Red sky in the morning...

Strange weather in Australia recently: record high winter temperatures, bushfires in spring, hail the size of cricket balls overnight and we woke this morning to an apocalyptic orange glow in Sydney.

Meanwhile our Prime Minister is at the UN for climate change talks and the domestic question is whether we should have our emissions trading scheme ready to go for Copenhagen or wait for the outcome of the Copenhagen talks and a post-Kyoto international agreement.

In today's Sydney Morning Herald, economics editor Ross Gittins has a go at both parties about their complacent approach to climate change and then turns his gaze to population growth and to economists for ignoring the environment.

Even the economists who brought us the emissions trading scheme don't adequately appreciate the problem we've got. They think all we have to do is switch to low-carbon energy sources (ideally by capturing all the carbon emitted by burning coal) and the economy can go on growing as if nothing had happened.

Being economists, they see us as all living in an economy, with this thing at the side called the environment that occasionally causes problems we need to deal with. As usual, wrong model. In reality, the economy exists within the ecosystem, taking natural resources from it, using them and then ejecting wastes, including sewage, garbage, pollution and greenhouse gases.

Not much to disagree with there, but I haven't seen Gittins talk about ecological economics before or what the alternative model might look like. (At the risk of caricaturing his columns, they seem to be, while interesting, a confusing mix of very staid conventional economics one day: 'if the politicians studied a bit of economics they'd realise that people will act in their self-interest and supply and demand will ensure such and such happens' with blanket rejection of economic ideas the next 'if economists studied human psychology, they'd realise that people don't act in their self-interest and so supply and demand can't be counted on' etc).

But perhaps we can look forward to some ecological economic analysis from Gittins in the future.

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

Economics and supermarket checkout lines

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

So if we believe shoppers are as rational as traders (why not?), then there should be a parallel efficient supermarkets hypothesis. The efficient supermarkets hypothesis tells us that: (a) the length of the line reflects all available information about its speed (cashier skill, size of preceding trolleys etc), (b) the best way of getting through the supermarket checkout is to pick the closest line and stay in it, and (c) the worst thing you can do at the supermarket is switch lines.

Of course, the number one problem with these things is the assumption that your fellow shoppers are rational in their choice of lines. Well, maths teach Dan Meyer has done the research at his local supermarket and it seems shoppers do not always rationally choose the shortest lines!

The express lane isn't faster. The manager backed me up on this one. You attract more people holding fewer total items, but as the data shows above, when you add one person to the line, you're adding 48 extra seconds to the line length (that's "tender time" added to "other time") without even considering the items in her cart. Meanwhile, an extra item only costs you an extra 2.8 seconds. Therefore, you'd rather add 17 more items to the line than one extra person! I can't believe I'm dropping exclamation points in an essay on grocery shopping but that's how this stuff makes me feel.

So there you go - watch out for the assumptions in your economic models!

Dealing with uncertainties in carbon price

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

It follows that choosing one over the other is partly an issue of whether you want certainty in your environmental outcome or certainty in the cost to industry.

The experience of the European emissions trading scheme and now it seems the US Regional Greenhouse Gas Initiative (RGGI, pronounce it 'Reggie' - a trading scheme involving 10 States in north-east USA) has been that the cap on emissions was set too high and too many permits made available, with high volatility in permit prices and permit prices crashing after a while. The governments were too worried about the potential cost to indsutry (which isn't known in a trading scheme, but has to be forecast) and so overallocated permits.

Australia's ETS will actually start out as effectively a carbon tax, because the price of permits will be fixed at $10 a tonne for at least the first year. After that it become a trading scheme, with a fixed emissions cap and an unknown permit price.

Actually, it's more like hybrid scheme in one way, because it's proposed that there will be a ceiling price of $40 a tonne: companies can buy unlimited permits from the government at that price, so the permit price will never rise above $40.

A lesson from the EU and RGGI is that it would make sense to set a floor price too, so everyone knows that the permit price will never fall below, for example, $15 a tonne. That gives some certainty to industry, that investments in emissions-reducing technologies that are profitable at a carbon price of $10 a tonne or more can be made with no carbon price risk. It gives some reassurance to renewable energy and similar industries that they can safely invest. And it means that if reducing emissions turns out to be cheaper than expected, some of the benefit goes to the environment in the form of lower emissions and doesn't all go to indsutry in the form of cheaper permits.

Stimulus payments can kill you

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

Many studies find that households increase their consumption after the receipt of expected income payments, a result inconsistent with the life-cycle/permanent income hypothesis. Consumption can increase adverse health events, such as traffic accidents, heart attacks and strokes. In this paper, we examine the short-term mortality consequences of income receipt. We find that mortality increases following the arrival of monthly Social Security payments, regular wage payments for military personnel, the 2001 tax rebates, and Alaska Permanent Fund dividend payments. The increase in short-run mortality is large, potentially eliminating some of the protective benefits of additional income.

