The economic value of natural resources

Ecuador has a lot of oil sitting beneath its beautiful and bio-diverse Yasuni National Park. If the Economist is right, it will soon need to tap that wealth. But the government has cultivated a 'green' image and doesn't want to touch the oil (although it expoits it elsewhere and even has loans from China that will be repaid in future oil production). It has proposed that it would be prepared to leave at least this oil in the ground, and maintain the Yasuni if the international community compensate half of the oil value that it would forego. The idea is that the trees an environment have both an intrinsic value by existing and provide a valuable service for the whole world; absorbing CO2. I have already contributed to the environment bonds. 

This week, one of my favourite podcasts, Planet Money, have an excellent episode on the Yasuni Park and the difficulties in how to compensate countries for maintaining their environments when it would be more profitable for them to destroy them. We need to find a better way to price nature and decide who should pay for it.

Natural gas and climate change

Natural gas is cleaner than many alternatives, notably coal. It could help to reduce US carbon dioxide emissions from around 18 tonnes per person today to around 14 by 2040.

Unfortunately, that is nowhere near enough. I went to an interesting presentation last week on the 'Economic Implications of Moving Toward Global Convergence in Carbon Emissions'. I learned that taking into consideration population growth, the sustainable level per person per year is around 2 tonnes. That is around the India's level today.

A carbon tax imposed only in the developed world can help. But even a tax of around $250 per tonne would not be sufficient to achieve convergence at sustainable levels. A tax around this level would increase the price of petrol by around $4 per gallon. That sounds like a lot but it really isn't. Americans are still drastically under-paying for petrol compared with Europe and even compared with plenty of developing countries, which can least afford it. Unfortunately, carbon is currently trading at around $10 per tonne in the EU. Still some way to go.

Buy your own environment bonds

Ecuador has lots of oil sitting beneath its rainforest. It could chop down the forest and become richer almost overnight. But you and your children would have less nice clean air to breath, and the world would lose one of its most diverse ecosystems - and who knows what medications might be found there in the future if it is left unharmed. This poor country would lose about USD 7bn if it does not tap this oil. But if the world contributes just half of these losses then it will be prepared to forego the lost resources. Effectively, a relatively poor country is prepared to subsidise your clean air. Pretty generous, I'd say. 

I bought a 'green bond' some time ago. You can contribute just $5 if you like and, if ever the decision is taken to pump the oil, the government has to give you the money back. The scheme is administered by the United Nations Development Programme (UNDP). The returns are in-kind. You and those around you get cleaner air; you keep the opportunity to visit this part of the world any time in your life; you get to feel good that you are doing something for the world and that you are helping to compensate a poor country for part of its losses (you like to give a little something back :)  ) and occasionally you receive emails giving you updates and reminding you what a fantastic human being you are. And it's one of those emails that prompted me to write this entry.

You can read about the scheme and buy your green bonds HERE. The Yasuni National Park website about the scheme is HERE (in Spanish) and an analysis of the scheme by the World Resources Institute is HERE.

The Oil Curse: How Petroleum Wealth Shapes the Development of Nations

I just attended a presentation by Micheal L Ross on his book: The Oil Curse: How Petroleum Wealth Shapes the Development of Nations. I learnt a some very interesting things in a short time that thought I would share whilst wolfing down my lunch*.

-- Oil countries have higher birth rates and lower female participation rates in the labour force. Possibly due to the fact that Dutch Disease kills sectors in which women tend to participate, such as the export manufacturing and agriculture sectors.

-- Oil-producers have considerably less open budgeting processes than non-oil producers.

-- Since the end of the cold war there has been a significant reduction in the number of civil wars in countries. But this reduction comes entirely from non-oil producing countries.

--The number of democracies has increased significantly since the end of the cold war but this is entirely in non-oil producing countries.

-- The oil curse only started to appear following the price hikes/wave of nationalisations that occurred in the 1970s. Prior to this, oil producing countries were no more likely to have a civil war, no more likely to be a dictatorship and their budgets were as transparent as other countries.

-- Countries with only off-shore oil are significantly less likely to have a civil war than countries with some on-shore oil - in fact they are about as likely as non-oil producers to have a civil war. This suggests that tribal, ethnic, regional tensions are exacerbated if those in oil-producing regions do not feel they get their fair share and the ability of fighters for these causes can use oil to prolong fighting. 

-- There are currently only about five major oil producers in sub-Saharan Africa but this is likely to double or even triple by 2050 as more exploration is done on the continent, as oil demand increases, supply runs out elsewhere and the resulting price increases make it viable to produce in the region. This makes it important to try to address some of these issues.

So, you see, oil isn't all good.

