We need a new Green party

So I’ve been told by CPW that the Green party has a new policy regarding electricity generation. I will discuss it here, and then explain why I’ve titled the post as such – overall, I do think we need an actual Green party who aren’t just redistributionists in green drag …

Here is the breakdown of the new policy:

Description A two-step progressive pricing system for electricity. The Electricity Commission would bulk purchase, at wholesale costs, a large tranche of New Zealand’s renewable electricity, and retailers would pass the savings through to all households and businesses.
Advantages All sectors of society benefit from generation assets currently in public hands, without distorting price signals on the margin that make the market function.

Isolates our predominantly renewable generation from the cost of carbon, which will raise all electricity prices unless we change market configuration.

Expenditure/ Revenue estimates The cost of managing the bulk purchase contract is easily borne within the existing budget of the Electricity Commission.
Economic impact Ever increasing electricity prices are a well known drag on productivity and real wages. Lessening the impact of price rises will boost both while still encouraging efficiency gains throughout the economy.
Impact on inequality Applies across-the-board, but has the biggest positive impact on low-income households and households living in energy poverty.
Administration The bulk contract would be managed by the Electricity Commission or its successor, with requirements that the cost savings be passed through by every retailer in New Zealand.
Use elsewhere Japan and California are both jurisdictions that employ progressive pricing. Both are among the most energy efficient regions in the developed world.

Lets think about this policy a little.  What happens is that everyone is offered a set of electricity more cheaply – either because the electricity company is owned by government, or they are a private company that is being forced to sell.  For now lets assume that the government doesn’t go all out and try to regulate quantity as well … although by the sounds of things I would put this sort of “socialist calculation” past the Greens.

So how does it work.  Start without assuming any reaction by the generator.

[Note:  One way to view this assumption is that there is a "magic" voluntary agreement between industry and government, where industry does not then go out and treat consumers differently - compared the later discussed case where they limit sales to households and sell to people they can actually charge the market price too].

Well, anyone who consumes below the threshold (by the sounds of things most households) will now face a lower “marginal” price for power – as electricity consumption is a normal good and the cut in prices acts as an income boost this combination of factors tells us that electricity consumption by households WILL RISE.

Now given that we are assuming no rationing by power companies in the face of this increase in demand and lower price, we have to ask what will happen in the market overall.  Two possibilities are:

  1. The marginal cost curve is flat over the relevant region, implying that consumption by electricity consumers that have to pay the full price is unchanged (the positive income impact would likely lead to more consumption, but I digress).
  2. The marginal cost curve slopes upward.  This implies that total consumption still rises, but by less.  Furthermore, the cost faced by high users of power is now higher.

Either way, the Green Party policy leads to an increase in electricity consumption.

The generator
Now lets think of a couple of the issues that may come up on the generators side:

  • Rationing:  If the price is below marginal cost for households, generators will limit supply to households.  Given that they can get a greater return from “high use” customers, there will also be relatively more focus on this section of the market.
  • Investment:  By reducing the rate of return from new investment, there will be a reduction in investment activity in the electricity industry – quite an unintended consequence methinks.

But they use it in Japan and they are energy efficient

That has nothing to do with this and a fair amount to do with “top runner“.

But power is cheaper, yah!!!

Lets think about this.

We have a government owned generator lowering the price of power – which in turn implies that government tax take must be higher.  Or we have a private firm being pressured by government, which in turn leads to much lower investment in electricity infrastructure.  There is no free lunch here.

If the Green Party wants to help the poor without “distorting prices at the margin” they should just admit they want higher taxes and higher transfers to people on low incomes – this is fine, this is standard redistributionist policy which does have a role in our political discourse.

However, the Greens want to act like they actually care about the environment when doing things, even though this policy will lead to an increase in power consumption.  This is a blatant form of “Greenwashing” – and even worse, they are using economic language to try and make it sound legitimate :(

To quote CPW:

It’s always funny how when it comes down to choosing between the environment and being socialists the “Green” party goes with socialism every time.

So is this why we need a new Green party

Yes.  The Greens seem to really just be a left wing party at heart – not a true Green party.  For me the essence of a “Green” focus must be on the environment and our scarce capital stock.  However, they are willing to sacrifice any focus on this capital stock in order to push through redistributionist or central planning style policies.

We need a Green party that actually concentrates on environmental issues.  This is my main problem with the Green party – they just use it for marketing instead of actually looking at the efficient allocation of our scarce capital stock.  This saddens me.

Issues of property rights, free rider problems, externalities, and a general willingness to discuss policy regarding these issues should be the focus of a Green party – it shouldn’t be Greenwash to sell a socialist agenda.

Tell you what, if someone actually forms a party that focuses on the issue of our scarce capital stock (instead of focusing on issues of redistribution) – which is a relevant issue for government – and if they write up a manifesto and sign up as a party, I’ll do some free economics analysis for policy (in my personal time, so not associated with Infometrics).

Note:  I sound very harsh about the Green party here, and there are people who genuinely care about the environment.  However, as long as large sections of the party abuse both environmental policy and economic analysis to sell redistribution I will be harsh to the party overall.  It is especially important to me as I do care about environmental and allocative issues a lot, and seeing a party call themselves “Green” while betraying these issues is insulting.

UpdateHere are more details.  Also I would note that of the 25 articles on their frontpage there are 4 on the environment.  Three of which are on mining, with one on UK environmental policies following the election.  And get this – there is a post saying oil prices are TOO HIGH :P (why I think this is a big deal here – actually, this update should go at the end of the post so that it is after the argument).

