Oikos

The Oikos archives

2011-06-13T12:58:00.002+10:00

Welcome to the archives of the Oikos blog.

Oikos is a blog I authored from 2005 to 2009, focussing on environmental economics and environmental policy in Australia.

If you'd like to contact me, please email me at ozelaw[at]yahoo[dot]com[dot]au. I check the account sporadically.

Cheers

David

Some quick thoughts on the Oz emissions trading scheme

2009-11-26T08:21:00.003+11:00

We have a good idea now of what the so-called Carbon Pollution Reduction Scheme is going to look like, after the Government and Opposition hammered out a deal on Tuesday and it was endorsed (barely) by the Liberal Party in a turbulent day yesterday. It seems that the Government now has the numbers to get the Bill through the Senate, with enough opposition senators willing to support it.

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.

Ken Henry on tax reform

2009-10-20T13:38:00.003+11:00

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.

Climate Change Blog Action Day

2009-10-16T08:40:00.000+11:00

Apparently today is Blog Action Day for Climate Change and I thought I'd throw it open to my wonderful blog readers.

I find myself alternatively optimistic and despairing on climate change. How bad is it going to be? Are we going to do what it takes to avoid the worst? And what do you think is going to be the most help? People and communities and businesses taking action themselves? National governments agreeing on strong action at Copenhagen and setting up strong domestic laws, like emissions trading? Peak oil or economic crisis reducing emissions automatically? Or technological breakthroughs making it easier than we thought? Or will it take some real environmental crisis to get the impetus?

What do you think? Put in your two cents for Blog Action Day - bloggers, regulars, visitors and lurkers!

Cheers

Dave

What's the Opposition's climate policy?

2009-10-08T08:35:00.003+11:00

I saw Maclolm Turnbull interviewed the other night saying that he supported emissions trading and reminding people that emissions trading was indeed government policy under the previous Howard Liberal government when Turnbull was Environment Minister (it was pretty token and very very late if I remember rightly). He also said that it had been on their "legislative program" to introduce (I guess they ran out of time; 11 years in government only gives you so much time to make new laws). He said the Coalition didn't oppose emissions trading (it was Coalition policy) - what they oppose is Labor's confused and costly scheme.

It all made me think: what is their position? I don't recall them articulating what exactly they don't like about the proposed scheme and what they would do differently. It seems that every public figure and lobby group in Australia has said what they do and don't like about the scheme and how they'd like it changed - except our opposition party.

Can this be right?

Picture: abc.net.au

Emissions trading: Auctioning permits vs giving them away

2009-10-06T21:54:00.000+11:00

As I've talked about before (The great permit give-away), one of the big debates in emissions trading is whether to auction most of the permits or give them away free to industry. Under the Australian CPRS it looks like more and more will be given away, to industries that are particularly affected and/or have to compete with overseas industries that do not face carbon costs.

There's a few myths going around about the different results from allocating and giving away permits.

One myth that I hear from the green side is that if you give permits to companies for free, they have no incentive to reduce their emissions.

A myth I hear from the industry side is that if they're given free permits, they won't have to raise their prices to recover the additional costs of permits.

But in theory, you get the same carbon price and the same impact on, for example, electricity prices, whichever allocation method you use.

The reason is trade and opportunity cost. Even if a firm gets permits for free, the permits still have a value. They can be sold. Other firms will need to buy them if they want to expand production and the firm with free permits can choose to sell or use the permits. If it can reduce its emissions more cheaply than the permit price then it has an incentive to reduce its emissions and sell the permits - even if it got the permits for free.

And if a firm gets permits for free, will it pass the savings on to its customers? Well maybe. But its competitors will still have to buy permits at market price. And the firm (and any other firms in the industry) will have to buy more permits if it wants to expand. So, at the margin, firms will need to take the permit price into account. Now the firm with the free permits could undercut its competitors. Its market share would then increase and it would have to buy more permits - at the market price. Or it could just charge the market price for electricity and pocket the difference as pure profit.

That was the experience under the EU's emissions trading scheme, where German electricity generator RWE passed the "cost" of permits onto its customers, even though it had received most of those permits for free. The result was a windfall profit of about $6.4 billion for RWE in the first 3 years of the scheme, and electricity prices that rose by 5% a year.

A new experimental study (PDF) also casts some light on the theory.

Experimental economics is a fairly recent and fascinating field where the predictions of economic theory are put to test in the lab. Testing economic theory in the real world is fraught because it's almost impossible to isolate the parameter you're testing from the thousands of other factors that could be affecting the outcome. What's the effect of the stimulus package on retail spending? No-one really knows because there are so many other factors affecting retail spending: unemployment, interest rates, exchange rates, etc etc. You can't control for them all. In the lab, you can control the environment. (The trade-off is whether you can translate behaviour in the lab to behaviour in real life.)

In this study, participants were randomly assigned roles as high emitting or low emitting firms in a simplified industry. In one treatment, high emitting firms were given free permits, while in the second treatment, permits were auctioned. Trading of permits was then allowed freely in both treatments and firms also then decided on how much they would produce and the prices they would charge for their products, taking into account the need for permits and the decisions of their competitors.

The results are interesting and accord roughly, but not exactly, with the theory:

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)

Red sky in the morning...

2009-09-23T09:27:00.003+10:00

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.

Photo: View from our front door this morning, photo credit Catherine Page

Economics and supermarket checkout lines

2009-09-10T08:33:00.003+10:00

I remember reading a nice exposition of the efficient markets hypothesis on Andrew Leigh's blog a while back:

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!

Dealing with uncertainties in carbon price

2009-09-10T07:57:00.003+10:00

The main difference between a carbon tax (emissions tax) and an emissions trading scheme is this. With a carbon tax, the price of emitting a unit of greenhouse gases is fixed but the total level of emissions is unknown. With an emissions trading scheme, the level of emissions is fixed (capped) but the price is unknown.

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.

Stimulus payments can kill you

2009-09-09T14:59:00.000+10:00

Yes, those $900 cheques from Uncle Kevin can kill. That’s the finding of a new study in the Bulletin on Aging and Health:

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.

Clean Coal on Four Corners

2009-09-07T09:38:00.004+10:00

Four Corners tonight is on progress with "clean coal" (also known as carbon capture and storage, CCS): coal-fired power stations that capture the greenhouse gases emitted from burning the coal and store them underground.

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.

Nitpick of the day

2009-09-05T07:00:00.003+10:00

OK, I'm being a bit trivial but indulge me. Sweeping generalisations and grand rhetorical statements bug me at the best of times, but particularly when they're quite obviously wrong.

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.

The great give-away: Allocating permits under an emissions trading scheme

2009-09-03T07:45:00.000+10:00

One of the bigger areas of debate in emissions trading is how to allocate permits. The purists (eg, Garnaut) suggest they should all be auctioned while political realities suggest a large chunk will be given away to compensate the industries that will suffer most under the scheme (Garnaut suggested that you should give cash compensation so it's transparent).

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...

Carbon offsets: Oils ain't oils

2009-09-02T12:41:00.003+10:00

If you wanted to offset the carbon emissions of a flight, you can buy carbon offsets from any number of providers. But the price for offsets done in different ways or certified under different standards can vary greatly.

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.

Tax cigarettes, aclohol and junk food til no-one buys them?

2009-09-01T16:51:00.003+10:00

The National Preventative Health Taskforce has just publicly released its strategy "Australia: The Healthiest Country by 2020".

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?

Renewable energy target expected to pass today

2009-08-20T07:56:00.006+10:00

Some good news following last week's defeat in the Senate of the Australian emissions trading scheme. The Senate is voting today on the big increase in the mandatory renewable energy target (MRET), and it's expected to pass after the government and opposition reportedly reached a compromise yesterday.

The target - 20% of electricity from renewable sources by 2020 - wasn't in doubt, but there was debate over the assistance to be given to electricity-intensive induestries.

The MRET was originally included as part of the CPRS (emissions trading) legislation, but the government agreed to split it as it was clear that the MRET could be passed and there was no use condemning it to defeat by insisting on it being a joblot with the CPRS.

This is good news. The new target is a big increase from the previous one and this gives some certainty to investors in renewable energy at a time where there's still considerable uncertainty about the timing and form of the emissions trading scheme. (And depending on what happens with the CPRS, it's possible that MRET, not emissions trading, will be the real driver of emissions reductions for Australia over the next decade).

Photo credit: davidnikonvscanon via flickr.

Update: The scheme has indeed now passed. Also, Sam Wylie at Core Econ has a nice summary of the scheme.

Sustainable House Day - 13 September

2009-08-17T17:18:00.003+10:00

13 September is Sustainable House Day. Greenies around Australia open their homes and share their stories and tips for making your home greener. Learn and be inspired.

HT: Greenfoot

Game theory and Kyoto negotiations

2009-08-14T08:55:00.000+10:00

I'm not a huge fan of simple game theory analyses of international climate change negotiations (even though I've been guilty of using them myself) because they tend to model each country as being an individual acting in its own interests, when the political reality is rather more complicated.

For example, simple prisoner's dilemma game theory would predict that no countries would take unilateral action on climate because it's not in their national self-interest - the only action would come in the form of a comprehensive international treaty. But domestic politics - for better or worse - often produces results that don't accord with national self-interest.

Anyway, Peter Wood has taken a neat look at the US position in international climate negotiations through a game theory lens. He incorporates domestic politics and looks at it as a 2-stage game where the need to get agreement in the Senate once negotiators get home will have a big impact on what those negotiators will want to get at Copenhagen. It's common sense really but interesting all the same.

Australia's Kyoto negotiation team prepares for Copenhagen (Dilbert - Scott Adams)

Wind power: plus ca change

2009-08-13T07:00:00.000+10:00

Some common sense observations about wind power's potential in the UK from The Times: it deserves attention as fossil fuels diminish, it has low capital costs, it's plentiful, it's intermittent and there are challenges with power storage, but this is only a problem if it's intended as baseload supply.

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.

The punchline? It was written 100 years ago - 1909.

From FT Energy Source blog via Knowledge Problem.

Making cycling safer: The Idaho Stop Law

2009-08-12T07:30:00.000+10:00

One area where I think public policy could really help sustainability in Australian cities is by making cycling an easier transport choice. Sydney strikes me as crying out for measures to encourage cycling. Cycling could really be a big part of the trasport mix here - yes some of the city is hilly but you've got probably 3 million people living within very easy cycling distance of the CBD. But it's just not a cycling friendly city.

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.

Photo credit: Infidelic Flickr stream (creative commons licence)

The oppostion's rival carbon plan: greener, cheaper, smarter?

2009-08-11T12:30:00.000+10:00

Malcolm Turnbull yesterday released an alternative carbon plan: "greener, cheaper, smarter". Sounds great. And finally some opposition policy on climate change. Well, not quite. The plan is a report by economic consultants 'Frontier Economics' commissioned by the oppostion and independent Senator Nic Xenophon. And it seems that it's largely a rehash of previous submissions that Frontier made both to the Garnaut review and government's green paper, on behalf of electricity generators.

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.

Idle thoughts

2009-08-10T07:56:00.000+10:00

An article in the August issue of Energy Policy suggests that people idling their cars (leaving the motor running when stopped) accounts for a surprising and mostly unnecessary 1.6% of US greenhouse gas emissions.

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).

What I've been up to...

2009-08-09T09:35:00.000+10:00

Hi all,

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!

David

Oikos returning soon...

2009-07-22T21:43:00.001+10:00

Stay tuned!

Congestion tolls in Sydney

2008-11-12T10:17:00.004+11:00

One interesting announcement in yesterday's NSW state mini-budget was the introduction of "congestion tolls" on the Sydney Harbour Bridge and Tunnel: the toll will vary depending on the time of day. Tolls will increase from $3 to $4 during peak travel times, stay the same during a shoulder period and drop to $2.50 at night.

Time of day tolls can be a sensible measure to reduce congestion: they encourage motorists to avoid driving at peak hour. The demand for road space varies throughout the day so a price that also varies to reflect that changing demand is likely to improve efficiency. Commuters accept variable time-of-day charges for rail in Sydney, so why not roads?

A few thoughts on the new tolls:

The government should closely monitor traffic densities and speeds at different times of day now and after the toll comes in to see what impact the toll has.

Time of day tolling should also be applied to other Sydney toll roads such as the M4 and M5 (the government has flagged this) - at least if the Sydney Harbour tolls are effective in reducing in congestion.

The public is cynical about this change and sees it as a revenue grab (which it probably is). If the government genuinely sees this as a congestion measure and wants it to be embraced, they should consider making it revenue-neutral or, more simply, reducing the night toll by the same amount as the peak toll increases. Alternatively, the additional revenue could be clearly earmarked for additional peak hour public transport so that people have a decent alternative to just paying the toll and continuing to drive.

Isn't there an issue because the toll is only collected from southbound traffic? So there's no new incentive to avoid the peak hour when you're travelling north...

What do you think of the tolls?

Conflicts of interest in environmental planning

2008-10-23T10:43:00.003+11:00

Andrew Norton has an interesting article on some unintended consequences of proposed reforms to Victoria's local government legislation. Reforms desgined to reduce the potential for conflicts of interest could undermine, rather than strengthen, the rights of residents to partcipate in the planning process:

In the future, local councillors may be prevented from voting on the very motions before council they may have been elected to support or oppose.
For example, they will be held to have become an ‘interested party’ if they have lodged an appeal in relation to a council decision, or have made an objection or submission. Say the Council wants to cut down the trees in your street, or redirect its traffic, or let someone build a house that overshadows your garden. You go through the normal proceses to protect your interests, by making an objection. This fails.
So you run for election on one of these issues, win a mandate to act on them, and then because of your earlier steps to protect your interests you cannot vote on the matter. Not only are you deprived of your right to vote, but the democratic will of the people who supported you is also frustrated.

Defensive investments

2008-10-20T17:50:00.002+11:00

I'm back from a very enjoyable trip to Ireland and Scotland - and two fantstic weddings. Being on holidays, I was only generally aware that there was a financial meltdown going on and that everything was costing more each day as the Aussie dollar sunk about 30% against the Euro and pound over the course of the trip!

I developed a bit of a taste for whisky in Ireland and (especially) Scotland, which is timely as it appears that fine whisky is one asset that has been appreciating in these tough times:

Roughly 11 months after the launch of a Dutch online trade platform for exclusive single malt whiskies, mostly from Scotland, the World Whisky Index has seen an average return of 26.2 percent, compared to a more than 40 percent decline in the MSCI World stock index.

I'd have some doubts about whether that will continue but there is this upside to whisky as an investment class:

But even if the 80-proof alcoholic drink turns out not to be recession-proof, there is still a reassuring side to this type of investment.
"While shares and obligations can become completely worthless, if bottles turn out to be not very valuable, you always still have the bottle to drink," the spokesman said.

Blogging break

2008-09-05T13:10:00.002+10:00

There's been a lot going on in my life lately (in a good way) and unfortunately Oikos has been the victim of that. Ironically I've been spending more time on climate change issues than ever before but my energy in that sphere has been channeled into my environmental economics thesis which has kept me busy indeed.

I'm heading off on a trip tonight and don't intend to blog while I'm away. I need a bit of a break.

Hopefully I'll come back refreshed in a few weeks and it might be time to overhaul Oikos as the site's looking a bit tired (why does it say Oikos twice in the sidebar??).

There's a lot going on in climate change and environmental policy right now and I'd like to get Oikos back up and running as a forum for policy ideas and debate.

See you in October!

David

Why do we pay people to waste our most precious resource?

2008-07-18T08:35:00.002+10:00

It's one year today since the contract to build Sydney's desalination plant was signed and ANU environmental economists Quentin Grafton and Michael Ward have run the numbers on whether it was a good deal. Their conclusion: the net benefit to Sydney households of the plant is negative one billion dollars. Ouch. The decision to build it will cost each Sydney household on average more than $700.

What's the alternative though? Well how about just letting people pay the actual cost of water so that they have an incentive to economise?

When most things get scarce, their price goes up. This sends a signal to consumers to economise and find alternatives and a signal to producers to find new sources and ways to produce them. We don't do this with water though. Instead we subsidise one of our most precious resources - massively. We encourage industrial water users to recycle their water or else use recycled water rather than water we've spent millions making fit for drinking. But why would they when it's so cheap? Cheap because it's subsidised by every taxpayer.

So why don't we do this? According to NSW's Water Minister Nathan Rees, that system "would result in gross inequalities and be a nightmare for business":

Any form of sound business planning would be impossible if water prices fluctuated from month to month and season to season.

The current system isn't too equitable either. Is it equitable that low income earning taxpayers who do their best to save water subsidise big water users to fill their pools and keep their lawns looking lush? In any case the extra revenue from actually charging wealthy water users for the water they use can be used to provide assistance to low income households.

As for the business certainty argument, businesses deal with price fluctuations all the time. I'm sure the cafe downstairs from my work would be happier if coffee bean prices didn't fluctuate, but they don't ask the government to nationalise the coffee trade to deal with it. The prices of rent, employees, petrol, commodities, food and every other business input fluctuate weekly or daily. And if it's critical for a particular business to know the price of water in advance, I'm sure purchasers and suppliers could negotiate to lock in a price in advance for a set period. That's what futures markets do with commodities around the world.

The federal government is putting a price on carbon emissions - a challenging and complicated task that involves working out the emissions from a huge range of business activities and creating new and untested markets. So why can't we allow a realistic price to be placed on one of our most precious resources? The alternative is pouring an extra billion dollars into an environmentally questionable desal plant that we don't really need.

Thoughts on the green paper - Part 1: petrol

2008-07-17T10:18:00.002+10:00

The government’s green paper on emissions trading is now available. The government’s new phrase for its emissions trading scheme is “carbon pollution reduction scheme”.

The first thing that’s captured everyone’s attention – not surprisingly – is petrol. With all the hoo-ha about petrol prices recently, the government’s proposal is to include petrol in the ETS / CPRS but to reduce the petrol excise by an equivalent amount for at least the first 3 years of the scheme. This is not very different from leaving petrol out of the scheme. And this has the Greens and others up in arms.

