Weekly blog roundup

Energy saving light globes

Federal Environment Minister Malcolm Turnbull wants to change the standards for lights to phase out the old-school electricity-chewing incandescent globes by 2010. This seems to me a sensible move that will make a modest impact at a modest cost. Joshua Gans is underwhelmed by the idea but Grant Young thinks it’s a good start.

Meanwhile, the libertarians at Catallaxy are incensed by this abolition of our freedom to waste electricity. I have sympathy with their ‘don’t ban things, persuade people to change instead’ philosophy, but I don’t think phasing incandescents out over 4 years is really such a big deal (from a personal freedom, or any other, perspective). If people are really worried about it, they have three years to stockpile incandescent lights (maybe in the underground bunkers that some of Catallaxy’s commenters no doubt have ready for when the leftist global warming conspiracy gives the UN an excuse to take over the world and abolish all personal freedoms).

Water

Harry Clarke crunches the numbers for suburban backyard rain water tanks and concludes that they just don’t make any economic sense.

Rising rents

Every second article in the Herald seems to be about rents going through the roof. Joshua Gans argues that proposed rent subsidies won’t help anyone except landlords.

Carbon offsets

Grant Young asks a very sensible question:

I wonder - if Richard Branson is splashing all this money around to reduce climate change, why doesn’t his airline have an “offset this flight” button when you book a flight?

People that want it can get it easily when they’re booking the flight. People that don’t simply uncheck the box.

What a great idea. Make it easy for people to offset their emissions at the point of sale, let them know how much it would cost, and no doubt many will take it up. Perhaps just as importantly, even if people choose not to offset, providing this will educate people about air travel emissions, what offsets are and how much the ‘carbon cost’ of their flight is.

Have a great weekend.

Does emissions trading spur innovation or hinder it?

Same day, two different perspectives.

Gar Lipow at the Gristmill blog examines a number of trading schemes that have previously been hailed as successes and comes to the conclusion that they’re not all they’re cracked up to be:

Compare the success of the often-touted sulfur dioxide trading system the U.S., instituted in 1990, with the speed and quantity of reductions under rule-based systems during the same period. U.S. SO2 emissions dropped by 31% between 1990 and 2001. Over the same period of time, under old fashioned rule-based regulation, Germany reduced its emissions by 87%, Italy by 62%, and Western Europe as a whole by 57%.

In both absolute and per capita terms, Western Europe and the individual nations within it have less acid rain-producing pollution than the United States. This was not true when they began their regulatory programs in 1982.

…emission trading has a record of producing slower results than conventional regulation, with at least one example of complete failure to meet a goal. But doesn't the increased flexibility at least encourage innovation? The empirical record says no…

Meanwhile, an article (pdf) just published by Environmental Defense (a US-based environmental NGO) looks at these same schemes, as well as early results from the EU carbon emissions trading scheme, and comes to the opposite conclusion. (via Conservation Finance)

I haven’t compared the two articles in any detail, so I’ll leave it to you to be the judge!

“Why be carbon neutral when you can be carbon optimal?”

So asks Tim Harford in The Undercover Economist, which is a very readable and entertaining introduction to how economists view the world. (I did, however, find it dogmatic and rather preachy in tone.)

Last week I looked at some of the issues around the ethics and effectiveness of carbon offsets; today I’d like to look a bit at the economics.

Harford tells the following tale about carbon offsets:

"How did you travel here today?"

"I'm sorry?"

I'm puzzled. Here I am, going to a panel discussion organized by an environmental
charity, and a very earnest young member of staff is grilling me before I even get past the door of the lecture hall.

"How did you travel here today? We need to know for our carbon offest program."

"What's a carbon offset program?"

"We want all our meetings to be carbon-neutral. We ask everyone who attends to let us know how far they came and on what mode of transportation, and then we work out how much carbon dioxide was emitted and plant trees to offset the emissions."

The Undercover Economist is about to blow his cover.

"I see. In that case, I came here in an anthracite powered steamer from Australia."

"Sorry...how do you spell anthracite?"

"It's just a kind of coal - very dirty, lots of sulfur. OW!"

The Undercover Economist's wife gives him a sharp dig in the ribs.

"Ignore him. We both cycled here."

"Oh."

