Thursday, November 26, 2009
Environmentally, it is modest indeed: it should deliver the Government's committment of a 5% greenhouse gas reduction by 2020. The Government has committed to a 15% reduction by 202 if there is an effective global agreement but, first, that looks unlikely and, second, even if there is, after the way the scheme was been watered down and watered down as it goes through the political process, I really don't have much confidence that the Government could get a scheme up that delivers 15% reductions by 2020. It's also probably worth noting that those 5% reductions won't all happen in Australia - under the scheme as it is, most reductions will be achieved by Australia buying credits from overseas schemes. I don't have a big problem with that - it essentially means Australian money driving additional reductions overseas - but a lot of people feel that when we commit to reducing our emissions, we should actually reduce our own emssions rather than paying others to reduce theirs.
Economically, I've heard it described as a "rent-seeker's paradise" and a massive transfer of wealth from households and small business to big polluters and I think those statements are pretty fair. It contains massive compensation for affected industries, and reasonable compensation for low-income households. Everyone else pays. Surprisingly, it is revenue-negative for government.
The questions is whether it's better than nothing at all. I'm not sure. On the plus side, it will drive some reduction in emissions and, probably more importantly, it establishes the machinery for dealing with the problem - we'll gain experience with an emissions trading scheme that can, in theory, be improved in the future. The Greens are adamant, however, that it will "lock in failure" and I think there's something to this argument. They claim it will actually unleash a lot of investment in coal-fired electricity generation and other polluting industry. I think they may be right: carbon-intensive industries have been worried about carbon policy and the CPRS gives them certainty that the policy environment will be very friendly for them for at least a decade. It also showers them with cash - it seems to me the dirtiest industries will actually profit from the scheme. You also have to wonder about the political likelihood of it being strengthened in the future - I think things would have to be looking pretty grim for the climate to get the political impetus to genuinely fix it up.
It's all pretty disappointing for someone who has high hopes in the ability of market-based policies to deliver good environmental outcomes at low cost and spread fairly over the community. If this is what an emissions trading scheme looks like in practice, the fact that I think a purer scheme could work really well in theory is pretty hollow.
Tuesday, October 20, 2009
If the tax structure from early last century prevailed today, we would have to raise $40 billion from excise and $230 billion from tariffs to meet today's revenue demand. At that rate the excise on a schooner of beer would be around 7 times what it is today. And I shudder to think how much a television set would cost.
That's Treasury head Ken Henry, speaking on lessons from past tax reform experience. Henry is chairing the review of Australia's tax system and he singles out road pricing to address congestion as a perfect candidate for reform:
When vehicles drive on a congested road they impose costs on other drivers. Each driver thinks of their own need to get to their destination, not considering how, by taking up space on the road, they impinge on the ability of other drivers to do so. There is no means for one driver to coordinate with others, to bargain about who should have priority, so that they can all be better off. This results in a predictable 'tragedy of the commons' which is estimated to waste around $9 billion a year in avoidable congestion costs, increasing to around $20 billion by 2020. Such costs will only increase with faster population and economic growth.
Worth a read.
Friday, October 16, 2009
Apparently today is Blog Action Day for Climate Change and I thought I'd throw it open to my wonderful blog readers.
Thursday, October 08, 2009
Tuesday, October 06, 2009
- Under free allocation, most permits remain with the high emitters who received them for free, apparently because the high emitters are able to use their market power to keep the permit price high and reduce trade.
- Firms pass the cost of permits through to their customers under both treatments (even if they got them for free). Surprisingly, product prices are even higher under free allocation (not sure why this is the case).
- With free allocation of permits, the high emitters walk away with large windfall profits. These disappear with auctioning, with the surplus instead going to the government as auction revenue and to consumers in the form of lower product prices.
This study adds further support to the idea that permits should be overwhelmingly auctioned, not given away. Permit giveaways benefit no-one other than the companies who get the free permits, at the expense of their competitors, consumers and taxpayers.
Goeree, J., C. Holt, K.L. Palmer, W. Shobe and D. Burtraw (2009). "An Experimental Study of Auctions versus Grandfathering to Assign Pollution Permits." RFF Discussion Paper 09-39, Sept 2009.
(HT: Climate Changes)
Wednesday, September 23, 2009
Strange weather in Australia recently: record high winter temperatures, bushfires in spring, hail the size of cricket balls overnight and we woke this morning to an apocalyptic orange glow in Sydney.
