Who’s to blame for the ‘housing crisis’?

I’m a bit confused.

There’s been a lot of talk recently, in the Sydney Morning Herald for example, about that perennial favourite of economic topics, home affordability. And someone always mentions property taxes.

According to the Herald last week:

IT IS well known that the Federal Government played a large role in fuelling Sydney's housing boom with its halving of the capital gains tax…

In 2000 the Government sparked a frenzy of investment in property after it halved the tax paid on capital gains, while keeping the negative gearing loophole open. Earlier it had introduced a superannuation surcharge for high-income earners, which also increased the relative appeal of property.

As investors rushed into the property market, they fuelled an explosion in building activity [and] home prices… the halving of capital gains tax and the loophole of negative gearing was the main reason for the speculative boom in investment properties.

According to the Herald today:

The Federal Government has urged the states to cut "excessive" stamp duties on conveyancing… to make housing affordability easier for first home buyers… Commenting on a report released yesterday that showed housing affordability had fallen to at least a 22-year low, acting Treasurer Peter Dutton said that in 2005/06 the states collected $10.8 billion in stamp duties…

"Property taxes, such as stamp duty and land tax, now make up, on average, 32.5 per cent of the total revenue raised by the states from their own imposed taxes… Stamp duties on a median priced property in Perth add, on average, $20,500 to the cost of the purchase, he said…

I call on all the state Labor governments to cut stamp duty on conveyancing now and make housing a whole lot more affordable for first home buyers."

So which is it: do tax breaks on property encourage more investment in housing, which increases the price or do high taxes on property increase the cost of housing, which increases the price? Surely it can’t be both - or am I missing something here?

Weekly Blog Roundup

As I suggested last week, I’m planning to have a weekly roundup of interesting blog posts from the week on environmental and economic issues – concentrating particularly on Australian issues and on issues that are both environmental and economic.

So here’s some of my favourites from this week:

Water restrictions

Economist Harry Clarke outlines some of the benefits of water restrictions but argues that increasing prices would give the same benefits without the arbitrary side-affects. (This is something I talked about a couple of weeks ago). Harry also deals with the concern of charging high prices for water to people on low incomes and offers some solutions.

Phone books

Earlier in the week, Amy Stodghill talked about the apparent waste of providing chunky paper phone books to every household and business in the US. I asked Telstra / Sensis about the position in Australia. The discussion has struck a chord, with Grant Young and Andrea at Buy Organic adding their thoughts and Sven Cahling talking about the situation in Sweden (for anyone who can speak Swedish!).

Green power

Economist Joshua Gans asks some questions about Green Power, such as ‘Will buying green power actually lead to more green power production?’

Have a great weekend!

Sydney to ship in drinking water?

Giant water tankers shipping water to parched Sydney from verdant Tasmania? And you thought desalination was a wacky idea... This raises quite a few interesting economic and environmental issues, but for now I'll just say 'Wow, really?!'

Five years ago Solar Sailor won an Australian Design Award for its electric catamaran, often seen plying Sydney Harbour. With rigid sails covered in solar cells, the boat catches the wind when it blows, or generates power from the sun when it shines. If the conditions are right, it can use both.

Now the company, chaired by the former prime minister Bob Hawke, proposes initially using conventional supertankers to ferry Tasmanian water to mainland ports. Later it would use even bigger hybrid electric supertankers, powered by solar and wind energy...

North-west Tasmania had abundant water, he said, in hydro-electric dams just 15 kilometres from the coast and only a short sea trip from mainland cities: "The water is used once for hydro electricity. It is not used for irrigation or feeding a town."

Within 18 months a 50 billion-litre-a-year supply could be operating, using two conventional supertankers each ferrying 330 million litres to Sydney, the Central Coast, Melbourne or Queensland "just like delivering oil". Within five years specially built electric tankers, each carrying 500 million litres, could be plying the routes. The ships would be powered by rigid solar sails, coal-fired electric motors, or both.

The company proposes exporting up to 200 billion litres of Tasmanian water a year for 20 years, enough to supply almost a third of Sydney's needs.

The ships would moor on the horizon off Sydney and the water would be pumped through undersea pipes to Kurnell, then into Sydney's water supply. It would cost about $1 a kilolitre, including a 30 cent-a-kilolitre royalty to Tasmania for water otherwise "going to waste".

Phone book follies

Amy Stodghill at It's the Environment, Stupid talks about the annual appearance of piles and piles of new phone books:

I happened to be walking in my neighborhood and noticed a few guys frantically running to and from a slow moving budget rental truck. They were distributing stacks upon stacks of brand, spankin' new phone books. No stoop was left behind - every single residential door was graced with updated contact information for the entire borough of Brooklyn.

Now, can you tell me when was the last time you flipped through the yellow pages to look up a phone number?

I understand this is a community service thing or paid advertising or something altruistic - but in our digital age (we'll suspend the e-waste topic for this posting) is this tower of telephone books really necessary? Even though they are made on paper that contains "up to" 40% post-consumer recycled material, what if they weren't printed at all? Or what if half as many were printed?

Good question. Aside from the environmental cost, distributing printed yellow and white tomes to every home and business in Australia must represent a huge cost to their business. Wouldn't you want to reduce that if you could?

In Australia, the phone books are produced by Sensis (a subsidiary of Telstra). They have a phone book opt-out: you can call them on 1800 810 211 and request not to receive one (and I'd encourage you to do so) but that seems a pretty inefficient way to reduce the number of phone books distributed - how many people know about (and will bother) opting out?

I've asked them if they're taking any other measures to reduce the number of phone books they need to produce and distribute and I'll let you know if I receive a response.


Update Thurs 18 Jan:

Sensis has replied - see the comments below.

Some of the measures they take to reduce the number of books are:

• Splitting of the metropolitan White Pages into Business and Residential volumes, and only delivering the Business section to business customers. If they want a residential section, they can ring up and order one.

• Reduction of business delivery numbers through asking a representative how many copies they require at the time of delivery.

• Directories are delivered to secured apartment buildings and calling cards left in each residence’s mail box. If the directories are not collected within 14 days, they are collected by Sensis and re-distributed elsewhere.

• Refining of print orders based on each year’s distribution figures for each area.

Another point they make is that they are required by the government to deliver a printed directory to every household as one of Telstra's licence conditions. Sure, Telstra should provide phone books to people who need them, but this seems to go way beyond what the community needs.

What do you want to see on Oikos?

I’ve been thinking about the content on Oikos and I’m wanting to make it more regular and predictable.

Some of my aims in starting Oikos a little over a year ago were to:

• Get some discussion going on the economic aspects of environmental issues in Australia;
  
• Educate people interested in the environment about economic ways of looking at environmental issues – particularly because those aspects tend to be emphasised in political decision-making and because I think the proponents of environmentally damaging activities have a better handle on this than the opponents of these activities;
  
• Highlight dodgy reporting and analysis of environmental issues.
  
• Clarify my own thinking and educate myself about economics and environmental issues.

Since I’ve started there are quite a few more Australian blogs that discuss these issues from time to time, which is great.

I’m thinking about introducing some regular (weekly) segments, such as:

• My thoughts on big picture issues that have been on my mind – perhaps on a Monday;
  
• Explaining a particular economic concept that can help in looking at environmental issues – perhaps on a Wednesday; and
  
• A weekly round-up of posts from Australian blogs that have looked at environmental issues from an economic point of view, together with any particularly important environmental economics news stories and overseas developments – probably on a Friday.

I’m also interested in other areas that raise similar economic issues to the environment – public health, for example – and will start to write a bit on those issues.

What would you like to see on Oikos this year? What issues are you most interested in? Any comments and suggestions would be most welcome.

How do we resolve environmental disputes?

A lot of environmental disputes are conflicts over resources and, underlying them, are conflicts over values – which of two things is more important.