There are two ways to look at this – from a practical perspective or from a principle perspective. Either way, my view is that cutting the petrol excise isn’t good but isn’t really all that bad either.

The practical implication of cutting excise and therefore neutralising the impact that the scheme has on the petrol price is that – to meet the target – the price of everything else in the scheme has to go up by more. Then again, the price of petrol has gone up so much recently that that’s done a lot of the work that the scheme will do anyway. But power bills will go up by more than they otherwise would to pay for the cut in petrol excise. Which of these would cause more pain? Who knows. The opposition, motorists and the media seem to be clamouring loudly for lower (or at least not higher) petrol prices but electricity prices haven’t gone up yet – presumably there’ll be some clamouring when that happens too.

Looking at the ‘principle’ of cutting the excise – well this really depends on whether the excise now is too low, too high, or just right (I don’t know which it is). Roughly speaking, the excise on petrol should be enough to cover the costs that it places on the community: motorists shouldn’t be expected to be subsidised by other taxpayers and so the excise should cover the cost of building roads, dealing with car accidents, dealing with air pollution, etc. There’s also GST on petrol as there is on everything else. Anything much more than that is seeing petrol as a revenue raising tool. Seeing as the ETS is going to raise plenty of revenue anyway, there’s a case for easing other taxes. So if excise currently goes beyond the social cost of petrol plus 10%, I reckon there’s a case for cutting it if you’re going to include petrol in the ETS. If the excise doesn’t go beyond that, then there’s no principled case for cutting it. I’d be interested in any comments as to which side of that line fuel excise currently falls.

One other comment I’d make is that I’m not sure about the idea of cutting it for 3 years then reviewing the situation. I’d prefer the government to say that they’re cutting it for 3 years only. Seeing we’re apparently talking about a cut of about 5c a litre and petrol prices fluctuate by that amount weekly, I don’t think people could complain too much if the government said “Petrol excise is going up by 5c in 2011: you’ve got 3 years to get ready”. That seems like a more than generous concession to me and better than just deferring the issue and the uncertainty around it by 3 years.

What do you think?

Government's green paper on emissions trading out today

2008-07-16T12:07:00.000+10:00

It's being launched by Climate Change Minister Penny Wong at the Press Club at 12.30.

I'll put up a link when I have one and hopefully some analysis tonight.

Garnaut Review out today

2008-07-04T09:35:00.003+10:00

The draft report of Professor Ross Garnaut's Climate Change Review will be released at 12.30 today here.

For overseas readers, this review has been described as the Australian version of the Stern Review. The report will look at the economic impact on Australia of climate change and the design of a domestic emissions trading scheme (ETS), as well as suggestions for Australia's role in international negotiations. The findings will be a major input into the government's ETS which is to be unveiled by the end of the year.

The next 6 - 12 months are likely to be a time of furious debate in Australia about what the ETS should look like. The debate has begun with whether and how petrol should be included in the scheme.

Responses to higher fuel prices

2008-06-18T11:56:00.004+10:00

Observing how people are responding now to higher fuel prices gives us some idea about how people will respond to a price on carbon under an emissions trading scheme.

In the short term, we can expect pain on households and businesses as their usual ways of doing things become more expensive. In the slightly longer term, people adjust by finding different ways of doing things: driving less, taking more public transport. And in the longer term, people make bigger adjustments like buying more efficient cars or moving closer to work.

We're definitely seeing the short term pain and the immediate political pressure to do something to bring petrol prices down. And we're also beginning to see people adjust - an interesting example is truckies choosing to take the ferry across the Spencer Gulf in South Australia rather than driving around it:

South Australian ferry operator Sea SA says figures for the June quarter show a doubling in truck traffic compared with the same part of last year.
Justine Day from the company says the main attraction is saving money. "We're being told by people in the industry that this is because the price of fuel which is, as we all know, at record highs at the moment - it's actually making the ferry a more attractive option than driving all the way around the Spencer Gulf," she said.

This also shows an advantage of using prices to drive changes in behaviour to reduce emissions, compared to government-dictated solutions like banning incandescent light globes or subsidising solar panels on roofs: you get a whole lot of unexpected and locally appropriate methods of reducing emissions coming out of the woodwork.

It also shows though that the effects can be somewhat unpredictable - would you necessarily think that a South Australian ferry company would benefit from emissions trading?

Adjusting to higher energy prices will no doubt be painful and difficult, but probably not as painful and difficult as people think: because innovative businesses will come up with ways to ease the transition - earning profits for them and reducing the costs for others.

Drivers with bumper stickers are road ragers

2008-06-17T10:03:00.004+10:00

My favourite subject at uni was social psychology. The experiments we studied were brilliant and most seemed to have a sense of humour. I love this one reported in Monday's Washington Post:

[Social psychologist William] Szlemko said that, in an as-yet-unpublished experiment, he conducted tests of road rage in actual traffic. He had one researcher sit in a car in a left-turn lane. When the light turned green, the researcher simply stayed still, blocking the car behind.

Another researcher, meanwhile, examined whether the blocked car had bumper stickers and other markers of territoriality. The experimental question was how long it would take for the driver of the blocked car to honk in frustration.

Szlemko said that drivers of cars with decals, bumper stickers and personalized license plates honked at the offending vehicle nearly two full seconds faster than drivers of cars without any territorial markers.

Szlemko's theory is that we inhabit different kinds of private and public spaces: private (your home), semi-private or temporarily private (your work office / cubicle) and public (a park / road). Actually a road can be confusing because we're simultaneously inhabiting a private space (our car) and a public space (the road). We're hard-wired to defend our territory and people who mark their territory by personalising their cars with bumper stickers are more likely to think about their own private space than the public space they're sharing when they're on the road.

It's an interesting article.

HT: Marginal Revolution.

Socially defective economists

2008-05-28T17:14:00.001+10:00

From time to time economists like to analyse human relationships through whatever economic model is occupying them at the time, thinking they're offering some insights. Like this from the EconLog ("insights in economics") blog:
One of the examples [of the idea that a lot of human behaviour can be explained as an attempt to signal something about onesself to others] concerns dating. If the point is to signal to the person that you are healthy, wealthy, and intelligent, why not just bring your health records, your bank statement, and your SAT scores?

One hypothesis... is that you would not want to date someone who went for those sorts of signals. Somebody who will hook up with you based on such simple information could just as easily cheat on you or dump you when someone else comes along and provides similar information. We want to go out with people who are "discerning," which in this context means that they signal a habit of processing other people's expensive signals. That in turn makes it more likely that they will be loyal...

So you have what I might call co-operative signaling. You signal to me that you are looking for "deep" signs of my health, intelligence, or whatever. I take that as a signal that you are into long-term relationships. So I then go through the rituals of dating and signaling.

Huh?? If I might offer an alternative hypothesis, perhaps you just don't want to signal that you're a socially defective economist.

Fortunately for such economists, they ultimately decide to leave their CVs at home before heading out on dates, apparently after doing a cost-benefit analysis that suggests that the obvious efficiency benefits of a first date spent going through each other's personal files may be outweighed by the cost that presenting your first-date portfolio introduces a selection bias for partners with a higher than average inclination for infidelity.

What the otherwise fairly interesting folks at the EconLog blog are signalling to me is that they don't understand human behaviour. Which makes me question the extent to which they really understand market behaviour either.

Liveblogging the budget

2008-05-13T09:27:00.003+10:00

Can't wait until tonight's budget? No worries, Zoe at CrazyBrave has already blogged the best bits, in advance:

7.37... We’re going to investigate the tax system - root and branch. We’re going to get the head of Treasury to tell us what bits are rooted and then we’ll get the maths whizzes who organised our branch stacking in NSW and Victoria to fix it all up.

7.38 There will be downward pressure on interest rates. There will be downward pressure on inflation. There will be downward pressure on prices, particularly at the supermarket and the service station. In fact Labor will ensure that downward pressure is so omnipresent it is a matter of some doubt whether the daffodils will manage to raise their sunny little heads next spring.

Well I'll be watching tonight anyway, taking a drink each time Swan mentions Working Families and checking out what's in there for the environment if I'm still sober.

Lessons from Europe's emissions trading scheme

2008-05-09T08:49:00.000+10:00

The Pew Center on Climate Change has released a new report examining what went wrong and what has been going right with the EU emissions trading scheme.

The report finds that the scheme has achieved much of what was intended: establishing a European-wide carbon price; causing businesses to incorporate the price into their decision-making; and creating the infrastructure for a multi-national trading program. As for actually achieving a reduction in emissions - it's been modest but improving.

Some of the key lessons:

Good information is critical. You need accurate data on baseline emissions.
Suppliers quickly factor the price of emissions allowances into their business decisions under a cap-and-trade program.
Price volatility can be reduced by including banking and limited borrowing of emissions allowances.
The relationship between permit allocation, permit markets, and the electricity market must be understood and addressed to avoid unintended consequences.
The linkage of 28 separate trading programs in the EU scheme provides a valuable prototype for a globally linked carbon market.

Taxing 'Alcopops'

2008-04-28T09:10:00.001+10:00

News over the weekend that the federal government has raised the excise on pre-mixed drinks ('alcopops') from $39 to $67 per litre of pure alcohol caught my eye, given my interest in using economic instruments for public policy.

These drinks are sweet and taste less alcoholic than they are and have therefore been a drink of choice for young people, women in particular, and the move is designed to help arrest the increase in dangerous drinking among teens and young adults.

On first thoughts, this seems to me like a sensible move:

It closes a loophole where spirits were taxed at a substantially lower rate if they were mixed with soft drinks and put in a can or bottle. So just on a tax efficiency basis it seems justified.
This is quite a targeted tax increase in that it focuses on drinks that I understand are largely consumed by young people who - given their lower incomes - are more likely to respond to a price hike.

The alcohol industry has claimed that young drinkers will just switch to beer or spirits. Some will, but I think that switch will be limited by two factors:

Spirits are taxed at the higher rate too.
Spirits and beer are not complete substitutes for pre-mixed drinks. From my experience, pre-mixed drinks tastse like soft drinks and are extremely easy to drink quickly. Spirits and beer just aren't the same.

I'll try and find some figures to assess my initial thoughts. What do you think of the move?

Other views:

Harry Clarke

Tim Dunlop

We need some clear thinking on plastic bags - Part 2

2008-04-18T12:55:00.001+10:00

What planet are our politicians inhabiting?

Here's Queensland Premier Anna Bligh on plastic bags, as reported by the Brisbane Times:

Queensland will oppose a levy on plastic bags at tomorrow's meeting of federal and state environment ministers. Premier Anna Bligh today told state parliament the levy would be another impost on families already struggling to meet rising household costs.
"Queensland does remain committed to completely phasing out non-biodegradable plastic bags," Ms Bligh said. "In this government's ongoing fight to protect our environment, Queensland will push for a total ban on non-biodegradable plastic bags..."

Let me get this right. Putting a 10c levy on plastic bags would hit struggling families too hard, so we'll just ban the things altogether? Well I admit there is a certain logic to that. Maybe we could apply that to petrol too when the emissions trading scheme comes in?

My government understands that effective action on climate change requires an
immediate and substantial reduction in fuel use. However, placing a carbon price on fuels would be another impost on families already struggling to meet rising household costs. My government will not take steps that hurts families. Accordingly, we will push for a ban on petrol use from next year.

Hmm, maybe not.

Federal Environment Minister Peter Garrett doesn't seem to have much in the way of solutions:

"I think all Australians really want to see much less use of these ... plastic bags we get at the check-out and when we sit down with the states today we've got to come up with something which is nationally consistent, which doesn't impose additional costs on families, and which starts to see much less of these bags ending up in the litter stream."

Sounds great Peter. And that something would be?

Meanwhile, the opposition's well-thought-through policy is to hope the problem just fixes itself:
"It's extremely important that we move to biodegradeble bags as quickly as possible," [opposition spokesman Greg Hunt] said. "We need to decrease the number of bags, but let's not ban them or put a levy on families that are doing it tough."

Yeah, we urgently need this serious problem to end but, given the pressures facing struggling families, we must be particularly careful not to do anything that might help fix it.

I'd love to hear Greg Hunt on fighting inflation:

It's extremely important that we reduce inflation as quickly as possible. I call on the Reserve Bank and government to do everything in their power to restrain demand - other than raising interest rates, increasing taxes or reducing spending at a time when families are doing it tough.

Victoria and South Australia have announed that they'll go ahead with a levy (starting with a pilot) and ban respectively.

Australians currently use some 40 billion plastic bags a year. Leaders who suggest that we can motivate a big change in people's behaviour in a completely painless way are lying to us. Let's be honest, there will be costs. The question is, are those costs worth the environmental benefits? If plastic bags are the serious problem that all these leaders say they are, then the answer is clearly yes. It then just remains to choose the option that has the greatest impact at least cost. For my money, that's a modest levy.

We need some clear thinking on plastic bags - Part 1

2008-04-16T13:14:00.001+10:00

I've been observing the debate about plastic bags for years but haven't posted anything on it.

I'm agnostic about whether something really needs to be done about plastic bags in particular.

Good environmental policy, it seems to me, looks at the best ways of fixing identified problems - rather than targeting certain products.

So what are the problems with plastic bags? As I understand it:

they're a large componenet of litter;
they're a reasonably important component of waste / landfill;
they get into waterways where they harm marine life;
they're made from a non-renewable resource.

To my mind, a more sensible starting point is to look at each of these problems separately.

Let's start with threats to marine life. What are the big threats? What's the most effective way to reduce their impact? Will getting rid of plastic bags make a big difference? These are the questions we should be examining.

Let's look at litter. What are the problems it causes? What are the main components? What are the most effective ways to reduce it?

Ditto for landfill and ditto for non-renewable resources.

I suspect that there's more effective measures to deal with these issues by looking at all contributors to a problem than singling out one product.

I also suspect that plastic bags are being targeted because they're a visible consumer product. The only concrete regulatory measure that the Howard government announced to reduce greenhouse emissions was phasing out incandescent light globes. Now it's a start and probably worth doing but will make an extremely modest contribution. I suspect they chose that because it's something everyone sees and has experience with - people will notice they're dong something. Similarly, Australian governments have had difficulty coming up with solutions to water shortages other than water restrictions on households. Again, a modest measure that looks to the average person like you're doing something, but really does little to fix the underlying problem.

Targeting plastic bags without examining why also creates confusion. Are biodegradable bags a good alternative? Queensland seems to think so. But my understanding is that they take months or longer to break down and in the meantime they create the same litter problems and danger to marine life that plastic bags do. And while they use renewable inputs (eg corn starch rather than petroleum), there's no guarantee that the overall environmental impact of those inputs is any lower: growing corn has its own problems in terms of resource use (think cleared land, water use, petroleum-based fertilisers, petroleum-fueled tractors) and waste (think fertiliser and pesticide runoff - what does that do to aquatic and marine life?). So deciding on alternatives really depends on what we're trying to achieve.

It's tempting to look at energy waste and think 'let's ban old-school light bulbs', to look at water problems and think 'let's water the garden less' and see litter and think 'let's ban the bag'. And yes, we all need to do our bit and those measures probably do some good.

But the challenge for good policy and what will produce real outcomes is to do the hard thinking about what are the real causes of the problem and what are the most effective measures we can come up with to deal with them - not just to go with whatever grabs our attention.

Earth Hour this Saturday night - is it all just a waste of time?

2008-03-27T17:42:00.002+11:00

It's the second annual Earth Hour this Saturday night and the wise cynics are once again gleefully reminding us how stupid we are to turn out our lights for one hour in the deluded belief that we're doing something about climate change.

Their triumphant, but I think misguided, crowing about how naive we all are kind of reminds me of a scene from the Simpsons:

Homer takes Lisa to the Springfield Museum and sees the sign, `Suggested donation: $4.50'.

Homer: Eh, what do you mean by `suggested donation'?

Clerk: Pay any amount you wish, sir.

Homer: And uh, what if I wish to pay ... zero?

Clerk: That is up to you.

Homer: Ooh, so it's up to me, is it?

Clerk: Yes.

Homer: I see. And you think that people are going to pay you $4.50 even though they don't have to? Just out of the... ha ha... goodness of their... [laughs] Well, anything you say! Good luck, lady, you're gonna need it!

Lisa's teacher arrives and goes to pay

Homer: No, no! It's a suggested donation. [whispers, smiling as if it's a great revelation] You don't have to pay!

Anyway, last year, before the first Earth Hour, I posted this list of reasons why I'd be turning my lights off for earth hour. It's why I'll be doing so again this year. For me it's not so much about emissions as about connections:

Connection with community

I don’t know if it’s widespread, but I often feel a lack of community in Sydney. And I think a sense of community is wonderful. Events like this connect us. If tens of thousands of people turn off their lights and TVs and sit out on their verandahs, or go for a walk and talk to some of the other tens of thousands of people doing the same thing, I reckon that’s great. Just have a look at some of the events people are organising!

Connection with our own power

Climate change is often presented as a big problem with big solutions needed, to be provided by government and business. To a large extent it is. But there’s a lot that people can do about it themselves, in their households and as part of businesses and communities. When each of us does something personal about the issue, we’re reminded that this is something that we, personally, can influence. And I think that’s very positive and powerful. We don’t have to shake our heads and our fists at John Howard and George Bush, we can do a lot ourselves.

Connection with nature

Again, this might be an inner-city dweller neurosis, but I feel a disconnection with the real world living in the middle of Sydney. I get home, turn the lights on, turn the heater on in winter and have my own comfortable cocoon. We all rely on the environment for our health and wellbeing. But it’s easy to forget that. It will be nice to sit out on the balcony and look at the moon and listen to the breeze in the trees and watch the fruit bats fly past and think about the world. Maybe we’ll even be able to see the stars.

Connection with ourselves and each other

As much as I love Iron Chef, it will be nice to have some quiet time to think and talk to Cat. Maybe we’ll have a candlelit dinner at one of the restaurants which are turning their lights off for Earth Hour.

