Economics – Page 102 – a sibilant intake of breath

The oil sands and Canada’s national interest

This Globe and Mail article on the oil sands and the new Obama administration makes a very dubious assertion: namely, that it is unambiguously in Canada’s interests for the oil sands to keep expanding and feeding US energy demands. It argues that, while most of Obama’s cabinet seems serious about restricting greenhouse gas emissions, General James Jones “may turn out to be Canada’s best ally,” because he supports the continued use of fuel from the oil sands.

In the long run, I think Canada will be better off if most of that carbon stays sequestered as bitumen an boreal forest. It certainly isn’t in Canada’s interests to see a delayed transition to a low-carbon economy in the US, given the extent to which it would increase the probability of abrupt, dangerous, or runaway climate change.

This is a case where short-term economic incentives have been trumping those based on a long-term view and a risk weighted analysis. In that sense, the oil sands boom is quite a lot like the housing boom that is in the process of unraveling worldwide. Canada would do well to accept how newly prominent environmental concerns (coupled with less access to capital) should combine to curtail the oil sands initiative before it becomes even more harmful.

[Update: 8 March 2010]. BuryCoal.com is a site dedicated to making the case for leaving coal, along with unconventional oil and gas, underground.

Fishing for krill

On several occasions, I have discussed the concept of ‘fishing down’ through marine food webs: starting with the top predator species, like tuna, and moving to smaller and smaller creatures as the big ones are depleted. In the waters around Antarctica, this process has come very close to reaching its logical extreme. Fishing for krill has become a big business.

Krill are shrimp-like marine invertebrates that make up a significant portion of the world’s zooplankton: the tiny creatures that eat phytoplankton algae. They, in turn, are eaten by all manner of other creatures, ranging up to large whales. Fishing them extensively risks knocking a whole tier out of the food web, with unknown but potentially severe consequences for all other forms of life in the ecosystem.

The krill that are caught are processed for fatty acids, used to make medicine, and fed to farmed fish. In particular, they are useful for giving farmed salmon more of a red colour, in contrast to the sickly looking pale pink much of farm salmon takes on. The current annual catch is estimated to be between 150 – 200,000 tonnes: much of that taken from the waters around Antarctica. Through the use of new technology, a planned new ship (the FV Saga Sea) will apparently be capable of collecting 120,000 tonnes annually. That is nearly one 1000th of the low estimate for the total global biomass of krill, and more such ships are planned.

While it may be that fishing for krill at this scale doesn’t pose a danger to marine ecosystems, it is worth noting that we have no scientific basis for being confident of that. An experiment is simply being performed in unregulated waters, which will have unknown future consequences. As with so many other instances of humanity’s engagement with the natural world, one cannot shake the sense that we are being awfully reckless.

The Economist on the dire state of the world’s oceans

A recent issue of The Economist features a leader and a special report on the state of the world’s oceans. As with a lot of their environmental coverage, it sits awkwardly beside the rest of their analysis. It is astonishing that the newspaper can argue that “the mass extinction, however remote, that should be concentrating minds is that of mankind” while not doing a lot more to advocate effective action. Like most of the policy-making community, they haven’t really internalized the fact that climate change is an issue of over-riding importance, and that nothing else can be durably achieved until it has been addressed. In addition to highlighting the dangers of climate change, their coverage includes discussion of how overfising risks rendering sharks and tuna extinct; how the oceans would require tens of thousands of years to recover from the pollution already released into them; how the Greenland is “on track” to melt completely, raising sea levels by seven metres; and how acidification, pollution, and climate change threaten to eliminate coral reefs.

Clearly, it is one thing to have accepted the collective judgment of the scientific community. It is quite another to have fully incorporated the consequences of that judgment into your structure of beliefs and behaviour.

A human spider, climate change, and economic systems

Alain Robert – a man famous for climbing absurdly tall buildings with his bare hands – is also something of a climate change campaigner. A website he runs endorses a three-stage plan for dealing with the problem:

Stop Cutting Down Trees. Plant More Trees.
Make Everything Energy Efficient.
Only Make Clean Energy.

What this speaks to is a central question of the climate change debate: how much do the economic and philosophical bases of society need to change in order to deal with it? Can climate change be successfully addressed through targetted policies that do not fundamentally alter liberal capitalist democracy, or is it only possible to address it through something more ambitious, such as switching from an economic system based on growth to one based on a steady state of wealth?

In some ways, this debate is reminiscent of other debates about capitalism. It certainly seems as though some of the harmful aspects of capitalism can be curbed through good laws, without eliminating the capitalist system itself. Such problems include things like local air pollution and child labour – if we really care about eliminating them, it is entirely possible within our current general economic approach.