A browse through environmental news stories this morning gives a number of examples.
In the US, the Fish and Wildlife Service has granted approval under the Endangered Species Act for a windfarm to operate even though it is expected to wipe out 5% of the global population of the critically endangered Puerto Rican Nightjar (story via NeoCommons).

Here, the conflict is between providing energy in a way that doesn’t worsen climate change and between protecting a critically endangered bird. (It’s the same conflict that Australia has recently grappled with.)

In NSW, the State opposition has called for national parks to be opened up for grazing to help farmers during the current drought.

Here, a land use conflict is at its core a conflict between income for struggling rural communities and the protection of fragile, rare and / or biologically important ecosystems.

And at a national level, the federal opposition states that, if elected, it will buy irrigation licences on the water market to improve river health. Farmer groups oppose this idea, as it will raise the price of water entitlements and mean less water used for agricultural production. Again, this is a conflict between using water to boost farm incomes or to improve the health of river ecosystems.

I’m just as interested in the processes and methods we use to resolve these conflicts as I am in the issues underlying the conflicts. My interest in economics stems from the fact that I think it provides a particularly useful set of tools for resolving resource use conflicts.

One of the powerful aspects of market systems is they allow us to resolve disputes by comparing apples and oranges. What is more important? Reducing carbon dioxide emissions by x megatonnes per year (by building a windfarm) or protecting y hundred critically endangered birds (by not building a windfarm). These are analogous to the disputes that markets resolve every day.

Should our society invest more money in IT, pharmaceuticals, agriculture, resources or manufacturing? This is a decision that no-one could hope to make – and no-one has to make because millions of individuals make their own decisions about where to invest their money and labour. Some new land is released in western Sydney. What should we build there? How many houses, how many shopping centres, how many factories, how many schools and hospitals? Well, governments make some of these decisions and guide or restrict others, but mostly these decisions are made by households and businesses. Would we be better using the Hunter Valley for coal mining, wine production or cattle? Well, mostly miners, farmers and grape growers can decide for themselves which land they’re prepared to buy.

Of course the trouble with our bird and windfarm problem is that the Puerto Rican windjar can’t buy up the land to protect their homes. Nor realistically can the residents and wildlife of places around the world particularly affected by climate change each pitch in a bit of cash to buy the land for the windfarm. Someone has to make a value call here: what is worth more? X megatonnes carbon dioxide or y hundred Puerto Rican Nightjars?

But we should always be on the lookout for tools that will make this decision easier, that will avoid what are essentially arbitrary value calls like this. Can we delve deeper?

I don’t know much about the background of this US case, but in a similar Australian conflict last year there was a simple solution. In that case, a proposed windfarm would kill, on average, one bird every 100 or so years. In a global population of only 150 birds, the federal Environment Minister decided that impact was too high and refused to let the windfarm go ahead. However, the birds can be bred in captivity relatively cheaply and then successfully reintroduced into the wild. A condition that the windfarm pay for a breeding program suddenly changes the equation from the unresolvable "Which is worth more: one bird saved versus x megatonnes of emissions saved?" to "Which is worth more: one bird saved versus 20 birds bred and reintroduced and x megatonnes of emissions saved?" – a question that is much easier to answer.

Of course, many or most environmental conflicts do come down to conflicts over values that can’t be sidestepped. But when we can sidestep them, we should. Requiring developers to fund measures that counteract the negative environmental impacts of their developments, where practical, means that government decision-makers don't need to make invidious jobs-versus-environment value judgements.

Big brother is watching your birdbath

Today’s Sydney Morning Herald reports that New South Wales is out of step with other Australian states which are tightening water restrictions as the drought continues:

WHILE other states are tightening water restrictions… NSW is steadfastly refusing to do the same, preferring to spend $1.3 billion to build a desalination plant.

On New Year's Day Adelaide and Melbourne significantly tightened water restrictions, and Melbourne restrictions will be tightened again as early as April. In Queensland restrictions are also likely to be tightened soon...

But the NSW Government said yesterday that any tightening of Sydney's water restrictions would be draconian ...

Dam levels are at a historic low of 36.4 per cent and will receive only a small boost from this week's rain. The Government has said it would go ahead with a desalination plant at Kurnell if the dams fell to 30 per cent, which is likely to happen soon after the state election on March 24.

Asked why restrictions could not be tightened to slow falling dam rates before March and April, when rainfall is heaviest, the Water Minister, David Campbell, said it would send a mixed signal to the public. "The community is accepting the position at the moment; they are doing the right thing," he said. "I don't think we need to send [sic] an air of panic. We have got a [Metropolitan Water] plan … which indicates we can secure Sydney's water supply without going to draconian water restrictions."

I have mixed feelings about water restrictions. Economic theory suggests that a more efficient way to deal with water shortages is by increasing prices (or, better, letting prices find their own level). Higher prices will encourage more careful use of water, but people will find the way to save water that best works for them. For some people that will be shorter showers, for others less water for the garden, for others washing the car less often. Over time, people will adjust in bigger ways: installing water-saving shower heads; reducing the size of their gardens and using more drought-tolerant plants.

I was at my Dad’s place in Canberra a few weeks ago and the bird bath – usually frequented by a number of native birds – was empty. Apparently Canberra’s water restrictions prohibit the filling of backyard water features because they lose a lot of water through evaporation. That seemed rather a shame to me, especially as I’m sure it’s a tiny fraction of his overall water use and there’s so many other ways he could cut down on water use. Any system of restrictions is inflexible, a ‘one size fits all’ prescription.

On the other hand, I think water restrictions can be useful in changing the way people think about water use. Economic theory prefers to let prices do their thing in encouraging behaviour changes because that will allow people to choose the behaviour changes that best fulfil their needs – and different people have different wants and needs driving their water uses. The most efficient solution is allowing people to make the choices that best fulfil their desires. But this partly rests on an assumption that the desires that underpin people’s choices are fixed and given. And this is not necessarily the case.

The thing is, water restrictions may not just stand in the way of people attaining their preferences, they may actually change those preferences. By signalling that we as a community are concerned about water use and want to limit it, that may just change my desire to have a big green lawn to show off to my friends and neighbours.

But is this something that could better be achieved by, say, educating people about the fragility of our river systems, than making people hose their gardens rather than use sprinklers?

What do you think?

Update Thurs 4 Jan:

• ABC's 7.30 Report had a story on this issue last night. The transcript (not yet available as at 9 am) will be here.

• Larvatus Prodeo had a discussion on this issue overnight as well.

Oikos is back!

Happy new year everyone!

Oikos has been silent for some weeks now as work and the silly season swamped me - and then I had a holiday!

Anyway, I'm back and refreshed and Oikos will be back to regular posting (I'm aiming for daily).

A theme of interest this year will be markets: When do they work? When do they not work? What do they do well? What do they do badly? Environmental protection is something they generally don't do well, but why? And is this always the case? Can you create artificial markets in environmental services and how well do they work? What makes a good one?

I wish you all the best for 2007.

David

Political climate change in the United States

The Pew Center on Climate Change has a nice brief piece on what the recent US Congressional elections might mean for climate change policy in the US:

All told, given:

• the US public's growing concern over climate change;
• the climate measures of California and the northeastern states;
• the growing sense in US industry that climate action is inevitable;
• the past several years of momentum in Congress;
• the recent election results; and
• Sen. McCain's chances of being the Republican nominee for President in 2008

we are optimistic that enactment of mandatory US climate action is plausible by 2008 and likely by 2010.

The ‘wild card’ according to the Pew Center is potential Republican presidential nominee John McCain, who has been a strong climate action advocate and could galvanise support for climate change measures from moderates on both sides.

Howard embraces carbon trading?

Well, a week is a long time in politics and, as you’ve probably heard by now, the Australian Prime Minister, John Howard has announced that he’s setting up a government-business task force to investigate a carbon trading scheme.

