Category: Economics

Matters of money

Meeting in Poland, while the Amazon burns

Satellite images show that 11,968 square kilometres of the Amazon rainforest have been destroyed this year, 4% more than last year. The amount of carbon dioxide released when these forests are cut and burned is colossal. Indeed, reducing the destruction of tropical forest is probably the single cheapest way to reduce the rate at which greenhouse gasses are accumulating in the environment.

Hopefully, the delegates at the ongoing United Nations Framework Convention on Climate Change (UNFCCC) meeting in Poznan, Poland will be able to make some progress on reducing deforestation. While higher cost mitigation will certainly need to take place, picking the low-hanging fruit could be a good way to make a difference relatively rapidly. That is especially important given the importance of the timing of emissions. The more steeply concentrations rise, the less time there is for any adaptation measures to be put in place. The risks of crossing critical climatic thresholds are also increased.

Income tax revenues in California

Surprising statistic of the day: according to The Economist, half of the state income taxes in California are paid by just 144,000 wealthy individuals. They represent about 0.39% of the state’s population of 36.5 million.

That can be interpreted in two rather different ways. On the one hand, you could highlight the degree to which that represents a heavy tax burden on a small number of people. On the other, you could say that the fact that so few people pay so much of the tax demonstrates just how concentrated wealth has become. Either way, it is an interesting figure.

Climate change mitigation cost-benefit analysis on different timescales

Peter Lilley, a British Member of Parliament, seems to have rather missed the point of climate change legislation. He is kicking up a fuss about how the UK’s Climate Change Bill might have costs larger than benefits in the period between now and 2050. Of course, the whole point of climate change mitigation is to avoid the worst effects of climate change and not leave future generations with a severely damaged planet. Almost by definition, the majority of the benefits associated with such an approach will accrue in the distant future.

Even if mitigating climate change has serious net costs between now and 2050, we still need to do it, at least if we care at all about the welfare of future generations and the integrity of the planet. That being said, we can certainly hope to mitigate effectively at a relatively low cost (taking advantage of mechanisms like carbon pricing to secure the lowest cost emission reductions first). We can also work to maximize the co-benefits of climate change mitigation, such an enhancing energy security and reducing other types of air pollution.

It is also entirely possible that we will end up spending more money on climate change than we should have, or than would have been possible if we had taken the best possible approach from the outset. To use an analogy, it is possible for a speeding car to brake too sharply to avoid hitting a pedestrian. Doing so jostles the driver and may damage the car, but it is a less undesirable outcome than braking too hesitantly and ploughing right into the person. When you are making a decision with important consequences and lots of uncertainty, erring on the side of caution and expense is the prudent and ethical approach.

Modes of transport and distances travelled

Adding once again to our ever-present debate about the ethics of air travel, a study from the University of California, Berkeley concludes that the major reason planes are more problematic than trains or buses is that people simply travel farther in them. This has two major implications.

For one, it suggests that efforts to curtain short-haul air travel may have limited benefits. If a high-speed rail corridor between Toronto and Montreal would only lead to incremental improvements in emissions reductions, the better course may be to try to discourage as much travel as possible. This may be especially true given another major conclusion of the study: that a very significant share of the environmental impacts of travel arises from the infrastructure (roads, rails, airports), rather than the emissions of vehicles themselves.

For another, it suggests that investing the time and money to travel by bus or train may likewise be less green than would be ideal. The problem may not be choosing to go from Ottawa to Vancouver by air; it may be an inescapable problem of making the trip in the first place.

It is well worth having a look at the webpage for the study, as it contains a lot of additional information. The study’s conclusions were also described on Slate.

Treating carbon as a cost in government projections

A document from the British government defining their ‘shadow cost’ of carbon (PDF) also discusses an approach to government planning that has a lot of potential. Essentially, the document estimates what the maximum amount a rational actor concerned about both the present and the future should pay to reduce carbon emissions. It then calls for that price to be incorporated into government planning and assessments, just as any other cost would be. For instance, two different proposals for the design of a hospital could be compared in a way that treats the social cost of carbon just like any other expense. The result is a cost-benefit analysis that operates as though a socially optimal carbon tax exists, even when no such instrument exists in the wider economy.

In situations where carbon costs have already been partly or fully taken into account – for instance, if a government building is using electricity on which an upstream carbon tax has already been applied – then only the remaining portion of the shadow price of carbon would be applied.

The approach is exciting because it could spur carbon-rational government action, without the need to wait for an economy-wide price of carbon to emerge. That means earlier results. It also means opportunities to secure economies of scale. The government is a major purchaser of products and services, and a push to incorporate the social cost of carbon into government procurement would affect which products are available to the economy as a whole, and at what price. Another advantage is that each layer of government has the power to impose the requirement; provinces and municipalities that wish to move forward could do so without the need for cooperation from the layers of government above them.

Fuel price floors and funds for the future

While prices send important signals about availability and marginal cost, volatility in fuel prices can be quite problematic. It impedes effective planning, causes abrupt swings in capital and wealth allocation, and sometimes leaves people hoping for future low prices, rather than investing in efficiency now. At the same time, there is an issue of inter-generational equity when it comes to fossil fuels. They are marvellous things: portable, packed with energy, and thus far relatively cheap and easy to extract. Recent generations have benefitted handsomely for their use (though future generations may suffer even more from the consequences of the emissions). A case can be made that some fossil fuel use has served to benefit future generations, because it has helped create the conditions for their material prosperity. Other uses are unambiguously selfish. The difference is akin to that between borrowing to invest and borrowing to finance consumption.

There does seem to be a fairly straightforward mechanism through which both of these problems can be made more manageable. The government could put a floor on fuel prices: pocketing any difference between the market price and the sale price as revenues. Those could then be invested in a fund that will pay out annual dividends to future generations. This would be akin to the oil-funded pension system that has been established in Norway. In this way, members of future generations will at least profit in some proportion of this generation’s fossil fuel wealth. It would also simplify planning for all those who use fuels, since they would be certain of paying at least a pre-set amount at any point in the future.

This isn’t an approach that the world as a whole could take, or even any major players in it. If the government set a floor price of $2 for a litre of gasoline, gas suppliers could just expand their prices to that point and eliminate any payments to government. Since Canada isn’t large enough to substantially affect the international price of oil, however, there may be scope to tax the difference between the floor price and the international price for an equivalent amount of crude oil / coal / etc.

No doubt, this system would cause some economic and equity-related problems I haven’t anticipated. That being said, it is perhaps an example of the general kind of approach that governments should be considering.

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.