Home > Economic policy, Environment > Economists lining up on climate change

Economists lining up on climate change

May 2nd, 2007

Today’s Fin includes a full-page ad from five prominent financial market economists, calling for the introduction of a carbon trading scheme to reduce greenhouse gas emissions (paywalled, but it gets a brief mention here in the Oz). Meanwhile, Crikey yesterday ran a piece by another financial market economist, Michael Knox. Knox multiplies the estimated social cost of CO2 emissions from the Stern review ($85/ton of carbon) by total carbon consumption to get an estimated 5.3 per cent of GDP, and concludes (contra Stern) “This means that the cost is not 1 per cent of GDP but 5.3 per cent of GDP.

But Knox has the problem back to front here. He has calculated the cost to the world of Australia’s carbon emissions. Equivalently, this is the revenue that would be raised by a carbon tax of $85/ton, assuming a zero price elasticity of demand.

But the 1 per cent estimate of Stern, with which he is comparing his numbers is the cost of reducing emissions by 50 per cent relative to business as usual. Assuming the policy adopted was a carbon tax, with zero exemptions, the appropriate measure is the welfare triangle of deadweight loss. Knox has instead calculated the rectangle of revenue, a standard mistake for beginners in welfare economics, but a bit surprising to see from a senior financial economist.

While I’m on the topic, I should mention Labor’s plan for interest-free loans to households undertaking water-saving and energy-saving investments, to which I had some very modest input. Not surprisingly, I think the plan can be defended on efficiency grounds. As regards water, the case is simple. The current price paid by households is below the short-run marginal cost of water, and there are good reasons why we are unlikely to move to short-run marginal cost pricing any time soon. So, the incentives for households to invest in water-saving technology are inadequate, and an interest rate subsidy makes good sense.

On energy, the part of the scheme I like is the possibility of generating carbon offsets. Until we have a comprehensive emissions trading scheme, ensuring that all prices incorporate the social cost of carbon, it makes sense to reward people who reduce CO2 emissions with offsets credits. Politically, this all helps to make the point that the price of carbon is not a loss to the economy (as Michael Knox supposes) but a transfer from those who consume more carbon than average to those who consume less.

More on this, with a range of different views from Harry Clarke, Joshua Gans, and Andrew Leigh.

Categories: Economic policy, Environment Tags:
  1. melanie
    May 2nd, 2007 at 20:11 | #1

    Link to a working paper by two of my colleagues: ‘Testing efficiency and price discovery in European carbon markets’ http://www.econ.mq.edu.au/Econ_docs/research_papers2/2007_research_papers/MERP_1_2007_Milunovich_Joyeux_online.pdf

    I’m sure they’d welcome comments.

  2. observa
    May 2nd, 2007 at 20:43 | #2

    “While I’m on the topic, I should mention Labor’s plan for interest-free loans to households undertaking water-saving and energy-saving investments, to which I had some very modest input. Not surprisingly, I think the plan can be defended on efficiency grounds.”

    Any idea what sort of carbon emission tradeoff is involved in subsidising say a kilolitre of water collected in household rainwater tanks vs more traditional, efficient water harvesting/saving methods to produce the same kilolitre? Whilst it’s true we could all make steel in our backyards, that may not be anywhere near the most efficient, resource wise and hence environmentally.

  3. May 2nd, 2007 at 21:50 | #3

    John, I think the economics of these backyard water tanks are pretty hopeless. There are better macro supply options that make sense.

    As a second-best alternative to carbon pricing, solar panels don’t come off well either. Any efficiency gain that you might enjoy from such panels are offset by the cost inefficiencies of the technology.

    I thought these measures were populist vote buying without much economic rationale. Am I missing something?

    Are you going to be on Ross Garnauts’s climate change study?

  4. Hermit
    May 2nd, 2007 at 22:29 | #4

    I won’t weigh into Stern’s costings and other academic issues. However I want to point out that so far the practice of offsets and carbon credits has been something of a debacle. Admittedly a few people have done quite well yet the effect on emissions has been miniscule. For technical explanations see p2 of http://www.climnet.org/hotspot/Hotspot%2041.pdf. For political analysis see this week’s Gristmill or Energy Bulletin websites.

    Indeed Malcolm Turnbull raised the subject of offsets (the Indonesian forests) in his Press Club address, along with the imminent advent of clean coal and the ‘on track to meet Kyoto’ line. This makes me think the government is not fair dinkum about greenhouse mitigation since the proposed actions have no timelines, benchmarks or commitment to early public reporting. All these measures are ‘gunners’ for which the time has long past.

    I’d also mention my house is 90% solar powered on a net basis and 100% reliant on pumped rainwater. This often leads me to the view that renewables are overpriced and unreliable. I think you can get good savings more cheaply by changing the way people use water and electricity based on centralised reticulation schemes.

