Archive for the ‘Economics – General’ Category

The patrimonial society comes to Australia

February 7th, 2016 77 comments

Forbes just released its annual list of the ten richest Australians. Of the top eight, four inherited their wealth. The other four range in age from 75 to 85, suggesting that new heirs are likely to be joining the rich list before too long.

This pattern isn’t yet representative of the Australian wealth distribution as a whole, but it is becoming more so. Piketty’s patrimonial society is not far away.

There are a lot of things we can do to promote a more equal distribution of opportunity and outcomes, but a return to taxes on inheritance (preferably levied on the recipient rather than the estate) would be a good start.

A question about group selection

January 29th, 2016 73 comments

I’m doing some work on evolutionary models of game theory and need to understand the debate about group selection. It seems pretty clear that the great majority of evolutionary biologists reject the idea of group selection, but I haven’t found an adequate (to me) explanation of why they do so. A crucial problem for me is that the literature seems, without exception as far as I can see, to conflate group selection with co-operation and altruism. But the problem of group selection arises in non-cooperative settings, provided they are not zero-sum.

To illustrate the problem I’m struggling with, suppose that two previously isolated species meet as a result of some change. In one species (peacocks), competition between males for mates takes the form of elaborate, and energetically costly, displays. In the other species (penguins) males compete by providing food to their mates. In all other respects (diet, predators and so on) the two are similar. It seems obvious to me that the penguins, with their more efficient social arrangements, are going to outbreed the peacocks and eventually drive them to extinction.

It seems to me there are only two possibilities here
(a) My reasoning is wrong, and we can’t judge which species, if either, will dominate; or
(b) Even though it involves one group being selected over another, this isn’t what is meant by group selection

I’d really appreciate some help on this. I’m happy to have thoughts from anyone, but I’d most like to hear from actual experts with contact details.

Categories: Economics - General, Science Tags:

Hard cash and climate change: repost from 2005

January 20th, 2016 142 comments

While thinking about decarbonizing transport, I dug out this old post from 2005. It’s interesting to see how the debate has evolved (or not) since then.

The big change has been that the prospects for technological alternatives like alternative energy sources and electric vehicles have improved dramatically. As regards transport, I don’t see much reason to change the analysis I presented in 2005. Unfortunately, while some progress has been made along the kinds of lines I suggested, it’s been very limited compared to the radical changes in electricity generation. So, we are only at the beginning of the process of decarbonizing transport.

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Categories: Economics - General, Environment Tags:

Increasing fuel efficiency: standards vs prices

January 19th, 2016 24 comments

As I mentioned in a previous post, I’ll be talking to the Victorian Transport Economic Forum on decarbonizing transport on Wednesday, 10 February 2016 from 5pm at the Public Transport Victoria Corporate Centre, 750 Collins Street, Docklands. I thought I’d start with the policy issue implying the smallest change in existing transport patterns, increasing the fuel efficiency of petrol-engined vehicles. The primary choice here is between relying on a carbon price and imposing fuel efficiency standards. For those who want the shorter version, I think we need both but standards are probably going to be more important.

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Categories: Economics - General, Environment Tags:

Directional politics

January 6th, 2016 21 comments

A few Prime Ministers back, Australian politics seemed to be all about Western Sydney. On the conservative side of politics, unremarkable politicians who managed to win and hold former Labor electorates were lionised, while similar wins in other parts of the country were seen as part of the normal ebb and flow of electoral politics. On the Labor side, the region was invoked by the NSW Right (many of whom preferred not to live there) as the basis for its “aspirational” politics. This was all nonsense. The two million or so people who live in Western Sydney vary far more among themselves than they differ from the Australian population as a whole. To the extent that they have any sort of collective identity it hasn’t stopped large numbers of them for voting for (or, for that matter, against) governments led by silvertails from the North Shore, Northern Beaches and Eastern Suburbs.

But since the brief return of Kevin Rudd, the focus has shifted back to an area of more traditional concern: Northern Australia and its supposed need for development. I had hoped to see the end of this when Turnbull became PM, especially given the government’s fiscal woes. But sadly, this is not to be. Not only is the $5 billion development fund still alive, but we are getting stories about Turnbull’s plans to “unlock the North“.