The announcement came, rather appropriately, at a speech at the annual dinner of the Business Council of Australia, which represents big business:

I think it is important to keep the challenge of climate change in perspective. I share [the President of the Business Council’s] view that it is happening and although I have been accused and continue to be accused of being somewhat of sceptic on the issue, the truth is I’m not that sceptical, I think the weight of scientific evidence suggests that there are significant and damaging growths in the levels of greenhouse gas emissions and that unless we lay the foundation over the years immediately ahead of us to deal with the problem, future generations will face significant penalties and will have cause to criticise our failure to do something substantial in response…

I’ve indicated in the past that I do not intend to preside over policy changes in this area that are going to rob Australia of her competitive advantage in the industries that are so important to us and I repeat that commitment tonight. I do welcome the contribution that the Business Council has made and many other people in the business community have made to tackling this issue. Many of you will know that
over the past few weeks the Government has reiterated its broad approach and later this week I will meet some significant business figures, some of them are in the room tonight, who are involved in the resource sector to discuss aspects of the Government’s response to the climate change challenge.

I want to indicate to you tonight that the Government will establish a joint government business task group to examine in some detail the form that an emissions trading system, both here in Australia and globally, might take in the years ahead. I think it is important to involve the business community in an analysis of this issue because decisions taken by the Government in this area will have lasting ramifications for Australia’s business community. I think we all recognise that we have to examine in the time ahead how we might devise an emissions trading system which properly cares for and accommodates the legitimate interests, and therefore maintains, the competitive advantage that this country enjoys in the industries that are familiar to you…

Although couched in familiar pro-resource-industry language, this is something of a turnaround from the Australian Government and so people are understandably questioning whether it’s genuine. I think we should give the benefit of the doubt – that the Government is airing these issues must be a good thing. It is quite odd though, given that the Australian States set up a task force two years ago to examine this issue and invited the Federal Government to take part or, preferably, take the lead. (The Government refused to be involved). The States’ taskforce issued a detailed paper outlining a possible trading scheme in August and it would seem to make more sense for the Government to get involved in that existing process. But I guess the national mood is changing and Howard wants to be seen to be doing something himself – and perhaps he wants to have more control by having his own taskforce rather than joining the States.

It’s also important to note that Howard is talking about looking at carbon trading both domestically and internationally, and spoke repeatedly of "a new Kyoto". I’m sceptical about this. Australia has actively disengaged from global negotiations on climate change since 1998 and now lacks influence internationally to be talking about setting up a ‘new Kyoto’. The existing Kyoto Protocol has always been flexible enough to accommodate what the Australian Government wants (in particular, targets for developing countries, which were not part of the first commitment period from 2008-2012 but will be at least on the table after that) and its refusal to ratify was, in my view, based on politics, not on principle.

If this task force is to come up with something useful, it should concentrate on the area it can influence – that is, a domestic carbon trading system. If Howard genuinely wants a new Kyoto, I’d suggest it’s time to re-engage in global negotiations.

Costello on climate change: Back to the future?

The Sydney Morning Herald and ABC News today report a "softening" in the federal government’s opposition to carbon trading.

ABC News had this to say:

Federal Treasurer Peter Costello says Australia should be involved in a worldwide carbon trading system to tackle climate change... "I think, in Australia, we've got to keep a careful eye on this," he said. "I think the ground is changing. I think it is important that we bring new countries into this discussion. And I think, from Australia's point of view, if the world starts moving towards a carbon trading system, we can't be left out of that. We ought to be in there negotiating what this system would look like so that we protect our own interests obviously but also, we ensure that it's broad ranging, wide-encompassing and effective."

But Mr Costello says any new international system is still years away. "You're probably talking about the next decade," he said. "And, bear in mind, greenhouse is something that's believed to increase temperatures, say, two degrees over 50 years. I mean, the thing about greenhouse emissions is - all of the evidence is that they're emerging but it's not something that's going to emerge tomorrow. It's something we have to work out over 10, 20, 30, 40, 50 years."

According to the SMH:

Labor's environment spokesman, Anthony Albanese, said yesterday that it was bizarre that Mr Costello could not see the need for urgency in light of the Stern report and the rapid growth in the international carbon market, already worth $US30 billion ($39 billion). "They are so far behind the game. I think the Government is stubbornly refusing to acknowledge that they have wasted a decade," Mr Albanese said.

He has a fair point. The government is only now beginning to talk about considering international emissions trading. But this is what Alexander Downer, the Minister for Foreign Affairs, had to say in a speech in May 1998 – more than 8 years ago – just after the present government made the decision to sign the Kyoto Protocol that it now derides:

I am pleased to be here with you today to share with you my assessment of the opportunities and far-reaching role that international emissions trading will play in the successful implementation of the Kyoto Protocol. International emissions trading provides the means of harnessing the power of the market to provide cost effective solutions to emission abatement.

The Framework Convention on Climate Change agreed at the Rio Earth Summit in 1992 committed action by industrialised countries, to reduce greenhouse gas emissions. However, by the first Conference of Parties to the Convention in Berlin in 1995, it was apparent that a different more specific and longer term approach was necessary. The Berlin Mandate negotiations were born and we were on the road to Kyoto.

Some argued then, as some still persist in arguing now, that as the science of climate change is still evolving, that we should simply just wait and see before taking action, either collectively or individually, to reduce the level of atmos-pheric concentrations of greenhouse gases… I and my colleagues in government were not prepared to do that…

In agreeing to play Australia's part in the global effort to reduce greenhouse gas emissions, our government accepted [the] precautionary principle. In the face of the current scientific evidence supporting global warming, to do otherwise would have been foolhardy…

The responsible approach, which the Australian government took, was instead to advocate an approach of equitable burden sharing or, differentiation, along with flexible implementation to make the climate change framework workable and sustainable over the long term...

And the Kyoto outcome, agreement to negotiated differentiated targets that reflect national circumstances, vindicated Australia's stand. We now have a framework that forms a sound basis for further elaboration. Securing agreement to an equitable distribution of the effort of addressing climate change through differentiated country targets, was a major step forward for the global community.

The Kyoto protocol is a major step forward. It is an agreement which provides the framework for environmentally effective, equitable and durable action to address climate change.

Kyoto though is but one step along the long term path. Critical steps still remain for the future. We need to fill in the details and make operational the far reaching market mechanisms we agreed in the protocol.

The provision in the protocol for emissions trading has altered production fundamentals... In providing for flexibility mechanisms, in particular emissions trading among industrialised countries, the Kyoto Protocol determined what would be the key driving force behind global emission abatement action...

While the Kyoto Protocol does not provide for developing country commitments, it does include provision for a clean development mechanism. The design of the clean development mechanism provides industrialised countries with the potential for low cost emission reductions, as well as providing significant economic incentives for developing country participation…

A final issue, which I'm sure will be the subject of much domestic debate, will be how any international regime might link with any domestic trading regime…

The challenge the government faced in the leadup to Kyoto was twofold: to contribute constructively to an outcome that deals with the problem of global warming and simultaneously to protect Australia's national interests. The Kyoto outcome has, I believe, the potential to deliver on both fronts.

So what happened? When did the federal government go off the rails and why is it only now beginning to consider ideas that it actively argued for during the Kyoto negotiations? And how will it justify its lack of action over the past decade?

Walk Against Warming

Tomorrow is the international day of action against climate change and I'd encourage you to attend the activities planned for your neck of the woods.

In Australian cities and many towns, there will be a Walk Against Warming, kicking off at 11 am.

I believe we should be getting the message to our national leaders, in particular the current federal government, that we need better responses to the threat of climate change than this:

Federal Tourism Minister Fran Bailey says using "shade cloth" over parts of the Great Barrier Reef off Queensland could protect it from the harmful effects of global warming.

