## Tuesday, December 23, 2008

### The bright side - a simple solution.

Many of my blogs have been perceived as a little pessimistic. This final blog of the year is intended to provide some optimism.

The positive message is this - Humans are infinitely adaptable, and can change very quickly when required.

Often I see graphs of exponentially growing resource consumption and environmental destruction, accompanied by the saying – this can’t go on. And that is absolutely right. It can’t go on forever. No matter what happens, we will adjust. We can’t defy physical limits. In times of crisis it amazes me how people can quickly make tough decisions, and devote their energies to the greater good. It appears that for most people then, there is no environmental crisis just yet, but I am certain when reality bites, actions will follow.

Now to the more specific task of reducing carbon emissions. I have made the point many times that we need to take a supply side approach, which means focussing on the actual source of pollution. Therefore pollution/emission limits are the only way to go. More importantly, this limit must consider all parties involved. For carbon emissions, we require global cooperation. Otherwise, there will always be incentive for those exempt from the limit to take advantage of the situation.

To explain why this is the case, consider the classic common pool resource problem (aka the tragedy of the commons). A common pool resource is non-excludable (you can’t stop anyone using it) and rivalrous (when someone uses it, others cannot). A park bench exhibits these features. Anyone can use it, but when someone is, others cannot. The atmosphere has similar characteristics. If one party uses the atmosphere to dispose of carbon, others cannot use it for providing a steady climate. The incentive in this situation is for the polluter to use as much of the resource as possible, as they receive all the benefits, while everyone else shares the costs. Water resources have, until recently, been much the same.

This issue has been historically solved by rituals, traditions, religion, and other enforceable means the limit use. The classic example is the summer meadows in alpine areas. Anyone can graze their farm animals there, but when there are too many other animals, there will not be enough grass for yours. To solve this problems of competing demands, one must enforce grazing limits (or some kind of rationing system) on all people involved. It is not enough that one person decide to do their bit and limit their herd, as it allows others to increase the size of their herd. Even if all but one farmer exercises self-control and limits their herd, the last farmer will take advantage of this and graze all remaining fodder.

In climate change lingo, the slack taken up by other countries is known as the displacement hypothesis. Tight pollution controls in developed countries stimulate the relocation of polluting industries to countries without environmental controls. This is the reason some countries appear to have been successfully reducing their carbon emissions.

Clearly then, we need enforceable limits on pollution at the relevant scale. For carbon emissions, this means global cooperation (this appears to be getting closer each day). For water management, whole catchment areas must be involved. It is a simple recipe for halting environmental degradation. As we have seen recently with the Murray-Darling Basin Authority, when we reach the point of ‘crisis’ effective actions follow swiftly.

Finally, to keep you give you a taste of what is in store for next year, some topics that are swirling around in my mind right now include:
- the similarity between Bernard Madoff’s pyramid scheme and the banking system
- the welfare benefits of piracy
- and the parallels between cap and trade regulations and land conservation.
- problems and solutions to degrowth

Merry Christmas.

## Tuesday, December 16, 2008

### Carbon tax V Cap and trade

This blog is to help those interested in understanding why there is a debate between these two alternative policy options for reducing greenhouse gas emissions. While at first a cap and trade scheme and a carbon tax appear to be different versions of the same thing, there are important differences. These differences explain the push from big business for a carbon tax.

First, we must recognise that a tax is simply a reallocation of funds between economic agents – from individuals and companies, to the government. Thus a carbon tax, a cigarette tax, an alcohol tax and a GST all generate government revenue. We know from my previous blogs that all consumption is equal (in resource terms). If governments do not spend this extra tax revenue, they will reduce other taxes, but the total economic production will be the same afterwards, as will the total consumption by all economic agents. Therefore a carbon tax will not reduce carbon emissions.

One quite interesting discussion I had earlier this year with ECOS magazine editor James Porteous led me to a paper by Barney Foran, entitled Powerful choices: Options for Australia’s transition to a low-carbon economy. Foran suggests that revenues raised from a carbon tax can be allocated to a future fund, which is basically an offshore investment vehicle. I think he fails to understand that this investment itself has serious carbon implications (This translates as “let’s stop climate change by taxing Aussies and investing in Chinese production”).

A cap and trade scheme on the other hand is actually a restriction on the amount of emissions – a ban on emissions once they hit a given level. This will guarantee emissions reductions (at least within Australia). Unfortunately, we know that to be effective, environmental policy must come at an economic cost – and this scheme will limit Australia’s total production, and limit its international competitiveness.

Without getting too political, the 5% target recently announced for the cap and trade scheme to be adopted in Australia in 2010 is infinitely greater than any carbon tax that could have been proposed to seek wide public approval. Intriguingly, I would suggest that the current governments popularity with green groups would increase with the proposal of a "large" carbon tax, even though it would be less effective at reducing emissions.

## Friday, December 12, 2008

### Some clarification on the solar riddle

My last blog was too brief, I suspect, for the challenging idea it presented. So I will elaborate a little further.

The key point I want to make is that a dollars worth of any consumption good or service, due to the infinite interdependency of economic production, requires an equal amount of resources for its production. A dollar spent on a pair of shoes requires an equal amount of coal, oil, minerals and other natural resource inputs, as a dollar spent on an apple, a hybrid car, a haircut, electricity, motor fuel, a solar panel, and every other good currently being produced. A dollar spent on any good also stakes a claim on an equal amount of pollution.

How can all goods be equal? Surely spending a dollar on a massage is better for the environment than a dollar on fuel or electricity?