As it happens, I’m in North Queensland right now, and I lived in Townsville for most of the 1990s. Like everyone else in the region I received a special “zone allowance” under the tax system to compensate me for living in a pleasant (if rather warm) coastal city with all the amenities that would be expected by a resident of, say, Newcastle or Wollongong. I understand that this allowance is still available. Nothing of the sort is on offer to people in poor suburbs or declining country towns in the rest of the country.

Like every other place in Australia, the North has plenty of unmet needs for services and, though to a much lesser extent than people seem to think, physical infrastructure. But it is in no sense “locked up”. There are road, rail and air transport links that meet the needs of the region with the same adequacy or lack of it as most other places in the country. Internet access is taken for granted in all but the remotest parts of the region. Ports, and transport links to them, are well developed to carry agricultural and mineral exports wherever they need to be sent. And so on.

Moreover, as with Western Sydney, the region has much the same diversity as the rest of the country, with a corresponding diversity of needs and wants. The cities of Rockhampton, Townsville, Cairns and Darwin differ as greatly from each other and from the rural areas they serve as they do from cities and regions in the rest of Australia.

We don’t need a Northern Australia policy any more than we need a Western Sydney policy. Public infrastructure projects should be assessed on the basis of their merits, and not their location. Private investment should be left to the commercial judgement of those involved. The $5 billion development fund should be rolled back into general revenue and used wherever it is most needed.

Categories: Economics - General, Oz Politics Tags:

What do you do with a problem like Adani ?

December 24th, 2015 22 comments

Having jumped a number of legal hurdles, Adani is now seeking approvals from the Queensland state government, necessary for the Carmichael coalmine/rail/port project to proceed. This presents the government with a nasty dilemma.

On the one hand, refusing approval would be a PR disaster. Adani, and the government’s opponents, would blame obstructive regulation for the failure of the massive bonanza that has been promised. Adani continues to claim that project will give Queensland $22 billion in royalties and taxes, and up to 10 000 jobs, even though its own expert refuted these claims in court.

On the other hand, everyone (even the International Energy Agency, notably until recently for its stubborn faith in the coal of the future) knows that this project is uneconomic, and unlikely to proceed before 2020, if ever. And while the government has said it won’t subsidise the mine, it appears that it may be forced to spend some money on the Abbot Point upgrade.

So, |irony alert on| I have a simple suggestion to resolve the government’s problem. Just ask for a downpayment of, say, 5 per cent of the promised benefits ($1.1 billion). In the unlikely event that Adani pays up, this will be money for jam. If, as is virtually certain, the money isn’t forthcoming, the government can rightly claim to have protected the interests of the Queensland public.|irony alert off|

Taking the question more seriously, the government should seek evidence from Adani that the project has sufficient finance to proceed before issuing any approval. That will be enough to ensure an indefinite delay.

Categories: Economics - General, Environment Tags:

The economist as Grinch

December 7th, 2015 51 comments

The Economic Society of Australia has started running a panel in which economists are asked to give their views on policy questions. I wasn’t too happy with the last one, on penalty rates, where I thought the question was ill-posed, and the majority of responses (though by no means all of them) failed to address the basic microeconomics of the issue.

The latest is a more light-hearted one, asking for responses to the proposition

“Giving specific presents as holiday gifts is inefficient, because recipients could satisfy their preferences much better with cash.”

Rather than give an opinion, I took the argument to its logical conclusion, as follows

The obvious problem with this claim is that exchanging cash is also inefficient, especially when combined with the generally accepted norm that equals should give presents of equal value. This results in a costly exercise that nets out to zero. Anyone who accepts the stated proposition shoud be in favor of cancelling Xmas and relying on the existing intra-family tax-transfer system

Monday Message Board

December 7th, 2015 16 comments

Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.

Categories: Economics - General Tags:

Secular stagnation and technology

December 3rd, 2015 26 comments

One of the problems I have with the term “secular stagnation” is that it implies condition relevant to the very long term, say, the coming century. Such long run conditions presumably have to arise from fundamental causes in demography and technology. That’s the kind of argument that Piketty makes with his r > g theory of rising inequality. There are some good arguments for the view that the depressed state of the global economy, and particularly that of the more developed countries, can be explained in this way. But it shouldn’t be implied in the name of the problem. I’ve argued in the past that technology, specifically the Internet, doesn’t explain growing inequality,

The key quote from that New Left Project article, responding to Tyler Cowen’s The Great Stagnation

The global crisis stopped economic growth, not only in the US, but in countries far inside the technological frontier like Greece; while it had hardly any impact in, for example, Australia, which avoided the initial financial crises and used Keynesian fiscal stimulus to offset shocks flowing from the global economy.