  5. observa
    May 2nd, 2007 at 23:55 | #5

    Technically Hermit, we could add up our current emissions now(say 1990 levels for argument) and auction these decreasing rights/warrants to the highest bidder on the understanding that they are a decreasing right by say 2% over the next 30 yrs. Like a reverse sort of treasury bond if you like. In other words each tonne of emission today is worth only 0.4 tonne in 30 yrs, the residual 40% right being leased from the taxpayer, unlike water rights nowadays, which we flogged off or handed out for a pittance in the past. Anyway this quantity approach would be in principle like slowly raising carbon taxes to achieve the same effect, except that the former has huge admin/policing problems, which is a major reason why Kyoto has failed to reduce emissions in the 3 years to date. The horrid compromise for administrative simplicity is to restrict the emission quantity controls to a few big players (after further dismissing individual carbon credit cards as leftist wet dreaming) and hand them out gratis. That way you don’t have to take any political responsibility for raising the bowser price or power bills, etc for the poor slobs, who think business really has to cut back on all that pollution stuff. You can then blame the horrid multinationals, to whom you’ve just handed over such a whacking big, economic rent freebie. Of course they’ll make that freebie as big as they can initially and play the only game in town from there on. Conscience isn’t exactly the stuff quantity control freaks lose any sleep over, in their rush to get their hands on the levers. That’s what they call an ‘inconvenient truth.’

  6. jquiggin
    May 3rd, 2007 at 07:01 | #6

    HC (and observa), I have plenty of concerns about the cost-effectiveness of rainwater tanks and similar, but that doesn’t invalidate the case for a subsidy if the market prices are wrong, as they are. I haven’t been approached about the climate study.

  7. Andrew
    May 3rd, 2007 at 10:05 | #7

    I’ve just put in a 50,000L underground tank in the garden – I cannot possibily justify it on economic grounds – but I like have a nice garden and green lawn and I’m prepared to pay for it.

    There is no alternative so it’s a very inefficient way of getting water. On a $/L basis it would probably be much more cost effective to build a big desalination plant that we could all access via the mains water system. The only trick would be working out how to differentially charge for the water usage. Solution 1 would be separate meters for house and garden, solution 2 would be some sort of tiered price structure – set what you consider to be the standard water usage at a mass market affordable price, and then charge me more for excess water if I want to keep the lawn green.

    If I want to use lots of water and I’m prepared to pay for it – why not? There is no shortage of water in this country (or the world) – there is just a shortage of infrastructure to get the water from where it is now to where it is needed (e.g. Ocean to mains water) – that is not an environmental issue, it is just a cost issue.

  8. rdb
    May 3rd, 2007 at 13:42 | #8

    The report – prepared by economists Marsden Jacobs Associates for the Australian Conservation Foundation, Environment Victoria and the Nature Conservation Council of NSW – found the widespread installation of rainwater tanks in Australian capital cities would mean big savings in water, energy and money.

    PDF article.

    The solar houses I looked at on Solar House day a while back used treated greywater for flushing toilets. I didn’t see any mention of the costs of this as an option,
    only rainwater.

    Wouldn’t explicitly targeting on cost help? For example installing rainwater tanks in schools for toilet flushing should be more cost effective than in a private home.

  9. observa
    May 3rd, 2007 at 20:36 | #9

    “For example installing rainwater tanks in schools for toilet flushing should be more cost effective than in a private home.”
    Funny you should say that rdb, because I have some costings on that from an article in the local Messenger Press (local suburban freebie rag they throw over the fence) The article reads-
    “More than 132,000 litres of water is likely to be saved by installing a rainwater 22,000 litre rainwater tank at its Brighton Civic Centre, Mayor Ken Rollond says. The tank will collect runoff from the building and the water will then be reused in the lower level toilets. The tank cost $18,349 and was funded by council, a community water grant from the Federal Government and two tank suppliers.”

    So we can quickly crunch some numbers on what is likely to be the most cost effective roof runoff, when compared with a domestic house setup. Let’s assume the tank lasts a generous 30 years with no maintenance costs. That’s $611.63/yr in depreciation and now you need to finance it at say 5%/yr which adds another $917.45 giving a total annual cost of $1,529.08/yr to buy from nature 132kilolitres of water making a cost of $11.58/kl. Now SA Water currently charge me $1.09/kl, which we all know is a wee bit on the cheap side as far as true social costs go. I find it pretty hard to believe I need to be paying 10.6 times that price to do so but I’m all ears for the arguments. Naturally if SA Water have to bump up their prices just on CO2 emission grounds, the council tank setup should suffer accordingly, if not more so. As to what rate a kilolitre I’d be paying to follow the council lead at my own humble abode is anyone’s guess, but apparently the new Kevinomics has the resources to burn. Or rather it will give the quarter of a million dollar battlers the chance to assuage their consciences, when filling up the pool. I find it hard to believe the sub $100,000 households are going to line up for a slice of the action here. Actually as I recall the Rann Govt offered $400 subsidy for anyone who installed and plumbed in a new rainwater tank and as I recall only had 800 take up the offer in 6 months. At over $11 a kilolitre could you really blame them?

