 86.7% x 30% = 26%.  That is, if the temperatures would otherwise rise by 2.0°C (relative to pre-industrial temperatures), they would instead rise by 2.0°C x 26% = roughly 0.5°C less.  Instead of rising by 2.0°C, they would rise (due to continued even if diminished CO2 and other greenhouse gas emissions) by about 1.5°C.  That would be a huge difference.

Cutting methane emissions immediately to zero is of course unrealistic.  But suppose they were cut by a still ambitious but conceivable 50% over the course of a decade or so.  The impact, after 30 years, would be to reduce global temperatures by roughly a still significant 0.25°C from an otherwise 2.0°C increase.

That is, it is precisely because methane will relatively soon be reduced in the atmosphere through natural processes that cutting back on methane emissions could lead to a significant reduction in global temperatures from where they would otherwise be.  Cutting back on CO2 emissions, in contrast, will only keep global temperatures from rising further, with no significant fall for a very long time.  The CO2, once released into the air, will remain for centuries and thus continue to keep the planet warmed for centuries.  Cutting back on new methane emissions, in contrast, could actually lead to a reduction in global temperatures (relative to where they would otherwise be) on a meaningful time scale as the remaining concentration of methane in the atmosphere (from past emissions) is soon depleted away.

Methane is important.  It deserves more attention than it has received.