A further reason for scepticism about technological stagnation is that this explanation has been advanced in recessions and depressions ever since the beginning of the capitalist business cycle in the nineteenth century. Such claims represent the flipside of the equally common claim, made during every period of sustained expansion, that the economy has entered a New Era of untrammelled growth. The most recent episode of this kind was the ‘irrational exuberance’ of the 1990s, fuelled by optimistic claims about the potential economic implications of the Internet, which was opened to commercial use by the US Congress in 1992, and by capitalist triumphalism exemplified by Fukuyama’s The End of History.The collapse of the ‘dotcom’ bubble was softened by the housing bubble that developed shortly afterwards (again, not at all a new phenomenon), but the result was only to worsen the inevitable crash in 2008. The similarity of these events to previous bubbles and busts is good reason to doubt that they represent, or that they have inaugurated, a new phase in the evolution of capitalism.

Categories: Economics - General Tags:

Secular stagnation and the financial sector (crosspost from Crooked Timber)

December 1st, 2015 21 comments

In my last post on private infrastructure finance and secular stagnation, I suggested a bigger argument that

The financialization of the global economy has produced a hugely costly financial sector, extracting returns that must, in the end, be taken out of the returns to investment of all kinds. The costs were hidden during the pre-crisis bubble era, but are now evident to everyone, including potential investors. So, even massively expansionary monetary policy doesn’t produce much in the way of new private investment.

This isn’t an original idea. The Bank of International Settlements put out a paper earlier this year arguing that financial sector growth crowds out real growth. But how does this work and what can be done about it?

The financial sector is an intermediary between savers and borrowers (for investment or consumption). So, the costs of running the financial sector and the profits generated in that sector must be included in the margin between the rates of return by savers and those paid by borrowers, or else they must be shifted on to society at large (for example, through bailouts or tax subsidies).

I’m still organizing my thoughts on this, so what I have are some ideas rather than a fully formed argument.

First, if the financial sector is unproductive, how can it be so large and profitable in a market economy?

Read more…

Categories: Economics - General Tags:

Private infrastructure finance and secular stagnation (crosspost from Crooked Timber)

November 20th, 2015 36 comments

For most of my academic career, I’ve been working on (more precisely, trying to demolish) the idea of private investment in public infrastructure, exemplified by the Private Finance Initiative in the UK and the Public Private Partnerships program in Australia. Here’s my first published article on the subject, from 1996. I conclude that

The current enthusiasm for private infrastructure, like the enthusiasm for public ownership which it replaced, has been based more on ideological beliefs in the virtues of one sector and the vices of the other than on any systematic economic analysis …Analysis of the relative performance of the private and public sector in different phases of infrastructure provision suggests that, in most cases, the private sector will be most efficient in the construction phase but the public sector will be best equipped to handle the risks associated with ownership.

Twenty years later, this analysis seems finally to have been validated. The UK Auditor-General recently reported that

Analysis of the 2012-13 Whole of Government Accounts (WGA) implies that the effective interest rate of all private finance deals (7%–8%) is double that of all government borrowing (3%–4%)

As a result of the excess costs, and some spectacular failures, bipartisan enthusiasm for the PFI has finally turned to disillusionment. Here’s the Telegraph, correctly putting much of the blame on New Labour. And, for balance, here’s the Guardian. There hasn’t been a similar admission of failure in Australia, but the flow of PPP projects has greatly diminished, and most new ones rely on a substantial component of public capital.

Unfortunately, the failure of private finance hasn’t led governments to resume the high levels of public investment that prevailed in the Keynesian era of the 1950s and 1960s. So, even with central bank lending rates at zero, there has been no real recovery in infrastructure investment. Apart from the direct effect of lower investment, there’s a strong case that infrastructure investment increases the returns from private investment in general and therefore stimulates growth.

