Category: Economics

Matters of money

Garnaut on managing risk

One of the better aspects of the Australian Garnaut Review of the economics of climate change is the straightforward language in which it is written. That particularly applies to the introductory and concluding chapters (PDF), the latter of which is entitled “Fateful choices.” Perhaps the finest passages in the whole work concern how we ought to respond to the uncertainty that remains in projecting future climatic change as a function of human emissions:

[T]he Review accepts the views of mainstream science ‘on a balance of probabilities’. That formulation allows the possibility that the views on climate change of the IPCC and the learned academies in all of the main countries of scientific achievement are wrong.

There is a chance that they are wrong. Just a chance. But to heed instead the views of the minority of genuine sceptics in the relevant scientific communities would be to hide from reality. It would be imprudent beyond the normal limits of human irrationality…

The mitigation process can be cut short, with due notice to those who have committed their capital to a new economy of low emissions, if at any time the international community comes to the view that new scientific knowledge establishes that the concerns of 2008 were erroneous to the extent that mitigation judgments based on them have become obsolete.

In this case, Australia would have paid 2 per cent of GNP as insurance against what would otherwise have been a high risk of immense damage. It would be a high price, but one that was reasonable on the basis of the evidence available at the time when decisions had to be made.

The consequences of inaction now are not similarly reversible. The arithmetic of Chapter 3 (PDF) about the new patterns of global growth takes away the time we may once have thought we had for experiment, talk, and leisurely decision making. It tells us that business as usual is taking us quickly towards what the science tells us are high risks of highly disruptive climate change…

On a balance of probabilities, the failure of our generation would lead to
consequences that would haunt humanity until the end of time.

The report concludes that an international agreement is vital. It needs to include a global goal for the concentration of carbon dioxide at the moment of stabilization (550 parts per million, perhaps, for an initial agreement – refined to 450 ppm in a subsequent iteration). The agreement needs to incorporate equity concerns, especially through the principle of contraction and convergence, and national commitments must add up to the global target.

It must be very much hoped that the UNFCCC Conference of Parties in Copenhagen next year will at least begin the process towards those outcomes. Barack Obama’s apparent seriousness about making climate change a priority is cause for optimism. If the US, China, India, Japan, and Europe can reach an accord, it seems likely that enough others will be drawn in to make the thing really work.

ExRo promises more efficient wind turbines

A new type of generator for wind turbines promises to increase the range of wind speeds across which they generate electricity efficiently. The system, developed by ExRo Technologies of Vancouver, uses stacks of copper coils that can be activated and deactivated individually. That means the generator is capable of deriving small amounts of power from slow winds and larger amounts from faster winds. Crucially, the system also allows that to occur without the use of any moving parts: decreasing the cost and increasing the reliability.

For now, the company has only tested a laboratory-scale prototype. They are now aiming to scale up the technology for use in large multi-megawatt wind turbines. In some cases, it may even be economically efficient to install the new generators in existing wind turbines.

One reason for which the technology looks promising is that it could decrease the variance in power output from wind farms, decreasing the need to balance times of low output using energy storage or alternative forms of generation.

PickupPal and unhappy bus companies

Is a web-based service that helps those with spare seats hook up with those willing to pay for rides “facilitating the operation of an illegal transportation service?” The Ontario Highway Transport Board has decided that it is, in a case brought against PickupPal by unhappy operators of bus lines.

While I can see how liability issues arise in relation to safety, it doesn’t seem appropriate for the board to fine and try to shut down this service. As someone who travels frequently by Greyhound, I know that bus service in Canada could stand some competition-driven improvement. This sort of decentralized commerce seems like a pretty good way to reduce the environmental impacts of inter-city travel. After all, having a passenger or two travelling along with you does more for your passenger-kilometres per tonne of carbon dioxide emitted than buying a more efficient vehicle probably would.

While I can see the reason for the bus companies’ grievance – after all, they need to pay a fair bit to comply with commercial transport laws – on balance their complaint seems anti-competitive and likely to be environmentally harmful.