  10. observa
    May 3rd, 2007 at 20:49 | #10

    Actually I should note that SA Water provide my household with the first 28kl of water at 47c/kl and then charge $1.09 above that, my anual household use being about 370kl, so you can see my average price is really $1.04/kl. Presumably they pay interest costs and I know they pay a return to the Govt to boot out of that $1.04.

  11. mugwump
    May 3rd, 2007 at 20:51 | #11

    “At over $11 a kilolitre could you really blame them?”

    Which is why we need the Quiggin subsidy! If an interest-free loan to put in a 10 times less efficient water system makes good economic sense, why stop there? Why not a straight grant?

    Labour’s economic credentials suffer another hit. I say sack the economic adviser.

  12. observa
    May 3rd, 2007 at 21:37 | #12

    From the SA Water website, their (averaged) return on assets for the five years to 2004/05 was 5.24% so the 5% cost I used was conservative(add another 33c/kl) As well their annual report shows that 16% of their overall costs is interest payments and they pay a healthy dividend to the govt. How much a kilolitre to pipe water from the Ord or tow icebergs here you wonder.

  13. jquiggin
    May 3rd, 2007 at 21:45 | #13

    Mugwump, a number of your recent comments have been snarky debating points. As noted in the discussion policy, such comments are discouraged here. Please either make more substantive and politely argued comments here, or comment at one of the many blogs where snarks are welcome.

    Past experience suggests you may want to engage in meta-discussion about the policy. Please don’t. If you have a point on this subject that really needs to be made, save it for the next open thread.

  14. May 4th, 2007 at 00:40 | #14

    Hmm. Let me see if I understand this…

    The costs from a carbon tax will be:

    1. the costs of collecting the tax.
    2. the costs of spending to reduce emissions and thus avoid the tax (which is the whole point of the exercise), and possibly
    3. the costs of misallocation of government spending of the additional money raised by the tax (which is one that could be argued until the cows come home, and in any case the money could simply be given back in tax cuts and make this a moot point).

    Rationally, people and companies will reallocate their spending in such a way that any emissions reduction that costs less than the carbon tax will be undertaken. Therefore, the only way that Knox’s numbers could be right if every emissions reduction cost nearly $85 per tonne, or if the tax was hugely costly to collect (which it shouldn’t be, at least for petroleum products and electricity generation).

    Have I got this right?

  15. BilB
    May 4th, 2007 at 07:35 | #15

    I would rather see the government handle a carbon tax than see business handle carbon rights any day. Recognise that with carbon rights we are talking about huge, huge, huge accumulations of money which require no movement of physical property. This is the territory of super fraud. Let me think of some responsible business people and outcomes……the enron people, christopher skaise, the hih people, onetel, allen bond,….and a whole lot more that I can’t think of the names for. Billions upon billions of dollars vanished into thin air. Governments can be held accountable and forced to rectify, individuals cannot.
    In a carbon offset scheme of thinking the nouveau-riche will be the homeless/propertyless and babies, because they have no carbon consumption at all. So for as long as they can stay in that state they will be accumulating carbon consumption rights. Can I use Grannie’s carbon rights accumulations?
    Surely the way that this whole carbon thing works is that the ground plane is zero historical carbon release and the aim is to stay as near to zero as possible. Recycled carbon has no cost. Apply an environment restitution tax to fossil fuels and be done with the debate. The only debate to be had is at what level should that tax be set and that is proportional to the cost of establishing the alternatives.

  16. wilful
    May 4th, 2007 at 14:56 | #16

    The problem with a tax is that they are only collected nationally, and any efforts by an Australian company to reduce emissions in a developing country couldn’t be counted or traded.

    But otherwise, I don’t want to see billions of dollars of rights given away for nothing to corporations.

  17. May 4th, 2007 at 20:44 | #17

    John you say

    ‘I have plenty of concerns about the cost-effectiveness of rainwater tanks and similar, but that doesn’t invalidate the case for a subsidy if the market prices are wrong, as they are.’

    I think that a case for subsidies is invalidated if consumers are misled about costs and if the costs of green alternatives are high enough. Maybe this is obvious but I;ll spell it out.

    Suppose the private marginal cost of a unit of energy using a standard technology is $1 but the external cost (due to say carbon emissions) is 40 cents.

    Suppose the private marginal cost of a unit of energy using a green technology is $3 and there is no external cost. The government therefore subsidises this green technology by $1 per unit.

    Social marginal cost of the standard technology per unit is $1-40.
    Social marginal cost of the green technology per unit (ignoring any deadweight losse of raising the tax) is $3.

    So society is worse-off subsidising the green technology (and thereby encouraging its use) even if the standard technology has an unpriced externality associated with it.