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Grattan Institute advocates cutting university research funding

November 2nd, 2015 44 comments

Andrew Norton of the Grattan Institute has received quite a bit of attention for a piece arguing that universities don’t need additional funding because money intended to fund teaching is going to support research instead. Norton suggests that the funding going to research is around $2 billion a year

University research matters to Australia, but the evidence that it improves teaching is less clear. Direct spending on teaching, by contrast, is far more likely to ensure that universities offer the high-quality courses students want.

The obvious question is, if university research is important to Australia, won’t cutting $2 billion (or some substantial component of it) from research funding harm our national interest. As the quote above shows, Norton merely asserts that redirecting funding from research to teaching will benefit teaching.

The core of Norton’s piece is a misuse of accounting categories. The implicit claim that, since university funding is allocated on a per-student basis, it must be intended entirely for teaching. The further implicit assumption is that the only research that should be undertaken is that explicitly funded through bodies like the Australian Research Council.

But this has historically never been the case. In Australia, and (as far as I know) in every other country, university academics are expected to undertake research as part of their duties, whether or not they have grant funding. The standard proportion, which hasn’t changed in my 30+ year involvement in the system is 80 per cent teaching (and associated service), 20 per cent research, which appears to be exactly the proportion cited by Norton.

It’s true that more transparency in the allocation of resources between teaching and research would be a good thing, if it were feasible. But as the travails of exercises like the Excellence for Research in Australia process have found, this is easier said than done.

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Adani out of excuses

October 15th, 2015 55 comments

Environment Minister Greg Hunt has just given approval to Adani’s proposed Carmichael coal mine in the Galilee Basin. This decision is sure to be challenged in court, but presumably the lawyers have been over the decision carefully, to fix up the errors that saw Hunt’s earlier approval overturned.

Assuming the decision stands up, Adani will be in the position of the dog that catches the car it’s been chasing. Adani and its advocates, like the Institute of Public Affairs, have been telling anyone who’ll listen that their marvellous project is being held up by “green tape”. The reality is that the project is as dead as a doornail.

No one will buy the coal it produces at a price that covers even the marginal cost of extraction. No bank will fund the deal: in fact, almost every potential financial institution that might provide funds has already announced a refusal (something almost unprecedented in the world of finance). Adani’s existing bankers, the Coommonwealth, walked away recently (or, in Adani’s telling, was pushed). All the contractors working on the project have been sacked, mostly without any public announcement

Most recently, Adani’s announcement of a proposed contract with Downer EDI has fallen into limbo. The contracts were supposed to be signed by 30 September, but nothing has happened. There’s a reference in the announcement to environmental approvals, so perhaps the contract will go ahead now, but, based on past form, this seems unlikely.

Adani would have done better, in PR terms, to pull the plug when the courts overturned Hunt’s initial approval. Perhaps they have a secret plan to salvage something from this mess, but it’s hard to see how this can work.

Categories: Economics - General, Environment Tags:

Bitcoin: a waste of energy

October 6th, 2015 51 comments

I have a piece up in The Drum, making the point that most of the market value of a Bitcoin reflects the electricity wasted in the calculations needed to “mine” it, with the obvious disastrous implications for the global climate. Unsurprisingly, it’s provoked some vociferous, if mostly incoherent, responses from Bitcoin fans.

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When did “Free Trade Agreements” become “reform” ?

September 8th, 2015 15 comments

The Oz is pushing hard for the China-Australia Free Trade Agreement. Support for the deal was (AFAICT) the only significant output from the “National Reform Summit” held by the Oz and AFR a week or so ago. This raises a few points of interest.

* Until very recently, bilateral trade deals of any kind were seen as the antithesis of free-market reform. Reformers favored either unilateral removal of trade barriers or global deals through the World Trade Organization. Admittedly, the latter is clearly a forlorn hope, but what happened to unilateral free trade

* Second, it ought to be clear by now that “reform” means “whatever the Oz and IPA wants”. For example, tax reform doesn’t mean taxing mineral rents or carbon externalities or tax-dodging trusts and shell companies. In essence, it means taxing food and giving the proceeds to the rich. Anyone concerned with good policy should stop using this word in a positive sense

* Most importantly, “Free Trade Agreements” are nothing of the kind. The key to the China deal is the expansion of the 457 system to allow for 100 per cent overseas workforces. Even if you think that’s a good idea, it should be addressed in the context of immigration policy. There’s a startling contradiction between this stuff and Joe Hockey’s high profile persecution of Chinese buyers who are allegedly pushing up the price of Sydney houses.

