Ghost Flights

Various UK media report that British Midland, Britain’s third largest airline, plans to fly empty or near- empty planes during next winter in order to retain valuable slots at Heathrow airport. This is just an extreme example of what all airlines expect to be doing; namely not reducing flight schedules in the face of the anticipated reduction in demand. (Some airlines may cancel individual flights, which would be a major inconvenience to the few passengers booked on such flights. And there is a limit to how much they can do this, because a flight must operate at least 80% of the time in order to retain the slot.)

This situation is crazy, both on economic and environmental grounds, but it is difficult to know what to do about it. Some advocate requiring a certain average percentage of seats to be filled, but when this was tried at the much smaller Norwich airport at least one airline responded by hiring actors to fill the seats.

Another suggestion is to change the way airport taxes are charged. Currently, they are charged per passenger, whereas a charge per seat (regardless of whether it is occupied) or per plane, would provide an additional disincentive to flying empty planes. It is not at all clear that this would work, however, as there is already a substantial financial cost to flying empty planes. Indeed it seems doomed to failure; if an airline is prepared to pay an actor to fill an empty seat, and to pay the tax for that actor, it would save money if it were able just to pay the tax on the empty seat.

The real problem is the use-it-or-lose-it policy on slots. This might make sense when slots are at a premium, but if flights are leaving empty in order to retain slots, that is clearly not the case and the policy should be suspended while demand is reduced. Better still, the policy should be abandoned altogether and slots auctioned afresh each year.

Cheap air fares and holiday homes.

Settling into the London apartment and noticing that British TV seems obsessed – even now – with real estate investment. There was a program last night about investing in apartments in Montenegro. Breathtakingly beautiful as it was, it seems to me that the investment potential depends upon two things: the continued desire to vacation in hotter climes; and the continued bargain prices of European air travel. Seems to me both are doubtful. Investing close to where people work makes more sense to me; hence the London apartment.

The Price of Oil

I have been “off the air” for some weeks due primarily to the time it has taken to get broadband in the London flat which will be my summer home, but also due to being sick. I woke up this morning to the sound of Malcolm Wicks (UK Minister for Energy) explaining why going to Jeddah to discuss oil prices was not only worthwhile but also consistent with the government’s commitment to reduce Britain's use of fossil fuels. I cannot say it made a lot of sense, but with demonstrations in various parts of Europe about high fuel prices, and discussion on both sides of the Atlantic about reducing or removing fuel taxes, a politician must pander. (To his credit, Obama has not called for a “tax holiday” though he stopped short of giving the real reason.)

The truth is one might as well protest about the color of the sky. The market is sending us a message; our reliance on fossil fuels is unsustainable, and the only way we will see prices go down is if we use less. And as the Asian countries increasingly meet their populations’ legitimate aspirations we in the west who can best afford it need to set an example by using much less. As for fuel taxes, this would be a good time (for a suicidal politician!) to increase taxes; in the current supply/demand scenario the money would come almost exclusively out of the producers’ pockets, leaving the consumer price unchanged. Producers would have reduced incentive to develop ever more costly sources of oil, while the extra tax revenue could be used to encourage energy efficiency and clean energy.

Sign Petition on Gas Tax Holiday

I have blogged before about the gas tax holiday proposed by Clinton and McCain. It sends a bad message but in fact my main objection is that it is stupid; since there is little scope to increase supply, the benefit would go to the oil companies as the price at the pump adjusts to the current price to balance supply and demand. In fact, now would be a good time to increase gas taxes, for the same reason; it would not affect retail prices in the short run, but would send a message that high gas prices are here for the long term.

To sign a petition on this go to http://www.terrapass.com/blog/posts/sign-the-gas-tax-holiday-petition?utm_source=newsletter&utm_campaign=newsletter-b&utm_source=bronto&utm_medium=email&utm_term=Sign+the+%26lsquo%3Bgas+tax+holiday%26rsquo%3B+petition&utm_content=twelsh%40barbecana.com&utm_campaign=Newsletter+05%2F14%2F08+-+segment+B

Why Tax Holiday Won't Work

Both McCain and Clinton have proposed a gasoline tax holiday for the summer. Fortunately for the environment, it won't work.

McCain, whose idea it was first, admits he does not understand economics, but Clinton should know better. There is very little short-term elasticity on the supply side, so the price at the pump is determined by demand. This price won't change much if there is no tax; rather the money which would have gone to the government will go to the oil companies. Which is ironic, given Clinton's idea of a windfall tax on these companies.

