Category: Economics – General

What do destroyers destroy? What do frigates … ?

John Quiggin192 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.

The generation game and the 1 per cent

John Quiggin50 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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EROEI

John Quiggin35 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.

CCS: A fiction that has outlived its usefulness

John Quiggin41 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.

Leaving it in the ground

John Quiggin33 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.

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

John Quiggin160 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

John Quiggin68 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.

Adani Galilee Basin project on hold: threat or alibi?

John Quiggin36 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.