Business

It’s easy for households to switch off lights and appliances during earth hour. It’s much harder for some businesses, despite the fact that at 7.30 on a Saturday night, many businesses aren’t open. This exercise has been a useful learning exercise for many businesses (including my workplace) that you can’t assume that everything is switched off on a Saturday night. (Have a look at office buildings in the city at night and be dazzled by all the empty offices with all their lights still on).

They have had to put measures in place to achieve this and hopefully those measures will continue to bear fruit in terms of energy and emissions savings long after earth hour is over.

I had a great Earth Hour last year - it was quite cool to see lights go out in so many other apartments. For the people who go through with their oh-so-rebellious, witty and contrarian 'Illumination Hour', although I mock them and they mock me, I genuinely hope they enjoy that too - at least we share the recognition that the issue deserves attention and that symbolism can be important. There's nothing wrong with celebrating electricity - go for it! - but I'll be reflecting on simpler things this Saturday night. I'd encourage you to be part of Earth Hour too.

Why don't TV networks advertise their competitors' shows?

2008-03-27T08:49:00.004+11:00

Here's my random thought for today: why don't TV networks ever promote their competitor's shows?

Now I'm sure you're thinking that's one of the most stupid ideas you've heard lately. And it probably is, but it's not quite as stupid as it sounds.

The potential audience for any particular show is people who would otherwise watch another free or pay TV channel and people who otherwise wouldn't watch TV at that time at all.

Consider a deal where two networks ran three ads for a show on the other network. If successful, they'd take viewers from each other - but they should roughly cancel each other out - and, importantly, they'd also take viewers from other networks not in on the deal as well as people who would otherwise wouldn't have watched TV at all on that timeslot.

They should both win from such a deal. It should grow both their markets.

So why do you think we don't we ever see it?

Garnaut review - emissions trading scheme discussion paper

2008-03-26T09:05:00.001+11:00

Professor Ross Garnaut's blueprint for an Australian emissions trading scheme was released last Thursday (pdf). I haven't got past the exec summary yet, but Robert Merkel has an excellent discussion at Larvatus Prodeo today, and econobloggers Harry Clarke, Peter Martin and Joshua Gans had some thoughtful comments over the weekend. And it's received a lot of press over the past few days.

The big issue appears to be whether to auction permits or hand them out to exsiting emitters. More on this from me later, but it seems the debate has finally moved beyond the myth coming from the electricity industry that they need to be issued with free permits or else electricity prices will rise, disproportionately hurting the poor who spend a greater proportion of their income on energy. Electricity prices will inevitably rise under an emissions trading scheme: to a large extent, that's the point. Giving handouts to existing generators in the hope that they pass some savings on to households and not just their shareholders is naive - particularly when their competitors (new entrants to the market) will have to buy permits on the open market. And it's not necessary: the best way to compensate poor households, surely, is to use the revenue gained from auctioning permits to target tax cuts at lower incomes.

On that point, I notice that petrol producers have run the same line in recent days: petrol should be exempt from an emissions trading scheme because families are struggling enough with petrol prices already. Aside from the fact that these kind of suggestions wholly undermine the aim of a trading scheme, there's better ways to help out struggling families than subsidising their energy use. How about reducing their overall tax burden? They can spend their savings on petrol if they so desire but how about we leave it up to them what they spend it on, rather than what petrol or electricity companies think they should spend it all on (oddly enough, petrol and electricity)?

EPA: US can halve greenhouse emissions for the cost of a cup of coffee a day

2008-03-18T13:03:00.000+11:00

Alright, that's a bit of an exaggeration, but a report very quietly released by the US EPA (there's remarkably little mainstream coverage of it) has found that if emissions were cut by 56% by 2050, US GDP would grow by 80% between now and then, compared to 81% if emissions were allowed to increase on a business-as-usual basis.

And that comparison doesn't count the costs of allowing emissions to grow unabated.

It seems to me that the US is in a unique position when it comes to fighting climate change: it's the only country where taking unilateral strong action would pay off for it. That's because its emissions are such a big chunk of the global total (more than a quarter) that it can have a real impact on its own - and it faces some big costs from climate change. So if any one country should be leading on this issue, it's the US. And yet, it's the country that up to now has done the most to delay a global solution to the problem.

The EPA's analysis follows other analyses (eg, the Stern Review in the UK and recent McKinsey reports on the cost of abatement in Australia, the US, the UK and Germany) that show that strong action on climate change is compatible with strong economic growth and can be achieved at a more modest cost than is widely anticipated.

Rudd's tax cuts - inflationary or illusory?

2008-03-17T01:17:00.000+11:00

Mark Davis has a nice piece in the Herald today questioning the angst expressed by so many people about Rudd's election promise to cut taxes in an inflationary environment.

Davis points out that these announced tax 'cuts' (and the Howard government's cuts of the past few years) are not necessarily cuts at all: the stated amount of the cut is the predicted reduction in the amount of tax collected because of the change to tax rates, compared to what would have been collected if the change hadn't been made (not compared to what was collected last year). The upshot? A government can collect more income tax than the year before and still call it a tax cut - and everyone seems to buy it.

So what about the proposition that the latest batch of tax cuts due this July and said to be "worth" $7.1 billion will fuel inflationary pressures?
Taking Treasury's most recent forecasts, and using some back-of-the-envelope figuring, suggests that Canberra could collect about $4 billion more in personal tax next financial year compared to this year.
And as a share of the economy that would see the tax take from individuals decline
by a little under 0.2 per cent of GDP.
So while the Government has been defending the tax cuts with convoluted arguments such as their effect on boosting labour supply and on dampening wage demands, the simpler reality is they will not fuel demand excessively because they are not nearly as generous as the politicians would have you believe.

Speaking of inflation and things macro, one thing that I don't think has received enough attention is the emissions trading scheme due to kick off in 2010. It will come too late to influence our current bout of inflation but, depending on its design, it could have significant macroeconomic consequences down the track.

Can biofuels help reduce greenhouse emissions?

2008-03-07T17:35:00.000+11:00

The answer, from a recent CSIRO study (pdf), appears to be yes - unless it's from a plantation that was established by clearing forest.

The study compared total life-cycle emissions from biofuels from various sources with diesel. Fuel from canola has 49% lower emissions over its life cycle than diesel and, for a waste product such as used cooking oil, emissions can be 87% lower than diesel.

However, total life-cycle emissions from biofuels derived from palm oil plantations established by clearing rainforest or swamp forest are up to 21 times higher than diesel.

The problem is that some biofuels do indeed come from these sources.

The CSIRO report points to other studies that have estimated that a substantial proportion of international palm oil production is established by clearing - and often burning - these forests in Indonesia and Malaysia, which together supply 83% of the world's palm oil:

It has been estimated that in Malaysia nearly half of all new oil palm plantations involve deforestation, with 87% of deforestation between 1985 and 2000 due to oil palm expansion.

From 1982 to 1999, about 16,000 square miles of Indonesian tropical rainforest was converted to plantation. Oil palm plantations were responsible for at least 44 percent of that rainforest loss.

And although palm oil hasn't so far been a major source of biofuels, that may slowly change:

with growing demand for biodiesel, especially in Europe, with increasingly large suggested as well as mandatory targets, it has been observed that it is unlikely production will be able to meet future demand without the use of palm oil as a feedstock.

It seems that biofuels do have the capacity to lower greenhouse emissions from transport. But whether their contribution will be good, bad or ugly depends critically on where they come from.

It's true: oils ain't oils.

Economic analyses of intergalactic trade

2008-03-07T08:55:00.001+11:00

A new paper on the potential pitfalls of interstellar trade prompts economist bloggers Tyler Cowen and Joshua Gans to look at some of the recent and not so recent economic treatises on the subject.

I love this quote from a Paul Krugman paper on the topic:

It should be noted that, while the subject of this paper is silly, the analysis actually does make sense. This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics.

An important day for climate change action?

2008-03-05T15:49:00.003+11:00

With Mike Huckabee withdrawing from the Republican party nomination race, all three remaining US presidential contenders favour strong action on climate change (albeit to varying degrees).

That means - whatever happens in November - we will see a significant shift in US climate change policy in January 2009. Today is an important day for global progress on climate change.

Garnaut Review - interim report now out

2008-02-21T17:29:00.005+11:00

The interim report of the Garnaut Climate Change Review is now out and is required reading if you're interested in what an Australian emissions trading scheme will look like. The review was commissioned last year by Australia's State and Territory Governments (and the then federal opposition - now federal Government) to examine the impacts and opportunities of climate change. It will propose "a national framework for action, with recommendations for medium to long-term policy options to minimise the environmental and economic impacts of climate change".

From the press release:

“Contrary to the conventional wisdom which has dominated Australian debate over the past decade, comprehensive global efforts to reduce emissions will play to Australia’s strengths,” said Professor Garnaut. “It is in Australia’s interests for the world to adopt a strong and effective position on climate change mitigation.”...

The Report states that Australia’s interest in strong global action stems from its “exceptional sensitivity to climate change”, and its “exceptional opportunity to do well in a world of effective global mitigation”.

“We have many resources and skills that will allow us to convert strong global action into an economic opportunity,” said Professor Garnaut. “We have a first-rate skills base in areas related to innovation, management and financial services. We have rich renewable energy resources. We are among the world’s largest exporters of uranium and natural gas which can benefit from the low-emissions’ efforts of other nations. And our agricultural sector emits less than other developed countries. By contrast, Australia would be a big loser – possibly the biggest loser among developed nations – from unmitigated climate change. Australia is more vulnerable to climate change than most other developed nations as we are highly sensitive to climate variation, and we are surrounded by mostly developing nations, which are likely to be adversely affected by rising temperatures,” he said.

Professor Garnaut said that due to a sustained period of high economic growth – led by China and India – the world was moving towards high risks of dangerous climate change more rapidly than had been generally understood. “Faster emissions growth makes mitigation more urgent and more costly. The challenge is to end the linkage between economic growth and emissions of greenhouse gases,” he said...

The Interim Report states that Australia should make firm commitments this year to both 2020 and 2050 targets that reflected “similar adjustment cost to that accepted by other developed countries”.

“Australia should be ready to go beyond its stated 60 per cent reduction target by 2050 in an effective global agreement that includes developing nations,” said Professor Garnaut.

The Report also supports the development of bilateral and regional agreements to accelerate domestic and international action. “Unilateral and regional efforts under way in parallel [to global efforts] might make for a ‘messy’process, but it is one which has the highest chance of success in the short time available,” the Report says.

The Interim Report sets out some initial considerations for the design of Australia’s emissions trading scheme (ETS), due to come into effect in 2010. Further detail on the Review’s proposals for ETS design will be released in a discussion paper in mid March 2008. “The emissions trading scheme will need to be supported by measures to correct market failures or weaknesses related to innovation, research and development, to information, and to network infrastructure,” the Report says. “Steady, long-term policies are what Australia needs in order to provide the market certainty for making appropriately large reductions in emissions at the lowest possible costs to Australians’ standards of living,” said Professor Garnaut.

Submissions are invited on the Interim Report and any issues related to the Review by 11 April 2008.

Does car sharing have a place in Australia’s transport mix?

2008-02-12T17:03:00.000+11:00

The Wall St Journal had an article last week on the emerging car sharing industry in the US.

Car sharing is designed for people who want access to a car for short trips occasionally without the expense of owning a car. You pay a membership fee and then hourly or daily usage rates that include petrol, insurance, etc. Its target market is urban dwellers who take public transport to work and need a car only occasionally to go shopping or visit friends. They tend to be in densely populated areas where levels of car ownership are lower and so you don’t have to walk far to get a car. Apparently companies are also targeting universities and small to medium businesses where employees need vehicles for meetings or site visits but the company doesn’t have its own fleet.

There are a number of car sharing companies in Australia. I’ve noticed quite a few setting up in my neighbourhood recently.

The personal advantages:

Much cheaper than owning a car if you only need a car now and then.
You don’t have to worry about parking, insurance, cleaning.
Convenient (compared to renting a car) – you book online, and swipe a membership card to unlock the car and drive away. The idea is that there would be a car within a few blocks of where you live.

The environmental advantages:

fewer cars, since this allows some people to avoid buying a car;
the cars tend to be the most efficient on the market;

There’s also a benefit in densely populated areas that there’s a single car being used by 15 - 20 people in a week and occupying one parking spot, rather than 15 cars occupying 15 spots.

Essentially the savings and efficiency come from the fact that share cars, unlike most others, are not simply sitting idle for 90% plus of the time.

What do you think of the idea? Would you use it? Do you think it will take off?

Economic communicators contest

2008-02-01T12:53:00.000+11:00

Are you an effective communicator of economic ideas?

The US Association of Private Enterprise Education is running a contest with a first prize of US$10,000. You need to submit a video and a written piece explaining an economic idea. (Oh, and it's not open to tenured academics).

Details here.

Moral hazard in emissions trading

2008-01-31T12:55:00.000+11:00

Moral hazard is an interesting concept in economics. It’s the problem that someone protected from risk may behave differently from how they’d behave if they were fully exposed to the risk.

It’s a big issue in finance and insurance. Moral hazard has been blamed in part for the sub-prime mortgage debacle gripping the US and elsewhere. Governments often guarantee banks to protect citizens from losing their savings if banks collapse. But this guarantee to bail out banks can encourage the banks to make riskier loans: if the loans go OK, they make money and if everything goes wrong – well, the government will bail them out to protect the savings of the mums and dads. The government’s guarantee can therefore – perversely – make the financial systems riskier and more unstable.

An environmental example is drought assistance. By helping farmers when they face a drought we may encourage unsustainable farming practices. ‘Should I farm in the drought-prone area? Well, if it rains I’m fine and if it doesn’t, I’ll get drought relief, so why not?’

A proposal in the Garnaut Climate Change Review's latest discussion paper on emissions trading (pdf) is that permits be allowed to be “banked” or “borrowed” from future years. Banking’s not a big issue – if you reduce your emissions more than anticipated, you can “bank” your excess credits and use them in a later year. But “borrowing” is a potential minefield. It allows a company to say “I’ll exceed my allowance this year but it will be OK because I’m planning to reduce my emissions substantially in the next few years so I’ll repay them then”.

What’s the problem? First, we really want to be encouraging emissions reductions now. But that’s pretty easily dealt with – you just charge interest. At a 10% interest / penalty rate on borrowed permits for example, a company could choose to emit 100 tonnes this year and 100 next year or borrow 10 and emit 110 this year but only 89 next year (100 minus the 10 borrowed minus interest of 1 on the 10 borrowed). You could give the same rate of interest as a discount on banked early reductions to encourage those.

The bigger problem is will these borrowed permits ever be repaid? And this is where moral hazard raises its ugly head. Imagine this scenario: coal-fired power plant operators are sure that carbon capture and storage is going to mean they can reduce their emissions massively and cheaply in 20 years. The technology is looking promising. But right now, reducing emissions is hard and expensive. So they borrow from their entitlements 20 – 30 years in the future. They’re sure the investment will pay off when the technology comes on line and they reduce emissions massively and cheaply. And seeing as they’re going to pay an interest or penalty rate for delaying their cuts, everyone will win: the cuts will be delayed but they will be so huge when they arrive that it will more than compensate in the long run.

But, as it turns out, the technology doesn’t deliver. So the power station operators deliver the unfortunate news to the government: "We got it wrong, we can’t afford to make the reductions. And we can’t afford to buy in permits on the open market. You’ve got a few options. You can fund us to buy more permits. Of course, the price of permits will spike, instantly and substantially increasing the costs of any emitting industries, sending some to the wall, increasing energy, food and goods prices to consumers and fuelling inflation, and maybe a small recession. And of course, taxpayers will be paying the debts that we’ve incurred. Or, we can just shut down. Electricity production will slump and energy prices will spike, again increasing the costs to energy users (sending some firms to the wall and hurting households), fuelling inflation, and maybe a small recession. Or you could just issue us with more permits…"

The idea of emissions trading between different companies is that it allows flexibility in who makes the reductions and therefore lowers the overall community costs of achieving reductions – whoever can reduce emissions most cheaply has most incentive to do so. Allowing the trading of emissions between different time periods adds more flexibility (flexibility as to when we make the reductions) and further reduces the total cost to the community. If it works. But we need to be very careful. Because the risk of moral hazard suggests it might not work.

How much should we spend to reward pollution?

2008-01-30T13:18:00.000+11:00

New Treasury figures estimate that by next year we'll be spending over $2 billion per year subsidising the use of company cars – nearly twice as much as was previously predicted.

I've talked before about this environmentally destructive tax rort that encourages drivers to drive and drive and drive - the more you drive, the less tax you pay.

Now if car travel is a legitimate business expense, then it's reasonable for allowance to be made for the cost of car travel when assessing tax. But you need to question whether tax breaks are justified for businesses providing personal (private) cars to employees as part of their salary package – cars that they may or may not use for business trips.

The big problem is that it’s hard to work out when a car is needed for business (in which case maybe it’s reasonable for an employee to provide one and for it not to be taxed) and when it’s really just being used for private purposes (in which case it shouldn’t be tax deductible). The Tax Office’s arbitrary solution is to assume that if you drive it far enough, you must have needed it for business – so the further you drive, the less tax you pay. The rate of tax you pay on your car loan repayments ranges from 26% if you drive less than 15,000 km in a year to just 7% if you drive more than 40,000km. This of course encourages driving more, not just for legitimate business, but also to reduce the amount of tax you have to pay, particular if you find yourself near the cusp of one of the tax brackets towards the end of the year.

The Australian Conservation Foundation puts it this way:

These tax breaks are economically senseless, reward environmentally destructive behaviour and increase taxes that the rest of us have to pay. There are much better uses for $2 billion than to hand it out to affluent corporate executives as an incentive to buy cars and drive them as much as possible to get the maximum tax benefit.

I can't say I disagree. The government has pledged to introduce a carbon trading scheme by 2010, at some cost to businesses and consumers. A sensible precursor is to remove the distortions like this one and the tax break for 4-wheel-drives / SUVs - which impose environmental and economic costs.

Maybe one for the Productivity Commission?

Will fuel efficiency laws save motorists money?