So, it's bad for the federal deficit, makes the oil companies richer, and has little or no effect on he price at the pump. And to the extent that it does reduce prices at the pump, it is bad for the environment.

Behavioral Economics

Dan Areily’s new book “Predictably Irrational: The Hidden Forces That Shape Our Decisions” seems to be getting a lot of press lately, having been reviewed in newspapers and Dan having been interviewed on NPR. It is the subject of a review, written by Elizabeth Kolbert, in this week’s New Yorker. Ms. Kolbert is the author of “Field Notes from a Catastrophe,” an anecdotal book about climate change (which I recommend by the way), but she does not link the two issues in the review.

Dan Areily’s book is a popular one on the subject of Behavioral Economics, which studies what people actually do when faced with economic choices rather than what Adam Smith thought they should do. It turns out that we are not very rational, and that calls into question the validity of a lot of classical economics. The invisible hand might be blind also, and maybe a bit tipsy. I got to thinking what this might mean for carbon pricing. (I should perhaps add here that I have yet to read the book, so this thinking might be premature.)

As discussed last week, a “sensible” price for carbon emissions is probably in the $10 to $50 range per metric ton, which translates into 10 to 50 cents on a gallon of gas or 1 to 5 cents per kilowatt hour on the electricity bill. This extra cost is meant to provide: the power company with an incentive to develop alternative energy sources; industry to find less energy-intensive ways of making products, and indeed entirely new products which use less energy; and consumers to demand and buy products which use less energy and to otherwise alter their life styles to use less energy. Furthermore, if classical economics holds sway and we all behave rationally, it is meant to cut emissions in a way that does least damage to our standard of living. But will it work?

We can probably rely upon industry to do its bit. At least we should hope that well-run corporations make their decisions on a rational basis. Fortunately their rationale includes their desire to look good, so if anything they are probably going to put more emphasis on going green than would be warranted by a strict calculation of the cost. Right now there is no cost, but companies are already beginning to behave as if a carbon tax or a cap-and-trade system were in place. This is partly because a lot of their decisions have long-term consequences, but also because of the public relations benefits.

As an example of this, I read somewhere that over half the coal fired power stations that were planned in 2000 have since been cancelled. Carbon Moratorium Now (www.cmn.org) reports that 59 such stations were cancelled in 2007 alone, while here in Texas (where we have more wind power generation on line than any other state), 8 of the 11 coal-fired stations planned by TXU were recently cancelled as a condition of its prospective new owners.

But what about us consumers? Here are a couple of statistics:

74% of Americans believe high gasoline prices are a "serious" or "somewhat serious" problem. (Source: Quinnipiac University Poll. June 5-11,
2007), and

81% of Americans believe gasoline prices are "unreasonable." (Source: CNN/Opinion Research Corporation Poll. May 4-6,
2007.)

Yet:

64% of Americans would be willing to pay higher gasoline/fuels taxes to support development of alternative energy sources. (Source: CBS News/New York Times Poll. Apr. 20-24, 2007.)

It is hard to think that we will change our habits because of a 10 cent increase in the price of gas, especially as this is dwarfed by recent increases due to normal demand and supply issues. But we are changing our habits. Prius outsold Explorer last year, and I saw my first Smart ForTwo in Houston last week. I was gratified to see two hybrids in the paddock of a vintage car race meeting at the weekend, showing that even us petrol-heads are concerned. (This was a casual observation; I was not looking for hybrids, let alone counting them. I just happened to notice the inconspicuous badges on these Hondas.)

I doubt that it is the possibility of another 10 or even 50 cents on a gallon of gas that is motivating people though. For now, I think the irrational motivations – by which I mean motivation not based on pure self interest – is working in favor of conservation rather than against it. Let’s keep it that way!

But if consumers don’t do our bit, industry will take up the slack in a cap-and-trade system. The solution will be a little less than optimal, measured in strictly economic terms, but one could argue that if we are happy with our choices then by definition they were the best.

US Leadership in Clean Technology?

When one thinks about the leaders in efforts to combat climate change, the US does not immediately come to mind. More likely Europe, Japan, or even Costa Rica. But that could be a misleading impression, based solely upon our federal government and in particular its failure to ratify Kyoto. This will of course change soon; all the remaining presidential candidates – even Huckabee, who does not believe in evolution -- are supportive of efforts to combat climate change.