Apart from being a good example of how irritating an Undercover Economist can be, this true story should, I hope, provide a few questions. Why would an environmental charity organize a carbon neutral meeting? The obvious answer is "so that it can engage in debate without contributing to climate change." And that is true, but misleading.

The Undercover Economist in me was looking at things from the point of view of efficiency. If planting trees is a good way to deal with climate change, why not forget about the meetings and plant as many as possible? (In which case, everybody should say they came by steamship.) If the awareness-raising debate is the important thing, why not forget about the trees and organize extra debates?

In other words, why be "carbon-neutral" when you can be "carbon-optimal,"… Instead of working out whether to improve the environment directly (by planting trees), or indirectly (by promoting discussion), the charity was spending considerable energy keeping itself precisely "neutral"... And it was doing so in a very public way.

A kind view would be that the charity was setting a "good example," if acting nonsensically can ever be a good example. An unkind view would be that it was indulging in moral posturing.

Describing carbon offsetting as “acting nonsensically” and then saying that that’s “a kind view” is pretty harsh. But is it fair?

I don’t think so.

Harford’s point is, on its face, a reasonable one: either you get more emissions reductions per dollar by planting trees or you get more emissions reductions per dollar by holding debates. Work out which is gives more bang for your buck and spend all your money on that.

It’s all so simple in the world of the Undercover Economist isn’t it?

Meanwhile, back in the real world, things aren’t quite so simple: there’s uncertainty and limited information.

I can almost imagine The Undercover Economic Consultancy Inc (not a real company – I hope) advising a homeowner in the tornado belt in the US against taking out tornado insurance: “No, no, it’s not optimal. You see, what you need to do is work out whether a tornado is going to hit your house this year. If not, then paying insurance is just a waste of money. If it is, then the optimal decision is simply not to live there.”

The point, of course, is that no-one knows whether a tornado is going to hit their house. Similarly, the environmental group doesn’t know how many tonnes of greenhouse gases their debates are going to encourage people to save.

Now maybe The Undercover Economic Consultancy Inc could try and work it out. They could survey all the attendees and ask them what changes they’ll make in their lives, then try and calculate the effect of that on their greenhouse emissions. But, as Harford tells us about elsewhere in the book, that would run into problems that economists talk about in terms of stated versus revealed preferences (ie, will people actually do what they say they’re going to do?) They could ask how many are going to lobby their local politicians for change, then they could employ some public choice analysis to work out what political change that will bring and the greenhouse implications of that. Maybe they could study literature on social movements and work out whether small meetings like this could contribute to some kind of overall momentum for change. I suspect you’d get a pretty fuzzy answer and it would cost you a lot more than simply offsetting the emissions.

The point is, no-one knows. And when you don’t know, it is perfectly optimal to hedge your bets. By offsetting the estimate extra carbon emissions that the meeting creates, the environmental group is at least making sure they don’t contribute to the problem, while at the same time I’m sure they’re confident that the debate will have some, albeit unmeasurable, positive impact.

The thing is, far from producing suboptimal decisions, hedging measures like offsetting help us to make better decisions. The decision of whether to buy a house in an area at risk from tornadoes is difficult. Indeed it’s difficult to know what the risk is. But insurance providers can help us decide. Because they assess and pool risks over thousands of households and businesses, they put a monetary figure on the cost of the risk. That helps us make better decisions. Is living here rather than in another town 50 kilometres away worth the extra $2,000 a year I have to pay in tornado insurance? That’s an easier decision to make.

Likewise, carbon offsets are an attempt to internalise the social cost we place on others through our use of carbon. If we’re interested in living our lives by some kind of ethic where we try and minimise our negative impacts on others, then offsets help us do that and they provide the information we need to make better economic decisions. Say I want to travel from Sydney to Tasmania and then drive around the island for a few days. Should I fly and then hire a car when I’m there or should I put my car on the boat and sail? Carbon offsets allow me to put a rough price on the carbon emissions of either of the options and that helps me decide.

I’d like to go further and see a carbon tax. Then some measure of the social cost of emissions would be embedded in the price of everything. If the cost of flights suddenly went up and the cost of boat trips went down, well, that would encourage a shift in the mix of activities we undertake that would be closer to what’s socially optimal.

Doesn’t sound nonsensical to me.