Earlier this week, Britain's Stern report said climate change could cause a global economic downturn and bleach the reef.

Ms Bailey says the shade cloth idea came from a scientist who found that coral in natural shade was healthier than that in direct sunlight…

One of the suggestions is to attach the shade cloth to pontoons, which is an idea Ms Bailey says is worth considering if it will help protect the reef.

"We're very concerned because this is a $5.8 billion tourist industry on the reef, employing 33,000 people," she said.

For some context, the Great Barrier Reef stretches over 2,300 km along Australia's north-east coast. Covering 344,000 square km, it's almost one and a half times the size of New Zealand. That's a lot of shade cloth.

Ah, inefficiency - I miss you

I remember reading a story about Henry Ford some years ago. He got some of his employees to go through old Model Ts in junkyards and find the parts that had never worn out. If there was some component that was still intact in all those old cars, there was a problem with it. It was too perfect. There’s no point having an axel that’s still perfect after the rest of the car has worn out – that’s just wasteful. So he’d then set them to work to make a cheaper and less perfect axel.

The competitive market is a rather ruthless and cut-throat thing. It doesn’t tolerate waste. If you’re a supermarket and you have really short queues, that means you’re employing too many staff. Your competitor, with slightly longer queues, can undercut your prices and steal your customers. If you’re an airline and you offer seats with lots of legroom, you can’t fit as many passengers in and you can’t compete with the prices offered by other airlines.

In a competitive market, companies are always looking for ways to make products better and cheaper. When they do, they capture a momentary advantage. Then their competitors copy what they do or work a bit harder to capture the advantage back. That must be tiring. I’d like to take long lunches at work. I’d like to leave a bit earlier. I think we all would. But we’re in a competitive jobs market that won’t tolerate that wastefulness.

Unfortunately, we tend to like things that are wasteful, they’re the things that are really good. Short queues, lots of legroom, long lunches.

What made me think about this was reading this document (pdf) about the successes of salinity emissions trading in the Hunter River, north of Sydney. It proudly proclaimed "The scheme has resulted in a significant improvement in water quality in the Hunter river – it’s now fresher than most bottled mineral waters!" My first thought was "That’s not an indicator of success, it just means that they’ve set the allowed emissions at an inefficiently low level: you don’t need river water that’s fresher than bottled water and what’s the cost to industry of complying with standards that stringent?" Oh dear, I’m thinking like an economist.

I’m overstating this a bit. After all, markets have niches and these include niches for higher-priced, higher- quality products and services – and maybe lower-paid, longer-lunch jobs.
Nevertheless, I’d say this. I think that most industrial countries have done a very good job over the past few decades of promoting market reforms and removing inefficiencies, getting rid of monopolies, fostering competition. Ultimately, it’s made most of us materially better off. It’s a good thing.

But I understand people who get nostalgic for a world of, well, unjustifiable inefficiencies: short queues; legroom on flights; long lunches; cars made to be great, not made to be just good enough at the lowest price. It does sound pretty nice, doesn't it?

The Stern Review: The economics of climate change

Release the Hounds

We face all sorts of risks in our lives. As individuals, there’s risks to our health and safety, our businesses and our homes. We take sensible actions to deal with those risks. We weigh up the risks, their likelihood and potential impacts and look at what measures we can take to minimise or deal with the risks and what those measures cost. If we own a house, we’ll put decent locks on the windows and doors and take out insurance covering the risk of break-ins and theft. If we have a particularly valuable house or live in a particularly crime-prone area, we’ll consider more expensive protection – alarms, fences, maybe even some hounds.

One of the things that I think many people miss in the climate change debate is that it’s largely a debate about weighing risks and costs: the likelihood and possible impact of a changing climate and the measures we could take to deal with the problem - the likely costs of taking action compared to the likely costs of not taking action. It sounds obvious but it’s routinely ignored.

It follows that we need good scientific advice to tell us what the likely risks are, and good economic or financial advice to tell us what they will cost, what measures we can take to mitigate or adapt to climate change and what they will cost.

What are the risks? What will it cost?

It annoys me when I hear people say that we must do whatever it takes to avoid climate change. It also annoys me when I hear people say that we should do nothing about climate change until we really know for sure that it’s a big problem. Does the first group have security guards at their homes and surround them with barbed wire fences? Would the second group leave their house open when they go away for a weekend unless I can prove to them that someone will steal their stuff while they’re away?

What probably annoys me most is the disingenuous conservatives who claim that the market economy is so marvellous at adapting to shocks that we don’t need to worry about a changing climate – we’ll just adapt and it will all be very efficient and painless – but God forbid we should sign the Kyoto Protocol or aim to reduce emissions or do anything to increase the cost of energy, because that’s a shock we just can’t cope with.

Some guidance is on the way

An important document relating to the economics of climate change will be released tonight (Australian time). It will help inform the debate about the risks and costs of climate change and the risks and costs of taking action to reduce climate change impacts - by putting some numbers on these costs.

In July last year, the UK government commissioned a review, headed by development economist and former World Bank chief economist Sir Nicholas Stern, to review the economic, social and environmental consequences of climate change, as well as possible actions to adapt to the changing climate and the costs associated with them, and the costs and benefits of actions to reduce the net global balance of greenhouse gas emissions. The Stern Review on the Economics of Climate Change will be published tonight.

Stabilising emissions costs money…

From what’s been released so far about the Review, it has estimated that effective measures to stabilise greenhouse gas concentrations will knock about 1% per year off global economic output. That apparently means it will take an extra two years for global wealth to double. Although it sounds small in the scheme of things, that’s not a trivial cost. It is, for example, in the same ballpark as estimates of what a global pandemic would likely cost the world.

…Not stabilising emissions costs much more

But the flipside is big. Very big. The Review estimates that “business as usual” would leave to a reduction in global economic output of at least 5% - ignoring health impacts, assigning zero value to the non-economic benefits of the environment and assuming no feedback effects that result in the atmosphere warming faster and faster as greenhouse gas concentrations rise. Factoring these in, the level of climate change in the next century based on continuing current trends would reduce output by as much as 20% per year. That’s an impact, according to reports on the Review, “on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century”.

The bottom line is that spending money on strong, early measures to reduce emissions is a very good investment. It’s insurance against what is looking like a very serious risk to the world that seems expensive now but, according to the Review, will seem in hindsight to be an absolute bargain.

No doubt there will be plenty of analysis of the Stern Report in the coming days and weeks. Hopefully this will help inform the debate about how we should respond to the climate change threat.

Other reports:

Reuters

BBC

Observer

Guardian

New Economist blog

Removing market distortions: A prerequisite for sustainable development

I'll be attending a lecture with this catchy title in Sydney next week, to be presented by Jean-Philippe Barde, Visiting Professor of Law at Macquarie Uni and former Head of the National Policies Division in the OECD Environment Directorate. It sounds interesting.

It's on at the State Library of NSW in Macquarie Street in the city at 6pm on Thursday 2 November.

It's free but bookings are essential.

More details here.

Become Al Gore!

Ever wanted to be Al Gore?!

OK, probably not, but this sounds like an exciting opportunity:

Al Gore will be travelling to Australia in November to personally train 75 special people in delivering his climate change presentation, as featured in the documentary An Inconvenient Truth.

Successful applicants will attend a two and a half day training seminar with Al Gore, eminent Australian scientists and expert public speaking trainers. Participants will receive the training and materials free of charge but will be required to fund their own travel and accommodation expenses. The training will be held in Sydney between November 18 - 20, 2006.

Some previous experience in public speaking and presenting would be an advantage. Applicants will also need knowledge of Keynote or PowerPoint programs and access to a laptop computer and data projector. Applicants MUST be willing to commit to delivering at least 10 public presentations in the year following their training.

Applications close at 9am, 30 October 2006.

More details and FAQs here. Application forms here.