2008-01-04T08:25:00.000+11:00

With petrol prices in Australia nudging $1.50 a litre, the clamour to 'do something' is growing and even the Australian Conservation Foundation is jumping on the bandwagon. Its solution: mandatory fuel efficiency standards for new cars sold in Australia:

ACF’s Sustainable Australia program manager Alison Cleary... said the introduction of mandatory fuel standards would reduce emissions and save Australian motorists money.

“With petrol nudging A$1.50 a litre, a fuel efficiency standard of 6.8L/100km would save the average Australian driver around A$1,000 on petrol each year.”

The previous Federal Government had a voluntary agreement with the car industry for vehicles manufactured in Australia to achieve an average fuel efficiency of 6.8L/100km by 2010. But almost no progress has been made towards that target, with only one Australian manufactured car model having an efficiency of less than 10L/100km in 2006. The auto industry failed to meet similar non-binding efficiency targets in 1983, 1987 and 2000.

“Mandatory efficiency standards for new cars are needed to help Australians cope with higher oil prices and ensure we remain competitive in international and domestic markets,” Ms Cleary said.

But is this true? There are some clues from the US, which has had mandatory fuel efficiency standards ("CAFE standards") for some time. And in 2004, the Congressional Budget Office examined the cost of using tighter fuel standards to achieve a 10% reduction in fuel use.

Their findings?

Raising [fuel efficiency] standards would impose costs on both the producers and buyers of passenger vehicles. To comply, producers would need to incorporate technologies to boost the fuel economy of their vehicles, which would increase their cost of production. Consumers would face higher prices for new cars and trucks. But consumers would also see lower operating costs for new vehicles because they would use less gasoline, offsetting some of the sting of the higher purchase prices.

CBO estimates that raising [fuel] standards by ... enough to reduce the amount of gasoline consumed by new vehicles by 10 percent would cost the U.S. economy a total of $3.6 billion per year.

That figure translates to about $230 per new vehicle. Consumers would most likely bear about two-thirds of the costs. Although the average price of a new passenger vehicle would go up by nearly $900, fuel savings would lower the additional costs to consumers to roughly $150 per vehicle, on average. Automakers' lost profits would constitute the remaining $80.

Now Australia is not the US and 2008 is not 2004. The costs to Australia's motorists and manufacturers might be higher or lower than those. But there's no reason to think that tighter standards should automatically save motorists money overall. If saving $1000 a year in petrol is important to motorists, they'll buy more efficient vehicles without the need for mandatory standards. And, indeed, more and more are doing just that. But for many motorists, there are trade offs. Not everyone wants a Prius.

A clue to the trade-offs lies in the ACF's two stats: that the average driver would save about $1000 on petrol a year if the 6.8L / 100 km standard was introduced and that only one Australian-produced car gets better than 10L / 100 km (and presumably not 6.8). To achieve that $1000 saving then, either drivers would be prohibited from buying Australian cars or Australian cars would have to get more efficient, fast. Either way, there's obvious costs to both consumers and local producers.

Now don't get me wrong: there are valid environmental arguments for tighter efficiency standards. And if the net cost to the driver over the life of the car is a couple of hundred dollars, the environmental benefits may well outweight the economic costs. But let's not kid ourselves that tighter environmental regulation is always costless. Far from helping motorists save money and making industry more competitive, the opposite is more likely.

As I've said before, environmentalists need to be making environmental claims strongly and eloquently and taking on the economic arguments too. But we should be careful about overplaying economic arguments. A weak economic argument can distract from a strong environmental one. And from where I'm standing, the economic argument for tighter fuel efficiency standards looks like a weak one.

Who should you vote for in the US Presidential elections?

2008-01-03T08:46:00.000+11:00

A site that should be of interest to all US readers (and many others) is glassbooth.org.

A non-partisan site, it aims to give you an insight into how the views of the Presidential contenders align with your own views.

First it asks you to assign points to issues that you're most concerned about, then it asks you a series of questions about those issues. Based on your responses, it tells you which contenders align most closely with your beliefs and - importantly - provides references and links to back up that assessment.

In case you're interested, the winning candidate for me was Bill Richardson (Democrat from New Mexico), followed closely by Barack Obama and Hillary Clinton. On environment and energy issues, Richardson was well in front (seems he's more of a greenie than I am), followed by Clinton.

More about glassbooth and some other handy election resources can be found in this Wired article.

Happy new year!

2008-01-02T17:15:00.000+11:00

I hope you've all had (or, better still, are having) a refreshing break and I wish everyone a healthy and happy 2008.

It's a good time to reflect and to look forward to a great year and, in that vein, the Sydney Morning Herald has a great article on eco-friendly New Year's resolutions - most of which are pretty cheap and easy to implement.

Bali wrap up

2007-12-17T09:06:00.000+11:00

I think this cartoon by Alan Moir pretty much sums it up!

I'll post some more thoughts soon...

Will the US be rewarded for failing to ratify Kyoto?

2007-12-10T12:58:00.000+11:00

The Sydney Morning Herald reports today:

Three options in the draft Bali deal will be put to international environment ministers who will meet on Wednesday... and the hope is that a deal will be signed by Friday.

The most favoured option is a two-track process. Under this, countries that have ratified Kyoto - Australia has taken the step towards ratification - would continue separate negotiations on the need for deep cuts by 2020 and 2050, and discuss binding targets.

A second process would look at commitments from developing countries and the US, which would not be binding but include renewable-energy and energy-efficiency targets, and emissions cuts from polluting industries.

Is it really the case that Australia has ratified the Kyoto Protocol just in time to be bound by deep cuts it otherwise wouldn't have been required to make?

New-ish environmental economics blog

2007-12-06T08:23:00.000+11:00

While I've been galavanting around Europe with its surprising lack of wireless internet, I've missed the appearance of a new addition to the healthy and growing stable of blogs around the world with an environmental economics focus.

Common Tragedies is a play on the 'tragedy of the commons' concept, the tendency for overexploitation of common resources. The blog chronicles thoughts on environmental and energy economics and policy from a group of research assistants at Resources for the Future, an environmental policy research centre.

An Inconvenient Truth: US doing better on climate change than Europe?

2007-12-05T13:23:00.000+11:00

Yesterday's Wall Street Journal reports some suprising figures on US greenhouse emissions:

The Bush Administration announced last week that U.S. emissions of carbon dioxide fell by 1.8% from 2005 to 2006. Output of all greenhouse gases was down 1.5% last year. All this while the American economy grew by 2.9%. It's the first time since 1990, when the U.N. began counting these things, that the U.S. has reduced emissions without also suffering a recession...

The EU hasn't yet released figures for 2006. But from 2000 to 2005, the U.S. outperformed Western Europe. Carbon emissions were up 3.8% in the so-called EU-15 during those years, versus 2.5% in the U.S. Over the same period, there has been virtually no difference between the increase in all greenhouse emissions in the U.S. and EU-15.

The WSJ goes on to make some odd inferences from this:

the reductions were in part due to higher energy prices and favorable weather. But greater use of lower-carbon energy sources, including natural gas, also played a big role. The U.S. reduction also suggests that letting markets work through higher prices will reduce carbon emissions more than the cap and trade mandates favored by environmental lobbies and most Democrats. [emphasis added]

I'm not sure what the WSJ is suggesting here. Markets won't just "work" and magically ascribe higher energy prices due to help save us from climate change. Governments actually need to somehow interfere in those markets to increase the prices of carbon-intensive energy sources. And there are two basic ways: impose a tax on emissions or require permits for emissions, issue a limited amount of permits and allow them to be traded (cap and trade). Either way, you're putting a price on emissions: only after you've place some constraint on the market can you stand back and let the market "work" to find efficient ways to reduce emissions.

But I think these US figures are worth examining for a few reasons:

They suggest that emissions can be reduced without much of an impact on economic growth. Economic / Business consultants McKinsey have released a study this week that indicates that the US could reduce emissions substantially with little economic cost.

They suggest higher energy prices (and by inference a carbon tax) can be quite effective.

They might give us clues as to what sort of action could be effective. What was different about 2006 to previous years? Why did the use of natural gas for electricity generation increase?

If you're interested, the full report is available (in pdf) from the US Energy Information Administration website.

Bali high - or ballyhoo?

2007-12-04T17:33:00.000+11:00

Now that Australia has ratified the Kyoto Protocol, I'd expect that Kyoto-related debate and discussion in Australia would focus on:

Can we meet our emissions targets in the first commitment period (2008 - 2012)?
What happens after 2012? What will the new Kyoto Protocol or alternative post-Kyoto agreement look like?

For the first issue, the die is really cast: there's not much we can change now in terms of domestic policy that will pay big dividends within the next 5 years.

The Bali conference will kick off international discussions on the second issue - probably one of the most important things to get right in the coming century.

What do you think should be the essential ingredients of Kyoto Protocol Mark II?

Australia's political climate change

2007-12-03T19:11:00.000+11:00

Australia has today ratified the Kyoto Protocol.

Cat and I are back home after a great trip, to a new federal government and some important developments on climate change.

Climate change was a prominent issue in the election campaign. My impression is that, while policy differences between the parties on this issue had narrowed since the former Liberal government announced earlier this year that it would establish a carbon trading scheme, the Liberals' regular climate skeptic rhetoric over the past decade (which only really changed this year) resulted in the distinct feeling that they were not genuine about climate change action.

A new government was sworn in this morning and its first official act was to ratify the Kyoto Protocol. This will enable Australia to participate properly in international negotiations on climate change for the first time in many years. It also leaves the United States exposed as the only wealthy country that has failed to ratify Kyoto. Whether this will have an impact on domestic politics in the US, particularly with a presidential election in the coming year, will soon be seen.

In Australia, the new government has set a long-term target of a 60% reduction in emissions by 2050, with a national emissions trading scheme to be implemented by 2010 to work towards that target.

The Bali climate change conference kicked off today, with new Prime Minister Kevin Rudd, Environment Minister Peter Garrett and Minister for Climate Change and Water Penny Wong, to lead the Australian delegation. The first commitment period under the Kyoto Protocol begins next year and runs until the end of 2012. The signatories to the Kyoto Protocol have committed to achieving certain (fairly modest) emissions targets on average over this 5 year period. The big task for the international community over the next couple of years, starting in Bali, is to negotiate what happens after 2012. It will be positive for Australia now to be more engaged in this process.

What happened to Oikos?

2007-09-12T17:07:00.000+10:00

Apologies to my loyal and very attractive readers for a lack of posts here lately. I'm acting in a new position at work which I'm loving but it's been a learning curve and a lot of work! Free time has largely been devoted to my thesis (first chapter now 4 weeks overdue - woops!) and - more importantly - planning a big overseas trip!

Cat and I set off for a very exciting 9 weeks in Europe via San Francisco and the Phillipines in only a few days.

So posts over the next couple of months will be sporadic and more about highlighting happenings of interest in environmental / economic policy than sharing many of my own thoughts.

I hope to return refreshed and renewed and ready to blog in earnest in late November!

David

Can markets predict global warming?

2007-08-23T13:36:00.000+10:00

It's been a little quiet at Oikos lately, as work has been particularly busy. I've also started researching for my thesis on whether prediction markets could effectively predict climate change and its impacts - something I've previously talked about. Could a well-functioning market in future temperatures or sea level rises be set up, and how might its predictions compare with the consensus forecasts from the Intergovernmental Panel on Climate Change (IPCC)?

According to an article today on MSN, companies are starting to look at precisely such markets:

Farmers have for generations used futures contracts on commodities such as corn and grain to provide insurance against poor weather and crops. But now financial exchanges are developing products that provide companies and investors with a way to hedge Mother Nature herself.
As hurricanes and variable weather make a more noticeable dent on businesses' bottom lines, financial institutions are stepping up to give individuals greater protection against the perceived risks associated with weather changes. Seen as an outgrowth of the traditional futures markets, these new weather-related contracts may help curb the financial disruption caused by climate change...

"There is great acceptance that companies need to manage weather risk," said Felix Carabello, the director of alternative investment products at the Chicago Merc. A more variable climate equals more uncertainty about profits, he said. "You can't predict the weather, but with some of these contracts you can dampen the volatility in earnings due to erratic weather," Carabello said, adding that reinsurance and energy companies have been big early adopters, while hedge funds and banks are increasingly exploring hurricane- and other weather-related risks...

HedgeStreet, a regulated online exchange, also trades hurricane futures and is looking into more potential products that would allow individuals to play global warming... Russell Andersson, HedgeStreet's vice president of instrument origination and a co-founder of the exchange, said other weather-related contracts in the future could be tied to rising ocean levels. "The risk has to be able to be measured in an index for a derivative product to become a candidate," Andersson said. An example would be precipitation or temperature.

It's a topic I'll be discussing more as my research progresses...

Related posts:

Should carbon taxes be linked to global temperatures?

Could long-term weather markets help us understand the risks of climate change?

More on weather markets and climate change

Australian Conservation Foundation looking for Economic Adviser

2007-08-10T17:11:00.000+10:00

An illustration of how economics is becoming increasingly important in environmental debates, ACF is advertising for an economist to fill the apparently newly-created position of Economic Adviser.

According to ACF:

ACF’s advocacy to protect the environment increasingly involves economic analysis, and ACF has set a long-term strategic priority to transform Australia’s economy into one that is ecologically sustainable. As a crucial component of this goal, ACF is developing a programme of work to promote alternative economic tools that incorporate environmental values, and challenging mainstream notions of every-expanding growth in consumption of natural resources.

The position of economic adviser is being newly created to assist ACF to develop this area of work rapidly, and to ensure that Australia begins the shift to economic institutions and instruments that fully recognise, account for and protect the environment.

More details. It would be an interesting job!

Kenneth Arrow and Thomas Schelling on Climate Change

2007-07-19T09:10:00.000+10:00

The latest issue of The Economists' Voice is out, with two articles on the economics of climate change by Nobel Prize-winning economists.

The first is an excellent primer on climate change by Kenneth Arrow: Global Climate Change: A Challenge to Policy. I'd really recommend reading it as a backgrounder to the issue:

Two factors deserve emphasis, factors that differentiate global climate change from other environmental problems. First, emissions of CO2 and other trace gases are almost irreversible; more precisely, their residence time in the atmosphere is measured in centuries. Most environmental insults are mitigated promptly or in fairly short order when the source is cleaned up, as with water pollution, acid rain, or sulfur dioxide emissions. Here, reducing emissions today is very valuable to humanity in the distant future.
Second, the scale of the externality is truly global; greenhouse gases travel around the world in a few days. This means that the nation-state and its subsidiaries, the
typical loci for internalization of externalities, are limited in their remedial ability.

The detail in the article is on the issue of discounting future costs, which is central to the findings in the Stern Report on The Economics of Climate Change that susbstantial immediate action on climate change is likely to be much cheaper over the long-term than inaction. Discounting is something I need to cover in a future Oikos 101 column, but for now I'll just observe that Stern has been criticised for using a zero rate of pure social time preference - which is consistent with the idea of inter-generational equity but inconsistent with observations by economists of how people actually behave.

Arrow conducts a sensitivity analysis, plugging different social time preference rates into Stern's figures, and finds that using a higher social time preference rate doesn't change the fundamental finding of the Stern Report, that action will cost less than inaction.

Thomas Schelling discusses what uncertainty surrounding climate change implies for policy responses and makes some sensible observations in Climate Change: The Uncertainties, the Certainties, and What They Imply About Action:

In some public discourse, and in sentiments emanating from the Bush Administration, it appears to be accepted that uncertainty regarding global warming is a legitimate basis for postponement of any action until more is known. The action to be postponed is usually identified as “costly.” (Little attention is paid to actions that have been identified as of little or no serious cost.) It is interesting that this idea that costly actions are unwarranted if the dangers are uncertain is almost unique to climate. In other areas of policy, such as terrorism, nuclear proliferation, inflation, or vaccination, some “insurance” principle seems to prevail: if there is a sufficient likelihood of sufficient damage we take some measured anticipatory action.
At the opposite extreme is the notion, often called the “precautionary principle” now popular in the European Union, that until something is guaranteed safe it must be indefinitely postponed despite substantial expected benefits. Genetically modified foods and feedstuffs are current targets. (One critic has expressed it as, “never do anything for the first time.”) In this country the principle says that until a drug has proven absolutely safe it must be deferred indefinitely.
Neither of the two extreme principles—do nothing until we are absolutely sure it’s safe; do nothing until we are absolutely sure the alternative is dangerous—makes
economic sense, or any other kind. Weigh the costs, the benefits, and the probabilities as best all three are known, and don’t be obsessed with either extreme tail of the distribution.

Exposing the hidden costs of pollution

2007-07-16T14:05:00.000+10:00

An article in today’s Sydney Morning Herald, which questions whether the Australian states could undermine national action on climate change, illustrates just why a broad-based national emissions trading scheme would be effective.

Environment groups said the Opposition Leader, Kevin Rudd, needed to explain how he would curb rising greenhouse gas emissions at a time when Queensland and NSW were dramatically boosting coal exports and several states were approving big road and power projects that would increase climate change pollution…

The NSW Treasurer [Michael Costa] favours building a new coal-fired power plant to meet the state's energy needs, in contrast to other proposals for more gas-fired generation or energy efficiency and demand management.

New coal-fired power stations would make it difficult for a federal Labor government to reach its target of cutting emissions by 60 per cent by 2050, said the Australian Conservation Foundation campaigner Tony Mohr.

"The really interesting question to ask Kevin Rudd would be if Costa approves a new coal-fired power plant, what will he do about it?" Mr Mohr said. "How is he going to deal with the parochialism of the states?

The power of an emissions trading scheme or carbon tax is that it imposes the same price on greenhouse pollution from any source in any state, so questions like these become irrelevant. Both major parties have now committed to a national emissions trading scheme.

With a trading scheme, the federal government sets a cap on total emissions from all sources and issues permits for that amount. Emitting without a permit is prohibited so total emissions don’t exceed the cap. If you don’t have enough permits for the pollution you wish to create, you need to buy them from someone else. They can only sell them if they’ve taken action to reduce their emissions so that they have surplus permits.

Under an emissions trading scheme, if NSW wants to approve a coal-fired power station, so what? For the station to be allowed to operate, the operator will need to buy enough permits to cover its emissions. It can buy them only if someone else reduces their emissions and so has surplus permits. The total level of emissions is therefore unchanged.