  • http://www.tvhe.co.nz goonix

    One of the features of the market is that prices effectively signal whether additional generation investment is needed, as well as incentivising its development. As you’ve rightly pointed out, this ‘plan’ by the Greens absolutely distorts those incentives. The only certainty coming from the ‘plan’ that I can see is increased blackouts.

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  • http://www.tvhe.co.nz goonix

    I understand the Green party like Earth Hour but this is a pretty extreme way to encourage it. :P

  • http://www.tvhe.co.nz Matt Nolan

    @goonix

    Agreed. They keep mentioning “the margin” without actually taking into account what the margin is appropriately OR incentives to invest. Seriously poor economics.

    @goonix

    LOL

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  • StephenR

    Still time to rename the post incorporating the word ‘GreensWatch’.

    And get this – there is a post saying oil prices are TOO HIGH :P

    Big deal?

  • http://www.tvhe.co.nz Matt Nolan

    @StephenR

    “Still time to rename the post incorporating the word ‘GreensWatch’.”

    Excellent point StephenR, I should make it a tag.

    “And get this – there is a post saying oil prices are TOO HIGH :P

    Big deal?”

    I agree in theory that it isn’t a big deal sure. BUT, they always bang on about how oil will run out and we need to move to substitutes and the price should represent that … so suddenly stating that prices are too high seems inconsistent with their previous blathering.

    In this sense, it illustrates that they seem to be focusing on inequality issues a lot more strongly than environmental issues since the change in leadership. Hence it adds weight to my belief that we need a Green party that actually looks at said issues.

    As a result, through this lens it is a big deal.

  • http://www.tvhe.co.nz Matt Nolan

    @StephenR

    To make that clear I will move the update to the bottom of the post – so it is after the argument. I agree that the comment appears arbitrary before reading the post – so this way people have to slug through the post first ;)

  • StephenR

    Sweeeet as.

    Now:

    I agree in theory that it isn’t a big deal sure. BUT, they always bang on about how oil will run out and we need to move to substitutes and the price should represent that … so suddenly stating that prices are too high seems inconsistent with their previous blathering.

    But they don’t argue that the rise in oil prices will be in an upward-and-never-down, linear fashion, do they? Frog is puzzled that with various economic indicators as they are, prices are higher than would seem ‘right’, hence:

    the data suggest it should be drifting downwards

  • http://www.tvhe.co.nz Matt Nolan

    @StephenR

    I see what you are saying, but the way it was framed and the lack of discussion around peak oil seemed indicative of a subtle change in direction.

    Also I would note three things:

    1) China, Aussie, and the US are all recovering more quickly than expected – the collapse in Europe isn’t quiet the same as the Lehman brothers drop.
    2) The Middle Eastern countries are more actively trying to manage prices in the $70-$80 zone. This is part of the reason that, even as activity has accelerated quickly we haven’t seen oil go anywhere near the levels during the oil crisis
    3) The sort of oil spill being seen near the US and the movement against offshore drilling in the US would normally have an upward impact on price – so that is helping to provide a base.

    In other words I can think of lots of excuses – although at a push 1) is my fav ;)

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  • Bliss

    The marginal cost of electricity goes up. Unless a household uses only the cheaper section of power.

    And you are criticising the Green’s economic analysis?

    Geeze!

    peace
    W

  • Bliss

    they should just admit they want higher taxes and higher transfers to people on low incomes –

    If you look at their policies that is roughly true. Yep charge more taxes (eco taxes and pollution charges, CGT). There is a proposal to cut taxes from the bottom by instituting a tax free band of $10,000 but CGT alone, in the medium term, more than covers that.

    The current government wants to cut taxes and redistribute more to the rich (because that’s whose taxes are being cut, probably)

    they just use it for marketing instead of actually looking at the efficient allocation of our scarce capital stock

    Efficient allocation is one thing. Just distribution is another. Which is the whole idea. On another thread you say the purpose of policy isn’t to increase GDP or fatten their wallet, it is to ensure that we have a society where welfare is maximised.. Precisely. Efficient allocation will not maximise our welfare (think beyond stage II micro economics) for all sorts of reasons. But mostly because in real economies wealth tends to concentrate, and there is no economic agent who has both an incentive and the power to reverse the process. It takes a governance agent – that is the government.

    that focuses on the issue of our scarce capital stock (instead of focusing on issues of redistribution)

    Dealing with the problems of “scarce capital stock” (actually the problems are depleted natural capital and over loaded sinks) with out dealing with social justice – which requires redistribution – is a recipe for dictatorship. Think about it!

    peace
    W

  • http://www.tvhe.co.nz Matt Nolan

    @Bliss

    “The marginal cost of electricity goes up. Unless a household uses only the cheaper section of power.”

    The marginal cost to the household falls, so their consumption rises.

    This leads to higher consumption overall – how much depends on whether this leads to an increase in the marginal cost of provision or not.

    I am criticising the Greens economic analysis because they don’t seem to fully understand which margins matter.

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  • http://www.tvhe.co.nz Matt Nolan

    @Bliss

    “The current government wants to cut taxes and redistribute more to the rich ”

    I would say redistribute less to the poor. Also, given the incidence of tax, a tax cut for the rich will many accrue to business, which in some markets will lead to lower prices – as a result, it isn’t completely clear if the redistribution is to the rich or actually to the poor.

    General equilibrium theory is crazy :P However, I digress :D

    “Efficient allocation is one thing. Just distribution is another.”

    I agree. However, I have also said that we should look at issues of allocation first – then once we understand allocation we need to figure out what distribution and welfare concerns we care about. This is the way policy should function – so that the trade-off is transparent.