*A part of the 'Insights into the exciting lives of economists' series

Market forces to combat climate change

David Frum argues that the best way for the (US) government to reduce oil dependence is to 'do nothing'. By 'do nothing' he seems to mean tax dirty energy and reduce income taxes by an equivalent amount*. If consumers really value polluting, they will spend all of their reduced taxation on that, if not, they can maybe use their extra cash to buy a bike and cut down on petrol. Given that 40% of trips in the US are under 2 miles and 90% of these are done by car, this seems possible even with current sprawling suburbs. Although there are issues, some independent-minded folk from Raleigh, North Carolina have been trying to figure out how to make Americans walk more (a short, fun video). I think that higher taxes on fuel are a practical and moral obligation.

Unfortunately, maybe your kid will learn that climate change is a big hoax in school. And Newt Gingrich seems to think that a free-market supporting American government should intervene to guarantee cheap petrol (HT:JK). The flip side is that taxes would have to rise to pay for the increased subsidies and there will be more floods, droughts, forest fires across America as a result of the increased pollution. It doesn't seem like such a fantastic deal.


* In the sense that this means no net change in the burden on the taxpayer, this is 'doing nothing'. But I think he undersells himself in that changing behavioural incentives to minimise negative externalities is a difficult and important part of governing a country.

Britain's progress (and lack of) in cycling

HERE is a great Guardian Focus podcast on cycling in the UK. Part of the great Bike Podcast they do. 

With the caveat that I do not live or cycle in London, I agree with some of the things discussed but disagree with others. Not enough is invested in cycling especially considering the economic benefits of cycling and the billions lost every year because of congestion. I think they have been too harsh on Boris Johnson - although it is not perfect, plenty of progress seems to have been made in London on cycling. A lot more needs to be done though. London's Blue Lanes are clearly insufficient but I disagree that they do nothing - I think that they are likely to raise awareness and change attitudes slowly. I am concerned however at the lack of resources used for cycling when funds are found for other transport. I was interested to discover that Tony Blair revealed in his memoirs that the closest any of his governments came to collapse was when there were queues at the petrol pump (I have not read it). It shows the power of the car lobby. I was happy to see that petrol prices in the UK are probably now about two thirds to three quarters of the full cost of humanity. They still need to rise further.

Carbon offsetting is sexy!

I did it for my flights to the UK over the xmas hols and for the 1600 miles I managed to clock up in the hire car. I don't think that I should have had to do either as it should be included automatically. Happily, any airlines flying into or out of the EU now have to pay the carbon tax if they exceed their (tradeable) limits. It's a pity these carbon credits were given away rather than sold to begin with and not sold but it is a good start. 

I am really happy the EU resisted pressure from airlines and other countries not to introduce the tax. See, for example, this stupid article from the Washington Examiner which thinks that the EU is trying to get foreigners to bail out the failing European economy - um... Europeans have to pay the tax too; increasing transport costs hurt not benefit the economy in the short run; and, quite frankly, we will all destroy all of our lives if we done implement schemes such as this - in economic models, that results in a utility of minus infinity making this excellent long-run economics.

Carbon offsetting the flight and the car journey makes them both more expensive but if I don't pay, someone else (who is probably significantly poorer than me) will pay for it. 

I use myclimate.org to do my carbon offsetting.

On environmental issues, businesses need government leadership

I've been wanting to write something about the Durban Climate Talks that was something more than the morbid curiosity with which I watch humanity choosing to cease to exist à la Easter Islanders by destroying all of the earth's natural systems on which we rely for survival. I like a lot the personal perspectives of my friend, Jo, who is attending the meetings. In the end, of course, countries decided to push our survival to the limit by agreeing to do something after 2020. Scientists say it will not avert catastrophic climate change and somewhat surprisingly for a country that already suffers extremely badly from the effects of climate change, India, were villains (who needs to drink water from the mountains anyway? and why should we care about monsoon patterns anyway?). All this is rather bad economics.

Thankfully, some companies are doing their best to go green despite a lack of Government leadership. But they are doing less than they otherwise would. One of the reasons is that they don't know what the standards will be and there are costs associated with setting standards only to have to change them. For this reason:

Of 300 bosses of big global firms recently quizzed by Ernst & Young, 83% said they wanted to see a legally binding multilateral deal struck in Durban to update the ailing Kyoto protocol and help to put a price on carbon emissions. But only 18% expect this to happen. The absence of a clear climate policy helps explain why, for example, investment in British clean technology fell from around $11 billion in 2009 to $3 billion last year. It would also suggest that any firm factoring a steep carbon price into its plans—as Shell does, assuming a notional price of $40 a tonne—should quietly lower it.

(see FULL ARTICLE in The Economist)

This applies in particular to new technologies such as that associated with electric cars. Israel is reportedly doing very well because the Government has already defined standards. Why invest in a system of recharging or changing batteries when the country may change standards? This partly explains why other countries are doing less well in this field.