Meanwhile our Prime Minister is at the UN for climate change talks and the domestic question is whether we should have our emissions trading scheme ready to go for Copenhagen or wait for the outcome of the Copenhagen talks and a post-Kyoto international agreement.
In today's Sydney Morning Herald, economics editor Ross Gittins has a go at both parties about their complacent approach to climate change and then turns his gaze to population growth and to economists for ignoring the environment.
Even the economists who brought us the emissions trading scheme don't adequately appreciate the problem we've got. They think all we have to do is switch to low-carbon energy sources (ideally by capturing all the carbon emitted by burning coal) and the economy can go on growing as if nothing had happened.
Being economists, they see us as all living in an economy, with this thing at the side called the environment that occasionally causes problems we need to deal with. As usual, wrong model. In reality, the economy exists within the ecosystem, taking natural resources from it, using them and then ejecting wastes, including sewage, garbage, pollution and greenhouse gases.
Not much to disagree with there, but I haven't seen Gittins talk about ecological economics before or what the alternative model might look like. (At the risk of caricaturing his columns, they seem to be, while interesting, a confusing mix of very staid conventional economics one day: 'if the politicians studied a bit of economics they'd realise that people will act in their self-interest and supply and demand will ensure such and such happens' with blanket rejection of economic ideas the next 'if economists studied human psychology, they'd realise that people don't act in their self-interest and so supply and demand can't be counted on' etc).
But perhaps we can look forward to some ecological economic analysis from Gittins in the future.
Thursday, September 10, 2009
So if we believe shoppers are as rational as traders (why not?), then there should be a parallel efficient supermarkets hypothesis. The efficient supermarkets hypothesis tells us that: (a) the length of the line reflects all available information about its speed (cashier skill, size of preceding trolleys etc), (b) the best way of getting through the supermarket checkout is to pick the closest line and stay in it, and (c) the worst thing you can do at the supermarket is switch lines.
Of course, the number one problem with these things is the assumption that your fellow shoppers are rational in their choice of lines. Well, maths teach Dan Meyer has done the research at his local supermarket and it seems shoppers do not always rationally choose the shortest lines!
The express lane isn't faster. The manager backed me up on this one. You attract more people holding fewer total items, but as the data shows above, when you add one person to the line, you're adding 48 extra seconds to the line length (that's "tender time" added to "other time") without even considering the items in her cart. Meanwhile, an extra item only costs you an extra 2.8 seconds. Therefore, you'd rather add 17 more items to the line than one extra person! I can't believe I'm dropping exclamation points in an essay on grocery shopping but that's how this stuff makes me feel.
So there you go - watch out for the assumptions in your economic models!
It follows that choosing one over the other is partly an issue of whether you want certainty in your environmental outcome or certainty in the cost to industry.
The experience of the European emissions trading scheme and now it seems the US Regional Greenhouse Gas Initiative (RGGI, pronounce it 'Reggie' - a trading scheme involving 10 States in north-east USA) has been that the cap on emissions was set too high and too many permits made available, with high volatility in permit prices and permit prices crashing after a while. The governments were too worried about the potential cost to indsutry (which isn't known in a trading scheme, but has to be forecast) and so overallocated permits.
Australia's ETS will actually start out as effectively a carbon tax, because the price of permits will be fixed at $10 a tonne for at least the first year. After that it become a trading scheme, with a fixed emissions cap and an unknown permit price.
Actually, it's more like hybrid scheme in one way, because it's proposed that there will be a ceiling price of $40 a tonne: companies can buy unlimited permits from the government at that price, so the permit price will never rise above $40.
A lesson from the EU and RGGI is that it would make sense to set a floor price too, so everyone knows that the permit price will never fall below, for example, $15 a tonne. That gives some certainty to industry, that investments in emissions-reducing technologies that are profitable at a carbon price of $10 a tonne or more can be made with no carbon price risk. It gives some reassurance to renewable energy and similar industries that they can safely invest. And it means that if reducing emissions turns out to be cheaper than expected, some of the benefit goes to the environment in the form of lower emissions and doesn't all go to indsutry in the form of cheaper permits.
Wednesday, September 09, 2009
Many studies find that households increase their consumption after the receipt of expected income payments, a result inconsistent with the life-cycle/permanent income hypothesis. Consumption can increase adverse health events, such as traffic accidents, heart attacks and strokes. In this paper, we examine the short-term mortality consequences of income receipt. We find that mortality increases following the arrival of monthly Social Security payments, regular wage payments for military personnel, the 2001 tax rebates, and Alaska Permanent Fund dividend payments. The increase in short-run mortality is large, potentially eliminating some of the protective benefits of additional income.