    My criticism is not of the idea that the Greens want to redistribute – far from it. I am annoyed at the obfuscation of meaning inherent in the way they talked about this policy. They are using economic language to make is sound like there is no trade-off here – when in actuality they are using a roundabout way to redistribute income.

    I would say redistribute transparently.

    “Efficient allocation will not maximise our welfare (think beyond stage II micro economics) for all sorts of reasons”

    It is in 1st stage micro so we don’t need to think too far.

    The reasons the “efficient” allocation will not match the one that maximises welfare are well known – and policy prescriptions to improve outcomes given these failures are well known. This Green policy does not fit into these categories, and it does not properly identify the issue they want to fix.

    Why? They want a redistributive policy while “sounding” environmental. In truth, this policy is only about redistribution, so they should be honest – and not abuse economic language.

    “But mostly because in real economies wealth tends to concentrate, and there is no economic agent who has both an incentive and the power to reverse the process”

    If this is the case just redistribute directly instead of coming up with ridiculous schemes like the power company one methinks.

    “Dealing with the problems of “scarce capital stock” (actually the problems are depleted natural capital and over loaded sinks) with out dealing with social justice – which requires redistribution – is a recipe for dictatorship. Think about it!”

    The problem is the depletion of natural capital given common issues – such as the lack of property rights and the free rider problem. This is in essence a problem of misallocation in the face of scarcity.

    It isn’t a recipe for dictatorship. Using the term social justice to introduce abject policies that destroy peoples choice and overtly interfere in peoples lives is dictatorship. Governments are great things, but like all large institutions they can also use overtly blunt instruments to try to solve problems, and they can suffer from rampant institutional issues – markets fail, institutions fail, governments fail lets just try to understand what is going on before saying one should solve the other ;)

    My problem here stems from the discussion. “Scarce capital stock” is an issue of allocation and distribution. First we need to figure out how allocation works – then given this understanding we can redistribute directly. This is common thought, and Green party policy shows a severe misunderstanding of the first step (allocation) which makes any policies based on the second step (distribution) a touch silly.

    Now economics is the study of allocation:

    http://www.tvhe.co.nz/2009/03/28/what-is-economics-in-the-most-general-sense/

    I am not saying how we should redistribute – no economist can say that, we have to put on a different hat to come to actual conclusions. I think it should be part of the democratic process and that parties SHOULD show an opinion. And I am happy that the Green party states there willingness to redistribute – that honesty is good.

    But they are using “quasi-economic” arguments to try to avoid discussing trade-offs, especially when they have to admit that their redistributionist aims will have an environmental cost. This is very poor form – and as long as the party continues to do things like this I will be forced to write blog posts that no-one will read ;)

    FYI, I like the peace signout

  • Jeremy Harris

    I used to be a fan of energy efficiency until reading report after report that stated greater effeciency just drives consumption as it is cheaper per unit and who doesn’t want to be a little warmer or cooler or enjoy more entertainment etc…

    If we are taking energy effciency measures due to peak oil, so be it, but lets at least make it clear that is why…

  • steve

    great article. the greens are really a very left wing party disguised as environmentalists. the only thing I would say is that many voters of the green party know these types of policies aren’t going to get through. they are still voting for the green party as a coalition partner to another party where only the environmental policies get through (and not redistribution policies disguised as environmental). in the same way a voter for Act is really voting for their policies on crime and punishment rather than for their economic policies.

    Does this mean we still need a new “green” party. well not necessarily, but perhaps it means we need a commitment from any coalition partner that they would negotiate with greens only on environmental policies; and that is extremely unlikely.

  • Raptor

    “Either way, the Green Party policy leads to an increase in electricity consumption.”
    Wrong. The amount of kilowatt hours in the first tier of pricing would be about what a family of four/five need for their basics. This is electricity that is going to be used anyway. After you hit that mark you start paying higher rates. This ensures that everyone has enough electricity at a cheap price to keep their house warm and health with. If they use more they still pay for it. People aren’t going to be going out and buying inefficient

    Rationing: The consumer market has never exactly been the focus of electricity generators, hence why residential customers don’t pay SPOT prices.

    Investment: The electricity companies would still be getting a decent return: the electricity is purchased bulk and sold slightly above margin and hey, even when they’ve been raping a return out of the market they haven’t invested wisely.

    “We need a Green party that actually concentrates on environmental issues.”
    Most environmental issues could be resolved by economic means. In the case of power the progressive pricing makes the green option cheaper and makes local and individual generation affordable options. You obviously have no grasp of what a green party actually does.

  • http://www.tvhe.co.nz Matt Nolan

    @Raptor

    “Wrong. The amount of kilowatt hours in the first tier of pricing would be about what a family of four/five need for their basics. This is electricity that is going to be used anyway.”

    Ahhh so you are going to defend their economic illiteracy with some of your own :D . That is nice, but ….

    Even by your own logic a household of one or two people would face a lower marginal price and would increase electricity consumption. This is what I would term 5th form economics. Actually recognising where the margin is – rather than using the term margin and then ranting.

    And even if the scheme was set up so ALL people already consume that amount of power we are effectively giving a $X transfer to all households – so why don’t we do that directly instead of f’ing around with the electricity market.

    My suspicion is that the Green party is doing this as they can make the transfer less transparent. Now I have NO problem with transfers – they should just be honest about them rather than hiding them behind an arbitrary energy sector scheme which is likely to have unintended negative consequences.

    “The consumer market has never exactly been the focus of electricity generators, hence why residential customers don’t pay SPOT prices.”