    Of course this argument does not work if consumers are rational since they know their private cost of using the new technology after the subsidy is $2 while the private cost of using the standard technology is $1. So they will rationally reject the subsidy offer. But it will work if consumers are foolede by governments who deceive them about the effective marginal cost of the green alternative. In my view that’s exactly what is happening now both with respect to solar panels and backyard tanks. Government is wrong to suggest to consumers they will be much better off switching to the green alternatives and, in both cases, social costs will rise.

    Of course if the goovernment offered a $2-50 subsidy to the green technology the users would not need to be fooled – they would rationally swiitch to the green technology even though it still remains far too socially exspensive.

  18. BilB
    May 5th, 2007 at 08:44 | #18


    The Australian government spends 9 billion dollars a year, now, subsidising coal and gas. That is on top of the “subsidy” of having built most of the power stations and the cable distribution infrastructure from public money. “Standard” technology has a very significant cost. JH is now commiting to spend billions of dollars more to make “standard” technology more palatable to the environmentally concerned world. If you are suggesting that “standard” technology is ground zero then you are very much mistaken. In another aspect of taking existing energy prices as a comparison platform consider the situation of say a Canberra resident who has reasonable energy costs for many years and then their house burns down in a fire storm arguable a symptom of the extended environmental cost the energy that he has been using. The cost calculation would look something like 10 years at $2000 totalling $20000, 1 day at $350000, total energy bill for 10 years and 1 day equalling $370,000. Average annual energy bill, $37,000. That would be a very expensive energy.
    If most of the alternative energy systems received such treatment as “standard” technology has enjoyed then they would be in most cases cheaper than the “standard” technology, along with offering significant social advantages.

  19. May 5th, 2007 at 10:45 | #19

    BilB, I am making the point that it is not sensible to subsidise a renewable technology if that technology is very high cost and purchasers don’t know that.

    I assume that Prof Q is arguing a case for a subsidy on ‘second-best’ grounds because carbon emissions are untaxed. If you are saving that coal and other technologies are themselves subsidised then a second-best argument for subsidising renewables could be constructed on the basis of that and my argument would apply to that as well.

    Of course the best policy is to remove all subsidies and levy a carbon tax. But subsidising very expensive renewables does not promote efficiency. If perople are aware that the renewables are expensive then they won’t take up the subsidy ooffer and the policy will fail. If they are not aware they will take up the technology and impose higher social costs – again the policy will fail.

  20. May 6th, 2007 at 17:46 | #20

    I viewed low the interest loans for water tanks and solar panels as populist vote buying as well, and I expect even bigger green bribes from Costello on Tuesday. They’d be mad not to, it will cost very little and it will give the Coalition some desperately needed green cred.

    Whether any of this makes economic sense is another matter. Frankly, solar PV is long, long way from making financial sense for the typical household, and even a draconian carbon tax and generous loans is not going to change that. Even solar hot water is a stretch, and it has a much shorter payback period than solar PV.

    Imagine for a moment your electric hot water system dies. Gas is not available at your house so you get a quote for solar. The solar heater and tank will set you back about $5K, the plumbing and electrics up to the roof will cost another $5K, and the government will give you ~$400 back. Alternatively, you could get the electric heater replaced for around $1K. You’d have to be very committed and/or very well off to go solar.

    IMO, we have to change the economics so that solar (or gas) is a no-brainer –OR– make it mandatory to replace electric hot water heaters with a low emissions alternative. We all know that most people ignore operating costs when making purchasing decisions and only look at the upfront costs, so how do we reduce the sticker shock of going green?

  21. Peter Wood
    May 6th, 2007 at 17:57 | #21

    Prof Quiggin wrote:

    Assuming the policy adopted was a carbon tax, with zero exemptions, the appropriate measure is the welfare triangle of deadweight loss. Knox has instead calculated the rectangle of revenue, a standard mistake for beginners in welfare economics, but a bit surprising to see from a senior financial economist.

    It seems that this is a mistake that is often made when costing the mitigation of global warming. Are there any articles, papers, books, or links to do with this subject that you would recommend?

    On the subject of the interest free loans scheme for green technology, it sounds like quite a good idea. I noticed it was mentioned in the Stern Review (p 378) that individuals and firms appear to discount investments in energy efficiency at a rate of about 30%, which is does not seem to be rational behaviour. Interest free loans seem like a good way to address this issue.

    A significant barrier to investing in sustainable technology occurs when people rent their dwellings. One party selects the technology – the other pays the energy costs. There isn’t much incentive for either party. What possible policy could be put in place to address this issue? Regulation for energy efficient buildings is one approach, but might there also be others?