Perhaps more to the point, business is on board, partly in anticipation of GHG emissions carrying a price tag soon. The Financial Times last month published an article about how the amount of US venture capital going into GHG abatement technology was threatening Europe’s lead. According to Cleantech, a US research group, European investment in clean technology companies was only a third of the $3.7bn invested by US investors.

As reported by Reuters and AP, last week saw a UN summit where institutional investors pledged to invest $10bn over the next two years in technologies aimed at reducing greenhouse gas emissions. The plan "reflects the many investment opportunities that exist today to put a dent in global warming pollution, build profits and benefit the global economy," said Mindy Lubber, the president of Ceres, a coalition of investors and environmental leaders, and director of the Investor Network on Climate Risk. Lubber called it the largest meeting of financial leaders ever to focus on climate change and said it would illustrate how the marketplace is starting to transform.

The gathering of 480 investors and other Wall Street types, representing $20 trillion in capital, was organized by groups supporting UN efforts such as the UN Foundation, Ceres and the UN Fund for International Partnerships. For the full Reuters/AP story see http://www.thestar.com/News/World/article/303882

The Right to Emit GHG

There are a number of ethical questions surrounding climate change, not least those to do with the fact that many of the people expected to be most affected contribute little or nothing to greenhouse gas emissions because they live in poor countries or are not even born yet. But this post concerns a particular question posed by a comment to my February 6th post, namely: does wealth entitle one to create more greenhouse gas (GHG) emissions? (Actually the comment said CO2, but I am generalizing to GHG.) This got me thinking, which is always dangerous and in this case is probably going to be contentious.

I don’t like left/right political labels much, but on economic issues I think of myself as left-leaning. For example, I think the government has a role in redistributing wealth, as well as in regulating business, for example in preventing fraud, ensuring health safety, protecting the environment, and so on. On the other hand, I am certainly not in favor of a command economy. Marx’s maxim “from each according to his ability, to each according to his needs” has not worked very well. I am therefore basing my analysis on the assumption that we are working within a properly regulated market economy, and I am a little surprised to come up with the answer “Yes, wealth does entitle one to create more GHG emissions.” But first, we need to examine that word “entitle.” My dictionary defines the verb “entitle” as “to give a right or claim to,” so someone who is entitled to something has (been given) a right to it.

There are various sorts of rights. Certain political rights for example are guaranteed by the US Constitution together with its amendments. These rights are not so much granted as proclaimed. One example is the right to free speech. The protection of these rights is in the form of a prohibition of any law which would infringe those rights. It does not guarantee that a particular individual can exercise the right, or regulate the extent to which he can exercise it. For example, someone in a coma has the right to free speech but cannot exercise it. I have the right to free speech but cannot exercise it as extensively as Mitt Romney. (This may well be unfair, and may well be a misinterpretation of the first amendment, but that is the current interpretation.)

The rights that are given, as implied by an entitlement, tend to be the rights to certain kinds of wellbeing, typically goods and services. One might think everyone is entitled to free health care or clean drinking water, for example. Attitudes vary around the world: most western countries regard free health care as a right. The US does not, but it does regard free education as a right. China is meant to be a communist country but provides neither health care nor education free. Which brings me to the contrast between these kinds of rights and the rights guaranteed by the constitution.

A more controversial example of the latter would be the second amendment right to bear arms. This has been interpreted as meaning that every citizen has the right to own a gun, but not even the NRA thinks it means the government should provide them free. Likewise, merely proclaiming the right to free health care would not in itself make it happen; it would just mean free health care could not be made illegal. The point is that the right to a particular good or service has to be granted by someone, and so implies an obligation or duty on that person to provide it. If the government thinks everyone should have clean drinking water, they have the duty to legislate so as to somehow provide it.

I contend that emitting GHG (other than by breathing!) is such a right. Indeed, the way we create these emissions is by consuming goods and services and hence energy. That being the case, the question really becomes “should wealth entitle one to create more GHG emissions” rather than does it. Some authority would need to grant rights to emit GHG, and the implication of the question is actually that this authority would have to restrict those rights. (So maybe this is a third kind of right; one which is taken away by some authority.) Possibly this authority is just ones conscience, but maybe it is an international institution like the UN.