The expanding scope of economics

I enjoyed reading Freakonomics but it wasn’t really what I expected. For a start, most of it wasn’t really about economics. I’m not sure exactly what to call it other than social science. It was a bit sociology, a bit epidemiology, a bit social psychology, a bit cultural studies maybe. It was essentially using statistical techniques developed in economics and applying them to other fields.

It seems to be a growing trend. Joshua Gans talked today about economists doing medical research and Andrew Leigh’s blog today mentions some recent economic studies from the National Bureau of Economic Research – at least two of which I wouldn’t really say are economics at all.

I’m not sure what’s driving this foray from economists into areas that other social scientists would traditionally hold. Do economists’ methods and training allow them to answer these questions better than others? Are there just more economists out there? Are economists bored with traditional economics? Is it easier to get funding to study something if you’re an ‘economist’ than, say, a ‘sociologist’?

This was one of the topics I first talked about in this blog (Economists should stick to economics). I think it’s a good thing when economist apply their tools to other areas. But I do worry that economists often carry, along with those tools, a particular suite of theoretical or ideological baggage that means studies of social phenomena shouldn’t just be left to economists.

A Convenient Truth

Here's a convenient truth: you can see Al Gore's climate change doco An Inconvenient Truth for free.

According to the Australian Conservation Foundation, travel agency Intrepid Travel will refund the cost of your ticket if you send them the stub. Details here.

And speaking of ACF, climate change and free stuff, you can also get a free 'climate change action kit' from ACF, containing such goodies as:

• Fridge Magnet with GreenHome tips for making simple changes in your life to reduce your greenhouse pollution
• 'Act now on Climate Change' sticker
• ‘Australia’s Inconvenient Truth’ – this booklet provides an overview of climate change, its impact on Australia and solutions we can adopt today
• A letter for you to send to your Federal MP urging greater Government action on climate change
• Ways for you to become part of a growing community of Australians committed to tackling climate change.

Details here.

There's no such thing as a free park

The Age on Friday had an article entitled ‘Inner-city parking wars’ about the competing demands for scarce parking spots in inner city suburbs of Melbourne such as Richmond:

Ted Woodruff has a daily parking dilemma that many other inner-city residents could relate to - the Richmond resident arrives home from work on most days to find every park on the street taken. Vehicles are even parked on the footpath and nature strip.

Mr Woodruff has been slugged with some hefty parking fines in the past year, despite the fact that he has a parking permit.

"The problem is there are so few parks you end up having to park up on the curb or,
alternatively, park three or four streets away and it's not in your zone," he explains.

This scene is repeated throughout Melbourne's inner suburbs. Residents in heritage properties without driveways fight for on-street parking spaces with apartment dwellers and other residents who may have a garage but own more than one car.

Nearby businesses and entertainment venues also attract visitors searching for that elusive spot, adding to residents' parking woes.

The article also talks about the advent of new inner-city apartment developments designed to be car-free.

Harry Clarke has an interesting discussion of the economics of free parking on his blog over the weekend, reviewing a recent US book: The High Cost of Free Parking. The average parking spot is worth a lot more than the car occupying it and the high availability of ‘free’ workplace parking in the US effectively represents an average 22c per mile subsidy to commuters. This distorts a range of economic decisions, affecting public transport, land-use and planning and the cost of housing. An interesting argument is that so much congestion is caused by people driving slowly looking for a parking spot that an optimal policy would set the price of parking spots high enough so that there's always one available without a search. (Ie, lots of empty spots).

Interesting stuff.

Crazy water audit plans

I don't want to be too scathing, because ABC Online news reports rarely provide sufficient context to get a proper idea of what they're about - but this plan from a Professor of water policy sounds crazy to me:

The author of a new book on ways to better manage water says all users should have to account for the way they use the resource.

John Pigram, a Professor of water policy at the University of New England in New South Wales, says farmers have already been forced to improve their efficiency to make the most of low commodity prices.

He is calling for a national audit system to force users to justify their water allocations.

"Whether that be for irrigation, for industry, for a wetland, or a brewery, [they have] ... to be accountable for its use," he said.

"They have to specify what they want the water for, how they're going to use it and manage it and eventually audit their performance, and if it doesn't come up to scratch they either lose the water or they have to adjust their management protocols."

Is he for real? He wants someone (ie, the government) to check on every single water user to check if they're using it properly, efficiently, and really truly need the water they're using?

Here's an idea - how about we just charge people appropriately for water and let them figure out themselves how much to use and how to use it? The farmers who he states "have been forced to improve their efficiency" weren't forced because they submitted detailed water plans to government and government came up with some great ideas on how they could all make their water use more efficient. They were forced to, as Pigram himself suggests, because the financial pressure from "low commodity prices" made them figure out their own ways of saving water (and therefore money). How about we just stop subsidising water, let people pay the price for it that reflects its increasing scarcity, and let them figure this stuff out themselves?

Valuing environmental benefits

Natural environments and ecosystems provide a range of valuable economic services to communities. One of the contributions of environmental economics is in the field of environmental valuation: attempting to put a monetary value on the services that ecosystems provide.

"Putting a dollar value on nature" inevitably attracts criticism as it seems to represent the worst of the economic way of thinking: something that’s sacred and priceless is reduced to a dollar figure. But the reality is that people make decisions about natural resources based on an assessment of the value of different uses and when the value of ecosystem services is not known, it tends to be ignored or at least underestimated. For example, the decision to clear fell an area of forest is much less likely to be approved by a government forest management agency if you can demonstrate that the value of a standing forest in purifying water entering a catchment approaches the value you could obtain by harvesting the trees.

There’s good news for Australian economists and policy-makers with an interest in this area: Australia has just joined the international Environmental Valuation Reference Inventory (EVRI), which means that all Australians can access the inventory for free. (The United States, France, the United Kingdom and Canada are already members).

The inventory contains details of about 1,700 international studies providing values, methodologies, techniques and theories on environmental valuation. It’s intended primarily as a tool to assist policy analysts in estimating economic values for changes in environmental goods and services. The idea is that the results of the previous studies in the EVRI can be applied, with appropriate modifications, to estimate the economic value of changes stemming from new programs or policies. This should be easier (and cheaper) than setting up a valuation study from scratch.

I haven’t checked it out yet (it looks a bit technical for me!) but it should be a useful resource for any environmental economists out there. The NSW Department of Environment and Conservation has more information on the inventory and Australian data in this area.

An Inconvenient Truth: My thoughts

Well it was an unseasonably cold September evening in Sydney as we shivered and shuffled our way up Oxford St to the cinema and I couldn’t help but think "Bring on global warming".

Just kidding.

We had booked tickets for the sneak preview but we needn’t have – there were not a lot of people there. But then again, it was cold, it was a Friday night and we were there to watch a documentary on climate change. Anyway, we were excited. We purchased our choc tops, which seemed to be melting faster than when I was a kid, and settled in to enjoy – if that’s the right word – An Inconvenient Truth.

Ninety minutes later, our reactions were mixed. I found it pretty riveting, but of course I’m very interested in climate change and - more importantly - I'm a sucker for diagrams, charts and graphs. My girlfriend, Cat, found the presentation staid and she almost nodded off a couple of times. The presentation was unusual, even for a documentary. It really is a talk by Al Gore on climate change, albeit mixed with some spectacular footage and some very convincing and illuminating visual explanations of the science. No-one else gets interviewed or really speaks in the movie. That does give it a kind of one-sided feeling, even though the facts that Gore is presenting are mostly indisputable.

Gore is engaging though and he lays out a convincing argument. He explains the link between carbon dioxide concentrations and global temperatures, shows that current carbon dioxide concentrations are unprecedented and tells us the impacts that that will have. He gives the opponents’ arguments short shrift and I sometimes think this is a problem.