Carbon offsets: good, bad or ugly?

Yesterday I talked about CheatNeutral: a spoof website that offers people the ability to compensate for their infidelity by investing in projects that will help other people stay faithful. Their message is that that makes about as much sense as offsetting carbon emissions.

The fundamental difference of course is that greenhouse gas emissions have the same effect no matter where or how they’re emitted (actually, there are some exceptions – eg, carbon dioxide emitted at high altitudes by planes seems to have more of an effect – but by and large this is true). It makes no difference to the climate whether I emit a tonne of carbon dioxide by driving my car in Sydney or if you emit a tonne of carbon dioxide by having a bonfire in Canada.

Anyway, let’s look at the three criticisms I discussed yesterday that are levelled at the idea of greenhouse offsets.

Carbon offsets are not necessarily effective.
If you drive somewhere, you instantly pump a measurable amount of greenhouse gases into the atmosphere. If you pay a company to invest in a renewable project or plant some trees, how do you really know how much that reduces emissions by?

This is a very valid concern, but it’s not in my mind an argument against offsetting altogether. It just means you need to be careful how you do it. You need methods to measure, verify and audit reductions and methods to deal with uncertainty.

Let’s take an example. Say I want to offset some of my emissions by providing funds to a company that will plant trees to sequester (another great word!) carbon dioxide. Sequester is the cool way to say ‘suck out of the atmosphere’. But there are some issues with this:

• I’m pumping gases into the atmosphere now but the trees will suck it out over a number of years.

• What happens if the trees are destroyed in a bushfire or by disease and the carbon dioxide they’ve sequestered is released back into the atmosphere?

• The rate at which they sequester carbon dioxide is uncertain: it depends, for example, on the weather over the coming years.
  

These are certainly real issues but there are ways to deal with them. We can account very conservatively: if we know that the trees will suck up between 1 and 2 tonnes of CO2 a year but we can’t be more precise than that, well, we only count it as 1 tonne per year. We can further reduce the emissions we count by the risk of fire, etc. And, we can insure the plantation, so that if it does burn down we can replant it immediately and perhaps also buy some offsets from other projects to make up for the lost time. We can have the offsets independently verified and audited.

And there are various ways we can deal with the timing issues. A simple way, for example, is to count / sell only the emissions that are reduced that year. So, we plant our trees and year one, we estimate they sequester 1-2 tonnes of CO2, so that year we sell 1 tonne’s worth of offsets. Year 2, we estimate they sequester a little more – 1.2 – 2 tonnes, so we sell 1.2 tonnes worth, and so on. Another way is to count up the estimated reductions over the life of the tree and sell them all up-front - but discount their value on the basis that they will only come online gradually and so do not fully compensate for emissions that are all happening in year one.

The devil is in the detail and we need to be vigilant to ensure we get what we pay for, but this is hardly unique to carbon offsets or a reason to reject them as being able to make a valid contribution to dealing with the problem.

Carbon offsets are immoral because they allow people to pay someone else to deal with the problem, rather than taking responsibility for the problem themselves.

I accept that this is a concern for some people; it’s not really a concern for me. I’m interested in seeing that the problem is dealt with. I don’t really care if Bill Gates takes two hour showers and flies around the world in a private jet which he then washes in French champagne and dries with irrigated-Egyptian-cotton bath towels that he then throws away, if he decides to make up for that by funding a solar power plant that will allow a dirty coal power plant to be closed down. I know many readers will feel differently though.

Flowing on from 1 and 2, carbon offsets interfere with other effective measures to combat climate change because they allow people to distance themselves from the problem and so they reduce the pressure on individuals, governments, businesses and communities to take measures that actually will have a real impact.

This is the criticism that resonates most with me. If it’s true that offsets are not sufficiently scrutinised so that they don’t truly offset the emissions they claim to, but we think they are and so we leave it to offsets to deal with the problem – well, that is a problem.

But I don’t really think that offsets do have this effect. I’ve heard similar kinds of arguments about efficient hybrid vehicles like the Prius: they won’t have any positive effect because people will then think that all they have to do to be good green citizens is buy a hybrid. In fact, I think the research shows that people who are buying hybrids and offsets are people who take environmental issues including climate change seriously, and are taking a whole lot of measures in their lives to try and make things better. Rather than encouraging people to switch off and leave it to offsets to deal with the problem, I’m prepared to believe that offset schemes engage people and actually encourage them to take steps to reduce their personal emissions as well.