Given a certain worldwide budget for GHG emissions, there are various ways in which we could allocate it between individuals. The free-market way is to price the emissions so that it is reflected in the price we pay for everything. This is efficient because it allows individuals to make choices which maximize their total utility, and also creates an incentive to provide new goods and services with fewer emissions. Another way would be some form of rationing. In addition to paying for a product or service, we would have to hand over a coupon representing the carbon footprint of that product. The coupons could be allocated equally to everyone, and would almost represent a parallel currency. The problem with this idea is that it would severely limit the ability of above-averagely well-off people to spend their money (while giving the poor rights they cannot afford to exercise) and the problem with that is that it removes the incentive that is the basis of the market economy I am assuming.

In other words, unless we are prepared to say that wealth does not entitle one to drink more wine, wear a better suit, or whatever – which is tantamount to making wealth meaningless -- it is hard to see how we could say it does not entitle one to emit more GHG. Having said that, the price mechanism I would advocate for GHG emissions would bear more heavily on the wealthy than the poor. The wealthy would bear the brunt of both the reduction in GHG (since the poor don’t have much to reduce) and the cost of mitigation. It goes some way towards equalizing the emissions of rich and poor, without going to the extent of requiring them to be equal.

If we still think this is unfair, because the poor cannot afford to consume more, we should separate the issue of this unfairness from that of GHG emissions. We should subsidize people rather than emissions. That is, we should enact policies which redistribute wealth from the rich to the poor, who may well choose to spend it on something they want or need more than GHG-intense goods, which is preferable to encouraging them to emit more GGH.

New Report Sees Profit in Combating Climate Change

Once again, late breaking news trounces what I had prepared for today. According to the Financial Times yesterday, McKinsey was set to release a report about the cost of addressing climate change, and the man conclusion is that about half of the required reductions in greenhouse gas (GHG) emissions could actually be achieved at a profit. I have not been able to find this report yet on the web, but it seems to be a follow-up to the report they issued last November, prior to the Bali conference. (See http://mckinsey.com/clientservice/ccsi/greenhousegas.asp for a summary and the ability to download the full report, an executive summary, video or slideshow presentation.)

The good news is that McKinsey believes that about half the reductions in greenhouse gas GHG required to meet the IPCC goal of stabilizing GHG atmospheric concentration at 550 ppm not only can be achieved by energy savings using existing technology, but that it can be done at a profit (with an average return of 17%). That would suggest to me that the other half would probably be achievable and profitable with the imposition of a relatively low carbon tax or the equivalent, especially when measures other than energy efficiency are included.

The bad news is that we are apparently not doing it. That is to say, we are not acting in our own economic interest. Adam Smith’s invisible hand is not working. I wonder why? One explanation is that this conclusion must be quite sensitive to the price of fossil fuels, and these have only recently reached the dizzying heights they are today. Other reasons, especially among individuals and small companies, probably include ignorance, apathy, and an inability to make the necessary capital investment. I have also found personally that companies often look for unrealistic rates of return, often expecting a payback period of 2 years. I do not understand why this is; where can they invest and get a 50% return? (For insights into how big business regards climate change issues, see another McKinsey report “How Companies Think about Climate Change,” which indicates that climate change issues are considered mostly with regard to the effect on a company's brands and reputation. This and other McKinsey reports on climate change can be found at http://mckinsey.com/clientservice/ccsi/.)

In the new report, McKinsey looked at all energy-saving technologies which would provide a return of 10% or more and found that adopting all of them would cost about $170 billion a year worldwide (0.4% of global GDP and not much more than the US spends annually on the Iraq war) but would provide an average return of 17% on this investment. It identifies heavy industry in China as the sector with the most to gain, with the second being residential housing in the US, where homes are large, poorly insulated and equipped with a range of appliances that are often themselves inefficient or poorly used, such as air-conditioning systems left on unnecessarily. (US homes happens to be the subject of the posting prepared for tomorrow, Saturday being my day for what individuals can do.)

Overall, out of the $170 billion, $83 billion would be spent on industrial applications, $40 billion would be spent on residential, $25 billion on transportation, and $22 billion on commercial. $38 billion of this would be spent in China and $28 billion in the US.

More on Carbon Price, CERA Week Houston

I posted twice about pricing carbon dioxide emission recently. Here are two new developments.