Clean Coal on Four Corners

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

The bottom line: coal is a large and growing contributor to greenhouse gas emissions and clean coal technology is a long way from being a commercial reality.

Should be worth watching.

Nitpick of the day

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

Ziggy Switkowski who, as former CEO of Australia's first and biggest telecommunications company, should know better, opens an otherwise interesting Online Opinion piece about the march of technology with this:

Our forebears 100 years ago could not have dreamt of the emergence of television, computers, satellites...

Really? No-one in 1909 could have even dreamt that those things might emerge?

Could our forebears have imagined 100 years ago that advancements in technology would allow you to check big statements like Ziggy's in about a minute?

According to Wikipedia:

The first electromechanical television system was patented in 1884 in Germany. Before that, the concept of electrically-powered transmission of television images in motion, was first sketched in 1878 as the telephonoscope, shortly after the invention of the telephone.

Punch's Almanack for 1879 imagines a 100-inch wall-mounted interactive LCD TVwith surround sound

The first fictional depiction of a satellite being launched into orbit is a short story by Edward Everett Hale, The Brick Moon. The story is serialized in The Atlantic Monthly, starting in 1869. The idea surfaces again in Jules Verne's The Begum's Fortune (1879). In 1903 Konstantin Tsiolkovsky (1857–1935) published The Exploration of Cosmic Space by Means of Reaction Devices, which is the first academic treatise on the use of rocketry to launch spacecraft. He calculated the orbital speed required for a minimal orbit around the Earth at 8 km/s, and that a multi-stage rocket fueled by liquid propellants could be used to achieve this.

The "castle clock", an astronomical clock invented by Al-Jazari in 1206, is considered to be the earliest programmable analog computer. But it was the fusion of automatic calculation with programmability that produced the first recognizable computers. In 1837, Charles Babbage was the first to conceptualize and design a fully programmable mechanical computer, his analytical engine. From the end of the 19th century onwards, the word computer began to be used to describe a machine that carries out computations.

People have more ambitious dreams than Ziggy gives them credit for.

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

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

An important thing to keep in mind is that this aspect of the debate doesn't change the total emissions - it's not an environmental debate; it's about fairness and economics. You get the same emissions whether you auction all the permits or give them all away. What changes is who pays and who gets the revenue. Under auctioning, the government gets the revenue and hopefully uses it to reduce other taxes. If you give permits away, the emitting industries get the money.

A new study has examined the economics of auctioning versus freely allocating permits under the US emissions trading scheme, with some possibly surprising results. They point very much to auctioning a vast majority of permits as a better way.

First, the unsurprising result: the more permits that you auction, if you use the revenue to reduce other taxes, the lower the economic cost of the trading scheme.

Second, the possibly surprising result: you only need to give away 15% of permits to completely compensate the industries most affected by the scheme. I think the proportion the government and opposition are debating freely allocating for the Australian scheme are substantially larger than that*, so think about what that means: these industries will actually profit from the introduction of the ETS. The study suggests that giving away 100% of permits leads to a doubling of profits for many industries.

*Our scheme and industries are slightly different so the numbers from the US won't directly translate, but they should be in the same ball park. Does anyone know if anyone's run the numbers here? Maybe in the Treasury modelling...

Carbon offsets: Oils ain't oils

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

Why? A new paper investigates.

Among the findings, providers located in Europe sell offsets at prices that are approximately 30 percent higher than providers located in either North America or Australasia. And, not surprisingly, offsets that qualify for emission reductions under the Kyoto Protocol, sell at a premium of more than 30 percent.

In theory, a project that avoids the emission of a tonne of greenhouse gas should give the same benefit (and have the same price) as the same as any other project that avoids the emission of a tonne of greenhouse gas. But of course you need to have confidence that this is actually what will happen and I'd guess that this is the difference: you're prepared to pay more if you're more confident that the advertised benefits are really being delivered.

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

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

For probably the first time ever, life expectancy in Australia is getting shorter. Three of the biggest and most preventable killers are tobacco, alcohol and obesity. And high on the list of strategies for discouraging them are "economic policies and taxation systems", which I read (and newspapers are reporting) as "make them more expensive". Not very imaginative, but will it be effective?

For cigarettes, they suggest increasing taxes soon so a pack costs at least $20 and for alcohol, interestingly, creating a 'floor price' - not necessarily increasing the price of all alcohol, but ensuring there's no very cheap stuff. For junk food, they just talk about exploring taxation, incentives, subsidies etc to promote consumption of healthier foods.

Will this help much? Is there a better approach? Has the government reached the extent of what it can reasonably do in terms of banning, taxing, subsidising, promoting, and is the rest up to the community?

Pricing is clearly a factor but it seems to me that changing a culture of smoking and drinking is the big thing - is that something that the government can or should really do?