It will no longer be up to the NSW Government to decide whether a new coal-fired power plant, more gas-fired generation or energy efficiency and demand management is the best way to meet the state's energy needs: all those methods will compete side by side on the basis of bang for your cost-of-pollution-adjusted buck.

So what is a parochial state government that wants to encourage coal-fired power production to do? Well it can offer breaks from state taxes and planning restrictions, but that’s not a good look. Importantly, it can’t exempt power stations from emissions trading, because it’s a scheme administered by the federal government. If it really wants to encourage the power station, it will have to agree to buy the permits for it. (Scarily, they’ve already started doing this).

And this is one thing I love about a national emissions trading scheme: it puts a price on pollution for everyone to see. State governments place costs on their citizens every time they exempt a large development from laws that apply to everyone else, but those costs are hidden. Voters don’t notice the cost of a government exemption, but you can bet they’ll notice when their taxes are used to buy permits for a large and profitable energy company.

When we put a price on polluting, we bring hidden costs into the open.

Live Earth concert this Saturday

2007-07-03T17:19:00.000+10:00

Only 4 sleeps to go until the Live Earth concerts around the world - in New York, London, Johannesburg, Rio de Janeiro, Shanghai, Tokyo, Sydney and Hamburg on 7/7/07 - this Saturday!

By the way, I have a couple of spare tickets to the Sydney concert, so email me at ozelaw [at] yahoo [dot] com [dot] au if you missed out.

Check out the Sydney concert website for lots of good material about the concert and the cause.

Cheap ways to reduce greenhouse emissions

2007-06-28T13:06:00.000+10:00

An interesting article in The Economist last month took a look at the cost of various options for reducing greenhouse emissions (summarised in the graph above).

Two things are particularly notable:

There are a number of options that have a negative cost. In other words, not only would they reduce emissions, they’d also save us money. The biggest one is insulation and low-energy lighting is also up there.
The solutions we hear a lot about – such as wind, solar and carbon capture – are among the most expensive options.

So why are we not voluntarily making decisions that would not only reduce emissions but also save us money?

The Economist identifies a couple of possible reasons, the most compelling to my mind is that the people who make the choices are not the people who pay the costs of those decisions. For example, property developers have to pay for insulation but they won’t get the benefits of lower electricity bills, so their incentive is to go cheap on insulation. If the property is to be rented out, it’s not even the buyer who pay those bills – it’s a tenant.

How to solve this? In theory, awareness of the issue should be enough: if tenants and buyers of new houses (or other buildings) are aware that good insulation can save them substantial amounts of money, they should demand it and be prepared to pay more for it – in the same way they’d be prepared to pay more for a good bathroom or kitchen.

So why isn't this happening? And seeing as it doesn’t seem to be happening, is there a role for government in mandating it in building standards or requiring developers and sellers to at lease provide understandable information (eg, energy efficiency ratings)?

[HT: RSMG Blog]

Coming soon to an Australian high school near you?

2007-06-25T09:17:00.000+10:00

Click picture to enlarge.

More nuclear fun at Ethan Persoff's site.

Should carbon taxes be linked to global temperatures?

2007-06-18T12:59:00.000+10:00

I’ve mentioned before the possibility of creating markets in long-term weather – that is, betting on future climate change – as a method of predicting and insuring against climate change. Betting markets are good at predicting future outcomes – you can look at the odds on horses in a race if you want to get an idea of who’s likely to win. The idea is that allowing climate scientists, businesses, etc to bet on future climate change would be a way of aggregating all the knowledge that people have about likely future climate change in a way that’s more decentralised and independent than say the consensus method of international scientists at the Intergovernmental Panel on Climate Change (IPCC). There are advantages and disadvantages of either way of distilling the information from thousands of climate scientists into consensus estimates of likely climate change.

In an article last week in Canada’s Financial Post, Canadian economist Ross McKitrick proposes a different method of removing scientific uncertainty about climate change from the policy response to climate change. He proposes a carbon tax where the tax rate is linked to average global temperatures over the prior 3 years:

Climate models predict that, if greenhouse gases are driving climate change, there will be a unique fingerprint in the form of a strong warming trend in the tropical troposphere... The Intergovernmental Panel on Climate Change (IPCC) states that this will be an early and strong signal of anthropogenic warming. Climate changes due to solar variability or other natural factors will not yield this pattern: only sustained greenhouse warming will do it. Temperatures in the tropical troposphere are measured every day using weather satellites…

Suppose each country implements something called the T3 tax, whose U.S. dollar rate is set equal to 20 times the three-year moving average of… estimates of the mean tropical tropospheric temperature anomaly [warming], assessed per tonne of carbon dioxide, updated annually. Based on current data, the tax would be US$4.70 per ton...

This tax rate is low, and would yield very little emissions abatement. Global-warming skeptics and opponents of greenhouse-abatement policy will like that. But would global-warming activists? They should -- because according to them, the tax will climb rapidly in the years ahead.

The IPCC predicts a warming rate in the tropical troposphere of about double that at the surface, implying about 0.2C to 1.2C per decade in the tropical troposphere under greenhouse-forcing scenarios. That implies the tax will climb by $4 to $24 per tonne per decade, a much more aggressive schedule of emission fee increases than most current proposals. At the upper end of warming forecasts, the tax could reach $200 per tonne of CO2 by 2100, forcing major carbon-emission reductions and a global shift to non-carbon energy sources.

Global-warming activists would like this. But so would skeptics, because they believe the models are exaggerating the warming forecasts. After all, [the average tropical troposphere temperature] went up only about 0.08C over the past decade, and has been going down since 2002. Some solar scientists even expect pronounced cooling to begin in a decade. If they are right, the T3 tax will fall below zero within two decades, turning into a subsidy for carbon emissions…

Under the T3 tax, the regulator gets to call everyone's bluff at once, without gambling in advance on who is right. If the tax goes up, it ought to have. If it doesn't go up, it shouldn't have. Either way we get a sensible outcome.

It’s an intriguing idea. I suspect its biggest detractors would be energy-intensive industries, who would have no certainty about the level of carbon taxes in the future. McKitrick’s response is that those industries will just have to forecast that as best they can and actually sees this as an advantage:

best of all, the T3 tax will encourage private-sector climate forecasting. Firms will need good estimates of future tax rates, which will force them to look deeply, and objectively, into the question of whether existing climate forecasts have an alarmist bias. The financial incentives will lead to independent reassessments of global climate modelling, without regard to what politicians, the IPCC or climatology professors want to hear.

(This is the advantage too of a long-term weather market. Presumably McKitrick’s proposal would lead to the development of such a market so that energy-intensive industries could assess - and hedge - their exposure).

There are a few potential problems with the proposal that immediately spring to mind.

The first is that it relies on the fact that “climate models predict that, if greenhouse gases are driving climate change, there will be a unique fingerprint in the form of a strong warming trend in the tropical troposphere”. But what if that isn’t the case? McKitrick’s claim is that his proposal takes the scientific debate out of the policy response, but it relies on climate model predictions that troposphere warming reflects man-made emissions and leads other warming. If he’s prepared to accept this finding, why not go the step further and accept the estimates of warming presented by those models and then base the level of tax on those?

It also doesn’t really deal with the problem of lag periods: the tax paid now depends on the level of warming now. But the purpose of the tax is to prevent increased warming in the future: surely its level should be based on an assessment of what’s required to constrain future temperature increases.

McKitrick’s answer is that “investors planning major industrial projects will need to forecast the tax rate many years ahead, thereby taking into account the most likely path of global warming a decade or more in advance”. And that’s no doubt true for major industrial projects. But household consumers of electricity and petrol will make their decisions based on today’s prices.

A related problem is that it doesn’t deal with dangerous thresholds. The tax is linear: it increases by US $20 for every 1 degree rise in temperatures. But damage isn’t linear. What happens if our best science suggests that damage will be moderate up to, say, two or three degrees but that, above that, there will be feedback loops and greatly increased risks of catastrophic damage? If that was the case, we’d want an aggressive tax before those dangerous levels are reached. McKitrick’s tax would only start becoming aggressive once those levels were passed, by which time even much higher tax rates may have become much less effective.

It’s an interesting idea though that deserves some attention and debate. I think it’s interesting that market approaches may help not only with developing effective and low-cost policy responses, but may also help improve our understanding of the science on which policies must be based.

[HT: Lars Smith at Conservation Finance]

Review of Environmental Economics and Policy

2007-06-14T14:09:00.000+10:00

The first issue of the Review of Environmental Economics and Policy is out and articles can be downloaded for free.

The Review

...seeks to fill the gap between traditional academic journals and the general interest press by providing a widely accessible yet scholarly source for the latest thinking on environmental economics and related policy...

Looks like there's some interesting articles, with a focus on carbon taxes and emissions trading.

[HT: Environmental Economics blog]

Happy World Environment Day!

2007-06-05T16:08:00.000+10:00

Who do you trust with the challenge of climate change?

2007-06-04T16:41:00.000+10:00

That’s what Australia’s Prime Minister John Howard asked yesterday, when announcing his Government’s policy on climate change for the next election:

We must get this right. If we get this wrong, it will do enormous damage to our economy; to jobs and to the economic wellbeing of ordinary Australians, especially low-income households. The question I pose to the Australian people, quite directly, is this: who do you trust to take the vital decisions about our future?

Howard announced yesterday that his government would introduce emissions trading by 2012:

I announce specifically that Australia will move towards a domestic emissions trading system, that’s a cap and trade system beginning no later than 2012.

Secondly, we will as a nation set a long term aspirational goal for reducing carbon emissions but we need to assess very carefully with detailed economic modelling the impact any target will have on Australia’s economy and Australian families, this target will be set next year 2008.

Thirdly, the scheme will be national in scope and as comprehensive as practicable, designed to take account of global developments and to preserve the ompetitiveness of our trade exposed emissions intensive industries.

Fourthly, Australia should not pay higher energy costs than necessary to achieve emissions reductions, in other words, governments need to let the market sort out the most efficient means of lowering emissions with all low emissions technologies on the table and that of necessity must include nuclear power.

First, credit where credit is due. The PM has now committed his government to introducing a domestic emissions trading scheme by 2012. In effect that’s a commitment to reduce our emissions unilaterally even if it’s not required under the next round of Kyoto after 2012 (or some other international agreement). On the other hand, he has deferred setting a target for reducing emissions until next year, ie, after the election. That’s really half a policy. It’s like announcing that you’ll introduce a goods and services tax but you haven’t worked out what the rate will be. Or you intend to give a huge boost to health spending, but you haven’t worked out how much or where it will be spent. (Trust us).

Trust on climate change action is a double-edged sword. We need effective action but at a reasonable cost to the community. The Liberal Government enjoys the community’s trust that it will have broadly sensible economic policies, but I don’t think the community trusts it to deal with climate change effectively. It has spent the last 10 years taking only modest action on climate change and at the same time has damaged the cause of effective action by rejecting the Kyoto Protocol, supporting the world’s biggest polluter - the United States - in its stance to take no effective action on climate change, and publicly expressing its scepticism that climate change is even a problem.

We’re starting to get some reasonable modelling on the costs of emission reduction pathways. Strong targets will impose costs on businesses and households, but are entirely consistent with strong economic growth. Indeed, they make relatively little difference to overall projections for growth. Leaders that we can trust will be those that tell us the truth:

It’s true we’re a small player in all this. Adopting a strong domestic target won’t in itself save us from the risk of dangerous climate change.

However, it’s a likely prerequisite for getting our neighbours to play their part.

Strong targets will mean that we’re not as wealthy in 50 years as we would be with no targets. But we’ll be much wealthier than we are now. The economic chaos that Howard fears the ALP’s “reckless and irresponsible” target may inflict is being 169% wealthier on average than we are now compared to 184% wealthier if we don’t set a target.

Of course, that doesn’t take into account the dangers that climate change presents to our wealth. I reckon being only 169% wealthier in 50 years is worth it to avoid the (small) risk that climate change will make us much poorer, in nasty ways.

Nevertheless, the flipside is also true. On the best estimates, climate change will make people in 50 or 100 years poorer than they otherwise would be – but (unless things go really wrong) still substantially wealthier than we are right now. So don’t be too worried about the people of 2100 – they’ll probably be better off materially than you or me.

To a large extent, climate change is an economic issue. Some of the problems of climate change will be dealt with better by spending money on adapting than by spending money on reducing the severity of climate change. For example, we could invest billions on reducing the severity of climate change to reduce the spread of malaria that it will cause as warmer regions expand. But we might save millions more lives by investing that money in research into malaria treatments.

But, most importantly of all, climate change is not just an economic issue. It will destroy or radically alter species, ecosystems, landscapes, and communities. The extra wealth we’ll gain from inaction won’t compensate us for that. I hope our leaders can show that that’s something they understand.

I’m working my way through the PM’s task group’s report and in the next couple of weeks, I’m going to outline what it means, where we are in terms of climate change policy in Australia, and some of the things you need to understand to make some sense of it all, including:

What is emissions trading?

How does it differ from a carbon tax?

What are the main political parties proposing?

How does Australia fit into the global challenge?

What are the economic effects of imposing a cost on emissions?

How do you choose an emissions target?

Are there any other questions you’d like answered? Let me know: leave a comment or email me at ozelaw [at] yahoo [dot] com.

Emissions trading - the report is out

2007-06-01T13:39:00.000+10:00

The Prime Minister's Task Group on Emissions Trading has handed down its final report and it is now available.

It recommends an emissions trading scheme based on the following principles:

a long-term aspirational emissions abatement goal and associated pathways to provide an explicit guide for business investment and community engagement an overall emissions reduction trajectory that commences moderately, progressively stabilises, and then results in deeper emissions reductions over time and:
· is sufficiently flexible that it can be periodically recalibrated by government to changing international and domestic circumstances through regular and transparent reviews
· provides markets with the ability to develop a forward carbon price path to guide business investment decisions and help drive longer-term technology development – markets would be expected to establish a low initial carbon price and a forward price curve that rises over time

maximum practical coverage of all sources and sinks, and of all greenhouse gases with permit liability placed on direct emissions from large facilities and on upstream fuel suppliers for other energy emissions with those sectors initially excluded from the emissions trading scheme subject to other policies designed to deliver abatement

initial exclusion of agriculture and land use from the scheme though agricultural emissions should be brought into the scheme as practical issues are resolved

a mixture of free allocation and auctioning of single-year dated emissions permits that:
· provides an up-front, once-and-for-all, free allocation of permits as compensation to existing businesses identified as likely to suffer a disproportionate loss of value due to the introduction of a carbon price
· ameliorates, through free allocation, the carbon-related exposures of existing and new investments in trade-exposed, emissions-intensive industries while key international competitors do not face similar carbon constraints, but which also provides ongoing incentives for abatement and adoption of industry best practice allows for the periodic auctioning of remaining permits

a ‘safety valve’ emissions fee designed to limit unanticipated costs to the economy and to business, particularly in the early years of the scheme, while ensuring an ongoing incentive to abate

recognition of a wide range of credible carbon offset regimes, domestically and internationally

capacity, over time, to link to other comparable national and regional schemes in order to provide the building blocks of a truly global emissions trading scheme

incentives for firms to undertake abatement in the lead-up to the commencement of the scheme, including through the purchase of offset credits from carbon plantations, and potentially from other accredited activities

revenue from permits and fees to be used, in the first instance, to support emergence of low-emissions technologies and energy efficiency initiatives (the focus might shift more toward households and business as the scheme matures).

That mostly sounds pretty good to me but I think the emphasis is clearly on being business-friendly more than being effective (where those two goals conflict).

Will be interesting to delve into some of the detail. Some initial thoughts:

The 'safety valve' fee is potentially worrying

The idea of a cap-and-trade scheme is that the government sets the maximum emissions, issues permits for that level of emissions and then emitters trade the permits. If one emitter can reduce its emissions for less than the market price of the permit, it will do so and sell the excess permits it has. If another emitter wants to expand and that will involve more emissions, it will need to purchase permits. It will then have an incentive to pursue options that involve relatively less emissions so that it doesn't have to buy as many new permits.

If the government stands by ready to charge a 'safety valve' fee to emitters that don't have enough permits, that sets a maximum price on the permits: if it's cheaper just to pay the fee than to buy the permits, you'll just pay the fee, so the permits won't rise above that price.

But that means that the cap on emissions isn't really a cap. If emitters pay the fee rather than buying permits, then the cap will be exceeded. From business's point of view it's a good thing: it means there's a known worst-case-scenario in terms of the costs it will impose. But if it's set too high, the reduction in emissions could be much lower than we anticipate.

The allocation of free permits is controversial

Ideally, you should auction all permits. As Peter Martin says in the Canberra Times:

The best way to distribute permits is to auction them. The firms that need them will pay what they are worth and pass on the costs to consumers in higher electricity prices. The government can use the money it raises from each year’s auction to cut income tax, to cut company tax, or to support the development of low-carbon technologies.

However,

Polluter after polluter that has made a submission to the Prime Minister’s taskforce on emissions trading has said that while it supports the idea of a trading scheme, it wants the price of the permit set low and it wants to be given enough permits - gratis - to cover most of the pollution it already does.As Australia’s most venerable economic modeler and one of the signatories to the economist’s letter Professor Peter Dixon of Monash University told me: “It’s the same as putting a tax on carbon pollution and then instead of doing something useful with the proceeds - like cutting another tax - giving it to the shareholders of the polluting companies”.

It is even better than that for the polluting companies. If they get given for free permits that a would-be competitor would need to buy, they get given a built-in cost advantage. Their would-be competitors might not bother! No wonder they like the idea. (Economists call the idea “grandfathering” and call the result a “barrier to entry”.)

Expect a lot of political argy-bargy over this one.

PM's Emission Trading Task Group - report out midday today

2007-06-01T11:31:00.001+10:00

I've just been informed that the report will be posted on the Task Group's website at midday today.

