Economics – Page 90 – a sibilant intake of breath

Patent reform idea

The trouble with patents is that they block people out of using the latest technologies and techniques. Sometimes, that means one manufacturer can offer things their competitors cannot. Sometimes, it means that firms can effectively block technologies that would otherwise compete with them. The question, then, is how to encourage innovation without permitting such barriers.

One idea that comes to mind is state support for innovators: invent something useful, and the state gives you a lifelong pension with a value proportionate to the value of the invention. They then distribute it for everyone to use for free. The size of the pension could be based on the number of dollars that get spent implementing your idea, with larger amounts for innovations that people really pour money into using. The state could fund the system with higher taxes on businesses and consumers. Consumers benefit because best practices spread more rapidly, and the market overall benefits because firms are less able to undertake anti-competitive behaviours.

There is, of course, the issue of pre-existing patents. One way to deal with that would be to take the age of the youngest patent holder, calculate a maximum plausible remaining lifespan, and decree that all existing patents will expire at that point, including those held by corporations. There is also the issue of dealing with international patent agreements. Indeed, that and the entrenched interests of firms that hold lots of valuable patents are probably the major forces that would block any such reform. That being said, implementation difficulties aside, it does seem possible that this would be a better system than the current practice of granting a time-limited monopoly on use to patent owners.

Macroeconomic calculations using water

On the New York Times website, there is a column about a water-based analog computer that was used to model the economy back in the 1950s:

Water flows through a series of clear pipes, mimicking the way that money flows through the economy. It lets you see (literally) what would happen if you lower tax rates or increase the money supply or whatever; just open a valve here or pull a lever there and the machine sloshes away, showing in real time how the water levels rise and fall in various tanks representing the growth in personal savings, tax revenue, and so on.

It’s both clever and amusing. Certainly, operating such a machine would have been less tedious than doing all the calculations with a pencil and paper. There is a video of the machine working on Cambridge University’s website.

Algae for biofuels?

One possible feedstock for biofuel production is algae, which could be grown and processed in various ways, producing transportation fuels. Some people seem to think this is the most plausible path to affordable non-fossil transportation fuels. Others think various land-based plants and processes (cellulosic ethanol, jatropha, etc) are more viable. Another big question is how cheap biofuels could ever become. Biofuels at $100 per barrel probably wouldn’t mean the end of air travel, private cars fueled by liquid hydrocarbons, etc. Biofuels at $1,000 a barrel would push us a lot father away from their mainstream use.

I don’t know enough to decide one way or the other, though it certainly doesn’t seem like anyone is making cheap and functional biofuels from algae right now.

Why Your World Is About to Get a Whole Lot Smaller

Jeff Rubin is a Toronto-based economist for CIBC World Markets, and he has written a book predicting a future of “triple digit” oil, and some of the consequences it will have. While the book is interesting and many aspects of the hypothesis are plausible, the lack of rigour in analysis makes the work less convincing than it might otherwise have been. For one thing, “triple digit” oil covers an awfully broad range. For another, it isn’t clear whether the effects he predicts will unfold in the order he anticipates. For instance, if severe climate change impacts emerge before acute and permanent increases in the price of fossil fuels, the global consequences may look rather different.

When he says that the world is going to get ‘smaller,’ Rubin is reversing the normal sense of globalization having shrunk the world. What he really means is that the world will get larger, relative to our ability to travel and move goods, and that we will have a correspondingly more local focus as a result. That means less imports of all kinds, less travel, and the re-localization of industry. Rubin’s strongest points and arguments relate to the production and use of fossil fuels: such as the effect of domestically subsidized fuels in oil producing states, the limitations associated with energy efficiency, the problems with corn ethanol, and the importance of energy return on investment, when contemplating alternative fuels and sources of energy.

Rubin’s habit of mixing established fact with speculation, and sometimes dismissing important possibilities with a brief splash of rhetoric, makes this book more valuable as a prod to thinking than as a guide to what is likely to happen. The book also contains the occasional overt error, such as referring to prosperous South Korea as the ‘Hermit Kingdom’ – rather than the tyrannical regime to the north. The chapter on climate change was certainly lacking in ways that make me doubt the overall quality of Rubin’s understanding and analysis. He doesn’t really seem to grasp the concept of a stabilization pathway, technological wedges, or the physical realities that must accompany the stabilization of greenhouse gasses at a safe level. His discussion of electrical generation – in both fossil fuel based and alternative forms – is similarly lacking in detailed and rigorous evaluation.

In the end, Rubin’s work is an interesting way to set yourself thinking about the effect that constrained energy ability would have upon the world and your life. When it comes to evaluating the macroeconomic and societal consequences of such a development, the book would probably best be read alongside a more transparent and quantitative analysis, such as that in David MacKay’s book on sustainable energy.

Obama’s speech in Cairo

President Obama’s speech on the United States and the Muslim world, delivered in Cairo, is worth watching:

It covers the history of Islam, the United States, and the Muslim world. It also covers Afghanistan, Iraq, the Israeli-Palestinian conflict, Iran, nuclear proliferation, democracy, religious freedom, the rights of women, and economic development. Many translations are available. Climate change was not directly mentioned, despite its considerable importance for both Muslims and Americans.

At the very least, the speech demonstrates the change in tone between this administration and the last one. Whether it is the start of something more meaningful, time will tell. Slate has some commentary: relatively positive and more negative.

Who Killed the Electric Car?