    Yawn. Over time, pricing policies will change to incorporate differences in returns.

    Were any dynamic considerations taken into account when the Greens came up with this policy – obviously not. For a party that likes to talk about thinking about the future this is awfully myopic.

    “The electricity companies would still be getting a decent return”

    Given that the current return isn’t sufficient to provide what most people call a reasonable level of investment this statement is nonsense …

    Now I could buy an argument here where we say that the government should own generation – but given the status quo, the actual private rate of return and its impact on investment is a central issue.

    “Most environmental issues could be resolved by economic means. In the case of power the progressive pricing makes the green option cheaper and makes local and individual generation affordable options. You obviously have no grasp of what a green party actually does.”

    This policy makes no sense. The nonsense you say the policy achieves makes no sense. I can see what Green policy does here – it makes no sense ;)

    I will agree with you that my conception of what a green party should do is different from the default – you are right here. And that is because my focus on a green party is on the environmental issues, not the issues of social justice per see.

    The Greens used to balance these dual goals well – recent policy prescriptions have illustrated that this balance has fallen by the wayside, and as a result so has the focus on the environment.

    As a result, I would like a party that actually does focus on the environment and public policy issues, in order to balance this.

    I find it especially frustrating as, at least a few years back, Green party policy involving externality taxes and the such made heaps of sense – it was miles preferable to the crap we got from other parties on the issues. Now they are making up arbitrary policies that are really just marketing, and show no sense of real analysis.

  • http://www.tvhe.co.nz Matt Nolan

    @Jeremy Harris

    That is true consumption will rise – but overall we would still expect the amount of inputs used to fall.

    Ultimately, as long as price represents scarcity it will provide incentives for technology – policies that force energy efficiency are necessarily going to always be a good thing.

    It is a fascinating issue, definitely.

  • http://www.tvhe.co.nz Matt Nolan

    @steve

    Good points Steve.

    Deep down I feel like calling for a new green party as I think there is a substantial amount of feeling regarding environmental issues – and that many of these people have very different conceptions regarding other policies. A party that can focus on environmental issues, and is willing to analyse issues of scarcity, could do well – at least I would vote for them :P

    Now I have zero problems with the left wing, distribution, views of the current Green party – that is a value judgments which they should make as a party – definitely. My concern stems from the fact that people see them as focused on the environment when there is a STRONG underlying focus on redistribution which seems to be dominating environmental analysis at present.

    It makes me feel that the current green party is really just “Greenwashing” :(

  • Kimble

    “Ahhh so you are going to defend their economic illiteracy with some of your own ”

    Oh snap.

  • http://www.tvhe.co.nz goonix

    Kimble :

    “Ahhh so you are going to defend their economic illiteracy with some of your own ”

    Oh snap.

    http://i11.photobucket.com/albums/a177/schwartzo/blakckid.gif

  • http://blog.greens.org.nz frog

    What a lot of blather, and a misinterpretation of the progressive pricing policy. If it is such poor economics, why did a national party dominated Select Committee endorse the proposal in 1992? Why did Federated Farmers, Goodman Felder and other big corporates endorse it?

    What you seem to have left out of your logic is the fact that the second tier of power will come at a much higher price – enough to make up the loss of revenue on the first, meaning that anyone who uses more power will get punished more than they would now.

    The point of the policy is to address energy poverty, the scourge of 1 out of 4 Kiwi households. The progressive pricing model used was Hydro NZ, well developed and considered by our govt in 1992. It’s a bit dated, but allows us to answer the primary policy question – would progressive pricing impact positively on fuel poverty? The answer is yes.

    If you can develop and defend economically a better proposal or an updated version of Hydro NZ, please let us know. But don’t get high and mighty about a policy instrument you clearly haven’t bothered to investigate.

  • http://www.tvhe.co.nz goonix

    @frog
    Oh if National said it then it must be great economics, as you were.

  • http://www.tvhe.co.nz Matt Nolan

    @frog

    “If it is such poor economics, why did a national party dominated Select Committee endorse the proposal in 1992? Why did Federated Farmers, Goodman Felder and other big corporates endorse it?”

    Because they also support poor policy I guess.

    It is also an income transfer to business at some level – so I guess that could be part of the reason they support it.

    Trust me, the all political parties, corporates, and Federate farmers are constantly guilty of poor economics …

    You guys have just provided a fairly extreme case where you’ve actually explicitly abused economic language to make it sound like theory would support it.

    “What you seem to have left out of your logic is the fact that the second tier of power will come at a much higher price – enough to make up the loss of revenue on the first, meaning that anyone who uses more power will get punished more than they would now.”

    Wait up here – so the price marginal cost for people who consume more power will be higher. How does this work?

    Isn’t the price in electricity markets effectively set by the marginal cost of the most expensive form of generation that is being used. In this case either:

    1) The marginal cost remains unchanged when this policy comes into effect.
    2) The marginal cost rises as generators are pushed to use more expensive forms of generation.

    In this case it incredibly unlikely that the increase in prices on the second tranch will actually lead to higher revenues electricity generators – and if it does that would be on the back of a HUGE increase in costs for businesses, which will be passed on to the poor no doubt.

    “The point of the policy is to address energy poverty, the scourge of 1 out of 4 Kiwi households”

    Yawn. I have no problem with addressing actual poverty through transfers. The cost of energy is a relative price issue and an income issue – if there is an issue with the price of power relative to other things we can tax or subsidise, if there is an issue of peoples income (which is what poverty is fundamentally about) give them money.