Today's Sydney Morning Herald has a brief summary and the recommendations are a little disappointing (if not surprising). The good point is that it recommends a domestic cap-and-trade system (with fees for exceeding permit requirements - which makes it more like a hybrid cap-and-trade / carbon tax).

Other features of the report according to the SMH:

The scheme "must not overtly harm the economy" (so it will be restricted to measures that covertly harm the economy??)
too early to set a target until more modelling has been done
would not be introduced until at least 2012
revenue from the scheme should be used to support low emission technologies
no mandatory renewable energy target.

The Canberra Times has a slightly better summary and Peter Martin has a good piece on the economics.

I'll try and put up a summary of the main recommendations shortly after midday...

The Prime Minister's Task Group on Emissions Trading

2007-05-31T09:32:00.000+10:00

The Prime Minister’s Task Group on Emissions Trading gives its report to the PM today and is expected to recommend the introduction of a national emissions trading scheme in Australia.

I have been pretty sceptical about the taskgroup, given its membership: of the twelve members, five are from within the government, three are from mining / resources companies, one is from a power company, two are from heavy energy users (aluminium and airline companies). Only one (from National Australia Bank) is not from a heavy greenhouse-gas-emitting company. There are no representatives from outside government or big business and no businesses that would have an interest in a strong trading scheme (eg, insurers, agriculture, tourism, renewable energy).

The group is also repeating work that has been done pretty thoroughly already: the National Emissions Trading Taskforce was established by the Australian states and territories in January 2004. It presented key design propositions for a successful trading scheme later in 2004, issued a background paper and undertook public consultation in 2005, and presented a proposed trading scheme in August last year. As far as I’m aware, the federal government declined to have any involvement in the NETT process. The states and territories have committed to a national state-based scheme by 2010 if the federal government fails to introduce its own national scheme.

And the terms of reference themselves seem to suggest the result:

Australia enjoys major competitive advantages through the possession of large reserves of fossil fuels and uranium. In assessing Australia's further contribution to reducing greenhouse gas emissions, these advantages must be preserved.

Against this background the Task Group will be asked to advise on the nature and design of a workable global emissions trading system in which Australia would be able to participate. The Task Group will advise and report on additional steps that might be taken, in Australia, consistent with the goal of establishing such a system.

Nevertheless, the media are tipping that the taskforce will recommend a national trading scheme. If so, it’s remarkable that the government lags behind even the most reactionary businesses with the most to lose from action on climate change. Why does the PM have to wait until even coal miners and electricity generators call for some action on climate change?

Clive Hamilton has an article today suggesting 7 tests for a decent trading system, which I think are pretty sensible. In summary they are:

1. Comprehensive coverage of the main emissions sources.
2. A clear target.
3. No loopholes. (Hamilton reckons there shouldn’t be offsets or credits from actions like planting trees. I disagree, but the challenge is ensuring that offsets are genuine and robust.)
4. Permits should be auctioned, not handed out to existing big polluters for free.
5. It should be able to link in with foreign schemes.
6. Allow the market to work unconstrained.
7. Ensure medium-term economic certainty (ie, fixed emissions caps) but longer-term flexibility to adjust caps if necessary.

We should see the report later today or tomorrow – it will be interesting to see what it says. The PM will apparently respond on Sunday. The opposition has attempted to steal the PM's thunder by issuing its own policies today (including a national emissions trading scheme by 2010 coupled with a mandatory renewable energy target) – they are mostly pretty good but I’m not sure there’s anything new there they haven’t announced before.

Carbon offsets

2007-05-23T14:00:00.000+10:00

From GeekCulture, via env-econ.net.

Live Earth tickets on sale tomorrow (Australia)

2007-05-17T17:02:00.000+10:00

You've probably heard about the Live Earth concerts around the world on 7/7/07 to "engage people on a mass scale to combat our climate crisis".

Tickets for the Australian show in Sydney go on sale tomorrow morning at 9 am. $99 including public transport to the show. The line-up looks really good.

Vincenze has alerted me to an unofficial Live Earth blog which is quite interesting too, with news and gossip on the concerts (plus some serious environmental news).

Update: Tickets are sold out but I have a couple of spare tickets to the Sydney Live Earth concert if you missed out - drop me a line asap!

More on weather markets and climate change

2007-05-15T13:05:00.000+10:00

I wrote a couple of weeks ago about the possbility of long-term weather markets helping us to understand and prepare for climate change.

I've since found a smattering of information on this topic elsewhere, although not as much as I'd expect given the large amount of information on on prediction (or betting) markets for things like elections.

Some resources are:

a website on climate change betting by James Annan, a scientist involved in climate prediction. His blog has some interesting stuff too.

There's an article in Reason Magazine.

Wandering a bit off-topic but a conceptually similar operational hurricane futures market allows meteorology researchers and students to invest real money ($5.00 - $500.00) in securities whose payoffs depend on where a given hurricane makes its first landfall. The prices of these securities is then used to forecast where a hurricane will actually land.

The New York Times had a very readable article a couple of months ago on prediction markets.

Also, on the subject of prediction markets, a number of prominent economists have advocated some changes to US online gambling laws to ensure that useful prediction markets can operate legally. The authors made these observations about the usefulness of prediction markets:
Prediction markets have already been used in a variety of contexts with remarkable success. For example, prices of economic derivatives predict economic variables better than professional economists; prices in Iowa political markets are typically more accurate than the polls in forecasting elections; and prediction markets at Hewlett-Packard Labs beat official forecasts of printer sales most of the time.

Prediction markets reflect an old thought that underlies the price system: Information is widely dispersed in society, and it is highly desirable to find a mechanism to collect and aggregate that information. These markets work for several reasons: First, almost anyone can participate. Second, people think hard when they have to back up their predictions with money; buy the right presidential contract and you win, buy the wrong one and you lose. Third, the profit motive encourages people to look for better information.

I'll keep following this theme on the blog. It seems to me that even a small betting market on long term temperatures (or associated climatic changes) could be a very cheap way to improve our understanding of climate change risks.

Oikos 101: Price elasticities

2007-05-09T13:15:00.000+10:00

Welcome to the first in what I intend to be a regular series: Oikos 101.

Here I’ll attempt to explain useful economic, ecological or environmental policy concepts in a way that’s simple but still accurate. (If it’s not simple or is inaccurate, please let me know).

I’ll then use these concepts in future posts without the need to explain them each time.

The first concept is an important one in economics: price elasticity.

Elasticity generally is a measure of responsiveness: how much one variable changes when another variable changes. The more “elastic” something is, the more responsive it is. Two important elasticities in economics are the price elasticity of demand and the price elasticity of supply.

When the price of something goes up, the quantity that consumers demand generally goes down. If McDonalds doubled the price of its Big Macs, people would by fewer Big Macs. (Some would switch to Whoppers, some would cut back from two Big Macs for lunch to one, some would decide it’s finally time to take their own sandwiches to work, etc etc). The price elasticity of demand refers to how much the quantity demanded changes as price changes.

Different goods have different price elasticities. Some things are easy to avoid or substitute for. When the price of bananas shot up in Australia after Cyclone Larry devastated Queensland banana plantations last year, people mostly bought other fruit or just ate less fruit. We can describe demand for these sorts of items as price-elastic or just elastic. (The quantity demanded is quite responsive or sensitive to changes in price). Other things are difficult to avoid or substitute for. If the price of cigarettes increased suddenly, some people would quit or smoke less, but many would not change their habits much. Demand for cigarettes is relatively inelastic. (The quantity demanded is quite unresponsive or not sensitive to changes in price).

We can also look at the price elasticity of supply. Again, let’s look at bananas in the aftermath of Cyclone Larry. The price that producers could get for their bananas rose substantially, but it takes a while for bananas to grow. So in the short term, growers couldn’t take advantage of the high prices by supplying extra bananas. Perhaps some overseas producers could ship more bananas to Australia. But many overseas producers are prevented from selling bananas to Australia because of Australia’s strict quarantine laws. So, in the short term, supply was not very responsive even to the much higher prices: we would say it was inelastic.

It’s also important to note that the elasticity of a good depends on the price of that good. Imagine petrol is so cheap that it costs me only $10 to fill the tank of my car. If the price increases by 50% to $15 a tank, I still probably won’t cut back on my driving very much. However, if the price of petrol meant that it cost me $50 to fill the tank and it then rose by 50%, that change would have a much larger impact on my consumption. So at low prices, petrol is highly inelastic (it’s so cheap that even if you double the price I’ll still buy almost as much) but at high prices it’s elastic (I’m already near breaking point, if the price doubles I’ll buy much less – I might even sell my car).

Looking at elasticity of their products is important for businesses (will I lose many sales if I put the price up?) but elasticity is also useful for looking at a number of environmental and economic policy issues. So, for example, if we want to reduce water use and we’re thinking about water restrictions versus an increase in water charges, we might want to know how elastic the demand for water is. If it’s highly inelastic, so that consumption will not respond much to price increases, we could conclude that modest price increases aren’t going to be very effective: we’ll need to look either at substantial price increases or other measures such as water restrictions.

More info:

Wikipedia

Other Oikos posts that use the concept of elasticity:

Should women be taxed at a lower rate than men?

Do parking levies reduce traffic congestion?

Will climate change get a run in tonight's budget?

2007-05-08T14:02:00.000+10:00

Federal Treasurer Peter Costello hands down his 10th(?) budget tonight. Will climate change get a mention?

Not much, according to the budget 'leaks' so far: there seems to be an extension to the solar rebate and little else.

Anyway, have a punt at the Greenpeace website on how many mentions there will be and win a solar backpack. The competition closes at 5pm.

HT: Solidariti

Could long-term weather markets help us understand the risks of climate change?

2007-05-03T16:44:00.000+10:00

Markets are good at aggregating information. When individuals - each acting according to their own personal preferences, ideas and knowledge - interact in a market, the market price that is set for a commodity reflects society’s best guess about the commodity's value. For example, shares in Telstra can (probably) be bought and sold by Telstra employees, share market analysts, Telstra’s competitors and customers, telecom regulators (maybe), directors of overseas telco companies, etc etc. Each of these individuals has their own thoughts, based on their own expertise, of Telstra’s business and prospects. The resulting share price reflects a consensus on Telstra’s value.

To put it another way:

When individuals make economic decisions based on diverse sources of information, market aggregates – such as prices – will to a greater or lesser extent reflect the pieces of information received. By observing a market aggregate, each person may learn something about the information possessed by others. In some cases, enough information is reflected to induce everyone to agree on a consensus estimate of the relevant uncertainty. This theme has been extensively explored in the literature on rational expectations.

Another example: individual punters at a horse race may have particularly good knowledge of one or more of the horses in the race (how fit they are, what sort of conditions they like), the jockeys, the track, etc. When combined, they give odds which represent the betting community’s best estimate of the probabilities of each horse winning, distilled from this dispersed information.

The odds in these sorts of betting markets give a good indication of future events. For example, economists Andrew Leigh and Justin Wolfers have found that election betting markets are good at picking election results, and certainly better than polls on intended voting behaviour (papers here and here).

I don’t know much about the economics of betting markets but I was intrigued by this well-defined bet on future global temperature change between a climate change ‘believer’ and a ‘sceptic’:

We have three bet periods -10, 15, and 20 years - and two bets for each period - an even-odds bet and a 2:1 bet in David's favor. The even-odds bet centers around a temperature increase rate of 0.15C/decade with a 0.02 void margin on either side (bet voids if temps increase between .13 and .17C/decade). The 2:1 bet centers on 0.1C/decade with a .01 void margin. Even-odds bets are for $1,000 each, and the 2:1 bets increase over time, with me betting $1,000, $2,000 and $3,000, and David betting half that. My exposure is $9,000; his is $6,000.

So I was thinking: What if someone set up some decent markets in future global temperatures? Anyone would then be free to bet on how much climate change they expect in the future. There are already weather markets for short-term weather events, so it shouldn’t be too much of a stretch.

I can think of a number of benefits:

It would give an independent estimate of likely magnitude of climate change based on individual scientists, companies, individuals, etc all betting on how much they think temperatures would rise by based on their understanding of climate change science. This would be very valuable to guide government policy and private sector decisions.

Some people have criticised the scientific integrity of the Intergovernmental Panel on Climate Change (IPCC) estimates of climate change because they are based on consensus and therefore ‘political’ and biased. There could be no such criticism of this process – people would be acting independently and putting up their own money.

Climate change sceptics (and believers) could put their money where their mouth is: if they’re so convinced that we’re not at risk from climate change, they could make a motza. (And it would test the claims from some quarters that this is some sort of vast left-wing conspiracy).
There would be incentives to invest in climate change research, as people could make money from it: if you understand the likely future climate better than (or before) everyone else, you can make money on the markets.

People could use it to hedge or insure their exposure to climate change impacts. For example, say the market assesses the chance of very large temperature rises of 5 degrees in the next 50 years is 1 in 1000 and so I can make a bet on that level of change that pays 1000 to 1. Now, if I own a beachside house that will be ruined by sea level rises associated with a temperature increase in that range, I could bet say $1000 now that temperatures won’t rise by 5 degrees in the next 50 years. If they don’t rise that much, I’ve only lost $1,000. If they do rise that much, I can use my $1 million to buy a new house. Ski resorts could hedge some of the risk of declining snowfalls from higher temperatures. This could be helpful to all sorts of businesses, especially insurance companies, helping them to assess risks and cover them.

Wouldn’t a government or financial institution be providing an enormously helpful (and potentially profitable) service by setting up such a market?

John Howard’s climate policy: Que sera, sera

2007-05-01T13:07:00.000+10:00

When the federal opposition announced a target last week of reducing Australia’s emissions by 60% by 2050, John Howard described it as “crazy”:

"You've got this ridiculous situation where the Greens are advocating an 80 per cent cut by 2050, the Labor Party is only slightly less radical at 60 per cent by 2050," Mr Howard told ABC radio.

"Neither the Greens or the Labor Party has any idea of what that will do to jobs. I think it is crazy and irresponsible of any political party in this country to commit to a target when you don't know the impact of the target."

The target is based on the scientific reality (or at least our best current understanding of it) that 60% is the absolute minimum emission reduction required by 2050 in order to stabilise the concentration of carbon dioxide at a level which minimises the risk of severe climate impacts:

Although the pursuit of emissions reductions of 60% or more cannot be translated directly into a specific stabilisation target, this emissions target does have its origins in the analysis of different stabilisation pathways, particularly the 550 ppmv stabilisation target which… is roughly the upper limit for atmospheric GHG [greenhouse gas] concentrations that avoid DAI [dangerous adverse impacts]…

Despite the precedence for the use of 550 ppmv as benchmark for estimating GHG emission reductions necessary to avoid DAI, it is clear from the range of proposed thresholds… that even this threshold is considered too high by some experts. Carbon dioxide and CO2e concentration thresholds well below 550 ppmv frequently have been recommended…

…the goal of Annex I [developed country] emissions reductions of 60% by 2050 may be considered a minimum estimate of the effort needed to achieve stabilisation to avoid DAI.

(CSIRO, pdf here [see pages 17-18], my emphasis).

And it’s not dissimilar to the target suggested by the federal government’s own Chief Scientist three years ago:

Fresh from defending himself against allegations of a conflict of interest [over his dual roles as Australia’s Chief Scientist and chief technologist for mining company Rio Tinto], the Chief Scientist, Robin Batterham, said Australia must halve its greenhouse gas emissions by 2050.

Talk of such a target by the Federal Government's most senior scientific authority is in stark contrast to the recently released white paper on energy policy which broadly supported Australia's continuing use of fossil fuels, a major source of man-made greenhouse gases.

Dr Batterham said he supported the Federal Government's decision not to ratify the Kyoto protocol on climate change because the reductions it set were not high enough.

"I'm talking about enormous reductions - 80 per cent by the end of the century," Dr Batterham said. "Fifty per cent by 2050, I think, is realistic."

Of course, it's not true that we have no idea of the economic impact of these proposed targets (more on that tomorrow). But the more important point is this: any target has costs and benefits. The costs are obvious and are what the government has focussed on: higher energy prices and resulting lower profits and job losses in fossil fuel industries. The benefits are more dispersed: jobs and earnings in renewable energy, indirect benefits of policies to reduce energy waste (better energy efficiency, more economically efficient transport, and reduced air pollution), credibility in the global debate on climate change and, the biggie, reduced risk and severity of adverse climate change.

If you don’t set a formal target, you’re simply setting a target by default: a target of emissions increases. This unstated target has costs as much as a stated target does. If setting a target based on an incomplete knowledge of all the costs and benefits – a ‘best guess’ target – is irresponsible, how much more irresponsible is not setting a target at all – just letting whatever may happen happen? Is that any way to decide policy?

A crude analogy

2007-04-30T13:00:00.000+10:00

Today I’d like to pose a scenario to think about. Imagine you live with your family in an enormous 5 bedroom house in a small, mostly self-sufficient development. There are 3 other properties in the development. There’s an apartment block with 12 small apartments. There’s a little complex of 12 luxury townhouse villas. And there’s 20 families living in a commune, growing their own food. It’s an eclectic community but everyone gets on well.

As part of its self-sufficient nature, the development isn’t connected to town sewerage. Instead there’s a large septic tank that breaks down sewage so it can be safely used as fertiliser on the farm and water for gardens.

But there’s a looming problem. The septic tank is almost at capacity. Within a couple of years at current usage, it’s going to reach capacity and regularly start overflowing raw sewage, mainly onto your property and the commune. A new tank is prohibitively expensive. And usage is set to increase: a couple of new villas are being built and the commune has plans to expand.

The residents convene a meeting and start by looking at everyone’s sewage levels. The 12 families in the luxury villas use an enormous amount of water and contribute correspondingly enormous amounts of sewage to the tank. The 12 families in the apartment block contribute only about half as much and the 20 families in the commune even less. Your family doesn’t contribute very much in the scheme of things, but with a huge house and garden, still contributes more than any other family in the whole place – even the rapacious villa dwellers.

The residents agree that, to start with, the two biggest contributors – the luxury villas and the apartments – will reduce their contributions by 10%. Your family won’t have to reduce its sewage but you agree not to increase it by more than a very small amount. Everyone agrees that the commune, which doesn’t produce much sewage anyway and is considerably poorer than everyone else, won’t have to do anything just yet but will monitor its sewage.