For example, I watched the ABC’s At the Movies show (for those of you unfamiliar with it, it’s a chatty film review show usually in the form of a discussion between the two engaging hosts, and they had this to say after watching the film:

MARGARET: David, it's done very lucidly, the graphics are great, you know, if this is fact, then it's pretty scary. But what I want to know is, you know, if there is doubt about what Gore is claiming...

DAVID: Well, some people have attacked the film.

MARGARET: Right, well, I mean surely it's possible to set up a body that doesn't have any vested interest in either outcome, you know, that just wants to know the truth and finding out what the truth is. I mean, it can't be a scientific stretch to discover whether we're losing the polar ice caps…

I actually think we owe it to our kids and our grandkids to find out the truth, and, you know, I mean a lot of money ought to be put into finding out the truth of this situation. I mean, it's very easy to get people's gander up with a documentary like this, and I think it's been very well done, but, the truth of the situation is significant, and that's what this documentary ought to do. It ought to galvanise people in power to discovering the truth.

That discussion riled me when I saw it because, of course, exactly such a body does exist – the Intergovernmental Panel on Climate Change – and it has answered most of the big questions. But after seeing the movie, I can understand why Margaret said this.

I think the problem is this. The science behind climate change is not highly disputed. There’s a lot of uncertainty at the margins about exactly what’s likely to occur, what the impacts will be, etc, but the basic concept has essentially unanimous support among serious climate scientists. (If I can attempt to summarise that basic concept, it’s that we are substantially increasing the concentration of greenhouse gases in the atmosphere above historical levels and that this will result in a rise in average global temperatures and a massive range of impacts on climate (that will vary from place to place) including higher temperatures in some places, lower temperatures in others, more rainfall in some places, lower rainfall in others and an increase in the frequency and intensity of extreme weather events – droughts, floods, fires – pretty much everywhere.)

The science behind climate change is not highly disputed, so Gore doesn't present a dispute, but climate change is highly disputed in the popular media. So when Al Gore presents one version of a debate which rages in the media, the natural question is ‘Well, what’s the other side of the story?’. That question is asked, I think, because people are used to social documentaries that concentrate on conflict – where people from two very different viewpoints are interviewed and their opposing views and stories presented. Documentaries do this because they want to appear to be balanced (though they rarely are) and perhaps more so because playing up the conflict creates drama and interest.

When that format is absent from a movie, I think people naturally ask whether they’re being told the whole truth. I guess it’s also because climate change science is presented popularly as much more controversial than it truly is. I would have liked to see Gore engage some of the main opposing arguments a little more - even if they don't truly deserve airtime.

Anyway, I think this is an important and compelling film. I’d recommend you see it – and take any sceptical friends with you. It certainly gets people thinking and talking about the issues. Our Saturday night was spent talking climate change, Kyoto and politics until the early hours of Sunday morning – not the usual Saturday night fare.

By the way, Al Gore is being interviewed tonight (Monday) on Enough Rope on ABC.

Greenhouse update

I've been meaning to post some stuff on carbon emissions trading as I've been slowly wading through the Australian States' and Territories' discussion paper on a national emissions trading scheme.

Meanwhile, California is going it alone in the US with a bold-sounding scheme to cut emissions to 1990 levels by 2020. It doesn't seem that there's much detail in the scheme just yet so it will be interesting to see how it develops and how it affects other jurisdictions.

In the meantime, I can recommend two new Australian blogs that are examining these issues: carbonsink and Burrows: Reduce CO2 emissions. They have some good pieces on the Australian politician posturing on climate change, Peak Oil, the power of markets, Tim Flannery, Al Gore, the California scheme, climate sceptics and using algae to capture CO2.

Law firm Blake Dawson Waldron produces a good regular update on Greenhouse issues from a legal and regulatory perspective and the August edition (pdf) has just come out. It includes a good summary of the main features of the proposed Australian national emissions trading scheme.


Tags: climate+change emissions+trading

Killing endangered animals to save them?

I’ve belatedly discovered YouTube and my girlfriend was showing me some very amusing Borat clips on the weekend. There’s one interview with a particularly ghastly big game hunter in the US whose comments are so offensive you can only laugh, or cry. In one scene he’s showing off the trophy heads of animals he’s shot. He points to one and says proudly "This one’s the most expensive. I had to pay $12,000 to shoot it. But it was worth it. [beaming] It’s extinct now!"

Hunters do not attract a lot of sympathy. But I’ve come across two thought-provoking articles this week on whether allowing hunting and trade in endangered animals and their products could actually help save them from extinction.

The first article* looked at recent efforts in China to commercialise tiger ‘production’:

like forests, animals are renewable resources. If you think of tigers as products, it becomes clear that demand provides opportunity, rather than posing a threat. For instance, there are perhaps 1.5 billion head of cattle and buffalo and 2 billion goats and sheep in the world today. These are among the most exploited of animals, yet they are not in danger of dying out; there is incentive, in these instances, for humans to conserve.

So it can be for the tiger. In pragmatic terms, this is an extremely valuable animal. Given the growing popularity of traditional Chinese medicines, which make use of everything from tiger claws (to treat insomnia) to tiger fat (leprosy and rheumatism), and the prices this kind of harvesting can bring (as much as $20 for claws, and $20,000 for a skin), the tiger can in effect pay for its own survival. A single farmed specimen might fetch as much as $40,000; the retail value of all the tiger products might be three to five times that amount.

Yet for the last 30 or so years, the tiger has been priced at zero, while millions of dollars have been spent to protect it and prohibit trade that might in fact help save the species...

If we truly value the tiger, this crisis presents an opportunity to help it buy its way out of the extinction it now faces. The tiger breeds easily, even in captivity; zoos in India are constantly told by the Central Zoo Authority not to breed tigers because they are expensive to maintain. In China, which has about 4,000 tigers in captivity, breeding has been perfected. According to senior officials I met in China, given a free hand, the country could produce 100,000 tigers in the next 10 to 15 years…

tiger-breeding facilities will ensure a supply of wildlife at an affordable price, and so eliminate the incentive for poachers and, consequently, the danger for tigers in the wild. With selective breeding and the development of reintroduction techniques, it might be possible to return the tiger to some of its remaining natural habitats...

Unfortunately, the article is long on free-market rhetoric and short on examples, theory or other information on how allowing trade promotes recovery. The argument seems to be that if trade was legal, farming would become cheap and widespread and there would be no incentive to hunt wild tigers. I’m not at all sure that’s right. Breeding or ‘farming’ tigers is no doubt difficult and expensive. I imagine it’s cheaper and easier to go into the jungle and just shoot one than breed and raise these animals from cubs.

It may well be that allowing trade in tiger products could assist wild populations, but it would have to be combined with well-resourced enforcement to prevent hunting of wild tigers, effective tracking of products to ensure the traded products didn’t include illegally hunted tigers and well-resourced reintroduction programs to re-establish wild populations. Simply legalising trade would only increase the demand for wild tigers and reduce the risks of prosecution and therefore costs of hunting them.

And, of course, this all ignores the objections that many people will have to the initially repulsive idea of commercially farming majestic wild animals like tigers to grind their claws into insomnia treatments.

The second article** (pdf), which is quite detailed and much more useful, examined elephant populations in Africa.

It found that countries where ‘ownership’ of elephants (ie, the power to make decisions about what to do with them and the right to the benefits of those decisions) was vested in local communities had elephant populations that grew much more than countries where ownership was vested in the government (eg, through wildlife reserves), was not vested in anyone (open access) or where hunting was banned. Bans were ineffective because the resources required for their enforcement were too high for governments which meant that poaching was rife (in effect the position was similar to if the elephants were an open access resource).

Communities in these successful countries could decide which of the elephants in the vicinity of their village would be killed for their products, which kept for tourism benefits and which licensed for hunting. The communities made the decisions and the economic costs and benefits of their decisions accrued to them in the form of fees from tourist operators or hunting licences and food and/or income from selling elephant products. These communities could also effectively monitor their local elephants and had enough information and resources to stop poaching.