Oil tanker captured off Somalia

Yesterday, Somali pirates seized a Saudi Arabian oil supertanker, carrying about two million barrels of oil. It is a tangible demonstration of just how insecure marine traffic in some parts of the world has become. According to the Associated Press, “piracy is considered the most lucrative work in Somalia.” It is estimated that pirates have taken in $30 million in ransoms this year.

As discussed here before, piracy is a growing challenge for private shipping firms and the world’s navies. In the end, maritime insecurity derives from the lack of security on land. Pirates need means to acquire arms and recruits, as well as means to collect and launder ransoms and sell stolen goods. In the end, it is just another reason for which failed and failing states are of global concern.

The coming auto bailout

North America’s auto manufacturers seem to be next on the list for a big government bailout. As with other bailouts of private sector firms, there are legitimate worries about the public at large bearing the cost of losses, while gains had accrued to private individuals. In the case of the auto industry, there is the further risk that a bailout will permit North American firms to continue with their existing mode of operations, which had clearly failed before the credit crunch made the situation acute.

That being said, a case can be made that a bailout is the least problematic option. It can also be pragmatically recognized that governments are likely to provide the cash, rather than allow one of more of the firms to fall into bankruptcy.

Perhaps the best way this situation can be turned somewhat positive is to mandate tougher efficiency standards for vehicles, as partial public recompense for the funds. The biggest gains can be made in improving the least fuel efficient vehicles. According to calculations posted on Gristmill, improving the fuel efficiency of dire vehicles like the Hummer H3 (15 mpg), Yukon Denali (14 mpg), and Chevy Trailblazer (13 mpg) is a more promising initial strategy than trying to push the efficiency of cars like Honda Civics (29 mpg) upward.

This strategy is likely to be politically problematic. For one thing, it impinges on the flawed notion that people have a right to drive whatever they want and can afford. For another, the production of highly inefficient, high-margin vehicles is concentrated in North America. Nonetheless, if this is to be a one-off rehabilitation, rather than a temporary reprieve from systemic problems, the North American auto industry needs to shed much of its past philosophy and approach. It is remarkable that no automobile assembled in North America meets China’s fuel-efficiency standard. Along with the structural financial problems in the industry, that is a situation that will need to change.

Ethanol and energy independence

Writing in Slate, Robert Bryce has produced a rebuttal of the idea that ethanol is part of the road to energy independence. Essentially, this is because it can only displace a portion of the demand for petroleum products in general:

The corn ethanol scam cannot, has not, and will not significantly reduce overall oil use or significantly cut oil imports because it only replaces one segment of the crude-oil barrel. Furthermore, all the talk about “cellulosic ethanol,” a substance that, in theory, can be profitably produced in commercial quantities from grass, wood chips, or other biomass, is largely misplaced because, like corn ethanol, it will only supplant gasoline.

If this analysis is correct, yet another problem can be lain at the feet of ethanol, alongside the low energy return on investment and dubious climate change benefits.

New developments in spam

Remarkably, it seems that 70% of the world’s spam emails were originating from an American firm called McColo. On November 11th, two American internet service providers cut them off from the web, leading to the huge drop in the global volume of spam. It is estimated that 90% of spam messages are actually sent by computers that have been compromised by viruses, which makes it a bit surprising that such a drop could be generated by disconnecting one firm. Clearly, it is a network that needed central direction to operate. Those that emerge as successors will probably be more robust, located in more unpoliced jurisdictions, or both.

While the respite is likely to be temporary, the situation may reveal some useful information on the practice and economics of spam. This unrelated paper (PDF) examines the latter. The researchers infiltrated a segment of the Storm Botnet and monitored its activity and performance. On the basis of what they observed and estimates of the rest, they concluded that the botnet earned about 3.5 million dollars a year by selling pharmaceuticals. While that isn’t an inconsiderable sum, I suspect it is less than is being spent by companies combatting the flood of spam messages themselves.