  22. Valuethinker
    May 7th, 2007 at 00:48 | #22


    Perhaps you meant to imply this, but the obvious answer as to why a respected economist would make such a trivial mistake is:

    - he doesn’t believe in global warming

    - therefore any measure against GW is a bad measure because it would be economically damaging (GDP reducing)

    - therefore any attack on such a measure is justified, even if he knows the economic logic is wrong

    GW is now in the world of ideology and rhetoric. Don’t expect professional economists to be, professional, about it. Bjorn Lomborg twists the truth to suit his position (OK he’s a political scientist not an economist). So does Ross Mckibin (?). Richard Tol I don’t think one can say that. William Nordhaus is paradoxical: global warming is a problem, and we ought to do something, but not too much. Tol and Nordhaus (and Lomborg) seem to fit into the paradigm of: ‘this is the central case for damage, it’s not too bad, and it’s quite uncertain, therefore our remedies should not be precipitate or expensive’.

    Of course Stern et al. blow a hole in that. Uncertainty makes you *more* cautious about tampering with the world’s climate because you can’t know the end state. And because the damage function is clearly exponential on the average temperature rise (1 degree ain’t so bad, 5 degrees is more than 5 times as damaging) you want to err on the cautious side.

    There are climate model runs out there that credibly show a 10 degrees rise in world temperatures. Economists tend to talk about that the way they talk about the Crash of 1972-73 in the UK (90% fall in stock markets), ie almost never, and with a shrug of the shoulders: it happens so rarely, we shouldn’t worry about it. It’s too awful to contemplate. Anyway in economics we just cut interest rates to solve that one.

    There is this incredible disjuncture out there between what climate scientists, paleontologist, glaciologists etc. think (panic verging on fatalism) and what economists and policy makers are arguing about ($10/tonne of carbon, or $20?).

    By their nature economists think at the centre of the Gaussian distribution of outcomes. But Mandelbrot, Taleb et al have shown that financial markets don’t obey the Gaussian normal distribution. And there’s no reason to think the world climate will.

    Economists are some of the most common sceptics of global warming, I find (I have worked as a professional economist, and have a postgrad degree in a related discipline, but am not now an economist). I think the reason is because their own discipline tells them about the plasticity of models, and the need to drive policy recommendations *from* your ideological viewpoint and a paradigm which is held ‘on faith’.

    Accordingly they think that climate science, and the ecosystem, are equally plastic. It’s not in their understanding (how many I wonder have read John Houghton’s book cover to cover?) that climate scientists might have rigorous models based on tested laws of physics and chemistry.

    Don’t expect economists like your man to be rational or reasonable about this. They have decided the global warming paradigm is wrong, and they won’t play fair when they attack it.

  23. May 7th, 2007 at 10:02 | #23

    carbonsink – “The solar heater and tank will set you back about $5K, the plumbing and electrics up to the roof will cost another $5K, and the government will give you ~$400 back. Alternatively, you could get the electric heater replaced for around $1K. You’d have to be very committed and/or very well off to go solar.”

    I think that this is bit high. I just got 3 quotes for replacing my gas hot water heater with an electric boosted solar. They ranged from $4200.00 to $5200.00 complete cost installed on the roof for a 330l system. If you went for the cheaper option then this is not far from a high end gas or electric unit. Simply introducing a volume incentive where the first say 20kW per day of electricity is charged at normal tariff, the next 20kW charged at 1.5 times the tariff and so on would reduce drastically the payback time for replacing an electric hot water heater with a solar one.

    For large airconditioning users this volume pricing would also reduce the payback of solar PV. Aircon for cooling is most needed when it is hot and sunny when solar irradiance is at a maximum. If it was important to stay under 20kW per day a solar PV system could keep a large airconditioner going without using grid power. There are now thin film panels available in the US for USD$4.40 per watt. While these panels are less efficient than monocrystalline cells they are more heat tolerant, they just need more area to generate the same power.

    2kW of these panels (http://www.atensolar.com/14.html) would cost AUD$8448.00 plus a Latronics 2500W PV Edge at $4000.00 gives a figure of of approx $14 000.00 installed. With a $4000.00 rebate this would be $10 000.00. On a hot sunny day this could run entirely a quite large 6 star airconditioner and keep the total house use below the tariff step.

    We really need to make large consumers pay the REAL cost of electricity. Australia has amongst the cheapest power in the world however we are only just realising the immense cost of burning all that coal and selling the power so cheaply. Industries like the aluminium industry have grown up with cheap power and can only function with power this cheap. With cheap electricity it is cheaper to smelt more bauxite that go to the trouble of recovering ALL the scrap aluminium that only takes 5% of the power to recycle that it did to smelt it. Changing the power tariffs even for large consumers might make recycled aluminium far more attractive and more effort might be put into it.

  24. Hal9000
    May 7th, 2007 at 12:19 | #24

    he solar heater and tank will set you back about $5K, the plumbing and electrics up to the roof will cost another $5K, and the government will give you ~$400 back.”

