More on weather markets and climate change

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

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

Some resources are:

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

• There's an article in Reason Magazine.

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

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

Also, on the subject of prediction markets, a number of prominent economists have advocated some changes to US online gambling laws to ensure that useful prediction markets can operate legally. The authors made these observations about the usefulness of prediction markets:

Prediction markets have already been used in a variety of contexts with remarkable success. For example, prices of economic derivatives predict economic variables better than professional economists; prices in Iowa political markets are typically more accurate than the polls in forecasting elections; and prediction markets at Hewlett-Packard Labs beat official forecasts of printer sales most of the time.

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

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

Oikos 101: Price elasticities

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

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

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

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

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

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

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

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

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

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

More info:

• Wikipedia

Other Oikos posts that use the concept of elasticity:

• Should women be taxed at a lower rate than men?


• Do parking levies reduce traffic congestion?

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

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

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

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

HT: Solidariti

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

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

To put it another way:

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

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

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

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

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

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

I can think of a number of benefits:

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

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

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

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

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

John Howard’s climate policy: Que sera, sera

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A crude analogy

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

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

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

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

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

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

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

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

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

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

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

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

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

(Oikos)

Environment, economy and climate change

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

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

EcoLibertarians?

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

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

It’s well worth a look.

Water water everywhere… except the catchments

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

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

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

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

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

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

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

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

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

Should women be taxed at a lower rate than men?

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

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

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

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

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

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

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

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

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

What an interesting idea. What do you think?

Lawyers leading the way on climate change?

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

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

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

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

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

I have two main thoughts on climate change litigation:

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


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

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

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

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

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

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

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

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

Hot rocks: a cheap and clean energy solution?

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

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

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

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

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

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

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

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

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

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

Earth Hour: The wrap up

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

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

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

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

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

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

Other Earth Hour experiences:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But these critics are really just unimaginative.

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

Connection with community

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

Connection with our own power

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

Connection with nature

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

Connection with ourselves and each other

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

Business

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

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

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

Australian ecological economics conference in July

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

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

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

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

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

Other people's money

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

New Australian green living site

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

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

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

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

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

The environmentally destructive tax rort for cars

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Green ethanol – from coal?!

An interesting development from the US:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(via env-econ.net)

Solving climate change: the truth is out there

This is a little leftfield:

A former Canadian defence minister says be believes advanced technology from extraterrestrial civilizations offers the best hope to "save our planet" from the perils of climate change.

Paul Hellyer, 83, is calling for a public disclosure of alien technology obtained during alleged UFO crashes -- such as the mysterious 1947 incident in Roswell, New Mexico -- because he believes alien species can provide humanity with a viable alternative to fossil fuels. Mr. Hellyer has been a public UFO advocate since September 2005 when he spoke at a symposium in Toronto. But with concern over global warming at an all-time high, and Canadian political parties struggling to out-green one another, Mr. Hellyer said governments and the military have a responsibility to "come clean on what they know" now more than ever.

"Climate change is the No. 1 problem facing the world today," he said. "I'm not discouraging anyone from being green conscious, but I would like to see what (alien) technology there might be that could eliminate the burning of fossil fuels within a generation ... that could be a way to save our planet."...

Mr. Hellyer, a former Liberal cabinet minister, political turncoat and one-time leadership candidate for the Liberal and Conservative parties, said UFO researchers have amassed undeniable evidence that aliens have visited our planet. Due to the distance such spacecrafts would have to travel, UFOs must be equipped with some kind of advanced fuel source or propulsion system, he said.

(via env-econ.net)

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

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

Have a great weekend.