    Again, you guys SHOULD discuss inequality and redistribution – it is part of the value judgments you have to make as a party and I am in no position to judge you on these. However, allocatively this is a god awful way of doing it.

    “If you can develop and defend economically a better proposal or an updated version of Hydro NZ, please let us know. But don’t get high and mighty about a policy instrument you clearly haven’t bothered to investigate.”

    A first year economics student could create a better model if given the underlying priors. Come up with a clear policy goal instead of marketing waffle like “energy poverty” and an economist will give you a clear allocation mechanism. If the goal of the policy is to reduce poverty – transfer income. If the goal of the policy is to improve the allocation of energy resources change the actual marginal price instead of creating arbitrary margins for different groups.

    In fact, I’m close to 100% sure that there has been a pile of work over at Victoria University and ISCR discussing electricity markets using actual theory – might be worth a look IMO.

    If the Green party is serious about policy, do two things here:

    1) Learn what the margin is before sprinkling the term through your press releases – the FACT is that the marginal cost to many households will be lower according to definitions I’ve heard, a factor that will increase consumption.
    2) Get a CGE model of the allocative impact of policies – so that you can clearly discuss the equity-efficiency trade-offs involved, instead of pretending they don’t exist.

    Also, none of this changes my conclusion that we need an environmental party without such an intensely redistributionist bent – so we actually get some important environmental policies through …

  • http://www.tvhe.co.nz goonix

    While you’re here:

    “Isolates our predominantly renewable generation from the cost of carbon, which will raise all electricity prices unless we change market configuration.”

    How does the Green Party propose to incentivise new investment in renewables when the price that renewables are receiving is less than that of non-renewables? One of the results of the ETS is to change the relative prices of renewable and non-renewable generation technologies. i.e. to make renewable technologies relatively more attractive. You are proposing to effectively REDUCE the amount of money per unit that renewable generation receives!

  • http://www.tvhe.co.nz Matt Nolan

    @goonix

    ^ This.

    Lower the rate of return – lower the investment.

    Greens support lower investment in renewable energy. Sounds like a good title for a blog post Goonix ;)

  • http://blog.greens.org.nz frog

    Wow Goonix. You are not listening. The Hydro NZ model was developed by Victoria University economists. You should go over and do a little research yourself, IMHO!!

    You are being disingenuous and intellectually lazy. I never said this would provide more revenue for the generators. You’re making stuff up!

    Go read the Hydro NZ proposal, which is just one way to do progressive pricing, then come back and we’ll talk about returns and prices at the margin. Otherwise you’re talking down a policy you know nothing about.

    We’re not talking about a lower rate of return either. Same rate of return, in different price blocks, with the true cost of new generation reflected in the higher, marginal priced block.

  • http://www.tvhe.co.nz Matt Nolan

    @frog

    “Wow Goonix. You are not listening.”

    Goonix didn’t say most of these things it was me. And I am listening intently :)

    “The Hydro NZ model was developed by Victoria University economists”

    FYI, I was talking about recent literature from Vic – namely in terms of the stuff discussing investment under uncertainty.

    “You are being disingenuous and intellectually lazy.”

    I would say that applying basic economics is neither disingenuous or intellectually lazy. Arbitrary policy that discuss allocation of scarce resources and ignore basic economics is both …

    “I never said this would provide more revenue for the generators. You’re making stuff up!”

    And I quote from before:

    “What you seem to have left out of your logic is the fact that the second tier of power will come at a much higher price – enough to make up the loss of revenue on the first, meaning that anyone who uses more power will get punished more than they would now.”

    So the higher price in the second tier creates more revenue than the loss from the first tier of prices according to what you are saying.

    I don’t believe this would happen – but if it did it directly implies that the revenue for generators is higher.

    I wouldn’t call quoting you making things up per see …

    “Go read the Hydro NZ proposal”

    I would love to – do you have a link for me :)

    I am just discussing the economic issues steming from the proposed policy given what you guys have written – so I’ll still stick with what I have said in that sense. I would love to compare all this to the inital proposal though, for sure.

    “We’re not talking about a lower rate of return either. Same rate of return, in different price blocks, with the true cost of new generation reflected in the higher, marginal priced block.”

    Two things:

    - The marginal price will only be higher for the generators if marginal costs are higher, which implies that there is in aggregage higher consumption. So we agree on this point right?

    - Goonix’s point was that forcing hydro generators to price at a lower level reduces the rate of return for investing in hydroelectic power generation BY DEFINITION. So IF that was part of your guys aim it would imply lower rates of return on this renewable energy source.

  • http://www.tvhe.co.nz goonix

    @frog
    Matt has covered things off pretty damn well in my absence (cheers Matt!) so I’m going to leave you with a couple of simple questions.

    What effect would your policy as outlined have on the proportion of renewable generation?
    a) increase
    b) decrease
    c) no effect
    d) unsure

    What effect would your policy as outlined have on electricity consumption in NZ?
    a) increase
    b) decrease
    c) no effect
    d) unsure

    I understand you have a lot invested in this proposal, you’ve probably spent many weeks of parliamentary/taxpayer time on it, but hopefully you can answer without being “disingenuous and intellectually lazy”.

  • http://www.tvhe.co.nz agnitio

    Still waiting for a link to this Hydro NZ thing.

  • http://www.tvhe.co.nz rauparaha

    Yeah, who doesn’t get excited by models? I’ve cleared my schedule for it, too!

  • http://blog.greens.org.nz frog

    It’s clearly not what I said. I said it would make up the difference, not add more!

    My quote:
    What you seem to have left out of your logic is the fact that the second tier of power will come at a much higher price – enough to make up the loss of revenue on the first, meaning that anyone who uses more power will get punished more than they would now.”

