Energy efficiency - further reading

A robust discussion on the impact of energy efficiency on energy use took place in the journal Energy Policy over the decade since Len Brookes' article The greenhouse effect: the fallacies in the energy efficiency solution in 1994.  It concluded (for now) with another article by Brookes in 2003 entitled Energy efficiency fallacies- a postscript.  Brookes' conclusions are almost identical to my own, and those of Blake Alcott - capping or rationing resources where their use entails some kind of externality.

Brookes also adds taxing resources to reflect the cost of negative externalities, which one assumes, would be spent on reparation activities to return to a new optimal resource allocation which internalises the cost of pollution and eliminates the possibility of rebound effects (if reparations are possible).

It is worth reading his conclusions in full (below the fold):

Dutch Cargo Bike Review

Note: A follow-up (3yr) review is here. I am now a local ambassador for Dutch Cargo Bikes. If you would like to test rise this bike in Brisbane (or a three wheeler) email me at cameron@dutchcargobike.com.au  

I almost convinced myself not long ago that a bicycle for carrying children was a completely unjustified expense.  Luckily I didn't. Because my sparkling new bakfiets.nl cargo bike, supplied through Dutch Cargo Bike, arrived several weeks ago. And I'm excited. I've also convinced myself that in reality it isn't expensive, and in fact represents great value for money.

In the past three weeks I've used the bike daily for the commute to work, to the shops, to day care, to pick up my wife from yoga – you name it. It is now time for an early review. But first, I need to explain how this value conscious economist ended up with a $3000+ bike.

For the non-cyclist the prices of these bikes can be a shock. Bikes are meant to cost hundred, and second hand cars are meant to costs thousands. We have trouble seeing where all the money goes on a bicycle! But as avid cyclists would know, high quality equipment still costs money in the world of bikes, and this bike is extremely high quality.

You need to understand that the ongoing costs for cycling are extremely low, and lower with higher quality components.  I can imagine in 5 years when our youngest child is happily riding themselves we might have less use for the bike, but it would be reasonable, given the high quality of all the parts on this bike, to expect the bike to be very good condition.  If the bike sold for $2000 in five years time, you are looking at a total 5 year total cost of around $1300 (including servicing, tyres etc) or less than $300 per year, or $5.70 per week –a little more than one bus fare – which is a bargain for a young family given the great health and social benefits from family cycling [1].

I believe this bike represents good value for our family, so what are my first impressions?

The Dutch Cargo Bike team arranged delivery and assembly at my local bike shop.  What first struck me about the bike was the attention to detail – rubber antislip coating on the floor of the box, with a ledge for kids to use to help them climb in, a magnetic latch for the very stable four-prong kick stand (apparently a patented design by Maarten van Andel), and built in elastic straps for securing loads to the heavy duty rear rack. Not to mention the very bright generator light as standard equipment (which I now just leave on at all times).

The bike rides incredibly smoothly.  In fact I can cross manoeuvrability from my cons list and shift it to the pros list. After a bit of practice you can steer this puppy easily through tight gaps, even loaded with four children. And slow, well, it’s actually not as sluggish as I expected either.  After a week of riding this fairly weighty beast my legs seem to have built up the strength to ride at breakneck pace and tackle those hills that seemed so intimidating at first.

The box is extremely strong.  It looks like flimsy plywood in photos, but is almost one centimetre think, does not scratch easily, and does not flex under heavy loads. I've taken all my mates for a spin, and even loaded with my wife, child and dog (80kg) on board it feels solid and safe.

The most unexpected benefit of the bike is that after a laid back ride and lots of smiles and waves from passersby, you always arrive happy.

fn.[1] The alert reader will note there is an opportunity cost to the forgone $3000 that could have been alternatively invested, say at 5%, which adds another $150 per year.

Energy efficiency: A flawed paradigm

The word efficiency carries a meaning immersed in all things positive – you never hear that being more efficient could possibly be detrimental.  In fact, if you can bear the evangelical fervour, you may have read about achieving ‘Factor Four’ or ‘Factor Five’ gains in energy efficiency, as part of a ‘Natural Capital’ revolution comprising a ‘decoupling’ economic growth from a growth in the consumption of exhaustible resources – aka ‘sustainability’.  You may even have heard that I=PAT, where environment impact (I) is a function of population (P), affluence (A) and technology (T), and that becoming more efficient will enable a desired level of affluence will far less environmental cost.

Believe me, this is all nonsense, and indeed counterproductive to the stated aims of curbing resource use and decreasing negative environmental externalities.

When it comes to natural resource use, and the externalities associated with resource extraction and production, efficiency alone is the enabler of greater consumption.  William Stanley Jevons first noted that technological improvement, in terms of greater efficiency and therefore productivity, was the enabler of greater coal consumption in Britain back in 1865 in his book, The Coal Question: an Inquiry Concerning the Progress of the Nation, and the Probable Exhaustion of our Coal-mines. His observation was coined Jevon’s Paradox, even though the argument that technological improvements in resource efficiency (modes of economy) leads to greater resource use was already widely accepted in the labour market:

“As a rule, new modes of economy will lead to an increase in consumption according to a principle recognised in many parallel instances. The economy of labor effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened.”