In what could be a U.S. first, California’s Bay Area Air Quality Management District is proposing to charge an annual fee to businesses based on emissions, the Mercury News reports. All 10,000 “stationary sources” of air pollution that the air district regulates would be subject to the fee, 4.2 cents per metric ton of carbon dioxide, including businesses and government agencies.. The Shell oil refinery in Martinez would pay the largest fee, $186,475 a year for its 4.4 million annual metric tons of emissions. The air district’s board could take a final vote by May.

The fee seems ridiculously small. By contrast, FT reported yesterday that in evalulating investment decision US companies were planning on future legislation imposing a charge of betweeen $13 and $40 a metric ton. That's more like it, and within the $10 to $50 range suggested in my post of February 8. The report also noted that this congress had introduced 125 pieces of legislation addressing climate change.

Meanwhile, at the Cambridge Energy Reasearch Associate's conference here in Houston this week, Jim Mulva (CEO of ConocoPhillips) in a keynote address warned that the US risks the loss of geopolitical influence and "incalculable damage" to its efforts to fight terrorism and encourage trade due to its opposition to worldwide action on climate change. I would have said that had already happened.

Unintended Consequences

I don’t normally want to do more than one post per day, but this breaking news is also a perfect example of why we need accurate price signals.

It has long been known that corn-based ethanol is a very inefficient way of producing fuel, and that by raising the price of corn (and other foods which could be grown on the same ground) contributes to starvation in developing countries. (See for example http://www.truthout.org/issues_06/032207EB.shtml.) The motivation for corn ethanol was always political, to reward the farm lobby.

But yesterday there was news of two new studies published online in Science magazine which take all this into account and concludes that the overall effect of corn ethanol production is actually counterproductive, i.e. it adds about twice as much GHG to the atmosphere than using gasoline. The food taken out of the supply system for ethanol production needs to get replaced, and the way it gets replaced is largely by deforestation.

Financial Crisis?

This might seem a little off-topic, but it is certainly topical in the temporal sense and it gets my new blog off to a controversial start. I promise to get onto more familiar territory tomorrow with a short post on car mileage standards.

With the benefit of hindsight, and in particular with the revelation that Societe Generale were selling 50 million euros worth of securities into a falling market while US markets were closed for Martin Luther King Day, the dramatic Fed action the next morning seems to me like a panic over-reaction. It is not at all clear to me that further action is required this week, but I fear the Feds don't have much choice because that expectation is already factored in. It is not really the Fed’s job to bail out the stock market, though they would probably argue that they need to do so because of the spillover effect on the real economy. All they are doing is putting things off until the next crisis. If investors think the Fed will always bail them out, there is every incentive to bid prices up again.

Nor do I think we need the much-trumpeted and bipartisan agreed stimulus package. I am not an economist, but as I see it the fundamental cause of this is not Societe Generale’s rogue trader, nor their apparent incompetence in first letting it happen and in the way they liquidated the positions, nor the sub-prime mess, nor even the US housing bubble.

The real problem is that Americans consume more than they produce. That being the case, why would we want to encourage them to borrow and spend more? The next crisis may well be a loss of confidence in the dollar, and by then the dollar may well have lost its pre-eminent position as a reserve currency, which will make it much harder to control the consequences.

So, what has this to do with climate change? Well, if we consumed less we would reduce CO2 emissions not just here in the US but also in China and other countries which export to us. We are fond of pointing out that our carbon intensity is going down in the US – that is to say that we emit less CO2 per unit of GDP – but that is because we have moved so much of our manufacturing abroad. We are also fond of pointing to China’s rapidly growing CO2 emissions, but that is because they are making stuff for us! So, all I am asking is: would it be so terrible if we started consuming less, i.e. just consuming what we can afford, and slipped into recession?

I have raised a lot of questions, and maybe hackles. I certainly do not know all the answers. I am not against growth. Indeed growth is necessary to lift billions out of poverty. The question is, where should that growth be? It seems to me that the current situation is unsustainable. There is no reason, morally or economically, why the American worker should live better than his counterpart in China. (It is sometimes claimed that the American worker earns more because he is more productive, but that reverses cause and effect. The American worker is more productive not because of any innate superiority but because more capital is employed to help him, which in turn is because he is more expensive to employ.) There is no way we can prevent wages converging over the globe. Of course, the Chinese standard of living needs to improve, but maybe also the American standard of living needs also to decline. (Note that by “standard of living” I mean per capita GDP, which in my view is very different from “quality of life.” I will come back to that in future postings.)