    Yours:
    So the higher price in the second tier creates more revenue than the loss from the first tier of prices according to what you are saying.

    Just where in the first quote did I say that?

    I’m trying to find a hyperlink to HydroNZ – I’m sure it’s in the Vic library, if you care to make the effort. I emailed a scanned version back to the professor, but I don’t know if it has been linked online.

    Goonix

    a)

    and

    initially c), long-term: b) relative to business as usual

  • http://www.tvhe.co.nz Matt Nolan

    @frog

    “It’s clearly not what I said. I said it would make up the difference, not add more!”

    Fair point for sure.

    However, there is virtually ZERO probability that the increase in the revenue for the other section of the market will exactly equal the decrease from lower pricing in initial consumption.

    Furthermore, you are focusing on a single point that is virtually IRRELEVANT to the critique we have made of this specific Green party policy. Even in a magic world where revenue is unchanged, logic would dictate that consumption would be higher – as the marginal cost for some households would be lower AND we need to move further up the marginal cost curve (which requires higher electricity consumption) for the price in the second tranche to be higher.

    “I’m trying to find a hyperlink to HydroNZ – I’m sure it’s in the Vic library, if you care to make the effort”

    Look here. We criticised the poor policy on the basis of the policy YOU GUYS put forward. It isn’t up to us to go around finding papers that you think justify your policy – it is up to you to actually make the argument, and show where our discussion of your policy is wrong.

    Stop acting like you have analytic backing and we don’t here. Furthermore, we don’t have time to run around finding specific papers as we have full time jobs – we don’t get paid to blog and sell crap policies.

    I realise that my language regarding the policy is becoming terse – but I am getting frustrated by the fact that:

    1) You are either unwilling or incapable of discussing the valid criticisms we have raised about the policy points raised by your party.
    2) You keep implying that we are stupid and lazy, even though we are all paid economists who have studied issues of allocation IN DEPTH.

    If you move away from the swipes at us, and actually try to discuss issues of allocation in an objective fashion, you will get reasonable and good natured feedback from me – I promise :D

    “Goonix

    a)

    and

    initially c), long-term: b) relative to business as usual”

    See I think you’ll find that, given the way the policy can be interpreted at present a normal economic analysis would actually lead to the opposite conclusions.

    Remember, there is a difference between “what you want” a policy to do and “what will actually happen”.

  • http://www.tvhe.co.nz agnitio

    I don’t see how you think the answer to Goonix’s first question is a)

    So the owner of a hydro plant now gets less revenue then he would have otherwise and this will somehow make people invest more in hydro relative to the status quo?

    wow

  • http://blog.greens.org.nz frog

    Agnito
    As the last portion of everyone’s power bill will reflect the true cost of new generation (Yes, my friend above is correct that the latter tiers in any progressive regime will not exactly balance the revenue lost from the first tier, but should follow the true marginal cost of new generation, which will likely rise with any new demand), more renewable generation projects will become economic. New renewables would be undercut by new thermal if the cost of carbon gets left out of the equation, but this is less and less likely in the current global economy.

    The proposal would only use the older hydro and geothermal assets whose costs are long sunk and whose unit costs of production are very low to use for that initial low cost tier. This amount remains unchanged form the original 1992 proposal, because of the issue you have raised. Any generator building hydro today would be able to charge the full marginal price – it would not be added to that first tier, or the project would collapse.

    ~ 20,000 GWh of production, to be shared between business, commercial and residential users in proportion to their 5 year rolling average percentage of consumption. Residential users would get a flat share, (progressive), but comnercial and industrial users would get a proportion relative to their own 5 year rolling average. No point in having big commercial usuers helping out smaller ones.

    My responses to Goonixs questions are what the HydroNZ proposal predicted the response would be. Because the marginal KWh for all users except the very smallest households (not businesses) would reflect the higher cost of new generation, as opposed to an averaged market wholesale price, all users would be rewarded handsomely for any energy efficiency they undertook rather than just consuming more. That doesn’t mean that they would take up energy efficiency measures, as the current level if inefficiency in our economy reveals, but they would have a much clearer signal to do so.

  • http://www.tvhe.co.nz agnitio

    The proposal would only use the older hydro and geothermal assets whose costs are long sunk and whose unit costs of production are very low to use for that initial low cost tier. This amount remains unchanged form the original 1992 proposal, because of the issue you have raised. Any generator building hydro today would be able to charge the full marginal price – it would not be added to that first tier, or the project would collapse.

    So it is an expropriation/transfer from owners of esxiting hydro projects. Interesting. There is still the dynamic problem that anyone thinking of building a new hydro project today will face uncertainty over whether in the future they will be added in. In a static sense what you outline might happen, but as soon as you start thinking about things dynamically it has the potential to fall over in a spectacular fashion.

  • Tom M

    I’m not usually about compulsory minimums for anything, but this thread suggests to me that perhaps there ought to be a compulsory minimum number of economics grads working as staffers for any given party… At least they could explain the meaning of the word marginal.

  • http://www.tvhe.co.nz Matt Nolan

    @frog

    @agnitio

    Good comments from both of you here. In this situation, I agree that the main issues for investment stem from uncertainty itself – as the lower rate of return for existing owners of generation facilities will mainly work through prices. However, even then there is some investment issue – as it reduces the incentive to invest in assets that are depreciating in value.