    I’m with Ender. My system was installed in 2001. Total cost, including plumbing and electrics, was $4400, and I got $1000 back from the Qld government. My beef is that, even though the system uses zero electricity for two quarters each year (summer and autumn if you’re interested), I still have to pay a $23 ‘minimum charge’ to Energex on the off-peak electricity Rate 33. Before I had the system installed I used to pay about $700 per year in electricity on the Rate 33 for hot water. Now, even with the ‘minimum charge’ I pay around $120. Oh, and the hot water never runs out, which was a constant problem with the old stored water electric system, and I tend to use more of it – to wash clothes for example.

    I also run rainwater tanks, but this is not a matter of choice – there is no mains water in the area of Brisbane City where I live. FWIW, despite the drought I still have water to wash the car, and I can do so whenever I like. I have a 35000 litre underground concrete tank that still works fine 37 years after it was installed, an above ground 30000 litre concrete tank (17 years and still going strong) and a 30000 litre plastic above ground (10 years). None of them requires maintenance. I got the above ground concrete tank from a mate who was forced by the Brisbane City Council when they connected his place to mains water. The cost of transport was $400. The plastic tank cost me $2200, complete with a pressure pump and plumbing fittings – it replaced a steel one that rusted out after 15 years. I have another pressure pump ($350 in 1987 dollars) that has required $80 worth of owner-installable maintenance after 20 years and looks good for another 20. Subsidy or no subsidy, the economics of my system look pretty good compared with the cost and supply rationing my mains-connected acquaintances are faced with.

  25. Hal9000
    May 7th, 2007 at 12:23 | #25

    Oops. The sentence about the concrete tank I acquired from my mate doesn’t make sense. It’s supposed to say he was forced to remove his concrete tank by the BCC when they connected his place to mains water. And the solar hot water system ended up costing me $3400 after I got the government rebate cheque.

  26. Andrew
    May 7th, 2007 at 15:19 | #26


    I haven’t done the numbers, but I’m still not convinced that having individuals spend money on water tanks is more efficient than having better large scale infrastructure. As I said in a post above, there is no shortage of water in this country (we’re an island!) – there is however a shortage of infrastructure to get it to where it is needed.

    If we add up the total amount of dollars being spent by individuals on water tanks and gray water systems, and add that to the cost of dead/dying gardens/lawns and water bucket carrying related injuries – I wonder whether that would be more than the cost of spending money on say a large desalination plant for each of our major cities?

    Whilst I’m generally inclined to be pro ‘small government’ – I think provision of an adequate water supply is clearly one area where governments need to play a major role and at the moment they are not doing so.

  27. May 7th, 2007 at 15:27 | #27

    Funnily enough, I got a quote on solar hot water today and it looks like being around $4.5K installed, so I stand corrected. Still, I doubt the average Aussie would go for a $4.5K solar HWS if they could get and electric one for $1K. $3500 is a lot of money for most people.

    BTW, try as I might I couldn’t buy a large 6 star air-conditioner. When I had AC installed recently (primarily for heating) every installer said I needed a 6-7kW (out) AC unit, and you’ll notice over at http://www.energyrating.gov.au that the best 6-7kW units score around 4.5 – 5.0 stars. When I enquired about the top-rating units I was informed they were unavailable.

  28. Valuethinker
    May 8th, 2007 at 02:50 | #28


    I’m interested in Australian language.

    I *think* you installed what a North American calls an ‘air source heat pump’ (as opposed to the ground source heat pump, which works in much colder temperatures, requires a ditch or vertical bore, and has a Coefficient of Performance of 4 to 5, vs. 2 to 3 for an ASHP).

    Heating by electricity is normally a bad idea, from any cost efficiency point of view. Does Australia run to piped gas to the home? Or is gas for domestic cooking and heating bottled?

    On your $1000 v. $4500 calculation, I guess it’s a ll a matter of payback. Studies show homeowners, consumers and businesses typically buy energy saving features on a payback of 3 years ie a 30% IRR (about the same level of one return one would expect from investing in venture capital, and about 6 times the return from risk-free investments like bonds).

    If the investment saves, say, $300 pa on electricity, then that is an 8 year payback. Which isn’t too shabby for a risk free return.

    That consumers won’t make those decisions (30% IRR threshold) means they are literally ‘leaving money on the table’ and is an argument for government intervention:

    - to mandate higher efficiency standards for applicance, furnaces etc.


    on the interactions therein (note reverse ‘north’ and ‘south’ on the observations therein for an antipodean audience ;-)

    - to lower the adoption barrier for energy saving technology

    I would favour the Australian government simply mandating solar water heaters, in all new homes over, say, 1200 square foot (ie all homes but for the very basic starter homes). With electric backup heaters (or gas) for the rainy season.

    As we have seen with auto safety improvements, the cost of said heaters would fall very quickly with competition and economies of scale. As an example, when the Mercedes A Class required electronic tipping control, it cost £1500 per vehicle: that cost is now down to £300.