Monday, September 07, 2009
The bottom line: coal is a large and growing contributor to greenhouse gas emissions and clean coal technology is a long way from being a commercial reality.
Should be worth watching.
Saturday, September 05, 2009
Ziggy Switkowski who, as former CEO of Australia's first and biggest telecommunications company, should know better, opens an otherwise interesting Online Opinion piece about the march of technology with this:
Our forebears 100 years ago could not have dreamt of the emergence of television, computers, satellites...Really? No-one in 1909 could have even dreamt that those things might emerge?
Could our forebears have imagined 100 years ago that advancements in technology would allow you to check big statements like Ziggy's in about a minute?
According to Wikipedia:
The first electromechanical television system was patented in 1884 in Germany. Before that, the concept of electrically-powered transmission of television images in motion, was first sketched in 1878 as the telephonoscope, shortly after the invention of the telephone.
Punch's Almanack for 1879 imagines a 100-inch wall-mounted interactive LCD TVwith surround sound
The first fictional depiction of a satellite being launched into orbit is a short story by Edward Everett Hale, The Brick Moon. The story is serialized in The Atlantic Monthly, starting in 1869. The idea surfaces again in Jules Verne's The Begum's Fortune (1879). In 1903 Konstantin Tsiolkovsky (1857–1935) published The Exploration of Cosmic Space by Means of Reaction Devices, which is the first academic treatise on the use of rocketry to launch spacecraft. He calculated the orbital speed required for a minimal orbit around the Earth at 8 km/s, and that a multi-stage rocket fueled by liquid propellants could be used to achieve this.
The "castle clock", an astronomical clock invented by Al-Jazari in 1206, is considered to be the earliest programmable analog computer. But it was the fusion of automatic calculation with programmability that produced the first recognizable computers. In 1837, Charles Babbage was the first to conceptualize and design a fully programmable mechanical computer, his analytical engine. From the end of the 19th century onwards, the word computer began to be used to describe a machine that carries out computations.
People have more ambitious dreams than Ziggy gives them credit for.
Thursday, September 03, 2009
An important thing to keep in mind is that this aspect of the debate doesn't change the total emissions - it's not an environmental debate; it's about fairness and economics. You get the same emissions whether you auction all the permits or give them all away. What changes is who pays and who gets the revenue. Under auctioning, the government gets the revenue and hopefully uses it to reduce other taxes. If you give permits away, the emitting industries get the money.
A new study has examined the economics of auctioning versus freely allocating permits under the US emissions trading scheme, with some possibly surprising results. They point very much to auctioning a vast majority of permits as a better way.
First, the unsurprising result: the more permits that you auction, if you use the revenue to reduce other taxes, the lower the economic cost of the trading scheme.
Second, the possibly surprising result: you only need to give away 15% of permits to completely compensate the industries most affected by the scheme. I think the proportion the government and opposition are debating freely allocating for the Australian scheme are substantially larger than that*, so think about what that means: these industries will actually profit from the introduction of the ETS. The study suggests that giving away 100% of permits leads to a doubling of profits for many industries.
*Our scheme and industries are slightly different so the numbers from the US won't directly translate, but they should be in the same ball park. Does anyone know if anyone's run the numbers here? Maybe in the Treasury modelling...
Wednesday, September 02, 2009
Why? A new paper investigates.
Among the findings, providers located in Europe sell offsets at prices that are approximately 30 percent higher than providers located in either North America or Australasia. And, not surprisingly, offsets that qualify for emission reductions under the Kyoto Protocol, sell at a premium of more than 30 percent.
In theory, a project that avoids the emission of a tonne of greenhouse gas should give the same benefit (and have the same price) as the same as any other project that avoids the emission of a tonne of greenhouse gas. But of course you need to have confidence that this is actually what will happen and I'd guess that this is the difference: you're prepared to pay more if you're more confident that the advertised benefits are really being delivered.
Tuesday, September 01, 2009
For probably the first time ever, life expectancy in Australia is getting shorter. Three of the biggest and most preventable killers are tobacco, alcohol and obesity. And high on the list of strategies for discouraging them are "economic policies and taxation systems", which I read (and newspapers are reporting) as "make them more expensive". Not very imaginative, but will it be effective?
For cigarettes, they suggest increasing taxes soon so a pack costs at least $20 and for alcohol, interestingly, creating a 'floor price' - not necessarily increasing the price of all alcohol, but ensuring there's no very cheap stuff. For junk food, they just talk about exploring taxation, incentives, subsidies etc to promote consumption of healthier foods.