Failures in fish identification

Making an ethical decision about what kind of seafood to eat is very challenging. Considerations include environmental sustainability, the problems with different forms of fishing gear, and the maintenance of ecosystems and viable fish stocks. As this Vancouver Sun article points out, actually making good choices may be impossible for consumers in many cases because they are being lied to about what sort of fish they are buying.

In some cases, the guidelines for what you can call a fish are so loose as to be almost meaningless. In other cases, people simply lie. According to a study cited in the article, DNA tests of 91 seafood samples purchased in Toronto and New York revealed that 23 (25%) were mislabelled. In other cases, fish from depleted waters are labelled as originating in fisheries that are being more sustainably managed.

All this poses a big problem to the school of thought that suggests that educating consumers to make their own ethical choices is the best way forward. Even for those willing to put in the effort to investigate the state of various fisheries, as well as willing to pay more in time and money to find ethical fish, the failure to properly label products may make their efforts fruitless or counterproductive.

As with many other problems in food integrity, the solution may be a shorter chain from source to consumer, coupled with more stringent regulations and enforcement.

The article, along with several others in its series, was linked and discussed on Jennifer Jacquet’s blog.

Gore’s five point climate plan

Al Gore has an op-ed in The New York Times in which he argues that energy security and climate change can both be addressed through the same bold set of policies. He highlights five key areas for action:

  1. Incentives for concentrating solar in the Southwest, wind farms from Texas to the Dakotas, and new geothermal capacity.
  2. A national smart grid, including high voltage direct current transmission.
  3. Plug-in hybrids, capable of acting as an energy storage system for the grid.
  4. More efficiently heated, cooled, and lit buildings.
  5. A price on carbon, and an international agreement to succeed Kyoto.

Gore also highlights the importance that those who are now young will play in bringing this about: “The average age of the systems engineers cheering on Apollo 11 from the Houston control room that day was 26, which means that their average age when President Kennedy announced the challenge was 18.” While comparisons to Apollo can be misleading, the exhortation is a convincing one.

Hopefully, Obama realizes the seriousness of this problem and has the political skill to start the rapid transition to a low-carbon economy, and help lead the rest of the world along that path.

Debt and the credit crunch

If there is one thing the ongoing financial crisis demonstrates, it is the need for fiscal discipline. The causes of the crisis call attention to the more problematic characteristics of debt. At the same time, the prospect of bank failures and the curtailing of lending highlight the degree to which debt has a legitimate and important financial role to play. In short, debt incurred to finance investment is often justifiable; debt used to finance consumption is unsustainable.

Perhaps a healthy cultural outcome of the crisis would be the re-stigmatization of debt as a means of accelerating consumption. By all means, it is important for people to be able to access financing in order to fund education and other forms of investment. What is worrisome is the tendency towards low or even negative net savings, as well as taking on debt of an especially pernicious sort: on credit cards. Taking responsibility and making informed choices remains necessary, even if governments choose to regulate financial markets more closely.

People with a clean credit history who are paying credit card interest really ought to look into alternative financing options. Credit card interest rates are often around 20% per year, and minimum monthly payment amounts are just 2% of the outstanding total. That means your debt is growing by 1.67% per month, and you are paying it down by just 2%. The amount of principal being paid off each month is tiny.

Someone who put $1000 on a card with 20% interest, then proceeded to make minimum payments only, would have the debt down to $500 after 210 months (17.5 years), having paid $3043. Sticking to minimum payments, there is still $40 left after 1000 months (83 years), by which time the person would have paid $5838. The credit card company would be delighted for them to keep paying forever. Just by paying off 10% of the balance each month, instead of 2%, the time taken to reduce the debt to $50 becomes 36 months (3 years), at a total cost of $1148.

Both borrowing and lending are activities that need to be undertaken with wisdom and restraint. Hopefully, that will be the message that governments and individuals draw from the world’s present economic woes.