* The same is true of the other FTA’s this government has signed, and even more so of the proposed TPP. At most, the trade component of these deals consists of Australia selling its domestic policy sovereignty to foreign governments in return for the removal of their trade barriers.

The great replication crisis

September 3rd, 2015 30 comments

There’s been a lot of commentary on a recent study by the Replication Project that attempted to replicate 100 published studies in psychology, all of which found statistically significant effects of some kind. The results were pretty dismal. Only about one-third of the replications observed a statistically significant effect, and the average effect size was about half that originally reported.

Unfortunately, most of the discussion of this study I’ve seen, notably in the New York Times, has missed the key point, namely the problem of publication bias. The big problem is that, under standard 20th century procedures, research reports will only be published if the effect observed is “statistically significant”, which, broadly speaking means that the average value of the observed effect is more than twice as large as the estimated standard error. According to the standard classical hypothesis testing theory, the probability that such an effect will be observed by chance, when in reality there is no effect, is less than 5 per cent.

There are two problems here, traditionally called Type I and Type II error. The classical hypothesis testing focuses on reducing Type I error, the possibility of finding an effect when none exists in reality, to 5 per cent. Unfortunately, when you do lots of tests, you get 5 per cent of a large number. If all the original studies were Type I errors, we’d expect only 5 per cent to survive replication.

In fact, the outcome observed in the Replication Study is entirely consistent with the possibility that all the failed replications are subject to Type II error, that is, failure to demonstrate an effect that is there in reality

I’m going to illustrate this with a numerical example[^1].

Read more…

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My submission or the Abbot Point port expansion Environmental Impact Statement

August 28th, 2015 22 comments

The Queensland government is going ahead with (or, more hopefully, going through the motions of) the process for expansion of the Abbot Point coal terminal. A Draft Environmental Impact Statement has just been released, and there is a call for comments here

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What do destroyers destroy? What do frigates … ?

August 25th, 2015 192 comments

The Abbott government is copping plenty of flak (metaphor used advisedly) over its obvious politicking with respect to the construction of a new class of guided-missile frigate for the Royal Australian Navy. The project with total costs touted at $90 billion is promised to create lots of jobs in South Australia, perhaps replacing those when the same government, in its free-market incarnation, welcome the death of the car industry.

Rather than pile on, I’ll ask a question which, from past experience, I know is bound to annoy many. What are these things supposed to do?

As far as I can tell, guided-missile frigates are supposed to shoot down aircraft and missiles, but this seems, on the face of things, to be an absurd proposition. Pitting an effectively stationary boat, costing the better part of a billion dollars, against missiles (fired from land or from aircraft), travelling at the speed of sound or more, and costing a million dollars apiece, seems like a hopelessly lopsided contest.

Of course, it’s just about impossible to test this proposition. AFAIK, the only conflict in which surface ships have actually engaged in combat with aircraft using missiles was the Falklands, more than thirty years ago. That didn’t appear decisive: the Royal Navy managed a win against the air force of a Third World country, but took some heavy losses in the process. But technology has advanced a long way since then, and there’s no way of testing which side of such conflicts it now favours. So, naval advocates can make up whatever claims they like about the capabilities of the ships we keep on buying.

Of course, the fact that there has been so little naval warfare in the last 70 years or so seems to me to be a very strong argument for spending less on money on warships.

Readers will be aware that I think war is almost always disastrous for both sides, that most military spending is wasteful and harmful, but that I know this to be a minority view. Even given that, the case against spending money on navies (and particularly surface fleets) seems so overwhelming to me that I’m amazed to find hardly anyone in agreement.

Categories: Economics - General Tags:

The generation game and the 1 per cent

August 6th, 2015 50 comments

For a generation (fifteen years) or more I’ve been writing and rewriting the same piece about the silliness of the “generation game”, the idea that one’s year of birth matters more than class, gender or race in determining life outcomes and attitudes. But this is a zombie idea that can never be killed.

Stephen Rattner in the New York Times is the latest example, with a piece showing that US Millennials (those born after 1980) are doing much worse than previous generations at the same age, despite higher levels of education. Rattner notes the role of the recession, now nearly a decade old, but then jumps to the conclusion that it is the Baby Boomers, as a group, who are to blame. His only evidence for this is the long-discredited claim of a looming crisis in Social Security.