Will this help much? Is there a better approach? Has the government reached the extent of what it can reasonably do in terms of banning, taxing, subsidising, promoting, and is the rest up to the community?
Pricing is clearly a factor but it seems to me that changing a culture of smoking and drinking is the big thing - is that something that the government can or should really do?
Thursday, August 20, 2009
Monday, August 17, 2009
Friday, August 14, 2009
Australia's Kyoto negotiation team prepares for Copenhagen (Dilbert - Scott Adams)
Thursday, August 13, 2009
In view of our diminishing returns of coal and petroleum, the utilization of wind-power deserves careful attention. The available water power in this country is very limited, and the development of it generally requires so great a capital outlay that the standing charges more than equal the cost of the coal required to produce the same results by means of gas or steam...
Wind-power, on the other hand, is almost unlimited, and the capital outlay for its development compares favourably with that required for gas or steam. The intermittent and varying results obtained from wind-mills, however, confine their usefulness to industries in which the storage of power can be simply effected, and this feature is always met with in some form or other...
It is only when windmills become are used for providing a constant supply of electric current that storage becomes costly and troublesome, and conditions must be favourable to enable wind to compete successfully with other sources of power in this case.
Wednesday, August 12, 2009
One very simple measure I've just heard about is the Idaho Stop Law, in place in Idaho since 1982. Quite simply, cyclists can treat stop signs as give way signs (they must give way but needn't come to a complete stop) and red lights as stop signs (they must stop but can then proceed if nothing's coming).
In the first year it was introduced in Idaho, cycling injuries apparently dropped 14.5%. Michael Giberson at Knowledge Problem suggests part of the reason this law improves safety is that it reflects what many cyclists do anyway and so it aligns the expectations of cyclists and drivers.
Tuesday, August 11, 2009
So in terms of opposition policy announcements, this one's a whimper rather than a bang. They could have pretty much randomly selected any submission made to the Garnaut review or green paper and said "Here's a great idea, why doesn't the government negotiate with us and listen to alternative views like this? Not that it's Coalition policy. We haven't decided what we think of this yet".
But it promises really big things: twice the emissions reduction of the government's proposed carbon pollution reduction scheme at less than two-thirds the cost. Wow, the CPRS must have left some whopping great low-hanging fruit unpicked for those numbers to stack up.
Anyway, I spent last night reading it - badly, badly written as it is. There's 3 hours of my life I won't get back. At least some of the graphs were nice.
When people that really understand the economic modelling of emissions trading costs (not me) get to the bottom of this report I expect it to be thoroughly discredited or else I will learn some useful economic lessons - because I could not for the life of me see how the savings can be achieved. Because this scheme is not radically different to the CPRS; it's a minor tweak.
Very briefly, the idea is for special treatment of the electricity sector - because that's the sector affected most intensely by emissions trading. So instead of requiring electricity generators to have credits for all their emissions, they'd only require them for emissions above a 'best practice' baseline. That baseline would be progressively tightened, so rather than an immediate big electricity price rise, you get a gradual rise. As a result you get less revenue from auctioning permits but you also spend less compensating households and businesses for higher electricity prices. You also reduce the incentive for consumers to save electricity, but the report reckons this won't make much difference because consumers can only respond slowly to electricity price rises anyway: people won't go out and buy LED downlights and turn applicances off standby overnight.
All this is fine as far as it goes, but where do the massively higher emissions reductions at a massively lower cost come from? And the report's 86 pages are pretty hazy on this.
It's not because these tweaks makes it cheaper for firms and households to reduce emissions - rather, according to the report, it's "mostly due to a reduction in the economic distortions arising from the Government's revenue churning" when the CPRS means higher electricity prices, compensated for by other measures (eg, lower income tax). If you reduce the impact on electricity prices, much of that compensation isn't needed.
Well colour me sceptical. Nowhere could I see in the report an explanation of how collecting revenue from permits and using that revenue to reduce other taxes and increase welfare payments costs 1.5 times as much as keeping electricity prices low and collecting the revenue from existing sources instead. Why exactly is taxing electricity so wildly inefficient but taxing incomes just fine?
And how does shielding electricity from the full effects of the scheme allow us to double our target? Well, again, the report hints at this without really explaining it. What the report says is that international carbon trading means that the carbon price in Australia is the same regardless of our domestic target. We're a small country - we don't affect the international carbon price. Fair enough.