But enough from me – what do you think?

The 'low carb economy'

Steve Burrell in the Age says that “both sides of politics, and much of the business community, now agree that Australia must move to a "low carb"economy… like an economic version of [a low carb diet,] it's tough getting used to, but you are supposed to be better for it in the end.”

It’s a nice metaphor, so let’s extend it.

Our Prime Minister, John Howard, is surely advocating the economic equivalent of the Atkins Diet (eat as much fat and meat as you want but no carbs): all you can eat nuclear and ‘clean coal’.

At the other end, the Greens are advocating a version of Jenny Craig (we’ll provide all the food, you just stick to our program): high mandatory renewable energy targets and an end to coal exports.

The economist in me likes the flexibility of Weight Watchers: every food has a point value and you can earn extra points through exercise. You can choose to eat what you like as long as you’re under your points limit each day. That’s like an emissions trading scheme: you get a certain number of points to emit and you can spend them how you wish. So you can choose to eat low point foods (use renewable energy), eat less (improve energy efficiency) or exercise more (offset your emissions).

I like it!

Carbon offsetting: neutral shmeutral?

As you may have heard, the Oxford American Dictionary declared “carbon neutral” the word of the year in 2006 (shouldn’t that be ‘phrase of the year?’). It pipped other words / phrases such as “dwarf planet” (poor Pluto) and “elbow bump” (a greeting in which two people touch elbows, recommended by the World Health Organization as an alternative to the handshake in order to reduce the spread of germs) for the for the title.

The idea of carbon offsetting is that rather than (or, preferably, as well as) reducing your own greenhouse gas emissions, you fund projects that will reduce greenhouse gas emissions elsewhere. The most common projects are tree-planting or renewable energy projects. Trees suck up carbon dioxide as they grow, while renewable energy projects provide energy to communities at much lower emission levels than they would otherwise get from traditional energy sources. So rather than foregoing a trip to Europe because of all the emissions that would produce, you take the flight but pay a carbon offset company to act as a broker and direct your money to projects that will reduce an equivalent amount of emissions somewhere else. Thus your flight is 'carbon neutral'.

It’s one measure that individuals can take – as individuals – to help reduce the problem and, in an environment where governments seem reluctant to do anything, it is proving popular. If you can take realistic measures to reduce your own emissions: drive less (or not at all) and walk, cycle or use public transport instead, reduce your energy and water consumption at home (hang your clothes out to dry instead of using a dryer, open windows instead of turning on the air conditioner, etc etc), buy green energy for the electricity you use; then you can offset your remaining emissions (there are various online calculators to estimate your emissions) and sleep somewhat contentedly in the knowledge that at least you’re not making a net contribution to the problem. Apparently, the carbon offset industry was worth around A$150 million last year.

But there are plenty of criticisms of the scheme from various quarters and angles. Tim Harford in his book The Undercover Economist criticises the notion as uneconomic and I’ll discuss that another time. But most of the criticisms come from the green side of the fence and are along one of the following lines:

1. Carbon offsets are not necessarily effective. If you drive somewhere, you instantly pump a measurable amount of greenhouse gases into the atmosphere. If you pay a company to invest in a renewable project or plant some trees, how do you really know how much that reduces emissions by?
   
2. Carbon offsets are immoral because they allow people to pay someone else to deal with the problem, rather than taking responsibility for the problem themselves.
3. Flowing on from 1 and 2, carbon offsets interfere with other effective measures to combat climate change because they allow people to distance themselves from the problem and so they reduce the pressure on individuals, governments, businesses and communities to take measures that actually will have a real impact.

Via the Gristmill blog, CheatNeutral nicely illustrates some of these criticisms.

CheatNeutral is a site that allows people to offset the negative impacts of cheating on their partners, by paying other people not to cheat on theirs.

What is Cheat Offsetting?

When you cheat on your partner you add to the heartbreak, pain and jealousy in the atmosphere.

Cheatneutral offsets your cheating by funding someone else to be faithful and NOT cheat. This neutralises the pain and unhappy emotion and leaves you with a clear conscience.