Rattner doesn’t present any evidence about the recent experience of non-Millennials, but his piece leaves the impression that the experience of doing worse than older cohorts at the same age is uniquely Millennial. So I thought I’d do his work for him, and dug out this graph prepared by Doug Short HouseholdIncomeByAge As can be seen, the group suffering the biggest loss, relative to older cohorts at the same age, are those households with heads aged 45-54 in 2013, a mix of late Boomers (for aficianados, this group is called Generation Jones) and early X-ers. But the main point is that median household income is falling for all groups except the 65+ cohort (mostly called Silents in the generation game). Part of this is due to declining household size, but (IIRC) household size has stabilized recently as forming a new household has become less affordable.

Rattner doesn’t mention, even once, the obvious and well-known explanation for the fact that median income is falling while mean income rises. This can only occur if the distribution of income is becoming more skewed, with the top tail (the 1 per cent) benefiting at the expense of everyone else.

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August 4th, 2015 35 comments

Among critics of renewable energy, one key idea is that of Energy Returned On Energy Invested (EROEI). The central idea can be illustrated by the case of ethanol produced from corn in the US. It’s argued by critics that the production of ethanol from corn uses more fossil fuel inputs than it displaces. The US Department of Agriculture has an EROEI slightly greater than 1, but it’s still clear that corn ethanol is not going to do much to solve the carbon dioxide problem.

Now lets look at the case of solar PV. The energy-intensive component of a solar PV module is the polysilicon used to produce the wafer, which is produced using an electric furnace. Clearly, if more electricity is used in this process than is generated by cell, EROEI < 1, and the idea does not work. We can do a rough check by observing that a typical wafer uses 5 grams/watt of polysilicon. The cost of polysilicon is $20/kg. To be conservative let's assume this is all electricity, at a cost of 5c/Kwh. Then a quick calculation shows that each watt of PV requires 2 KWh of electricity in production or about 1 year's generation in a favorable location. So, for a panel with a 10-year lifetime, the EROEI is 10. Clearly not much of a problem. The estimate omits the energy costs of the rest of the module, but that's almost certainly more than offset by the conservative assumptions about polysilicon.

Some EROEI fans don't like this calculation. They want to include all sorts of other costs, going as far as the food energy used by the workers who instal the panel. At this point, the exercise becomes one of trying to price all economic activity in terms of energy, an idea that has been tried without success for decades. For everything except energy-intensive activities like smelting, energy costs are a small part of the total, and imputing such costs to any particular energy source is a fools errand.

Categories: Economics - General, Environment Tags:

CCS: A fiction that has outlived its usefulness

August 2nd, 2015 41 comments

With only a handful of pilot projects in operation around the world, Carbon Capture and Storage (CCS) has not played a significant role in reducing carbon dioxide emissions. CCS has, however, been valuable as a fiction for all those who want, for whatever reason, to avoid dealing explicitly with the fact that stabilizing the global climate will require ending the use of fossil fuels, and particularly coal. For example, rather than prohibiting new coal-fired power stations, the US EPA has proposed that only power stations equipped with CCS technology should be permitted. Since new coal stations are mostly uneconomic even without CCS, this amounts to a ban, but can be justified simply as requiring best practice.

It now appears that this fiction has outlived its usefulness. Recent reports suggest that the EPA will drop the CCS requirement in favour of the weaker requirement that all new coal-fired stations should use supercritical combustion. There are two main reasons for this

(a) The requirement might not stand up to legal challenge on the basis that CCS is not a feasible technology
(b) No new coal plants are likely to be built anyway

Meanwhile, the EU is struggling over proposals to stop subsidies for coal-fired power. Again, the compromise was to subsidise only projects with CCS. But the coal lobby is now arguing that

proposed requirements on carbon capture and storage (CCS) to neutralise emissions have to be realistic as the technology is still in its infancy.

In this context, “realistic” means supercritical and therefore theoretically ready for CCS, as opposed to actually using the technology.

Combine this with a string of cuts in funding for CCS projects, and the conclusion is inescapable. CCS is an ex-parrot.

