dant03

Water – is there a role for demand management at the household level?

/3 Comments/in , , , /by

Lately, water shortages, and in particular rural droughts, have been in the news. While the farmers in many regions certainly are suffering, and there are definitely enough meaty economic issues around farmers’ current water allocations and associated issues, I want to concentrate on economic issues around water use by (mainly urban) households, and what role demand management should play.

For the most part, New Zealand has heaps of water. Yet in Wellington, where I live (for instance) sprinkler usage is currently rationed, and there is talk of an all out sprinkler ban if a big downpour doesn’t happen soon (the recent trickles are only holding things off for a while). That is because the main sources of drinking water in the region – the water catchment area in the rimutukas (near Wainui), the Hutt River near Kaitoke, and the Aquifers under the Hutt Valley, are all at about the limit of what they can give without incurring major damage, due to the recent low water flows.
Read more

Matt Nolan

Banning supermarket bags?

/7 Comments/in , /by

Supposedly there is a plastic bag ban in China, and plans to introduce one in Australia. Now the reason these places want to ban plastic bags has to do with externalities associated with plastic bags (Aussie), both as a pollutant and in terms of the aesthetic appeal (China).

I’m not generally a fan of banning things that are currently not banned, especially in a situation where a pricing mechanism is easy to apply. Now I was pleased to see that the Green Party feels the same way, with Jeanette Fitzsimons stating that she was not in favour of an all-out ban and would support compulsory payment for bags.

If too many plastic bags are being consumed, we should make people pay for them. If we then set the price such that the benefit to the individual of a plastic bag equals the cost to society everything is fine.

However, then I realised that this was all too easy. If everyone already agrees with your point of view why say anything! So I’ve decided to try and make a case for why banning bags may be better than placing a price on them.

Read more

jamesz

Return to sender

/in , /by

Dwindling natural resources and increasing consumption are global problems that get plenty of airtime these days. So where do all the metals extracted and ‘consumed’ go? Well, apparently they end up in dumps in Japan:

Despite perception of Japan being short of natural resources, “urban mines” mean the country actually possesses world-leading amounts of rare metals such as gold, silver, lead and indium… in discarded items such as cars or electrical equipment. Japan’s urban mines contain about 61 percent of known natural indium reserves, 22 percent of natural silver reserves, 16 percent of natural gold reserves and 10 percent of natural lead reserves.

Read more

jamesz

Supply siders on climate change

/1 Comment/in , , /by

Most debate surrounding climate change focuses on the best method of suppressing demand for carbon intensive technologies. However, as Hans-Werner Sinn points out at VoxEU, reductions in demand for carbon could result in perverse incentives on the supply side. In particular, the suppliers of oil, coal and other non-renewable, carbon rich resources could face an incentive to increase their rate of extraction.

This arises because of the special nature of exhaustible resources: since there is a finite quantity of the resource to make profits from, the extractor tries to sell it when the price is highest. If carbon reduction policies are successful then we should observe declining demand for these resources over time. Decreasing demand will cause prices to fall and, since the extractors of oil can anticipate the price drops, they’ll try to sell as much now as possible. The increase in supply will cause prices to drop straight away which will trigger countries who have not signed up to Kyoto to consume more carbon rich fuels now.

The two ways this could be avoided are to either force the entire world to conform to the same Kyoto-type standards, or to forcibly restrict the supply of carbon rich fuels. Failure to do either of these things could result in global carbon emissions actually rising as momentum builds behind the environmental movement. Sinn thinks that the only way to cope is to invest heavily in afforestation to offset the extra emissions. Given the rate of global deforestation it can only be hoped that political pressure and reputation effects will be enough to prevent cheap oil flooding the world market. Thankfully oil prices show no signs of diving since the advent of the Kyoto protocol. So far at least…

jamesz

Caps, taxes and The Man

/5 Comments/in /by

Cato’s Regulation magazine has a fairly detailed comparison
of cap-and-trade and carbon tax systems in their latest issue. A couple
of commentators have interpreted the article as supporting their preference for a cap-and-trade system. They say that the two greatest benefits of taxes are revenue recycling and price stability but claim that the money could be wasted by the government and so it’s better to set up a permits scheme that mimics the outcome of a tax. I don’t have a problem with their conclusions but I do have a quibble with their assessments of the relative merits of each system.

The root of this issue is the question of how much to trust the government. The biggest problem with carbon regulation schemes is
that they are regressive: the poorest tend to spend the largest proportion of their incomes on energy and are thus disproportionately
penalised (although perhaps not in developing countries). This happens under permit trading and taxation since both schemes essentially seek to raise the price of engaging in carbon intensive activities. A tax scheme raises revenues that can be used to redistribute wealth and offset the regressive nature of the carbon regulation. Permit schemes which involve grandfathering of permits do not raise any revenues and so cannot redistribute the burden of emissions reduction. Schemes which either lease or auction the permit rights should raise the same revenues as a taxation scheme; however, this makes them just as susceptible to the critique about government wastage as taxation. The only way to avoid the potential for pork barrel spending is to accept a scheme that hurts the poor.

The second issue is price stability. The problem with taxes is that it’s difficult to accurately set the tax in the first place, and the same holds true for setting the lease price permits. Of course it can be adjusted later but then one can hardly call price stability a benefit of taxation. On the other hand permits guarantee a reduction in emissions, which is after all the goal of any such regulatory scheme. If the market is fully informed about the number of permits available then it can price the permits based on all the available information. If the market is efficient then the price will accurately reflect the cost of reducing emissions to the target level. An accurate tax will settle at the same level but any error in the government’s calculations will result in either changing taxes or over-pollution.

This really all boils down to how much you trust the government to get things right. Attempting to design a permit scheme that mimics a tax scheme opens it up to the same criticisms that are made against taxes. Either the government is effective and can tax carbon at the right price and redistribute revenues efficiently, or it can’t and should leave things up to the market through a permit scheme but accept that the poor will suffer.

Matt Nolan

Banning fossil fuel plants

/in , , /by

The government has decided to ban the construction of new fossil fuel plants for the next 10 years, as they believe that they are unnecessary.   However, I feel that this policy is unnecessary.

I do believe that if we left power generation to the free market, too much CO2 would be produced, and our liability under the Kyoto protocol would be ‘too high’.  But wasn’t that why the government introduced a carbon trading scheme?

In economics terms, the externality from fossil fuel plants is greater than the externality from Hydro, or wind power generation.  The government can try to fix this externality by putting an externality charge on unit production (which is what a tax or a carbon trading scheme does) or by directly regulating the industry.  As the carbon trading scheme is coming into place, the firm producing the power will have to pay the full social cost of producing the power.  In this case, if the firm still decides to build a coal power plant instead of a wind farm, it must be because the full social cost of the coal plant is lower than the full social cost of the wind farm.  As a result, banning the construction of fossil fuel plants seems unnecessary, as in this example, society is better off with this coal plant than with the wind farm.