Can I offset all my cheating?
First you should look at ways of reducing your cheating. Once you've done this you can use Cheatneutral to offset the remaining, unavoidable cheating.

Yes, it’s satirical. But it makes some serious points:

Five ways that Cheatneutral is like carbon offsetting:

Cheatneutral tries to make it seem acceptable to cheat on your partner. In the same way, carbon offsetting tries to make it acceptable to carry on emitting excess
carbon.

Cheatneutral doesn't really do much to reduce the amount of cheating in the world. Carbon offsetting does very little to reduce global carbon emissions.

It seems impossible to measure how much harm cheating on someone does. With carbon offsetting, there is currently no practically feasible way of measuring how much carbon offset projects actually save.

Having Cheatneutral's services available could actually encourages you o cheat more. [sic] If the carbon offsetters persuade you that it's possible to offset your emissions, you'll carry on emitting excess carbon through your lifestyle rather than think about reducing your emissions.

Cheatneutral is fundamentally the wrong way to go about solving problems with your relationships. Carbon offsetting is fundamentally the wrong way to go about tackling climate change.

Two ways which Cheatneutral is not like carbon offsetting:

We don't make any money out of Cheatneutral. Offset companies in the voluntary carbon market take a cut of every transaction and make a profit.

Cheatneutral is a joke we thought up in the pub. Carbon offsetting presents itself as a credible solution to climate change, described by the government's chief scientist Sir David King as “the most severe problem that we are facing today, more serious even than the threat of terrorism...”

So is trying to offset greenhouse gas emissions like trying to offsetting infidelity? I’ll give you some of my thoughts in a later post.

Did the Cross City tunnel put the cart before the horse?

Large cities throughout the world have problems with congestion in the city centre, resulting in lost time, lower productivity, higher costs to individuals and businesses, and more air pollution.

There are two ways to address this problem: you can introduce measures to discourage driving in the city or you can provide or improve alternatives to driving in the city. Preferably, you’d do both. Measures to discourage driving could be indirect, such as parking restrictions or fees or bus lanes (which means fewer car lanes). Direct discouragement, in the form of a fee for driving in the city centre (the most well-known is probably the London congestion charge) is more effective. Providing alternatives includes better public transport, infrastructure for cycling or, as Sydney has done, a tunnel under the city so that people can cross from one side to the other without going through the congested city streets.

Australian readers would be aware of the financial problems that the Cross-City Tunnel has had since its inception last year. Today’s Sydney Morning Herald reports that the tunnel, which cost more than $900 million to build, is now worth little more than a third of that.

The main reason for this is that the current usage of the tunnel - 30,000 vehicles per day – is less than a third of the forecast usage of 97,000 vehicles per day.

The tunnel and its associated toll always seemed to me to be the wrong way around. I've always thought there should be a toll for not using the tunnel – for driving through the city instead.
Tunnel users get charge a toll of $3.50 ($7.00 for trucks) for avoiding city traffic. Now, clearly tunnel users get a benefit from avoiding the city congestion, but by taking the tunnel rather than driving through the city, they’re also avoiding contributing to the congestion in the city. So both city drivers and tunnel users benefit from the tunnel, but it’s only the tunnel users who pay for that benefit. If you really want to encourage drivers to avoid the city, why make it free to drive through the city but expensive to use the alternative?

The Sydney CBD is a relatively small area with only a few entry points. If the State government is serious about reducing congestion and making an adequate return from its tunnel, why not introduce a congestion charge that makes it as expensive to use the city streets as to use the tunnel?

Parking fees – fighting climate change?

Today’s Sydney Morning Herald reports that a number of local councils in Sydney are considering – or have introduced – graded parking fees based on a car’s fuel consumption:

INNER-CITY councils will be urged to charge residents with petrol guzzling cars more for their parking permits - a scheme that netted a council almost $175,000 last financial year.

The Mayor of North Sydney, Genia McCaffery, introduced the scheme in 2005 and said yesterday she would use her role as the president of the Local Government Association to encourage other councils to go greener.

"Certainly this year we are looking pretty closely at climate change and what policies can we adopt as councils to educate communities," she said yesterday. "We'll be talking to our councils and saying this is one of a range of policies you can look at."