Categories: Economics - General, Environment Tags:

Leaving it in the ground

July 23rd, 2015 33 comments

If there’s to be any chance of stabilizing the global climate, a large proportion of existing reserves of coal will need to be left in the ground. The Galilee Basin, estimated to contain 27 billion tonnes of coal, enough to raise atmospheric concentrations of CO2 by several parts per million on its own, is arguably the biggest test case in the world right now. Fortunately, the latest news is good.

The critical project is the Carmichael Mine proposed by Adani Coal. To get the coal out Adani proposed a new rail line and a port expansion at Abbot Point. Korean conglomerate POSCO (originally a steelmaker) was named as the builder of the railroad, with the prospect that POSCO would take an equity share and the Korean Export-Import Bank would lend money on favorable terms. If the rail line is built, other projects could go ahead. One such project, owned by Bandanna Coal (now in receivership) was just approved by Environment Minister Greg Hunt.

It now seems clear that Adani is mothballing the project. A month ago, the engineering design teams were told to stop work, and now Posco’s contractors have been sent home. Coincidentally or otherwise, Posco has announced the intention to return to its steelmaking roots, with aggressive cuts to its engineering and construction divisions.

Adani is still blaming regulatory delays, but this seems increasingly implausible. The sacking of the engineering teams will set the project back many months, if not years, and burning your primary equity partner doesn’t seem like a sensible response to regulatory problems. At this point, I’d say the strategy is to obtain and bank the regulatory approvals then hope that the price of coal increases in the future. This seems unlikely, given the collapse of demand in the US, declining demand in China and increasing Indian focus on renewables, in which Adani itself is a big player.

Moreover, with every year that passes, the obstacles to coal projects of any kind get bigger. Most international development banks will no longer lend to such projects, global banks are under similar pressure and institutional equity investors are being pushed to divest. It’s unlikely that the proponents of new coal projects in Australia will ever again see a government as favorable as the Abbott government, so if they can’t succeed now, they will probably never do so.

Categories: Economics - General, Environment Tags:

Derp: An irregular verb

July 7th, 2015 28 comments

Following up on Noah Smith’s marvellous definition of derp, I thought I would add the first person to give the declension of this irregular verb

* I can’t see this happening
* You regularly restate your tight (low probability) prior
* He herped a flerp of derp, the twerp

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Backing down on Greece’s debt is the safest, most rational option

July 6th, 2015 160 comments

I wrote this for The Guardian and Crooked Timber in response to the Greek referendum result.

Lots of people have raised the suggestion of applying game theory to the the Greek debt crisis. I haven’t attempted this, reflecting my general scepticism about game theory in the absence of a well-defined strategy space. But now the Greek government and public have made, what is, in effect, a final move. In view of the No vote, Syriza can’t accept a deal that doesn’t include an explicit debt write-off or one that obviously crosses its stated red lines. Within those parameters, its clearly eager for a face-saving compromise.

For the other side (effectively the Troika and the German government), since Syriza’s move has already been made, the problem has now been reduced to one of decision under uncertainty, which is something I am comfortable with. More precisely, it’s a choice between a “safe” option, with an outcome that is fairly predictable, and a “risky” option where the outcome is uncertain.
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Economists call on climate change policy

July 2nd, 2015 68 comments

I’ve just signed a statement drawn up by a group of economists from the Toulouse School of Economics and the Université Paris-Dauphine, in advance of the current COP21 international negotiation. The aim of the statement is to encourage the parties to aim for a more comprehensive and economically effective agreement that would ultimately supersede the patchwork of voluntary commitments being put forward at present. While the commitments being made for COP21 represent a huge advance on the vague aspirations that emerged from Copenhagen, we should not lose sight of the ultimate goal of decarbonizing the global economy in a way that minimizes the economic costs by taking advantage of the power of price mechanisms.

From an Australian viewpoint, the most important part of the Call is Part 3: “Free rider” behavior must be hindered. The current government’s attempts to position Australia as a free rider on the efforts of others cannot succeed in the end, and will only do Australia harm.

If you’re a professional economist and agree with Call, you can sign it here. More generally, it’s open for discussion in the comments thread.

Categories: Economics - General, Environment Tags:

Adani Galilee Basin project on hold: threat or alibi?

June 25th, 2015 36 comments

In an interesting sequence of events, Adani has halted engineering work related to its proposed Carmichael mine in the Galilee Basin.