But let us run through the flow on interactions in each of these cases. You buy a massage. You mistakenly believe that the environmental cost is negligible because there are no material inputs. What happens to the money then? The masseur then spends that money on whatever they choose – food, fuel, furniture, and any other items. Then what happens at each of these purchases/transactions? The dollar divides further to pay for the labour costs, and the upstream material inputs and so on ad infinitum.

The dollar spent on electricity can be traced in a similar way. The wholesale costs as well as the labour and rents of the electricity retailer are paid for. Then these upstream intermediate industries use this revenue to pay for all of their inputs. Any profits made along they way get spent on other consumption items. This single dollar continues to divide and change hands until it is diluted amongst all natural resources that supply our modern economy.

If a dollar represents a claim on a proportion of the resource inputs into the economy, this paints a different picture for environmentalists. There are no ‘green’ alternatives. Which brings me to the solar panels.

A $20,000 solar panel will generate less than$20,000 worth of electricity over its lifetime. If all consumption requires an equal amount of resources, then it takes more coal to make the solar panel than is required to generate the electricity it is intended to replace. In energy terms then, the solar panel is also likely not to produce more energy than is required to manufacture it in the first place.

But then again there is no harm in going solar – you will just have less money to spend on other things (oh, and they aren’t much good for the environment either).

## Tuesday, December 9, 2008

### Solve the solar riddle

My recent blog on the Ehrlich-Simon wager aimed to raise 'the principle of the indivisibility of economic productivity'. Briefly, this means that when you improve the efficiency use (aka productivity) of one resource through improved technology, you actually improve the productivity of other resources. So for example improved energy efficiency, will also improve the efficiency of use of other resources - minerals for example (due to reduced extraction costs).

The point of this blog is to take an extra step. I may have previously raised the possibility that all consumption is equally environmentally degrading. Spent a dollar on an apple, and that has equal environmental footprint to a dollar spent of motor fuel - somewhat of a shocking thought. But since the economy is infinitely interdependent this is the case. Costanza raised this issue back in 1980. He found that a dollars worth of any commodity has almost equal energy intensity.

Now to the solar riddle. If a dollars worth of any commodity has equal energy intensity, then a dollars worth of a solar panel will require an equal amount of energy to produce as a dollars worth of electricity. If this is the case, a solar panel that costs more than buying the electricity it produces  from another source, than it cannot be said to produce more energy than is required to produce it in the first place. Since the coal fired electricity that it replaces is cheaper over the panel lifetime, traditional grid sourced electricity must be the less energy intensive alternative, taking all the economic interdependencies into consideration.

In the end, although it is a difficult concept for many to accept, your income is the sole determinent of your environmental footprint. You can't just choose to spend that income in a particular way or another. But by reducing your income, and hence reducing your contribution to economic production and its associated externalities, you can make a difference.

In fact that was not the end. Because if you weren't heading off to work each day to earn a crust, someone else might be able to expand their work instead. So there can be no blaming or finger-pointing in the environmental game. We live in a complex system, of which component parts are inseparable. Maybe we should instead attack externalities at their source by enacting effective regulations to prevent them.

## Tuesday, December 2, 2008

### A comment on Fixing the Floor in the ETS

Dr Richard Denniss recently published a research paper for The Australia Institute. Despite its promising title, there is no solution for fixing the ‘floor’ in the ETS to be found in this document. In fact, it takes tentative steps towards teasing out the mechanisms through which the economy and environment interact, but in the face of reality, jumps back on the feel good, greenwash, drive a hybrid, hold hands and be nice to each other bandwagon.

Let me explain.

The story woven by Denniss is that energy and emissions conservation efforts by households will be rendered ineffective due to the proposed emissions trading scheme (ETS). For example, if households reduce their electricity demand through efforts to conserve, the electricity producer now needs to produce less electricity, and can then sell some of their emissions permits to other polluters. Hence the ETS provides a floor on emissions that cannot be passed, as permits can always be traded to other potential polluters.

However, the fundamental assumption in the paper is that households can reduce their greenhouse gas emissions by simply changing their purchasing behaviour and embracing energy efficiency. If you have read my previous blogs you would know that this is an ineffective strategy.

While the paper provides an interesting insight for many, the major flaw is that Denniss acknowledges the flow-on effects from the ‘after ETS’ scenario, without any reference to flow-on effects in the ‘before ETS’ scenario. As an Associate Professor in economics, Denniss should know that these type of flow-on effects would appear without the ETS due the price mechanism. Taking the above example in the 'before ETS' scenario, a reduction in electricity demand should reduce the price of electricity, and subsequently increase electricity demand by others (because of the Law of Demand - lower the price, the more we buy). Therefore, the actions that are supposed to be rendered ineffective by the ETS are already ineffective.

Blake Alcott has a very interesting paper that debunks conservation as an effective way to reduce energy consumption and subsequent greenhouse gas emissions.

In short, as I have mentioned many times in this blog, to truly reduce resource consumption you must restrict the supply. In the case of greenhouse gas emissions, the ETS does exactly that. Individuals actions mentioned in the paper are presently ineffective, and will remain so under the ETS. However, there will now be the opportunity to buy emissions permits, restricting their supply to polluters if you wish to invest in behaviour that reduces emissions.

If the only pressure on emissions production is upwards, then the existence of a floor is clearly not an issue, as long as it also acts as a ceiling. If you think about is, most restrictive regulations that provide limits also act as floors with little criticism. Safety standards, town planning restrictions, and many other regulations provide no incentive to ‘outperform’. That is not their purpose.

It is time to stop the feel good ramblings and the government blame game and accept reality for a change.