No doubt you can see where I’m going with this, but let’s continue.

You don’t want to be wallowing in sewage within the next couple of years, so you sit down with your family and work out a plan.

One member of the family has talked to a plumber and reckons that total sewage inflows have to be cut by at least 60% to keep the tank operating pretty much within capacity with only maybe an occasional spill. She suggests that the family aims to get its sewage down to 60% below its current level, by taking shorter showers, diverting some of the shower water to use on the garden and getting more efficient appliances.

Another family member reckons this will be way too hard and way too expensive. He’s had a chat to the owners of the luxury villas and they reckon it’s too expensive too. He reckons the best option is to go along with the villa owners and not do anything right now.

Now, it’s obvious that neither of these is going to solve the problem we face. Both will lead to our backyard being inundated with sewage in short time.

Of course, what we’re really talking about in this crude allegory is climate change. Australia is the wealthy family with a big house. The US is the complex of luxury villas. Europe is the apartment block and the developing countries are the commune. The two family members’ approaches represent the dominant approaches from political parties (and green groups) in Australia. Green groups focus way too much on domestic emission reductions and ignore Prime Minister Howard’s valid point that our domestic emissions are but a small part of the problem. The Liberal Government though has been grossly irresponsible: it has done its best to undermine any international solution to the problem and has let the US off the hook. This, rather than failing to set a domestic target or not doing enough to reduce emissions, is its biggest policy failing in my view. It hasn't recognised the precarious position that we’re in, as both a wealthy contributor to the problem but also (unlike the US and Europe) a country that is going to be disproportionately affected by climate change.

Australia should be forcibly arguing for action in the international sphere. And we should take substantial action domestically: not because that will itself make a huge dent in the problem but because it’s the right thing to do and, perhaps more importantly, it’s an absolute prerequisite to arguing strongly (as we must) for other, bigger, countries to take action that will make a big impact.

Most of our neighbours are showing a remarkable level of neighbourliness in being prepared to make big sacrifices for a problem that affects us a lot more than it affects them. It’s time to get on board and get the neighbours all pulling in the same direction.

(Oikos)

Environment, economy and climate change

2007-04-26T17:14:00.000+10:00

I was part of a discussion panel on this issue on Triple J’s current affairs show Hack on Tuesday night, concentrating particularly on the economic implications of setting a target for reducing greenhouse gas emissions. There were some interesting perspectives.

You can listen to it here on the Hack website (and I’m on about 21 and a half minutes into the show, if you’re interested!).

EcoLibertarians?

2007-04-25T10:43:00.000+10:00

Via the new Ecocene blog, I’ve been alerted to an ‘ecolibertarian’ blog authored by David Reevely, a Canadian journalist with the Ottawa Citizen. David is “working out how to be a libertarian and an environmentalist at the same time” and has some great posts about environmental economics and environmental policy from a libertarian / small government perspective.

Two recent posts that caught my eye: commentary on the proposal to introduce a congestion charge for driving in Manhattan and the difficulties in trying to value a tree.

It’s well worth a look.

Water water everywhere… except the catchments

2007-04-24T12:40:00.000+10:00

Rain has been bucketing down in Sydney over the last couple of days but it has been a different story in the catchments that receive the water for Sydney’s water supply. According to the Sydney Morning Herald, 80 millimetres has fallen in the city’s north and 40-50 mm in the east, but only 10-20 mm in the west and less than 10 in the catchment areas.

While emergency services in the city have been battling overflowing drains, gutters and leaking roofs, dam levels have fallen by 0.3% in the last week.

This underlines the problem with having Sydney’s water supply piped from areas that are much drier than Sydney is.

Some possible solutions? Catching some of the stormwater and diverting it for industrial uses is one. Rainwater tanks for homes are another. A report last week commissioned by the Australian Conservation Foundation, Nature Conservation Council (NSW) and Environment Victoria examined The economics of rainwater tanks and alternative water supply options (pdf).

The findings are not very surprising: water tanks are most cost effective in areas where there are high rainfalls and for houses with large roofs (where they can collect more water). There are plenty of those areas in Sydney. The cost per kilolitre for large tanks in high rainfall areas is less than a small desalination plant and not much higher than a larger plant. When you factor in the reduced pressure on stormwater systems and emergency services that comes from diverting some rainfall during storms into household water tanks, it’s a fair bet that the social cost of water tanks is lower than desalination. When you factor in environmental costs, rainwater tanks become cheaper again: a desalination plant powered entirely from green power, as has been promised by the NSW Government, is a fairly expensive proposition.

However, there’s another very cheap measure that doesn’t get much attention: you can divert rainwater from your downpipes directly onto your garden – or your pool, if you have one. You can buy a diverter for less than $40 (I found a few websites from distributors) and your rainwater can go straight into a hose and out onto the garden. (‘Raingardens’ are popular in the USA).

Now, I don’t know how much this would reduce your water consumption by – after all, gardens are getting watered anyway when it rains – but it’s essentially zero cost and reduces pressure on stormwater systems. And it means your garden gets a thorough soaking when it rains. I lived in a house in Sydney a couple of years ago where the downpipes diverted directly into two garden beds and they rarely needed watering.

For backyard pools, it makes no sense to fill them from mains water when this option is available: an added advantage is that rainwater is much warmer than mains water.

Industrial water recycling and desalination may well be attractive measures as the drought continues: but household level measures can make an important contribution at a modest cost.

Should women be taxed at a lower rate than men?

2007-04-23T09:32:00.000+10:00

A fascinating article by economics writer John Garnaut in the Sydney Morning Herald today argues that women should be taxed at lower rates than men.

The reason is that women are more responsive to tax rates than men. If we assume that markets generally work pretty efficiently to allocate goods and services to where they are most useful and valued, then ‘good’ taxes are those that distort market outcomes the least (and those which compensate for market failures and actually help markets operate more efficiently). We should tax things in a way that minimises the extent to which people change their behaviour as a result of the tax.

One of the criticisms of high income tax rates is that it can change people’s behaviour in that it becomes less rewarding to go and work and produce socially useful things. But if, as Garnaut suggests, men tend to go off to work without much regard to the tax rate, whereas women’s decisions on how much to work depend more on the financial rewards, then you can afford to tax men more than women. A 10% increase on income tax that women pay will reduce their incentives to work substantially more than a 10% increase on income tax for men.

Garnaut refers to a study by economists Alberto Alesina, of Harvard University, and Andrea Ichino, of the University of Bologna, which finds that the "optimal" tax rate is much lower for women than for men. It varies from country to country because of different participation rates and cultural factors, but they suggest that women should be taxed at between 60-90% of the rate for men.

[Alesina] and Ichino argue governments could get away with reducing the female tax rate by a lot, and increasing the male rate by only a little, without affecting the budget bottom line, because taxpaying women would storm into the labour force but taxpaying men would be reluctant to retire. Governments would reduce the amount of tax-driven distortion in the economy per unit of revenue.

Another interesting aspect of this argument is that it would have other benefits too:

Men would spend a little more time with their kids. Women would improve their bargaining power within the home.

It would help overcome all kinds of gender discrimination in the workplace, as women would be prepared to work for lower pre-tax wages (because they would still receive more after-tax pay). It would help compensate women for bearing the brunt of maternity and child-rearing.

"From an employer point of view it would then become cheaper to hire women, therefore favouring women employment and their promotion to higher paid jobs," they say.

What an interesting idea. What do you think?

Lawyers leading the way on climate change?

2007-04-20T12:44:00.000+10:00

People around the world are starting to sue each other over climate change. There have been some interesting cases and there are more in the pipeline: probably the biggest is California's action against car manufacturers.

There's an article by Richard Ackland in today's Sydney Morning Herald that's worth a read:

It stands to reason that if governments, or their pals in business, don't fix things up, lawyers will enter the void and sue the pants off anyone they can get their hands on. We see it all the time with litigation against cigarette manufacturers, the miners and purveyors of asbestos, and the pushers of fatty foodstuffs ("cheeseburger litigation")...

So it's only a matter of time before a global warming litigation industry builds up a decent head of steam. One would think the scientific evidence is sufficiently in to meet a civil standard of proof.

I've written before about climate change litigation, both here and at the now-dormant Australian environmental law blog, ozelaw.

I have two main thoughts on climate change litigation:

It's a lousy way to influence climate change policy or to do anything about climate change;

Climate change cases will become less common, not more common.

Litigation, if it's good for resolving any disputes, is good for resolving simple disputes between two parties. Climate change is a big, global, complicated problem, where everyone in the world is a potential plaintiff (we'll all be affected to some extent by climate change) and everyone is a potential defendant (we all contribute to it). Attributing blame and working out damages is fraught to say the least.

In my view, climate change litigation will not do much to prompt good policy. And I think there's a danger if sympathetic judges overreach and these cases are successful.

Take the California vs car-makers case, for example. California argues that it will incur costs due to global warming contributed to by people driving cars made by car-makers. I don't doubt that's true. But should car-makers compensate the Californian government for that?

I'm sure the Californian government itself has undertaken a lot of action and made a lot of decisions over the last century that has contributed to global warming. Should the government of Tuvalu, low-lying Pacific island that's greatly affected by climate change, sue the US for the industry support it has provided to car manufacturers in the past? Should it sue the State of California for not banning cars as soon as global warming hit everyone's radar? Would California then seek a contribution from Brazil or Indonesia or Australia for allowing forests to be felled?

This is a problem that requires global co-operative solutions and I don't think legal blame games are going to help.

Climate change cases have been a good way to get climate change on the agenda, because the media seems to love a good legal stoush: where big global dramas get played out in the microcosm of a courtroom, reduced to some bite sized legal arguments and decided neatly by a judge. (If you ever actually read these cases though, they tend to come down to something arid like whether section 35ZZ requires a consideration of all "relevant" factors or only all "pertinent" factors and whether there's a difference between "pertinent" and "relevant". The big issues of principle are notably absent). Anyway, there's no doubt that climate change is on the agenda now - I'm not sure what more these cases will achieve.

Still, I'll be watching with interest...

Hot rocks: a cheap and clean energy solution?

2007-04-12T13:18:00.000+10:00

There’s been a flurry of media reports in recent weeks about the promise of geothermal energy in Australia:

PEOPLE could be using "green nuclear" energy in their homes within three years as entrepreneurs rush to produce zero-emissions electricity. Geodynamics Ltd told the Australian Stock Exchange yesterday it had sped up plans to harness the heat generated by natural nuclear activity deep beneath the central Australian desert. The company plans to pipe high-pressure hot water from the granite bedrock four kilometres beneath the Queensland-South Australia border, where the slow decay of potassium, thorium and uranium generates temperatures as high as 300 degrees...

Dr Williams expects the company to send electricity to the national power grid by 2010 and later directly to western Sydney. By 2015, it could produce as much electricity as the Snowy Mountains hydro scheme. Some scientists say hot-rocks technology could soon deliver huge volumes of economically viable power, thanks to the continent having the hottest and most geologically favourable granite deposits on earth.

The extent to which this technology is exploited comes down to its economics, relative to other energy sources:

The greatest impediment to the renewable energy industry is that the nation's electricity is among the cheapest in the world, thanks to huge deposits of high-grade coal. But geothermal energy is expected to be economically viable after a moderate cost is imposed on greenhouse gas emissions.

Geodynamic, assisted by $11.8 million in federal grants, said it would produce one megawatt of electricity for about $45 an hour - compared with coal power of about $35. The Prime Minister's taskforce on nuclear energy estimated the cost of nuclear energy at $40-$65, "clean coal" at $50-$100 and photovoltaic solar energy as high as $120.

So what should we do about geothermal power? Should we be investing in it? Or in solar and wind? Or in clean coal?

A low risk strategy would seem to be to start putting a price on greenhouse emissions, through some kind of carbon tax or emissions trading scheme, and letting investors put their money into what they assess to be the technologies that offer the best opportunities for power that’s relatively cheap and low-emission. These could be kick-started, where appropriate, by modest grants.

Of course, you don’t actually need to put a price on emissions to encourage investors to put money into researching and commercialising these technologies. There’s no price on emissions at the moment – coal power stations can emit all the carbon dioxide they like and they don’t have to pay a cent – but investment is occurring. The reason is that everyone realises there will be a price on emissions in the future and it’s time to start investing accordingly.

I suspect this is one of the reasons we’ve seen the apparent paradox of industries that stand to lose from carbon taxes and the like actually advocating that governments introduce a clear carbon price. If they have a good idea what the price on emissions will be over the coming decades, they can plan how much to stick with coal or oil and how much to invest in alternatives. At the moment, all they can do is speculate.

Earth Hour: The wrap up

2007-04-02T16:42:00.000+10:00

On Friday I posted about why I’d be turning off the lights for Earth Hour. Cat and I celebrated Sydney’s Earth Hour on Saturday night at our place with some friends and candlelit drinks and nibbles. It was very pleasant.

It seems to have been quite a success. According to Energy Australia, electricity use in the CBD fell by 10%, saving emissions equivalent to taking 50,000 cars off the road for an hour. 60,000 households and businesses signed up officially and I’ve read one estimate of 2.2 million people taking part (which sounds unrealistically high to me, but it was pretty big). I didn’t see the city but some of the pictures I’ve seen are quite impressive. And it attracted attention around the world (eg, this CNN report).

The big outcome to my mind is to re-energise people about what they can do in their homes and businesses.

I had meant to go for a walk to check out the neighbourhood response, but I got too caught up in conversation. By the time we thought of checking whether earth hour was over, it was 9 pm. But it was pretty encouraging from our balcony. We’ve got a good view of three other apartment blocks. There were very few lights on in any of them, although a large part of that might have just been people out on a Saturday night. I could see at least half a dozen apartments though where people were home and which were lit only by candles and a couple of others with only the TV on.

Listed below are some other blog reports on people’s Earth Hour experiences (pretty much a random selection from Google BlogSearch of people who devoted more than a couple of sentences to their own experiences). There’s quite few!

I’m pretty encouraged by the whole thing. I think the climate change debate is often dominated by extreme positions: acopalypse versus myth. The public policy debate is important but it would be nice if the shrill voices on both sides could be sidelined by a sensible majority taking the steps that they can take personally and easily to start to deal with this issue. Yes, difficult decisions will need to be made but there’s a whole lot of easy ones that can be made right now: by businesses and individuals and not by governments. Lots of people on Saturday night showed they’re keen.

Other Earth Hour experiences:

http://www.royaltech.net/blog/2007/04/02/in-the-dark-for-earth-hour/

http://jessykummer.blogspot.com/2007/04/so-you-want-to-know-how-earth-hour-went.html

http://globalwarmingwatch.blogspot.com/2007/04/earth-hour-got-bit-well-earthy.html

http://grabyourfork.blogspot.com/2007/04/dinner-by-candelight-chocolate-fondue.html

http://theaussieabadees.blogspot.com/2007/04/earth-hour.html

http://auntymonkey.blogspot.com/2007/03/earth-hour.html

http://theotherandrew.blogspot.com/2007/04/earth-hour-is-drag.html

http://stilgherrian.com/ecology/thoughts_on_earth_hour/

http://www.carpevia.com/?p=418

http://orwelliantremors.blogspot.com/2007/03/earth-hour.html

http://adrianphoon.wordpress.com/2007/04/01/earth-hour/

http://kstreetblues.blogspot.com/2007/04/state-of-things_6716.html

http://timblair.net/ee/index.php/weblog/note_on_the_door/

http://fibreinspirations.blogspot.com/2007/04/earth-hour.html

http://lcedres.blogspot.com/2007/04/is-there-fireman-in-house.html

http://g2007.com/blog/gary/archives/2007/04/earth-hour/

Why I’ll be turning my lights off for Earth Hour tomorrow night

2007-03-30T11:44:00.000+10:00

Tomorrow night in Sydney is ‘Earth Hour’: 60 minutes when tens of thousands of people and businesses turn out their lights for an hour to demonstrate their concern about climate change.

Something that has surprised me is the many negative responses that I’ve heard in response to this idea. The most puzzling to me is the response that I’ve seen a number of times: “This is such a stupid idea that I’m going to go home and turn on as many lights as possible just to show them!”.

Of course, it’s very easy to take pot shots at this idea. “What emissions will no lights for an hour save?”, “Sitting in the dark: that’s what the greenies want us to do permanently”, etc. At first blush, what will an hour without lights really achieve?

But these critics are really just unimaginative.

Here’s some reasons why I think Earth Hour is a great idea, and they’re not about emissions, they’re about connection:

Connection with community

I don’t know if it’s widespread, but I often feel a lack of community in Sydney. And I think a sense of community is wonderful. Events like this connect us. If tens of thousands of people turn off their lights and TVs and sit out on their verandahs, or go for a walk and talk to some of the other tens of thousands of people doing the same thing, I reckon that’s great. Just have a look at some of the events people are organising!

Connection with our own power

Climate change is often presented as a big problem with big solutions needed, to be provided by government and business. To a large extent it is. But there’s a lot that people can do about it themselves, in their households and as part of businesses and communities. When each of us does something personal about the issue, we’re reminded that this is something that we, personally, can influence. And I think that’s very positive and powerful. We don’t have to shake our heads and our fists at John Howard and George Bush, we can do a lot ourselves.

Connection with nature

Again, this might be an inner-city dweller neurosis, but I feel a disconnection with the real world living in the middle of Sydney. I get home, turn the lights on, turn the heater on in winter and have my own comfortable cocoon. We all rely on the environment for our health and wellbeing. But it’s easy to forget that. It will be nice to sit out on the balcony and look at the moon and listen to the breeze in the trees and watch the fruit bats fly past and think about the world. Maybe we’ll even be able to see the stars.

Connection with ourselves and each other

As much as I love Iron Chef, it will be nice to have some quiet time to think and talk to Cat. Maybe we’ll have a candlelit dinner at one of the restaurants which are turning their lights off for Earth Hour.