Economist forecasts for the record

Just for fun here are some recent forecasts from some of Australia’s leading economists.

Bill Evans – Westpac Chief Economist - 3 September 2010

At present we are expecting rates to rise by 75 basis points during 2011. Markets will need to adjust a long way to accommodate that view

Peter Jolly – NAB  Head of Global Research - 4 September 2010

Our year ended GDP forecast has lifted to 3¼% from a little under 3% As a consequence, we debated whether the 100bps of tightening in our forecast starting February 2011 was enough. We think it is, but it did remind us that a 2010 hike remains possible should either a) Q3 inflation in late October be shockingly high or b) the economy grows above trend in the 2nd half and the unemployment rate (now 5.3%) plunges through 5% - quite possible

Christopher Joye – Rismark - 23 Aug 2010

The economy is about to embark on a period of above-trend growth (mean of the ABS trend measure since June 2000 is 0.7%/qtr or 0.4%/qtr/capita)

Warren Hogan – ANZ Chief Economist - 1 September 2010

The consensus seemed to be that the Reserve Bank will be happy to sit pat for six months and then raise rates by 100 basis points through next year. The ANZ's Warren Hogan was the hawkish outlier of the group, predicting 150 or 170 points over the next 18 months.

Hogan believes we are about to see a period of serious inflationary pressures thanks to the commodities boom's income wave – the CBA's Michael Blythe reckons the income surge will add 3 or 4 per cent to GDP over the next couple of years

Dr Frank Gelber – BIS Shrapnel Chief Economist - 7 September 2010

Interest rates are set to rise and commercial property values will skyrocket.

"I've never seen a lower risk, higher prospective return, in the commercial property market, ever," he said. "We're looking at rents and property values doubling in Sydney and Melbourne over the next five years." [commercial property]

Cameron Murray –Economist, blogger (you read it here first)

Inflation and GDP will surprise on the low side in the September quarter.  Remember, the June quarter had a booming terms of trade (which is now languishing), fiscal stimulus (which is now finished) and two interest rate moves by the RBA which could drain consumer confidence and spending, especially when combined with house price nerves and debt concerns.  Therefore I expect the RBA to keep rates on hold for the next 6 months (with some independent upward moves of mortgage rates by banks), with a possible stimulatory move by the RBA next year.

On a different note, for those who want a little more insight into Australia’s own residential mortgage backed securities market, this piece from Adam Dellaverde might pique your curiosity.

Waste Revisited – the ‘Green’ bag revolution

The last time I wrote about waste I started like this:

The oft-repeated mantra of the ‘ecological modernist’ is that we are wasteful. They see the rise of disposable cups, packaging and plastic bags as a sign that of that wastefulness. Further, in terms of energy and climate change, they see traffic jams full of cars with only the driver inside, and lights on in buildings with no occupants in the city all night – a society squandering our resources. If only we could stop all this wastefulness and build a utopia.

I argued that waste is a relative and value driven term, and that the popularity of waste as a concept in environmental circles is in fact slowing progress on environment issues, as it distracts from the core problems.

Waste is not a useful concept, but litter, ‘stuff in the wrong place which may cause harm’, certainly is.  Governments have waged war against plastic bags in the name of reducing litter (even though they prefer the term waste).

Outlawing giveaway plastic bags appears to have gained traction with policy makers as one path to environmental bliss.  South Australia has a law.  Victoria has one. Ireland has one (although the list of exemptions is pretty long). California is considering one.  And the list goes on. 

The Environment Revisited

I want to revisit some of the key environmental themes of this blog that have had very little airtime lately. In particular I want to revisit, over the next month, the unintended consequences of some of our favourite environmental policies and personal choices.

For those new to the blog, the divergence of post topics from my blog title is explained here:

...understanding property is the key to a reasoned approach to preserving our quality of life by preserving environmental amenity. Maybe I am more of a ‘quality of life’ economist who believes there are many non-market goods, including the quality of, and accessibility of natural environments, that are major contributors to our well-being.

However the increasing fanaticism I have observed in some areas of the climate change movement, the lack of ability for some environmentalists to see the forest for the trees (pun intended), has lead me to distance myself from some of the core environmentalist views.

As a rule of thumb I believe we should first focus our efforts on local, tractable environmental problems with clear externalities, and implementable solutions – protecting diversity and fish stocks in the Great Barrier Reef, tackling air pollution and improving urban amenity, and preserving the quality of waterways and wilderness areas. Climate change, that global intractable problem, has dropped down my list of concerns, even though my previous research focussed on ways to reduce greenhouse gas emissions.

The development of my ideas on the environment is the reverse of renowned ‘skeptical environmentalist’ Bjorn Lomborg’s u-turn. He once held a strong position that climate change was far down humanities list of concerns, particularly noting the obvious an immediate threats from treatable diseases in the developing world. Now climate change to the top of his list, no doubt to pitch his new book to cashed-up fanatics.