    However, we still face the issue that the relative price for households who consume less than the allocated amount will now we lower – and as a result energy consumption will be higher on the back of an arbitrary change in relative prices. This in itself leads to a fundamental misallocation of resources. Note: This increase in consumption is implied by definition from the fact that the “marginal cost” has gone up – as the marginal cost curve is “upward sloping” (to be more concise it is monotonically increasing methinks) – the higher relative price for large scale users only occurs because consumption has increased …

    In this specific case, if the goal is to redistribute with the policy (which it still seems to be) the appropriate policy response is to transfer funds directly right, not to mess around with the relative prices.

    This policy implies that, even with carbon prices, many households will be facing less than the real social cost of their energy consumption – and so they will over consume. This to me is a key issue.

  • http://blog.greens.org.nz frog

    Indeed Matt, this is about redistribution at the bottom end of residentail consumption. However, if a household’s low price allocation is limited to ~4,000 KWhs per year, after which they have to pay the higher tiered cost, how much more are they incentivised to consume, exactly? A very few may be incentivised to reduce their consumption down to 4,000 KWHs to maximise their advantage, but when you get dopwn to this level, consumption really isn’t discretionary. Average households consuming 8,000 KWhs are paying their way fully (assuming the second tier makes up at least the revenue lost from the first), with a greater financial incentive to consume less. It is this signal that ought to inspire households and businesses to use less or at least grow their consumption more slowly – not overconsume. This to me is a key issue.

    Yes, agnito, this is a compulsory lockup/transfer of a fixed portion of the state owned assets, to be shared among all those who paid for them – the taxpayers, who will continue to own and benefit from them, in perpetuity. Your fantasy about further levels of expropriation don’t make economic sense and are ill founded.

  • http://www.tvhe.co.nz Matt Nolan

    @frog

    “However, if a household’s low price allocation is limited to ~4,000 KWhs per year, after which they have to pay the higher tiered cost, how much more are they incentivised to consume, exactly?”

    The higher tiered cost is implicit – it is only higher and the marginal cost of generation is higher because of higher consumption at the low level.

    So if additional consumption is minimal, the increase in marginal costs will be very small. In the extreme case the “first tier” may only be for a level that everyone already uses. In this case consumption is unchanged – however so is the marginal cost. In this case it is a strict redistribution – not energy policy.

    “It is this signal that ought to inspire households and businesses to use less or at least grow their consumption more slowly – not overconsume”

    For one, prices are higher because consumption is higher (as higher consumption pushes up onto a steeper portion of the marginal cost curve) in this framework – so there is “overconsumption”.

    For two, if we think the relative price of electricity should be higher we should tax it – and then redistribute the tax back to people as an income hand out. This is much more direct than the suggested scheme.

    “Yes, agnito, this is a compulsory lockup/transfer of a fixed portion of the state owned assets, to be shared among all those who paid for them – the taxpayers, who will continue to own and benefit from them, in perpetuity.”

    What matters here is the margin for investment. A scheme that targets sunk assets could still impact on marginal investment incentives by making people uncertain about the regulatory treatment of their sunk investment BEFORE they have invested – also there will be a disincentive any investment to depreciation in capital.

    This of course matters when investment in generation is made by private agents – if it was made by the government then these investment incentives would not be a central issue per see.

    “Your fantasy about further levels of expropriation don’t make economic sense and are ill founded.”

    Actually, they are a fairly substantial part of much modern literature which uses game theory to describe investment incentives – if the government shows it is willing to start extracting from sunk investments, people who in the future will make sunk investments increase the prior probability that such extraction is possible.

  • http://www.tvhe.co.nz agnitio

    translation of your argument:

    “I’m going to do this once now, but definitely won’t do it again in the future, trust me.”

    You are proposing expropriation and then saying it’s a fantasy to suggest that people might think in the future there will be further expropriation. Are you having a laugh?

  • http://www.tvhe.co.nz goonix

    Matt Nolan :
    This of course matters when investment in generation is made by private agents – if it was made by the government then these investment incentives would not be a central issue per see.

    Ahhh the good old days when Government invested in some of the most uneconomic projects possible with scant regard for the rights of those affected by development.

  • http://offsettingbehaviour.blogspot.com/ Eric Crampton

    General consensus in the Canterbury economics lunch room was that there’s no good reason to use this kind of hatchet job on prices instead of doing the usual sensible thing: give money to poor people if you reckon that they can’t afford to heat their homes but otherwise not screw up prices.

  • Kimble

    The Greens seem incapable of being honest without a push in the back.

    Its all about redistribution, but to avoid having everyone instantly see it is all about redistrubtion (by honestly just calling it redistribution) they elect to screw around with pricing.

  • http://www.tvhe.co.nz Matt Nolan

    @goonix

    Indeed – so investment isn’t the primary issue then ;)

    @Eric Crampton

    Excellent, glad to hear it. Good to hear you guys have a lunch room as well.

    @Kimble

    That is how I feel as well, given my ranting about transparency. That is the main reason I came to such a harsh general conclusion in the post :(

  • Bliss

    @Matt Nolan
    Very long winded Matt! Hard to know just what to respond to.

    First where you are wrong(ish) about economics:

    “Now economics is the study of allocation:” No and yes. Economics is how to manage scarcity. Everything else is details. But markets are not the only (or best) way to allocate resources.

    “I have also said that we should look at issues of allocation first – then once we understand allocation we need to figure out what distribution and welfare concerns we care about.”

    That would be OK if we were having a theoretical debate. But we are in a situation where (from memory) one third of NZ households are not as warm as they should be for good health. As an aside this is a market failure in the supply of housing. For years the market has supplied houses that drive up health care costs both for the state and the families that live in them.