This is an interesting topic and one I’d like to know more about. It seems to me that, in theory, allowing trade in endangered animals / animal products could improve their prospects of recovery but only under fairly limited conditions:

• The animals must be able to be either bred in captivity or their hunting regulated at a rate at which their wild populations will grow;

• Illegal hunting must be enforced at a level such that poaching is more expensive than legal breeding / harvesting;

• If we care about having the animals survive in the wild and not merely in zoos etc, captive bred individuals must be able to be returned to the wild and there must be some incentive or funding for that.

The main benefit of allowing trade seems to be that it allows for more effective enforcement against illegal hunting since poaching becomes a direct cost to the local community and it is often only the local community that has the local knowledge and incentive to actually enforce a hunting ban. Alternatively, it could be argued that the revenue from allowing trade could be directed into enforcement of illegal hunting.

Ultimately, it’s an empirical question (but also one of values) and it depends on the local conditions. I’ll try and track down some more empirical studies / articles. Does anyone know of any?

*Barun Mitra, The Value of wildlife: selling the tiger to save it (New York Times, 15 August 2006) via The Commons blog

** The Ivory Bandwagon:International Transmission of Interest-Group Politics
(Kaempfer and Lowenberg, 1999) via the Conservation Finance blog


technorati tags: environmental+economics endangered+species hunting tigers elephants borat

The economic case for reducing emissions

As I’ve discussed before, debates about reducing greenhouse gas emissions in Australia often pit ethical arguments in favour of reducing emissions against economic arguments that support doing nothing.

However, increasingly, there are good national economic reasons for taking strong efforts to start reducing our emissions.

In April, the Australian Business Roundtable on Climate Change put forward ‘The Business Case for Early Action’ on emissions. The Roundtable is a group of large Australian companies representing a cross-section of the Australian economy (including financial, energy and manufacturing companies). A group of businesses asking to be regulated by government? Asking for government to cap or tax their emissions? Why?

The same thing has been happening overseas. Also in April, CEOs of large energy and other companies such as General Electric, Wal-Mart, Shell and Duke Energy made submissions to a US Senate Committee saying they would welcome or accept mandatory caps on their emissions.

The Australian State and Territory governments last week released a very detailed discussion paper proposing a national emissions trading scheme. It also outlines some of the economic advantages of instituting a national scheme that provides some long-term guidance on what Australia’s climate change policy will be – whether by a national trading scheme, a carbon tax, or a long-term emissions reduction target.

So, here are some of the economic benefits of instituting a national scheme to reduce emissions:

Certainty is important for business

In the energy sector in particular, decisions often have long lead-times and long pay-off times. It can take a decade from the decision to build a large power station to the time it becomes operational and the station can operate for half a century.

Not knowing what rules will apply to greenhouse gas emissions in the future significantly increases the risks for investors, who are concerned about the risks of very expensive, long-lived assets. The current atmosphere of uncertainty can cause delays in investment until the policy position is clear. If this situation continues, it could mean higher electricity prices and less reliable supply than if the rules were clearly established in advance.

(NETS Discussion paper)

Delaying action could create economic shocks

The Roundtable’s ‘Business Case’ modelled the impacts of taking sustained action, starting in 2013, achieving 60% reductions by 2050 and also the impacts of the same reductions but starting in 2020. Under the ‘early action’ pathway, economic growth and employment growth would be higher, and the risk of recession and electricity prices lower than the ‘delayed action’ pathway. Of course, you can argue that the ‘no action’ pathway is best of all, but in a world where action is more and more likely to be demanded, adopting a ‘no action’ approach now increases the risk that the delayed action approach will be forced on us.

It’s likely that at some stage in the next few decades there will be a strong response (globally and/or domestically) and the ‘price’ of emissions may jump – perhaps strongly and suddenly. Taking action now reduces the risk of a shock in the future.

Encouraging action by other countries

Climate change will have substantial economic impacts on Australia. It’s in our interests that the world takes effective action to reduce its impacts. Taking active measures now gives us a more credible bargaining position later. Taking measures that help develop effective commercial technologies and institutions to reduce emissions will also make it easier for other countries (especially developing countries) to reduce their emissions. It also makes it more difficult for leaders of other countries to justify a lack of action on the basis that heavy emitters such as Australia are not taking action.

Encouraging commercialisation of technology

Australia is committing considerable funding to the politically uncontroversial route of supporting emissions reduction technologies. To get a return on these investments (in an environmental as well as economic sense), they need to be commercialised and adopted by industry. That is unlikely to happen (domestically at least) in the absence of measures that put a price on emissions and hence provide an incentive to adopt these technologies.

Until we have a strong international agreement to reduce global emissions, the economics for going it alone with a domestic scheme are unlikely to be compelling. But it is important to acknowledge that there are economic benefits of a strong domestic reductions scheme, the economic costs are more modest than is often assumed and there are strong ethical and political reasons for taking a national stand on this issue. Australia’s environment and economy are going to be heavily affected by climate change. In coming years, Australia may be pleading with other countries to take a stronger stand. We’ll be in a better position if we’ve taken a stand ourselves.

tags: emissions+trading climate+change global+warming environmental+economics

An inconvenient truth: Coming soon to a cinema near you

Al Gore's climate change movie An Inconvenient Truth opens in cinemas across Australia on 15 September.

In the meantime, WWF is hosting an advanced screening in Sydney at Dendy Opera Quays on Wednesday 6 September.

For more info about the film check out the Inconvenient Truth website.

(Thanks to Vincenze for the heads-up.)


Update 9/11/06: I saw the film and my thoughts are here: An Inconvenient Truth: My thoughts


technorati: an+inconvenient+truth inconvenient+truth al+gore climate+change global+warming

Australian economics blogs

There's some excellent economics blogs in Australia, from academics and others.

Academics

Harry Clarke is Professor of Economics at La Trobe Uni. His blog examines environmental and urban transport economics and the economics of public health - in particular, alcohol, tobacco and other drugs.

Joshua Gans is Professor of Management (Information Economics) at Melbourne Business School (Uni of Melbourne). His blog mainly looks at economics of technology, strategy and public policy.

Andrew Leigh is an economics lecturer at the ANU's Research School of Social Sciences in Canberra. His blog focusses on public policy economics.

John Quiggin, an academic economist at the University of Queensland, is a long-time and well-known Australian blogger. He approaches economics from a 'social-democratic perspective' so his stuff is a bit more lefty than the usual neoclassical fare.

Other economists

Institutional economics is a blog by Stephen Kirchner, a financial market economist based in Sydney. It has a macro and international focus, looking at economies, capital markets, monetary policy and similar wacky stuff.

Others

Catallaxy and Club Troppo I guess you'd describe as broadly right-of-centre political group blogs but they have some good economic pieces in between the usual political, um, discourse.


technorati tags: economic-blogs economics-blogs australian-economic-blogs australian-economics economics

Why won't someone do something about fuel prices?

Australia always seems to be a bit behind the US and so it is that the frantic whingeing about fuel prices has reached our shores.

After seeing our venerable politicians and wise TV commentators going on and on about this over the past few days (Beazley reckons Howard has 'taken his eye off the ball' in letting fuel prices get so high) and getting that ridiculous chain email "Boycott Mobil, they'll HAVE to lower their petrol prices, then their competitors will have to lower theirs too", I thought I'd post something on this topic this morning. Then I noticed that the Sydney Morning Herald had done it for me with two good articles.

Brendan Bouffler in Heckler presents a blunt demand and supply analysis:

The rise in the price of fuel seems to be a worldwide phenomenon driven by a worldwide increase in demand for oil products. Think: China gets the FJ Holden craze.

