Category: Economics – General

Adani mirage fading

John Quiggin28 Comments

Adani Mining has just received the final approval from the Queensland government for the Carmichael mine in the Galilee Basin. According to this report from February, citing a “top Adani Group executive”, operations should start in August 2016, which would be a disaster for the global environment.

But wait! Now it seems yet more “secondary approvals” are needed (it appears this refers to a bond for cleaning up the mess afterwards), and “we hope that construction would start any time in 2017”.

There’s more interesting stuff in the report.

He said the price of coal was not the main issue in determining the viability of the project, but rather the cost at which the coal could be mined as the company already had a price agreement with the Indian government.Adani Mining CEO Jeyakumar Janakaraj claims there’s no need to worry about the price of the coal they produce “We are an integrated player. We have sold electricity in India on a long-term price.

‘‘It is not about the price point of coal, it is about the cost point, at what cost can we produce coal so that we will always be able to make a profit with the electricity price that we have already sold,”

The reference to the Indian government is pretty cheeky, given the government policy of eliminating coal imports over the next few years, which looks to be on track to succeed. (it’s currently a little behind its targets for increased production, but that’s because of weak demand).

More importantly, Janakaraj’s claim that “We are an integrated player” suggests he does not know much about his own business. Adani was an integrated enterprise when the project began. But the restructuring of the Adani Group in 2015 separated Adani Power (the electricity producer with a diversified portfolio of coal-fired power and renewables) from Adani Mining, which holds the stranded assets like Carmichael. This analysis from IEEFA spells it all out. Adani Power would be breaching its fiduciary obligations to shareholders if it paid an above market price for coal from Adani Mining.

I found a response from Adani, which illustrates one of my favorite points. When you have no answer to a damning report, say that it is “flawed“. That’s true of just about anything, and saves you the trouble of an actual response.

Keeping Sea Lanes Open: A Benefit Cost Analysis

John Quiggin21 Comments

Whenever I raise the observation that navies are essentially obsolete, someone is bound to raise the cry “What about the sea lanes”. The claim that navies play a vital role in protecting trade routes is taken so much for granted that it might seem untestable. But it turns out that most of the information needed for a benefit cost analysis is available. Unsurprisingly (to me at least), the claimed benefit of keeping sea lanes open doesn’t stand up to scrutiny. I’ve spelt this out in my latest article in Inside Story, reprinted over the fold.

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The patrimonial society comes to Australia

John Quiggin80 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

John Quiggin73 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.

Hard cash and climate change: repost from 2005

John Quiggin142 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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Increasing fuel efficiency: standards vs prices

John Quiggin24 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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Directional politics

John Quiggin21 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.

What do you do with a problem like Adani ?

John Quiggin22 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.

The economist as Grinch

John Quiggin51 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