For the oil sands, PR is not the problem

In a bizarre story, The Globe and Mail is reporting on how representatives of the oil sands industry are claiming to have “‘dropped the ball’ in engaging with the public about the environmental effects of its energy developments.” This is a bit like saying that the industry has thus far been unsuccessful in deceiving people about the environmental impacts of oil sands operations, which definitely deserve the filthy image they have earned.

The problem with the oil sands certainly isn’t their public relations: it is their greenhouse gas emissions, their destruction of the boreal forest, their contamination of water, and so forth. Altering those aspects of the industry cannot be achieved through media messaging. It is dispiriting – though unsurprising – that the companies involved are keener on giving people the sense that their operations are clean (or at least improving), rather than actually raising standards. While oil sands production cannot be made into an environmentally benign activity, having all facilities adopt the best standards in other existing facilities could make a significant contribution towards reducing the level of harm they produce.

Dutch auctions for selling photography

Contemplating the economics of selling photographs in coffee shops and small galleries, I had an idea about how such a sale might be conducted. Selling by means of a Dutch auction could be an effective approach: combining a mechanism to encourage a reasonable return for the photographer with a mechanism allowing buyers to express their preferences through their response to falling prices.

It would work like this:

The total cost associated with producing each print would be tallied, inclusive of printing, framing, etc.
The display period for the prints would be broken down into a number of periods: say, three.
During the first period, prices would be the highest. If, for instance, a print costs $20 and a frame costs $25, the price during the first third might be $90 (cost +100%).
During the second period, the profit margin would be reduced – perhaps to cost +2/3 ($75).
During the third period, the profit margin would be further reduced – perhaps to cost +1/3 ($60).
The periods and costs would all be announced at the outset, and displayed along with the prints.

What the system does for buyers is balances the advantage of waiting for a lower price against the risk that someone will buy at the current price. People will be encouraged to buy on the first day when the print is available at whatever price they consider acceptable. For the seller, the system decreases the risk of losing money on the exhibition. The falling prices make it more likely that most images will be sold, and the high initial profit margins make it more likely that the costs of any unsold prints will be covered by the profits on those that are sold.

Of course, this approach doesn’t consider all the costs associated with the photography. When one factors in equipment costs and the photographer’s time, higher prices (via thicker profit margins) may be justified. That being said, a lot of the photography that gets sold in coffee shops would probably have been taken anyhow, even if the photographer never expected to sell it. As such, the objective of breaking even on the prints themselves and perhaps earning a bit for future equipment purchases might be a realistic one.

Photography as hobby or career

Over on photo.net there is a good discussion of whether photography is a good way to make a living. The overwhelming response seems to be that it is an excellent hobby, but a very problematic career. It makes more sense to have a job to pay the bills; finance life, family, and photography; and allow you to treat the production of images as an artistic rather than a financial undertaking.

That coincides pretty neatly with my own intuitions about the matter. A few minutes on photo.net will turn up hundreds of top-notch photos. If the people making them are mostly warning of the difficulties of photography as a profession, it seems likely to be good advice.

How can the government spend to fight climate change?

Partly for reasons of political acceptability, most approaches to pricing greenhouse gas emissions aim to be revenue neutral. This includes cap and trade and carbon tax systems where new revenues are offset by decreases in existing taxes; it also includes tax-and-dividend systems, in which that process is more fully automated. That being said, fiscal neutrality has gone out the window as governments seek (whether wisely or not) to offset the recessionary consequences of the credit crunch. That leaves us with a question: if you want to spend government money fighting climate change, how should you do so?

One option business is happy with is big subsidies for the development and deployment of big new technologies like next-generation nuclear reactors and carbon capture and storage (CCS). While such an approach may yield long-term benefits, it does risk simply funneling money from taxpayers to polluters in the near and medium term. It is also an approach that firms have already been very effective at advocating for themselves.

A more attractive option is to help finance the up-front costs of projects that both save money and mitigate emissions. This includes all kinds of unglamorous things, such as improving insulation and the efficiency of boilers, capturing waste heat in hot flue gasses, and replacing windows. Such an approach might be especially effective if directed towards public buildings such as schools, hospitals, government offices, and military facilities. That way, the government is investing in something that will improve its own medium-term financial position (important if existing debts are to be repaid, and future crises are to be managed), while also making a start towards a serious greening of government operations.