So, just to pick a round number out of the air, assume we emit a billion tonnes of carbon a year and the government wants to reduce that by 5% (down to 950 million tonnes). Assume also that the international carbon price is $20 a tonne and we can trade internationally.
So the government issues a 950 million permits. Let's say the government gives half of them away to industry and auctions or sells the other half at the international carbon price of $20. Each firm will reduce emissions where that will cost them less than $20 a tonne and will buy permits at $20 for emissions that it would cost them more than $20 a tonne to reduce. The government gets nothing for the half it gives away and gets $9.5 billion from the half it sells / auctions (475 million @ $20). Industry pays $9.5 billion plus the costs of reducing emissions that are cheaper than $20 a tonne to reduce.
Now, suggests Frontier, assume we double the target for reducing emissions from 5% to 10%. So instead of issuing 950 million permits, the government issues only 900 million. But the international carbon price stays the same, since Australia's decisions don't affect it. Now, each firm will still reduce emissions where that will cost them less than $20 a tonne and will buy permits at $20 for emissions that it would cost them more than $20 a tonne to reduce. So the cost to each firm is still the same. But now since the Australian government has issues fewer permits, it gets less revenue and indsutry buys them instead, at the same price, from overseas. The government now gives half away and sells the other half for $9 billion. Industry pays $9 billion to the government, $500 million for overseas permits and still pays the same to reduce emissions.
In effect, Australia's decision to lower its target is just the decision of a small supplier on a world market to supply less of a commodity - the world price doesn't change, the supplier just makes less money and other suppliers make more.
All this is fine, but the result is that the government gets $500 million less in revenue and that money instead goes overseas. That's $500 million less that the government has to cushion the financial impact of the CPRS on households and businesses. Frontier's report accepts that but says it doesn't matter: "This effectively represents a transfer from the Government to international markets, though in practice the magnitude of this transfer will be relatively small (see discussion later)". Unfortunately, there's no discussion later that I could find and I don't see why this should be small at all. In fact the transfer represents the total of any shift in the target multiplied by the carbon price. In other words, the government pays 100% of the cost of meeting any additional target by buying foreign permits.
Frontier does not explain the following, and to me it just doesn't seem explainable: Why does a reduction in emissions of 5%, spread over a range of industries, sectors, government and households, and with each of these groups making adjustments to the way they do things that reduce the costs they face, impose a huge burden on the economy - while reductions of a further 5% paid for completely by government buying permit, impose costs of a "relatively small" magnitude. It just doesn't make sense.
Now maybe I've missed something here but I've read the report and I'm still very unsure of how Frontier's proposed tweaks to the CPRS save money or allow for increased targets.
For the opposition to present this as an alternative to the CPRS strikes me as another big non-contribution by the opposition toe the climate debate.
Elsewhere: Joshua Gans (and more from Joshua), Peter Wood, Harry Clarke, Robert Merkel, Ben Eltham.
Monday, August 10, 2009
Drivers who were surveyed on average thought that a car could be idle for almost 4 minutes before it was better to turn the engine off (in fact, it's more like 10 seconds).
There are lots of resources out there on how to reduce your fuel consumption (in the US they call it 'hypermiling') - and turning your engine off when stopped for a while has to be one of the easiest.
The NRMA reckons that if you're stopped in traffic for any length of time you should turn the key to the 'accessory' position (not completely off) and shift automatic transmission to park or neutral. This way, when the traffic starts moving again, the engine starts straight away. Vehicles fitted with this feature as standard typically reduce fuel consumption in urban areas by up to 15% (see its PDF petrol saving tips).
Sunday, August 09, 2009
Well Oikos is back. Welcome readers old and new!
Oikos is a blog I started in November 2005, while enrolled in a Masters in environmental economics and not long after moving from an environment NGO to a government environmental agency.
The blog's focus is at the intersection of the environment and economics. Both ecology and economics derive from the Greek oikos, meaning household.
I'll mostly be looking at environmental policy on Oikos for now, with environmental economics, environmental markets and climate change a major focus. I'll also talk a bit about related topics I'm interested in (eg, prediction markets and behavioural economics).
2009's been a busy year so far. Work has certainly had an environmental markets focus, with involvement in establishing a market for biodiversity offsets. I've finished my last coursework subject at uni (evaluating impacts of policies using econometric and experimental methods) and my thesis (relating to carbon trading and prediction markets) while kind of stalled right now, is almost finished. And I've been busy organising my wedding too (the big day's next Jan)!
Anyway, I feel it's time to get Oikos back up and running and continue the environmental policy debate. Please join me!