My second rule of thumb is that personal ‘green’ consumption choices make no difference, and small actions do not add up. These behaviours are typically offset by other economic adjustments in upstream production and by choices of others as prices respond. These effects are know an rebound effects.

A recent article in The Economist highlights new research showing these rebound effects in action. The study estimates that new energy efficient lighting technology will increase energy consumption in the long run. My own research showed that conservation behaviour, such as using lights and electrical appliances and driving less, will also result in minimal change as money saved get spent elsewhere in the economy.

I intend to revisit ideas about waste, efficiency, environmental taxes, recycling and solar power over the next month to see how my ideas have developed, and to seek input to develop them further.

Interpreting today's National Accounts

A cautionary tale from RMIT's Dr Steven Kates over at Catallaxy Files:

The National Accounts for June 2010 have come out today and will provide those who look no deeper than the headline figure with the belief that the Australian economy is on a shortcut to prosperity. The numbers tell a different story, and while I have no better idea about the future than anyone else, there is nothing in the recent past that should make anyone think things are heading in the right direction.

Three sets of figures stand out as part of a cautionary tale told by the numbers.

The first is the set of figures on Private Gross Fixed Capital Formation, the data on private sector investment. Across the year the growth rate was a quite sedate 1.3% and for the quarter itself (I always use the trend numbers), the growth rate was actually negative, coming in at -0.1%.

Meanwhile, for Public Gross Fixed Capital Formation the growth rate was 38.5%, a monstrous increase. The quarterly figure was only 4.7% which means the numbers are coming back down to sane proportions but even so.

Then thirdly there is the figure for imports which rose by 15.9% across the year, raising spectres of its own. For the quarter it was 1.9%, and for the first time this financial year was lower than the level of exports.

There is a story of debt printed all over the accounts, both domestic and foreign. We have as a nation splurged to get a result, but the costs are still to be paid.

The notion of a double dip, especially after efforts made to maintain the appearance of growth in an economy heading into recession, is in part due to the need not only to unpick the production errors that led to recession in the first place, but now to undo all of the structural changes introduced as part of the stimulus. People producing and installing pink batts now have to find a real job although the major horrors may take place in the United States. We shall see what happens then.

Competition Series Part IV: The future

While competition can clearly bring significant consumer benefits (think Virgin Blue and the airline shake up, or Aldi and current supermarket competition) the evidence is clear that this is not always the case, and that harnessing the innovation stimulated by competition can come with a large coordination cost.

One major consideration as to whether competition can work effectively – will government still control a production bottleneck?

For example, once airport runways are operating at capacity, the government will have the final say on approving new runways. In the mean time, airport owners can act as a monopoly as there is a huge, in fact insurmountable, barrier to entry.

Friday quick links

On personal freedoms, litigation, and common sense (a good read)

Did he really say that? Chris Joye, optimist, reckons that stability and continuity are valuable things for an economy that is hesitantly emerging from the global financial crisis and about to embark on a period of above-trend growth

Does light rail improve public health? This study has results showing obesity declining in areas serviced by light rail in a before and after comparison.

In the spirit of the competition series running this month I thought it opportune to comment on Sam Wylie’s recent article on reciprocal obligations of banks following government support.  Thinking about the whole story makes the situation seems ridiculous.  The government privatises the banking system, allowing privately owned businesses to determine the money supply, and then bails them out after a crash which resulted from their undue risk taking, then left them to go on their merry way to make abnormally high profits once again.  Clearly, there is no moral hazard here and this wonderful situation is highly beneficial for the people.

Can you draw a conclusion about the impact of population growth on economic welfare from this graph? 

What does it mean for an economy to ‘turn Japanese’ and what determines whether it will?

What few seem to appreciate, either inside or outside of Japan, is just how strong the resulting Japanese recovery from 2002-2008 was. It was the longest unbroken recovery of Japan’s postwar history, and, while not as strong as pre-bubble Japanese performance, was in fact stronger than the growth in comparable economies even when fuelled by their own bubbles.

How on Earth did Japan manage that with their ageing population and zero population growth? Indeed, Japan outperformed Australia in productivity growth since 2000 and very nearly kept pace with real GDP per capita growth.

The RBA’s Ric Battelino seems confused. In a recent speech on the Australian economy he notes that “the slowdown in productivity growth has meant that GDP growth in the latest decade was not as fast as in the previous decade”, while also saying that for the past two decades “part of the growth came, of course, from the fact that the population grew strongly over the period, particularly in recent years.” What? The data he presents shows a negative correlation between economic growth and population growth, yet he continues to promote a positive relationship.

Australia’s average annual real growth in GDP per capita (currently the best measure of economic performance) since 2000 is 1.28%. While I can’t find a direct measure from the Japanese Statistical agency, using the World Bank data collection I can make a comparison of real GDP growth per capita of Australia and Japan using a common methodology. Using these statistics I find that Australia had a mean annual growth in real GDP per person since 2000 of 1.8% while Japan’s was 1.4%.