In the end, a lot of the most effective tools governments can employ cost very little. Improving building codes, requiring that vehicles be more efficient, and implementing carbon taxes all require only modest government expenditures – though they may cause other actors to incur major expenses. Approaches that are light on regulation and heavy on government spending are probably more likely to be wasteful than those based on compulsion through prices and regulation but, given the inevitability of additional fiscal stimulus in much of the world, it seems sensible to devote some of that directly to mitigation activities, while ensuring that spending not directly motivated by climate change doesn’t contradict climate change mitigation goals.

How else should a government that is feeling the urge to loosen the purse strings spend money on reducing emissions? With a new Canadian budget being tabled in ten days, it is a pertinent question.

Climate in 2009: predictions

Two related events are likely to dominate climate news for 2009: the first year of the Obama administration and the UNFCCC negotiations in Copenhagen. Arguably, the biggest open question is just how dedicated Obama will be to domestic and international climate change action. It may be that he lives up to the high expectations of the environmental community, setting the stage for the rapid deployment of a cap-and-trade carbon pricing system in the United States and playing a constructive role in the creation of an international legal instrument to succeed the Kyoto Protocol. It may also be that his focus lies elsewhere, or that Congressional opposition makes his platform harder to implement. The Obama administration failing to make climate a priority issue from the outset is probably the most likely ‘bad news’ climate story of 2009, whereas successful domestic and international engagement is probably the most likely ‘good news’ story.

American re-engagement with the UNFCCC process is a necessary condition for progress, but it will not be sufficient in itself. Much depends on whether India and China can be brought into the agreement, as well as whether deforestation can be successfully incorporated into a new accord. Given the urgency of reducing emissions (starting the long path to stabilizing atmospheric concentrations of greenhouse gasses), it must be hoped that all the key states will rise to the challenge and develop a fair and effective approach.

If there are going to be big climatic surprises in 2009, they are more likely to be physical than political. It is nearly certain that there will be strange and destructive weather somewhere, and that at least some people will attribute it to climate change (whether plausibly or not). A big surprise could take the form of an extreme weather event, or simply the sharp acceleration of a tend such as glacier loss, permafrost melting, or changes in precipitation patterns.

With luck, 2009 will be seen as the year in which the world really began turning the corner towards emissions reductions. Most of the governments most bitterly opposed to action on climate change have been eliminated, and an accord between the big players (the US, China, Japan, Europe, etc) would have the momentum to drag everyone else along. The road ahead will continue to include shifts in policy – as well as very active debates on who should bear which costs – but the general outlines could be affirmed this year and global implementation could begin in earnest. Those broad outlines include the need for both total and per-capita emissions to start falling globally (perhaps with a brief period of residual growth in very poor states), that per-capita emissions should converge between all states, and that many of the costs of global mitigation and adaptation be borne by the societies that have created the problem.

For the sake of all future generations, let’s hope this will be a year of great progress.

Grid technologies to support renewable power

The MIT Technology Review has a good article about renewable energy and the ways electrical grids will need to change in order to accomodate it. Both key points have been discussed here before. Firstly, we need high voltage low-loss power lines from areas with lots of renewable potential (sunny parts of the southern US, windy parts of Europe, etc) to areas with lots of electrical demand. Secondly, we need a more intelligent grid that can manage demand and store some energy in periods of excess, for use in times when renewable output falters.

The article highlights how the advantages of a revamped grid are economic as well as environmental:

Smart-grid technologies could reduce overall electricity consumption by 6 percent and peak demand by as much as 27 percent. The peak-demand reductions alone would save between $175 billion and $332 billion over 20 years, according to the Brattle Group, a consultancy in Cambridge, MA. Not only would lower demand free up transmission capacity, but the capital investment that would otherwise be needed for new conventional power plants could be redirected to renewables. That’s because smart-grid technologies would make small installations of wind turbines and photovoltaic panels much more practical. “They will enable much larger amounts of renewables to be integrated on the grid and lower the effective overall system-wide cost of those renewables,” says the Brattle Group’s Peter Fox-Penner.

In short, a smarter grid holds out the prospect of overcoming the biggest limitation of electricity: that supply must always be exactly matched to demand, and that prospects for efficient storage have hitherto been limited. The storage issue, in particular, could be profoundly affected by the deployment of large numbers of electric vehicles with batteries that could be used in part as an electricity reserve for the grid.

Providing incentives for the development of a next-generation grid (as well as removing some of the legal and economic disincentives that prevent it) is an important role for governments – above and beyond the need to put a price on carbon. While carbon pricing can theoretically address the externalities associated with climatic harm from emissions, it cannot automatically deal with the externalities holding back grid development, which include the monopoly status of many of the firms involved, issues concerning economies of scale, the fact that the absence of transmission capacity restricts the emergence of renewable generation capacity (and vice versa).

The full article is definitely worth reading.