  29. Valuethinker
    May 8th, 2007 at 02:58 | #29

    PS on water savings, I don’t think the Australian government should subsidise them.

    I think they should simply mandate them. New houses from now, and existing houses say within 10 years.

    That drought you are in is the ’1 in 1000 year drought’ according to your politicians.

    but what if actually, it is the *climate* in which you now live? There is evidence the jet streams are moving with global warming, shifting the Australian climate bands.

    History shows (I believe) that Australia has been both wetter than it is now, and *much* dryer. There is a reason why Australia, pre white man, supported c. 300,000 people? I mean the comparable number for North America was more like 10 million (it might have been more: smallpox cut a terrible toll– pre Columbus, you find cities of 100,000 people in the American Midwest)*, and for Europe must have been at least that large.

    Jared Diamond is very good on this. The aborigines were superbly adapted to a climate that can, and does, shut off the rain for decades, if not centuries.

    In a world of global warming, we are going to be confronted with new conditions at each turn. We might as well get ready, now.

    * Southern California went through a period, about 1150AD, where it *did not rain* for about 150 years. This in America’s largest lettuce and garden salad producer. North Americans aren’t ready, either, needless to say.

  30. Valuethinker
    May 8th, 2007 at 03:03 | #30

    PPS think of Israel, Switzerland and Taiwan (and South Korea?) requiring a reinforced concrete air raid shelter in all offices, apartments and houses.

    Same principle. Yes there is a cost, but there’s no point some of us being prepared, and not all of us.

  31. May 8th, 2007 at 12:19 | #31

    Valuethinker wrote:
    I *think* you installed what a North American calls an ‘air source heat pump’

    Yes, we would call it a reverse-cycle air-conditioner. Its an inverter model and has a COP of around 3.5 (2kW in, 7kW out). Some smaller units have a COP of close to 6, so I don’t know where you get your 2-3 numbers from.

    Natural gas is piped to houses in all cities and most large urban centres. Not available where I live, but I could get LPG delivered in bottles.

    Given the cheapness of our (coal-fired) electricity the payback for solar hotwater would be closer to 7 years than 3. It would take a very, very brave politician to raise electricity prices to a point that solar could be paid back in 3 years …. and we are in short supply of brave politicians.

  32. Valuethinker
    May 8th, 2007 at 16:39 | #32


    I’ll check my COP numbers– that was off the US EIA website.


    The US has the same problem with gasoline taxes re economic pricing. No one is going to push US gasoline taxes to, say, British levels ($6.50/gal vs. $3/gal total price). It just won’t happen.

    (and even if it does, gasoline consumption is sufficiently price inelastic that you won’t get huge gains in efficiency. Gains to be sure, but not huge gains)

    A payback of solar hotwater of 7 years is c. 10% IRR, which is still far better (for a risk free asset) than a consumer can get putting money in the bank.

    So society as a whole would gain (*besides* the additional cost of carbon) if everyone installed these. A low or zero-risk, NPV-positive investment.

    For the above reason, I think we have to have regulation on some of these things: US car fuel economy, and Australian solar water heating.

    I would put water savings measures in Australian homes on the same criteria.

  33. Valuethinker
    May 8th, 2007 at 16:44 | #33


    What do you pay for electricity?

    Sample data points:

    Toronto, Ontario (roughly 20% hydro, 40-50% nuclear, the balance coal and gas) – about 8 cents/ kwhr (say for sake of argument 7 cents US). Probably going to rise to 10 cents.

    London, England (mix is about 20% nuclear, about 40% coal, 30% gas, 10% other)- c. 9p/kwhr (ie 18 cents US)

  34. observa
    May 8th, 2007 at 19:27 | #34

    In South Australia (brown coal or gas fired only) we pay 6.7c/KWhr (5.5c US) for off peak power and up to 18.5c/KWhr (15cUS)for peak power. Off peak is used to heat hot water storage heaters at night when the generators are fairly idle(we have a Mediterranean climate here)My bill(all electric although I can access natural gas) last year for a family of 4 was $1750 of which 31% or $542 was off peak hot water heating. It would be this amount that is available for solar hot water savings so the 7 yr payback period seems about right at about $500/year.

    SA has introduced legislation recently requiring new homes to have either gas hot water(mostly instant piezo start units nowadays costing around $900-$1200 + installation) or electric boosted solar or heat pump electric heaters if town gas is not available. I noticed an ad for a 330 litre(3-5 persons) heat pump unit fully installed for $3000, so they’re not cheap but are advertised to ‘Enjoy savings similar to solar, without the need for solar panels’. Heat pumps run similar to the heat cycle of split system airconditioners.

    On the cost of water thought I caught a cost of $1.16/kl for the WA desal plant on some radio discussion. This was to jump to $2.40/kl for the proposed Qld plant as costs have risen dramatically apparently. That’s still a long way from Kevinomics of $15, $20????/kl for supporting rainwater tanks in domestic backyards, bearing in mind my Brighton Civic centre cost estimate above.