This film is worth seeing, if only to dispel the notion that all the electric vehicles that existed in the last few decades were awkward, short-range creations. The EV1 looks about as good as the forthcoming Chevy volt, got 260km per charge (with the second generation Ni-MH battery, apparently available from the outset), and was released in 1996. The film also helps to illustrate some of the relationships between lawmaking, regulation, and strategic industrial behaviour. Sadly, it also hints at the general willingness of political bodies and even bureaucracies to fold in the face of industry pressure, even when industries are acting against their own long-term best interest. Indeed, the film makes a reasonably compelling case that the American auto industry conspired to crush the electric vehicle as an alternative to the gasoline-fueled internal combustion engine car.

The film also does a decent job of highlighting that the hydrogen car has always been a deeply unlikely proposition; hydrogen is just an energy carrier, and it is a deeply problematic one. Fuel cells are expensive and don’t last very long. Hydrogen takes energy to produce and compress of liquefy. It is tough to store, and there is no fuel distribution infrastructure for it. Compared to all that, electricity looks very appealing.

The film does seem to contribute to the common argument that our current approach to automobile regulation lacks vision, especially given the degree to which auto companies are now creatures of government largesse. Given climate change, given the possibility of peak oil, given the geopolitical consequences of oil dependence, it really seems as though they should be under much stronger pressure to produce very efficient vehicles, as well as vehicles that do not derive their energy from fossil fuels. Now that the government and unions own GM, perhaps they can insist on digging up any corporate records that haven’t been destroyed, with respect to internal deliberations on electric vehicle strategies, as well as responding to California’s mandate for zero emission vehicles.

Individual vehicles won’t ever really be an efficient option, compared with mass transit. That being said, it is unlikely that we will see their abandonment in the developed world, nor much diminished interest in them in the rising middle classes of developing states. If we are going to keep building cars, we need to do so far more intelligently. Electric vehicles will likely be a big part of that.

[Update: 2:11pm In retrospect, some of the film’s conspiratorial allegations may be less convincing than they appear at first blush. It is certainly plausible that oil companies would have a reason to resist the widespread deployment of vehicles that are not dependent on their key product, but it is another thing entirely to prove that they actually took action in that direction.

Subsidized oil in producing states

It is widely understood that oil-producing states like Saudi Arabia, Venezuela, and Iran provide huge fuel subsidies to their citizens: selling them oil for a fraction of what it would fetch on the global market. Indeed, Iran is a major importer of gasoline, partly because domestic refineries are only able to produce and sell it at a loss. The most egregious example of all may be electricity in Saudi Arabia, about half of which comes from oil. A 2006 royal decree set the price paid by power plants for oil at 0.46 cents per million BTU: equivalent to $3 per barrel of oil, or $0.07 per gallon. That this is happening while companies are using up huge amounts of natural gas to produce synthetic crude in the Canadian oil sands is a demonstration of how irrational global energy use can be.

Indeed, with oil consumption growing at 5% per year in OPEC countries, between 2004 and 2007, they have actually contributed almost as much to increased global consumption as China has. One estimate holds that continued increases in domestic usage by OPEC states will cut their exports by 2.5 million barrels per day by 2010. That is about a quarter of total American oil use.

Hedging against ‘peak oil’

Previously, we have had a discussion about how to invest in a way that protects you from inflation, at least to some extent. Another risk worth considering is that fossil fuel availability and affordability might decline sharply in coming decades. This could be the product of any combination of declining output and rising demand, resulting in greatly increased prices and reduced availability. Such an outcome is especially likely if we resist the pressure to chase down every unconventional oil and gas deposit as conventional fields continue to decline in their production.

Both in terms of life choices and investments, it seems like there are behaviours that can be adopted to reduce vulnerability to peak oil. Of course, there are associated costs. Putting solar panels on your roof to reduce dependence on the grid is expensive; so too is investing in assets that are less vulnerable, but which have a lower return associated. The challenge, then, is to assess whether peak oil is a genuine risk across the next half-century or so, as well as identify the most cost-effective responses to deploy if it is decided that the risk is a meaningful one.

Steven Chu on the oil sands

Apparently, Energy Secretary Steven Chu thinks that technology will somehow make oil sands extraction compatible with climatic stability. While the The Canadian Association of Petroleum Producers was quick to praise his statement, it is wrong for a series of reasons. When it comes to emissions from the extraction and upgrading of bitumen, many are to dispersed to be compatible with carbon capture and storage (CCS), even if it does emerge as a safe, effective, and affordable technology. More importantly, about 85% of the emissions associated with oil derived from the Athabasca oil sands are generated when the fuels are burned. On one hand, that means that oil from that source isn’t enormously dirtier than oil from other sources (when considering only greenhouse gas emissions). On the other, it isn’t really the relative dirtiness of fuels that will determine how much warming we experience, but rather the cumulative quantity of greenhouse gasses added to the atmosphere. Climatic stability depends on keeping most of the carbon in coal and unconventional oil buried: not putting it into fuels that will be burned in the atmosphere, with waste products emerging to warm the planet.

Chu is a good enough scientist to realize that we cannot square the circle of unrestrained hydrocarbon usage and climatic stability. Unfortunately, it seems that politics still haven’t advanced to the point where not using fossil fuel resources is seriously contemplated. That is short-sighted and a shame, not least because it perpetuates the development and emergence of techological and economic systems that are fundamentally unsustainable. Rather than coveting the hydrocarbon resources of western Canada, North American leaders need to get serious about harnessing the renewable resources of the continent, while cutting total energy consumption towards the point where it can be renewably provided.

Anthony Cary on climate change and the recession

Earlier today, I saw a presentation by Anthony Cary, the British High Commissioner to Canada. He was talking about why this recession has involved less of a diminished interest in environmental protection than previous ones, as well as about the upcoming climate change negotiations in Copenhagen.

Detailed notes from the presentation are on my wiki, along with notes from other presentations on climate change.