    “I am annoyed at the obfuscation of meaning inherent in the way they talked about this policy. They are using economic language to make is sound like there is no trade-off here – when in actuality they are using a roundabout way to redistribute income.”

    Really? I thought it is clear that some will have to pay more. Of course there is a trade off. You have to be a troglodyte to think there is not! But in the medium and long term we are all better off if we address inequality. That is the point. In the short term some of us are worse off. (Me included as my household is way above average income. I should be against it by your reasoning!)

    We are not better off in terms of dollar income but better off in terms of lifestyle.

    National income or GDP is a very poor measure of an economies quality. Almost all economists would agree with that. I would be interested if you could find a respectable economic published article arguing that measuring GDP is the beast way to measure the quality of an economy. Some may argue it is the most practical, but that is a different argument!

    “The reasons the “efficient” allocation will not match the one that maximises welfare are well known – and policy prescriptions to improve outcomes given these failures are well known. This Green policy does not fit into these categories, and it does not properly identify the issue they want to fix.”

    Yes they do. The Green policies (as you point out) effectively redistribute resources (by making those people in small houses/businesses pay smaller power bills those in larger pay bigger). I was thinking about Edgeworth Boxes which I was taught in stage II. But it was nearly a decade ago!

    BTW In the Green party we are not an “environmental” party in the limited sense of trees, bees and flowers. See the charter http://www.greens.org.nz/charter.

    “If this is the case just redistribute directly instead of coming up with ridiculous schemes like the power company one methinks.”

    Because that is grossly inefficient! It is not a case of market or regulation. Why not let the market do what the market is good at (allocate at the margins) and regulation do what regulation is good at (control crooks and keep the economy within bounds)?

    Direct reallocation has been tried, it does not work. I am not a Stalinist!

    “This is in essence a problem of misallocation in the face of scarcity.”

    Yep! We agree!

    “The problem is the depletion of natural capital given common issues – such as the lack of property rights and the free rider problem.”

    No! Property rights are important, but not of overriding importance! If I own a property right to exploit a resource, say I own a mature forest. The most economically efficient thing I can do is cut it all down, now. That is because of the mismatch between human investment horizons and ecological processes.

    Another example is the festering sore that is the dairy industry (yes I know about all the lovely foreign exchange it generates). Because dairy land is sold at auction (either literally or effectively) the person who buys it will be the one the most optimistic. Probably basing the decisions on last years milk fat price. The mortgage will be 30 years. If after 30 years the land is a desert then that is economically efficient. (Not to mention externalities that are not solved with property rights but with regulation)

    Lastly Matt, you do accept now that you are wrong about the GP policy lowering the marginal cost of electricity? I see Frog has had a go at explaining it to you too.

    peace
    W

  • Bliss

    Gee, mine was quite long too!

  • Kimble

    “First where you are wrong(ish) about economics”

    LOLZ

    ““If this is the case just redistribute directly instead of coming up with ridiculous schemes like the power company one methinks.”

    Because that is grossly inefficient!”

    DOUBLE LOLZ

  • http://www.tvhe.co.nz Matt Nolan

    @Bliss

    Hi Bliss,

    ““Now economics is the study of allocation:” No and yes. Economics is how to manage scarcity. Everything else is details. But markets are not the only (or best) way to allocate resources.”

    By allocation I mean we are trying to understand how resources are allocated, and respond to changes in situation/institution/policy given scarcity. I don’t see how saying this makes me wrong about economics.

    “That would be OK if we were having a theoretical debate. But we are in a situation where (from memory) one third of NZ households are not as warm as they should be for good health. As an aside this is a market failure in the supply of housing. For years the market has supplied houses that drive up health care costs both for the state and the families that live in them.”

    We would use economics to understand WHY/IF there is a market failure. Once we understand it we can discuss it.

    The fact that scarcity exists, and that some people don’t have access to resources, does not imply we can ignore any analysis of what is going on.

    “Really? I thought it is clear that some will have to pay more. Of course there is a trade off. You have to be a troglodyte to think there is not! But in the medium and long term we are all better off if we address inequality. That is the point. In the short term some of us are worse off.”

    You are replying to a quote where I said we should address inequality directly, instead of using a roundabout and inefficient method. If we want to improve outcomes, work to improve outcomes, rather than using a worse policy that is more “marketable”. That is what I was saying here.

    “Because that is grossly inefficient! It is not a case of market or regulation. Why not let the market do what the market is good at (allocate at the margins) and regulation do what regulation is good at (control crooks and keep the economy within bounds)?

    Direct reallocation has been tried, it does not work. I am not a Stalinist! ”

    The policy is an indirect, inefficient, method of redistribution. If the goal is redistribution this is a way of doing it at a higher cost. That is ridiculous.

    If redistribution is inefficient in the first place, why would a more inefficient scheme be better exactly?

    “No! Property rights are important, but not of overriding importance! If I own a property right to exploit a resource, say I own a mature forest. The most economically efficient thing I can do is cut it all down, now. That is because of the mismatch between human investment horizons and ecological processes.”

    This is the discount rate argument. This is another form of externality – in this case we need to find a way to tax the use of the resource, so that the “effective discount rate” is equivalent to the true underlying social one.

    “Lastly Matt, you do accept now that you are wrong about the GP policy lowering the marginal cost of electricity? I see Frog has had a go at explaining it to you too.”

    Did you see that I replied and blatantly explained how:

    1) It lowers the marginal cost of power to people who consume less than the first tier amount.
    2) The marginal cost only rises in the second tier if overall consumption rises.

    This is why using “economic theory” is important :D

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