North Sydney Council uses the Federal Government's Green Vehicle Guide to judge if a vehicle has a very low, low, medium or high impact on the environment. Each car type attracts a fee ranging from $24 to $88 for the first resident parking permit. A resident parking permit for a second or third vehicle can cost up to $200 for a high-impact car.

Over at the Environmental Economics blog, Tim Haab decries a similar scheme proposed in the UK as inefficient and unfair:

It makes the solution too complicated and it doesn't target the real problem: DRIVING. Suppose Ian and Graham (good English names, don't you think?) live next door to each other and both own Hummers. But, Ian drives his Hummer 20 miles to work each day, while Graham drives his 5 miles. Who is causing more damage? Who should pay more?

Under the current proposal Ian and Graham would each pay the same amount. But that doesn't seem fair--I'm crossing my arms and stomping my foot with a "hmmmph!"--and it definitely isn't economically efficient. So what's the solution? Easy, charge people a fixed amount per litre of petrol consumed…

Well I'm not sure it is that easy and I don’t agree that these proposed measures are a bad thing. First and most obviously, councils can’t impose taxes on petrol, so parking permits are one of the few tools through which they can target the issue.

Second, driving doesn’t just produce greenhouse emissions, it also produces particulate air pollution. Where is air pollution a problem? In the centre of cities. In rural areas, it disperses without creating many problems. The enormous concentration of cars in cities means that this pollution can cause health issues in cities. A national petrol tax doesn’t discriminate between emissions in cities and the country (so to the extent you’re worried about local urban air pollution, a national fuel tax isn’t fair or economically efficient either). And so it's not surprising that it’s "inner-city councils" who are considering additional measures. The Green Vehicle Guide, which North Sydney Council uses to compare vehicles, incorporates greenhouse emissions and air pollution.

Third, and this is a point that economists always seem to me to miss (or ignore), measures like this can have an effect on people’s behaviour that goes beyond their immediate financial impact. Economists seem to assume that drivers see that owning a ‘petrol-guzzling car’ now costs an extra $40 a year to park and then decide whether it’s worth that extra $40 a year to have a petrol-guzzler. If $40 a year wouldn’t make a difference anyone’s purchasing decisions, then, according to the analysis, the extra charge hasn’t done anything. What they miss is that when a local council, which represents the local community, sends out a letter that tells everyone they’re going to charge more for parking permits for petrol-guzzlers because they’re concerned about climate change, that tells people "The community thinks fuel-efficient cars are cool and thinks big petrol-guzzlers are uncool" and, because people feel a connection to their community, that affects their purchasing decisions, probably more so than the $40 charge itself. Measures like this put the issue of driving and its effect on climate change on the agenda – it grabs people’s attention. Of course, councils could just send out a letter that says that gas guzzlers are uncool – but backing that with a $40 fee focuses your attention that little bit more.

So, are these measures a positive step? I’d say yes. I’m sure there are more efficient measures you can come up with but I’d also suggest that these measures are an improvement on the status quo.

What a week

I'm back from a most enjoyable and relaxing few days in Hobart and Eaglehawk Neck in Tassie, with my girlfriend Cat and her family. It's a beautiful part of the world. We packed a lot in, with some great walks - Mt Wellington in Hobart and a couple on the Tasman Peninsula, some interesting tours (my favourite was the old Cascade brewery; now I know what hops are) and great restaurants. The weather was crazy though - very much three seasons in one day (no summer!).

Elsewhere, it's been a big week for Australian and global environmental policy, with a new federal environment Minister, a big water plan from the federal government, talk about Queensland recycling drinking water, environmentalist Tim Flannery being named Australian of the Year, George W actually mentioning climate change in his State of the Union address and a lot of buzz over the upcoming release of the latest report from the Intergovernmental Panel on Climate Change (IPCC).

And in an interesting example of how climate change has become big news and how much of what passes as news isn't really news at all, CSIRO republished data they'd produced in 2004 in a more concise and rebadged document, and so the "frightening" "latest scientific report into the problem" has been front-page news across the country for the past 24 hours. I remember when it came out in 2004 - when it really was new and frightening - and it didn't make such a big splash then.

For some news and views on these issues:

• John Quiggin and Gary Sauer-Thompson's takes on the water plan are worth a look.
• Groovy Green talks about Bush's SOTU.