Business

It’s easy for households to switch off lights and appliances during earth hour. It’s much harder for some businesses, despite the fact that at 7.30 on a Saturday night, many businesses aren’t open. This exercise has been a useful learning exercise for many businesses (including my workplace) that you can’t assume that everything is switched off on a Saturday night. (Have a look at office buildings in the city at night and be dazzled by all the empty offices with all their lights still on).

They have had to put measures in place to achieve this and hopefully those measures will continue to bear fruit in terms of energy and emissions savings long after earth hour is over.

Good luck to the people who go home and bathe themselves in electric light as their own little protest against the stupidity of me and 50,000 other Sydney residents and businesses. I’ll be enjoying a refreshing change from my usual electricity-intensive routine and I'm looking forward to it!

Australian ecological economics conference in July

2007-03-28T09:42:00.000+10:00

The Australia New Zealand Society for Ecological Economics is holding a conference on Queensland's Sunshine coast on 3 to 6 July this year, with the theme Re-inventing Sustainability: A climate for change.

The conference program is here. Some of the topics sounds pretty interesting:

Resilience, thresholds and surprise in interdependent natural and social systems
Experimental economics
Modelling the relations between the environment and the economy
Analysis and communication of uncertainty, risk, and extreme events
Understanding complex adaptive systems
Environmental accounting

If you're interested in presenting a paper, abstracts are due 15 April.

Ecological economics is a transidisciplinary field that looks at the connections between ecology and economics and views the economic system as a social system that operates within a broader physical / ecological system. Traditional economics certainly doesn't ignore the environment, but tends to view it as an element of the economy that provides inputs and services. If you want to know more about ecological economics, check out the International Society for Ecological Economics or the Ecological Economics Blog.

Other people's money

2007-03-21T13:55:00.000+11:00

I’ve been thinking about the role of government in environmental policy. And in economic, social, health and education policy. When should governments provide services? When should they regulate activities? When should they just leave things alone?

There’s the environmental questions: Should they ban incandescent light gloves? Should they fund clean coal research? Should they restrict household water use? Should they impose a carbon tax or increase the price of water and let individuals decide whether to use incandescents or limit their water use and let energy companies decide whether they invest in clean coal or in renewable energy? And there’s others: To what extent should the government provide education and health and to what extent should the private sector do so? How should the government regulate smoking, alcohol and other drugs? Should the government get involved in the fast food / obesity debate?

I think economic ideas can help us think about some of these issues. One of the reasons that markets tend to work effectively is that they efficiently communicate information (Should I plant wheat or grape vines? Well, how much will they cost me to grow? How much will I get for them?) and they provide incentives for people to respond to that information (planting vines will be a lot of bother, but it should make me enough in a few years to buy that car I want).

The disdain that some have for governments providing services is that the information and incentives are less obvious. Should we invest more in mental health care or cancer care? Hm , hard to know. We can survey people and we can look at health stats but it’s hard to know where we’ll get more value for our money. And the people who make the decisions, while interested in the health outcomes, might also be interested in the publicity generated by opening a new cancer wing at a regional hospital.

Libertarian economist Milton Friedman talked about four ways you can spend money and I think it’s an interesting way to look at some of these issues:

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.

This observation is often used to suggest that things are always better left to markets than to government. But real life much more complicated than that.

There are other constraints on governments. Taxpayers are acutely aware of the taxes they’re paying and proposals to reduce them will be popular and proposals to increase them unpopular. So it’s not true to say that governments don’t care about how much they spend. They have incentives to care quite a bit. Voters are also very aware of the services they’re receiving, another accountability. But these accountabilities are generally less direct than in a market. If I don’t like the service or price of my doctor’s service, I can go elsewhere. But if I don’t like the service provided by public healthcare or the taxes I pay for it, I can only exercise my one vote among thousands every three or four years and there’s generally only one other real competitor.

But these problems also apply to the private sector. Economists call them agency problems. Have a think about a superannuation fund or a managed share fund, for example. When they choose to invest, they’re spending other people’s money on other people. They, not you, are making the decisions about what companies to invest in to benefit you. Where’s the incentive to make the best decision? Well, incentives are there, but again they’re indirect. After a few years of bad performance, people may start to switch funds. But this incentive is also distorted. They have an incentive not to perform much worse than anyone else – in other words, an incentive to make conservative investment decisions.

Have a think about a law firm acting for you in a court case and advising you about whether to accept a compromise. What should they advise you? Again, they’re decision in how to advise you involves their assessment of how someone else’s money should be spent. And possibly creeping into that assessment is a confidence of a positive outcome that might not be there if they were spending their own money or if your money wasn’t being spent on their fees.

Or think about the Board of Directors of a company deciding whether to award themselves a substantial pay rise. Here, they’re making a decision about how to spend other people’s (shareholders’) money on things that will benefit the company. Will a big pay rise for directors benefit the company? Of course, you’ll attract the best talent, the people who will boost the company’s performance, right? Again, people spending other people’s money on other people. And again, there’s incentives to do the right thing, but they’re indirect and conflict with the direct incentive to benefit themselves. (The incentives are that if they go too far, they’ll be removed by angry shareholders, and if they channel too much money that could be better spent on other things, the company will suffer, leading to pressure on them to resign and/or damaging the value of their own shares and options in the company).

Or think about any manager in any large company. They’re spending the company’s money on themselves, their staff and their projects with the aim of benefiting the company. Again you can make the claim that they won’t be as careful as if it was their own money. Once again, there are incentives to spend it wisely: they want to generate good results and be seen to be doing a good job. But there are also conflicting incentives to spend it on themselves, their staff, a team retreat in the Hunter Valley, etc.

Looking at who is spending whose money on whom is a useful way of looking at things and generally you’ll get the best decisions if people can spend their own money on themselves. But it doesn’t simply follow that the private sector does everything better than the public sector. A lot of private sector decisions involve how to spend other people’s money on other people too.

Taken to its logical extent, this argument would suggest that all goods and services should be provided by sole traders. The baker is disciplined because she depends on her customers for her livelihood. So she’ll spend her money in ways that best benefits her customers and hence her business. But the bakery staff-member who buys the flour is spending his boss’s money on his boss’s customers: he doesn’t care too much about either. But in reality, there are other incentives on the staff member to get flour that’s good value for money. And if the baker wants to expand her business, she has to put some trust in other people.

Large companies exist because the problems of people spending other people’s money is more than compensated for by economies of scale. And that’s one of the reasons that governments do things too. We could each build our own little private roads going only where we want them to go: spending our own money on ourselves. But maybe we get better value by governments doing it, even if they do sometimes decide that a marginal seat needs a brand new one to be opened at a photo opportunity just before an election.

New Australian green living site

2007-03-08T12:30:00.000+11:00

Check out futuremakers.com.au, a great new site for anyone looking for tips for a green lifestyle.

The site, created by WWF (and with a lot of work from Grant Young from the Synapse Chronicles blog), is a place where people can share their ideas for living sustainably. There's some good tips there for individuals and businesses.

It looks great and I like that you can add your own ideas. And you can keep updated with the Future Blog.

I've also noticed an Australian green living blog, called GreenFoot, which somehow I haven't seen before, although it's been around for a while. It's another really good resource: readable, interesting and a lot prettier than my blogspot effort.

And speaking of Australian environmental blogs, I really need to update my blogroll in that category. Please let me know if there's any you'd recommend.

The environmentally destructive tax rort for cars

2007-03-07T12:56:00.000+11:00

Did you know that Australians get bigger tax cuts the more they drive their cars?

Canberra economic journalist Peter Martin reprinted on his blog this media release he received from accounting firm Deloittes, urging people to consider driving their car as much as possible in the next month to reduce their tax bill:

( Drive your benefits further – before it’s too late!

As the end of the FBT year approaches, so does the last chance for significant FBT savings on your salary packaged car.

Deloitte Indirect Tax Principal Frank Klasic said that salary packaged cars remain the most popular fringe benefit provided to employees.

“Although many employees successfully package their cars, there are still many who do not minimise the FBT associated with their car fringe benefit,” Mr Klasic said.

“The easiest way for employees to maximise their FBT savings is to plan ahead before the FBT year ends on 31 March.”

According to Mr Klasic, many employees may be on the cusp of the next kilometre threshold used to calculate FBT using the statutory formula method. Where this is the case, increasing the kilometres driven can also significantly increase your savings.

For example, an employee who has a car valued at $35,000 and drove 24,000km during the FBT year would have an FBT liability of $6,720. Increasing the number of kilometres driven to more than 25,000km would reduce that employee’s FBT liability to just $3,696 – a saving of more than $3,000.

“Employees should be aware that all kilometres driven between now and 31 March will be included when calculating the associated FBT,” Mr Klasic said…

I assume the intent of these parts of Australian tax law is this: If car travel is a legitimate business expense, then it is reasonable for some allowance to be made for the cost of car travel when assessing tax. That’s reasonable as far as it goes, but there’s a couple of problems. First, what we’re talking about here, as I understand it, is businesses providing personal (private) cars to employees as part of their salary package* – not just employees deducting the operating costs of cars for business trips or the use of company cars owned by the company – so whether there really needs to be tax breaks for that in the first place must be questionable. Put another way, if you need to use your car for work, then fine, deduct the cost of that use from your tax. Similarly, if you use a company car for work, then your employer can deduct the cost from its tax bill. But do we really need tax breaks for businesses to provide their employees with their own private vehicles, which they may or may not use for work?

(*What actually happens is that employees arrange this all themselves: they buy a car, transfer it to a lease company and lease it back, and then deduct the costs of the lease from their pre-tax incomes).

The second, related, problem is that it’s hard to work out when a car is needed for business (in which case maybe it’s reasonable for an employee to provide one and for it not to be taxed) and when it’s really just being used for private purposes (in which case it shouldn’t be tax deductible). The Tax Office’s arbitrary solution is to assume that if you drive it far enough, you must have needed it for business – so the further you drive, the less tax you pay. The rate of tax you pay on your car loan repayments ranges from 26% if you drive less than 15,000 km in a year to just 7% if you drive more than 40,000km. However, Deloitte’s media release makes it pretty clear that this encourages driving more, not just for legitimate business, but also to reduce the amount of tax you have to pay, particular if you find yourself near the cusp of one of the tax brackets towards the end of the year.

There’s lots of talk about new measures to discourage the use of fossil fuels and debates about carbon taxes, carbon trading, mandatory renewable targets and so on. But a good start would be simply removing the economically questionable and environmentally damaging tax breaks that exist for private cars.

Green ethanol – from coal?!

2007-03-06T12:49:00.000+11:00

An interesting development from the US:

( The latest trend in the green world of ethanol is a surprising one: coal.

Minnesota's first coal-fired ethanol plant soon will begin operation in Heron Lake, and it won't be the last. The high price of natural gas is enticing new plant owners to embrace coal power. But while it may make economic sense, the choice of this fossil fuel to make a renewable one has some people shaking their heads.

The move comes as Minnesota steps up its efforts to embrace cleaner and greener sources of energy and reduce carbon emissions. Critics say it's a lousy idea to make renewable fuel in ways that generate more greenhouse gases than using gasoline.

"The country is investing in ethanol not only as a way to reduce our reliance on oil, but as a way to reduce our greenhouse emissions and our overall emissions," said David Morris, a renewable energy specialist at the Institute for Local Self-Reliance in Minneapolis. "I don't deny there is a savings for these ethanol plants using coal instead of natural gas. But at the same time, the country is providing an enormous incentive for making the ethanol in the first place," with a variety of subsidies.

Until now, all of Minnesota's 16 corn-based ethanol plants were powered by natural gas, at least initially. But the soaring and unpredictable price of natural gas has everyone looking at alternatives.

The most popular alternative for existing plants is generating heat with biomass, a green choice being used at plants in Little Falls, Winnebago and, soon, Benson.

But coal is making inroads among the newest ethanol plants, including one in Heron Lake, with another scheduled to begin construction this summer near Erskine in northwest Minnesota…

State regulators allow the owners of ethanol plants to choose their own power sources. Admittedly, coal "would not be our preferred alternative," said Myrna Halbach, ethanol sector manager for the Minnesota Pollution Control Agency.

"We're very much behind the governor's efforts on renewable fuels," she added. "But ultimately, that's a business decision they would make."

"The volatility of natural gas concerned (Heron Lake)," Halbach said. Using coal "gave them a way to control operational costs."

What’s the message from this? I think one lesson may be that we need to be careful about subsidies: if you subsidise ethanol, you’ll get more ethanol. But it doesn’t necessarily follow that you’ll get lower emissions. Rather than picking and subsidising particular technologies, a better solution may be to impose a carbon tax or similar measure that places a cost on emissions from all sources.

Another lesson is that we need to look carefully at the full life cycles of technologies:

( California Gov. Arnold Schwarzenegger and his state's Legislature have embraced a plan to rate all motor fuels by greenhouse gas emissions over their entire life cycles, from production to transportation to ignition.

Measured that way, ethanol made from plant residue would earn an excellent rating. Ethanol from corn would do moderately well. And corn ethanol made in a coal-fired plant? That would rate poorly — even lower than ordinary gasoline, according to Schwarzenegger's office.

An across-the-board carbon tax, as I understand it, would avoid the need for these calculations. You wouldn’t need to worry about whether ethanol plants were powered by coal or by natural gas, because they would already have paid their carbon tax on the fuel they used for power: it would already be embedded in the price of the product.

(via env-econ.net)

Solving climate change: the truth is out there

2007-03-02T17:10:00.000+11:00

This is a little leftfield:

A former Canadian defence minister says be believes advanced technology from extraterrestrial civilizations offers the best hope to "save our planet" from the perils of climate change.
Paul Hellyer, 83, is calling for a public disclosure of alien technology obtained during alleged UFO crashes -- such as the mysterious 1947 incident in Roswell, New Mexico -- because he believes alien species can provide humanity with a viable alternative to fossil fuels. Mr. Hellyer has been a public UFO advocate since September 2005 when he spoke at a symposium in Toronto. But with concern over global warming at an all-time high, and Canadian political parties struggling to out-green one another, Mr. Hellyer said governments and the military have a responsibility to "come clean on what they know" now more than ever.
"Climate change is the No. 1 problem facing the world today," he said. "I'm not discouraging anyone from being green conscious, but I would like to see what (alien) technology there might be that could eliminate the burning of fossil fuels within a generation ... that could be a way to save our planet."...
Mr. Hellyer, a former Liberal cabinet minister, political turncoat and one-time leadership candidate for the Liberal and Conservative parties, said UFO researchers have amassed undeniable evidence that aliens have visited our planet. Due to the distance such spacecrafts would have to travel, UFOs must be equipped with some kind of advanced fuel source or propulsion system, he said.

(via env-econ.net)

In news more terrestrial, network Ten has a show this Sunday night at 8.30pm called Cool Aid: The national carbon test, a 2 hour "world premiere television event" that "delves into the lives of everyday Australians and audits the environmental footprint of five different household types around the country" - together with celebrity interviews and live performances. Sounds a bit wacky but will be interesting to see how Ten grapples with bringing climate change awareness to a mass-TV audience.

When UFO hunters are using climate change to bring attention to their agenda and commercial networks are running two-hour Sunday night celebrity specials on the issue, you know it's become a minstream concern.

Have a great weekend.

Oikos

The Oikos archives

Some quick thoughts on the Oz emissions trading scheme

Ken Henry on tax reform

Climate Change Blog Action Day

What's the Opposition's climate policy?

Emissions trading: Auctioning permits vs giving them away

Red sky in the morning...

Economics and supermarket checkout lines

Dealing with uncertainties in carbon price

Stimulus payments can kill you

Clean Coal on Four Corners

Nitpick of the day

The great give-away: Allocating permits under an emissions trading scheme

Carbon offsets: Oils ain't oils

Tax cigarettes, aclohol and junk food til no-one buys them?

Renewable energy target expected to pass today

Sustainable House Day - 13 September

Game theory and Kyoto negotiations

Wind power: plus ca change

Making cycling safer: The Idaho Stop Law

The oppostion's rival carbon plan: greener, cheaper, smarter?

Idle thoughts

What I've been up to...

Oikos returning soon...

Congestion tolls in Sydney

Conflicts of interest in environmental planning

Defensive investments

Blogging break

Why do we pay people to waste our most precious resource?

Thoughts on the green paper - Part 1: petrol

Government's green paper on emissions trading out today

Garnaut Review out today

Responses to higher fuel prices

Drivers with bumper stickers are road ragers

Socially defective economists

Liveblogging the budget

Lessons from Europe's emissions trading scheme

Taxing 'Alcopops'

We need some clear thinking on plastic bags - Part 2

We need some clear thinking on plastic bags - Part 1

Earth Hour this Saturday night - is it all just a waste of time?

Why don't TV networks advertise their competitors' shows?

Garnaut review - emissions trading scheme discussion paper

EPA: US can halve greenhouse emissions for the cost of a cup of coffee a day

Rudd's tax cuts - inflationary or illusory?

Can biofuels help reduce greenhouse emissions?

Economic analyses of intergalactic trade

An important day for climate change action?

Garnaut Review - interim report now out

Does car sharing have a place in Australia’s transport mix?

Economic communicators contest

Moral hazard in emissions trading

How much should we spend to reward pollution?

Will fuel efficiency laws save motorists money?

Who should you vote for in the US Presidential elections?

Happy new year!

Blogroll update

Bali wrap up

Will the US be rewarded for failing to ratify Kyoto?

New-ish environmental economics blog

An Inconvenient Truth: US doing better on climate change than Europe?

Bali high - or ballyhoo?

Australia's political climate change

What happened to Oikos?

Can markets predict global warming?

Australian Conservation Foundation looking for Economic Adviser

Kenneth Arrow and Thomas Schelling on Climate Change

Exposing the hidden costs of pollution

Live Earth concert this Saturday

Cheap ways to reduce greenhouse emissions

Coming soon to an Australian high school near you?

Should carbon taxes be linked to global temperatures?

Review of Environmental Economics and Policy

Happy World Environment Day!

Who do you trust with the challenge of climate change?

Emissions trading - the report is out

PM's Emission Trading Task Group - report out midday today

The Prime Minister's Task Group on Emissions Trading

Carbon offsets