But given there is a somewhat fixed supply of oil, it pretty much follows (I learned about this "supply-and-demand" thing at high school) that the price goes up when people want to buy more of the stuff than there is to sell. Think: bananas.

He thus suggests possible demand-side and supply-side solutions:

Hence the best collective action we can take to bring prices down is to buy less of the stuff. Take the bus once a week, or walk to the shops every now and again instead of driving. God forbid, ride a bike to work if you don't live in Dee Why. If you do, car pool...

If you want supply to increase (to satisfy your apparently unrelenting demand), you probably only have two choices:
- Write to councillors advocating that more oil refineries be constructed in your suburb or
- invade OPEC nations, and Russia.

Ross Gittins weighs in too:

ONE thing I hate about politicians is the way they pretend to indulge us rather than level with us. They rarely tell us the unvarnished truth about what problems they can fix and what they can't, preferring to string us along. They act as though they can fix everything, which encourages a culture of complaint and a focus on the alleviation of symptoms rather than a search for fundamental solutions.

Take all the whingeing about the price of petrol. No pollie's prepared to tell us that since the problem is a global shortage of oil, the rise in price is a healthy development because, by encouraging both producers and consumers to adjust their behaviour accordingly, it offers the best solution to the problem.

He also makes some good observations about the related issue of traffic congestion:

...traffic congestion isn't the problem. Actually, it's the solution to the problem - the only solution the public finds acceptable.

The real problem is that we all want to live together in big cities and travel to and from work or school at pretty much the same time of day. Now, it makes economic sense for us to live in cities and it makes social as well as economic sense for us to want to work when others are working.

But the problem is greatly compounded by our desire to live in low-density suburbs and to travel in our own cars - by ourselves.

So the demand for road space at peak times of the day greatly exceeds the supply of space available. The result is traffic congestion, which is merely a way of rationing the space on a first come, first served basis. It's a queue, in other words...

When demand exceeds supply we have to ration. And when you won't ration by price (which is what economists advocate) you have to ration by queue. So congestion isn't the problem, it's the solution to the problem - the only solution we're prepared to accept, our unending complaints notwithstanding.

I think some things are best handled by governments and some things left to markets. But if there's anything markets are good at, and governments bad at, it would have to be coming up with solutions to high energy prices.


technorati: fuel+prices petrol+prices supply+and+demand traffic+congestion ross+gittins

Environmental economics blogs

I'm updating my list of links to other blogs and thought I'd take the opportunity to highlight some that I enjoy.

Today: environmental economics blogs. When I started blogging only late last year, there were only a couple of blogs devoted to this area (as far as I'm aware). Now there's a handful.

Environmental Economics
These guys have the self-confidence to call their blog simply 'Environmental Economics', and rightly so. It's authored by US academic environmental economists John Whitehead from Appalachian State University and Tim Haab from Ohio State University (with contributions from other US economists) and provides relevant, regular and very readable articles.

Ecological Economics
I'm an occasional contributor to this international group blog with the aim of providing a somewhat greener alternative to the mainstream (and, dare I say, conservative) Environmental Economics.

Environmental and Urban Economics
A more serious academic-style blog by Matthew Kahn of Tufts University (Massachusetts), it contains the full text of interesting articles with some brief commentary.

The Commons
Devoted to 'free market environmentalism', this blog is a bit hit-and-miss. The 'property rights are the answer to everything' perspective is interesting but the posts are more likely to be rants about how global warming is a myth than discussions of markets, property rights and environmental protection.

Robert Metcalfe (UK)
Robert is a student at London School of Economics and provides a UK perspective on environmental economic issues.

Brad Ewing (Ohio)
Brad is an economics and ecology student at Ohio State University. He posts some interesting articles and has a useful list of resources.

Conservation Finance
Lots of food for thought on the 'business' of biodiversity conservation.

Harry Clarke
I'm going to put Harry's blog 'Kalimna' in the 'Australian economics blogs' category, but worth mentioning here as he has a focus on environmental (and urban transport) economics.

Tomorrow: Australian economics blogs.


technorati: environmental+economics

The rise of the electric car?

Cars have transformed history, lives and cities in the past century. Cars have allowed people to travel further, more easily, comfortably and cheaply than previous modes of transport. They have also transformed landscapes, with substantial amounts of land devoted to roads and cities that are larger and more spread-out. Cars inspire passion. The fact that they are inherently individualistic - you travel in them alone or with your family and you can buy one that expresses your tastes and tells people who you think you are – I think does a lot to polarise opinions about them. They are often portrayed as being symbolic of freedom – go where you want to go, but to detractors they can represent a selfish individualism where people enter little metal boxes and disengage with their communities.

The connections between cars and other modes of transport, urban planning, economics, productivity and the environment are strong and complicated. Posts about urban transport policy invariably elicit strong debates on this blog. But some environmental impacts of cars are relatively straightforward, In particular, they are large contributors to urban air and noise pollution and global greenhouse gas emissions.

Electric cars promise to reduce some of these environmental impacts. They can be quieter, more efficient and less polluting. And with high petroleum prices, they have been attracting attention lately.

Pure electric cars run on a rechargeable battery than can be recharged just by plugging them into a power point in your garage. (note we’re not talking here about hybrids – they run on petrol but have a battery that’s recharged from the engine and from braking and they can be thought of just as a much more efficient petrol vehicle). From a consumer point of view, electric powered cars have two main advantages: they’re pretty cheap and they have a much lower running cost (about 1 – 2 cents per kilometre, less than 20% of the cost of petrol vehicles). But they have had two major limitations: low range between recharges and low speed. They’ve been kind of souped-up golf carts.

But new models can go further and longer between recharges and can achieve much higher speeds. USA Today earlier this week looked at two models on the US market: a US$100,000 electric "high-performance" sports car and a US$9,000 "city car".

The sports car version has a range of over 400km (which would allow an easy Canberra – Sydney drive with some detours and a margin of error) and a top speed of over 200km an hour which is a great deal more than anyone should be thinking about doing anyway. The city car has a range of just over 60km and a top speed of just over 60km/hr. Other models to hit the market soon start at US$5,000 for a 40km/h 2-seater with a 50 km range. The technology is advancing rapidly, with speed and range increasing.

What about the environmental impacts?

The biggest environmental benefits compared to regular petrol cars is in local noise and air pollution. These cars are much quieter and cause no particulate pollution in the city because they run on electricity. Of course, there’s air pollution created in generating the electricity that they run on (particularly in Australia where it’s likely to be generated by coal) but there’s still a substantial net benefit in terms of health etc because Australia’s power plants tend to be located in sparsely populated areas and where the particulates disperse before damaging people’s health (as opposed to cities where people breathe within metres of a car’s exhaust).

In terms of greenhouse emissions, electricity’s no better than petrol (unless it’s from low-emission sources such as wind or solar) so electric cars are only beneficial if they’re much more efficient (or if consumers choose to power them from ‘green’ electricity – which I guess is a real possibility for the segment of the market who’d be interested in these vehicles).

So are they much more efficient?

Well yes they are – much more. The typical electric vehicle today uses 0.3 to 0.5 kilowatt-hours per mile (0.2–0.3 kWh/km) while the average car in the US is equivalent to 1.58 kilowatt-hours per mile.

But will people buy these cars? And if so, who?

Well it doesn’t take a marketing genius to figure out people aren’t going to sell their Commodores and buy a zippy electric car that can do 60km at 60kph before the battery dies. But they’re cheap and getting cheaper and really cheap to run. So I can imagine a family getting one as their second car to drive the kids to school and soccer, go to the supermarket, maybe drive to work. The sportscars are going to have a limited market, but they’re pretty cool. They accelerate and handle better than a petrol car and there’s got to be some status in having an electric car, particularly if you sign up to green power with your power company. Very green chic, very sci fi - or something. If only DeLorean made one. That would be cool.

technorati: electric+car