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

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

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

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

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

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

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

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

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

Thoughts on the green paper - Part 1: petrol

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

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

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

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

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

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

What do you think?

Government's green paper on emissions trading out today

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

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

Garnaut Review out today

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

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

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

Responses to higher fuel prices

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

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

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

South Australian ferry operator Sea SA says figures for the June quarter show a doubling in truck traffic compared with the same part of last year.

Justine Day from the company says the main attraction is saving money. "We're being told by people in the industry that this is because the price of fuel which is, as we all know, at record highs at the moment - it's actually making the ferry a more attractive option than driving all the way around the Spencer Gulf," she said.

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

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

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

Drivers with bumper stickers are road ragers

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

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

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

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

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

It's an interesting article.

HT: Marginal Revolution.

Socially defective economists

From time to time economists like to analyse human relationships through whatever economic model is occupying them at the time, thinking they're offering some insights. Like this from the EconLog ("insights in economics") blog:

One of the examples [of the idea that a lot of human behaviour can be explained as an attempt to signal something about onesself to others] concerns dating. If the point is to signal to the person that you are healthy, wealthy, and intelligent, why not just bring your health records, your bank statement, and your SAT scores?

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

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

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

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

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

Liveblogging the budget

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

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

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

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

Lessons from Europe's emissions trading scheme

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

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

Some of the key lessons:

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

Taxing 'Alcopops'

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

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

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

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

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

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

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

Other views:

Harry Clarke

Tim Dunlop

We need some clear thinking on plastic bags - Part 2

What planet are our politicians inhabiting?

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

Queensland will oppose a levy on plastic bags at tomorrow's meeting of federal and state environment ministers. Premier Anna Bligh today told state parliament the levy would be another impost on families already struggling to meet rising household costs.

"Queensland does remain committed to completely phasing out non-biodegradable plastic bags," Ms Bligh said. "In this government's ongoing fight to protect our environment, Queensland will push for a total ban on non-biodegradable plastic bags..."

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

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

Hmm, maybe not.

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

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

Sounds great Peter. And that something would be?

Meanwhile, the opposition's well-thought-through policy is to hope the problem just fixes itself:

"It's extremely important that we move to biodegradeble bags as quickly as possible," [opposition spokesman Greg Hunt] said. "We need to decrease the number of bags, but let's not ban them or put a levy on families that are doing it tough."

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

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

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

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

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

We need some clear thinking on plastic bags - Part 1

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

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

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

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

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

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

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

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

Ditto for landfill and ditto for non-renewable resources.

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

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

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

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

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

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

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

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

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

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

Clerk: Pay any amount you wish, sir.

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

Clerk: That is up to you.

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

Clerk: Yes.

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

Lisa's teacher arrives and goes to pay

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

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

Connection with community

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

Connection with our own power

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

Connection with nature

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

Connection with ourselves and each other

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

Business

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

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

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

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

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

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

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

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

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

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

Garnaut review - emissions trading scheme discussion paper

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

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

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

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

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

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

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

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

Rudd's tax cuts - inflationary or illusory?

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

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

So what about the proposition that the latest batch of tax cuts due this July and said to be "worth" $7.1 billion will fuel inflationary pressures?

Taking Treasury's most recent forecasts, and using some back-of-the-envelope figuring, suggests that Canberra could collect about $4 billion more in personal tax next financial year compared to this year.

And as a share of the economy that would see the tax take from individuals decline
by a little under 0.2 per cent of GDP.

So while the Government has been defending the tax cuts with convoluted arguments such as their effect on boosting labour supply and on dampening wage demands, the simpler reality is they will not fuel demand excessively because they are not nearly as generous as the politicians would have you believe.

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

Can biofuels help reduce greenhouse emissions?

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


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


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


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


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

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

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

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

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

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

It's true: oils ain't oils.

Economic analyses of intergalactic trade

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

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

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

An important day for climate change action?

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

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