Last week, it appears, Adani sent out notices to our major engineering contractors, including WorleyParsons, Aecon, Aurecon and SMEC, to stop work. A team of up to 40 engineers at WorleyParsons’ Brisbane office, which was working with Aecon on the rail joint venture, was among those pulled off the project. No public announcement was made.

Yesterday, the Guardian revealed the stopwork, citing “sources”. Adani declined to comment

Today, Adani is claiming that the stopwork was due to delays in regulatory approvals, a claim denied by the Queensland government. It’s worth noting that the new Labor government quickly resolved the biggest outstanding issue for Adani’s rail line and port expansion, namely where to dump the dredging spoil from the port. The solution was neat – they offered land that had been reserved for an expansion proposed by BHP Billiton, who have abandoned the idea, as have most of the other big players.

So, there are two possible explanations. One is that Adani is pressuring governments to hurry up with the threat of bad publicity about putting the project on hold, lost jobs and so on. But if so, why not make a big splash with the announcement. The other, more plausible in my view, is that Adani is preparing to cut and run, and wants to be able to blame government interference rather than its own misjudgement of the market.

Categories: Economics - General Tags:

In the press

June 16th, 2015 116 comments
Categories: Economics - General, Environment Tags:

My response to Grattan on solar PV

June 1st, 2015 71 comments

Crikey has published my reaction to the Grattan Institute’s Report on solar PV (over the fold). My summary

the headline finding of the Grattan Report is totally wrong, even ignoring all the criticisms that have been made of the analytical framework. The report should be retracted and rewritten.

Read more…

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The end of coal

May 23rd, 2015 23 comments

I have a piece in The Conversation, looking at the continued fall in Chinese demand for coal, and a highly relevant IMF study confirming previous findings that, even disregarding climate change, the health costs of burning coal make it more costly than renewables. So, the idea that the path to development lies through coal is a nonsense. The Chinese government has recognised this and acted, and the same will be true in India before too long.

I’ve reprinted over the fold.

Read more…

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Queensland in recession?

May 22nd, 2015 6 comments

There’s been a bit of fuss over the announcement by Queensland Treasurer Curtis Pitt that Gross State Product contracted during the last two quarters of 2014, which were also the last two full quarters under the Newman LNP government. Two quarters of negative growth is a common criterion for declaring a recession, and much of the controversy concerns Pitt’s use of this term. Is it justified. Obviously, the LNP and their allies would like to prove that it is not, and have made vociferous attempts to do so.

Some can be dismissed pretty easily as bluster. Joe Hockey, demonstrating the grasp of quantitative analysis for which he has become famous, declared Pitt’s claim “complete rubbish”. His supporting arguments were a mixture of irrelevance “There’s certainly no evidence of that at a national level” and wishful thinking “the bottom line is, we want Queensland to grow”.

Similarly, the claim I’ve seen quoted by Opposition spokesman Langbroek that the numbers exclude net exports appears to be just plain wrong.

A more serious objection, at least potentially, is that these figures are derived from preliminary Queensland Treasury figures, rather than the ABS numbers due in June. June isn’t far away, and will either confirm the preliminary numbers or not. It will be interesting to see if anyone is willing to eat humble pie.

A more interesting question, to my mind, is whether two quarters of negative growth is a good definition of recession. This article (in the Murdoch Courier-Mail, but authored in part by the excellent Paul Syvret, suggests not.

According to the data released yesterday, Queensland was by strict definition in recession in the latter months of 2014, but it was not one accompanied by waves of retrenchments (outside sections of the resources sector), business failures and plunging consumer sentiment.

Part of the problem here is that the only recession most Australians can remember is that of the early 1990s, long and deep and followed by a jobless recovery. Before that, the recessions of the 1970s and 1980s were also severe. The last time we had a mild recession, of the kind for which the two-quarter rule was proposed, was back in the 1960s.

This is fairly accurately summed up in the same article

in the second half of last year we had gradually rising unemployment, and a more marked slowing in business investment as major resource sector projects tapered off. At the same time public sector investment was dragging on growth as the government concentrated on fiscal consolidation ahead of its planned privatisation and asset recycling program.

To sum up, the numbers are bad enough to demolish any idea that, to the extent that governments have any influence on the economy, the LNP government and its federal counterpart were doing a good job for Queensland in 2014. But we already knew that the economy was slowing down with the end of the mining boom.

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