  35. observa
    May 8th, 2007 at 19:29 | #35

    valuethinker, I multiplied Aust$ values by .82 to get the US$ values here.

  36. observa
    May 8th, 2007 at 19:40 | #36

    The missus saw an interesting shower setup on The Inventors?? the other day, to save water. It can recycle the water again and again to the shower head after an initial soap up and drain to waste. Technically you could sit under the same water for hours, although as usual there’s a tradeoff. The heater and pump setup and the power to run them. Save water but increase global warming, a bit like localised rainwater tanks.

  37. Valuethinker
    May 8th, 2007 at 22:54 | #37


    Thank you. We have peak/ off peak tariffs as well for those with electric heat. The CO2 saving is potentially big, given we have hydro and nuclear in the mix– if you have nuclear baseload the gains to CO2 emission of demand management are potentially huge.

    I get frustrated here because the ‘green’ tariffs don’t include nuclear generated electricity. I really want a ‘carbon free’ tariff.

    We deregulated electricity supply, but that means that no one will pay for ‘smart’ meters, which would help customers to optimise their electricity bills. It also means there is no incentive to invest in energy saving by the customer.

    We (UK) do have electric storage heating (typically there is a solid or oil in the rad, that is heated up at night).

    I would say a UK electric bill for a family of 4 is pretty similar (£900-1000 which is about USD1800) but of course most of us live in much smaller houses (terraced ie row, or semi-detached). Typical construction is a single layer of brick ie very poor insulation. Air con is increasingly popular (due to hotter summers!) but still very rare (maybe 1-2% of houses, but 90% of offices).

    Gas (heating, hot water and cooking) would be as much again, per annum. If you are on the gas mains network, you probably use gas for heat.

    So your total gas & electricity bill for a UK family of 4 is probably about £1800/ $3600.

    Toronto the numbers are higher in terms of consumption, but the price is lower so I think the amount would be pretty similar– say around $4500 USD. Also the typical English house is probably around 1400 square feet, and the typical Canadian house over 2000 (plus a finished basement). Toronto has a Sydney-type weather in summer (30-35 degrees and humid) and around -1-2 average in winter (but days with -20 with windchill). That Continental Climate is a brute– the humidity means pretty well everyone has air con.

    We are now required to use new ‘high efficiency’ condensing boilers with pizo-electric starts: 90% efficiency (gas thermal energy to heat energy). They cost around £1000 for a typical installation (USD $2000) + installation cost. Vaillant (Swiss) and Worcester-Bosch (German) make the best ones.

    Winter temperatures are as low as zero centigrade, but mostly around 7-8. This April they were over 20. So a maritime climate. Many people don’t realise that the UK is mostly north of 50 degrees latitude (think the middle of bloody nowhere in Canada– Toronto is on the same latitude as Aix-en_Provence in southern France) so the winter nights are *long*– even in London sunrise around 7am and sunset around 4pm.

    I noticed in Greece especially, but also Sicily, which probably have the closest climates to SA, that virtually everyone has a solar-powered water heater. But electricity prices are very high there, and outside of the big cities, there is no piped gas. They tend to cook with bottled gas. What is really sad is that you don’t see so many water heaters in Phoenix or Los Angeles.

    When I was thinking water conservation, I *was* thinking more of the ‘grey water recycling’ systems you mentioned than water tanks per se. Southeastern England has just come out of the driest 18 months ever recorded. We actually get less rain than southern Portugal (who knew? as they say in New York City). Cost per household would be c. £2500, but I could see us going there although the housebuilders are fiercely resisting it. As you say there is an energy tradeoff.

    Pomms will tell you it rains all the time here (London). Actually yesterday was the first rain in 35 days, but it happened to fall on a Bank Holiday Monday. That’s what psychologists call ‘salience’ in human memory ;-) .

    Water tanks are concrete; cement is the #2 world emitter of CO2 after coal fired generation. But if people want to have green gardens, it might be worth making them have them.

    I think a ‘split cycle air conditioner’ is what a North American calls an ‘Air Source Heat Pump’. I’ve heard the term here in the UK, but only in commercial installations. Sweden is huge in ground sourced (‘geo exchange’ is the American term) heat pumps– but you need to dig 200′ of trench or a 50′ vertical bore, typically. I think Sweden has something like 500,000 (in a country with about 2.5 million homes) vs. 20,000 in the UK. Switzerland is also big: the Swiss live in their houses a *long* time, and being Swiss, they see the value of saving money.

    You can get a grant for a heat pump in the UK, and it works especially well with under-floor heating (because the water it provides is lower temperature than a typical gas-fed hotwater system). However you can’t get that grant if you also install air conditioning (would be increasing consumption) and in practice, the grants are eaten up far faster than the government will fund them.

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