A few companies fight against change. For example BA announced that an air duty rise will cost jobs. They are correct. But only in the short run and the alternative is far worse or, at least, far more expensive.

So there are two reasons why Government leadership is necessary: setting standards which are predictable and, applicable to everyone (fair competition) and forcing companies to adjust to the changes rather than fight them.

I recently read a book about the impact that humans have had on the environment and what the planetary limits are in different areas now and what can realistically be done. I recommend as essential reading The God Species: Saving the Planet in the Age of Humans by Mark Lynas. There is also an excellent interview with him on The Guardian's Science Weekly. (I had pre-ordered this book in fact, and I plan to write a full review of it when I get time.)

He talks in great detail about the CFC (ozone layer) crisis. It is somehow seen today as if this was an easy one to fix but in reality it was far from easy. Governments needed to be strong armed into agreeing. Industry tried to resist saying that there was no alternatives.

Of course, any argument suggesting we could no longer have fridges or deodorants make people think twice. Indeed, I believe that all arguments saying that people's lives would be significantly worse following action to prevent climate change are doomed to failure. But this didn't happen. The industry developed new technologies and I am happy to report I as I write, I am sipping on a beer kept chilled in my fridge and smelling very nice, thank you very much.

The point is that clear legislation and leadership by Government gives industry an incentive to innovate. It gets around the short term profit motive. It gets around the risk of losing business if you go green but your competitor does not. It gets around the standards problem. Governments need to lead to avoid collective action failure (tragedy of the commons) and to create a level playing field.

And we need to have faith in human nature and the dynamism of the private sector to find solutions without lowering living standards. But this will only happen with Government leadership in the right areas (and, obviously, not interfering in business in the wrong areas).

One of the major justifications for having Governments at all is the ability to correct a collective action problem. In Durban they have failed and they all lose some legitimacy for this.

Adaptation to consequences of climate change in Kenya

The BBC has a short article on use of greenhouses in agriculture to help counteract the heavy drought in Kenya. Below is a short video, also in Kenya, on the impact of drought and climate change.

I find the below interview somewhat leading but it is still interesting.

A complete waste of resources

Here is a photo of my lunch yesterday. Don't get me wrong; the burger was delicious. But did I really need a whole cardboard dish with a smiley face in ketchup? I don't even like ketchup.

Why petrol needs taxing more despite a lack of alternative transport

I had an interesting conversation last night about the necessity to tax petrol more. At least, partly conversation, partly me ranting, but that still counts. 

In the past, I have had conversations with a number of people who have expressed the opinion that petrol can only be taxed more when there are viable alternatives. American cities especially have been built based on petrol prices which do not represent its full marginal social cost. Therefore, there are sprawling suburbs and under-resourced and under-utilised public transport networks, which can be difficult to develop anyway in sprawling cities. People have to drive to get to work and to get to the shops because they live so far away and because they have few public transport options. You can't change this situation without a large change in the urban environment and in public transport alternatives. A sudden increase in petrol taxes would hurt dearly and hit productivity as it may prevent some people from being able to work in a place where they are most productive.

This is all true. Or mostly true. Here are a few counters:

1. A lot of journeys currently made by car can actually be made by other means and an increase in petrol prices should make people think twice about which journeys are most important to make and which to make in the car. 

2. I also wouldn't advocate a sudden sharp rise in petrol taxes but even a slower increase would have negative impacts allowing for behavioural and financial adjustments as well as giving time to develop useful public transport. 

3. I also think that increasing petrol prices would create demand for transport alternatives (including electric cars). It is far from obvious to me that creating transport systems first would work because it is not necessarily easy to predict how people or firms might relocate following a petrol price rise or, given this, what transport types would be most useful. Nor, is it obvious to me that we would ever reach this point of 'sufficient public transport infrastructure' to increase petrol taxes. It is a constantly moving target. Therefore, better to increase taxes and let a mixture of the public and private sector respond to the changes more organically.

But here is something stronger: even if people don't abandon their cars, even if there is no improvement in alternative transport, even if there is no shift to electric cars, even if there is no spacial reallocation of firms and households, petrol taxes still have to increase. And here is why:

The private cost of petrol does not equal the full cost to society; somebody, somewhere in the world is already paying. The suburban commuter might have to pay more for petrol but it is not enough to say that he has to have a good alternative right now because at the moment another person is subsidising his lifestyle. The farmer in Africa who loses his crop to flooding due to climate change really had no alternative. The small businesses that can't survive due to flooding or the child who drops out of school or the American state who has to issue debt to pay for water management to ensure people have enough to drink and water crops are already paying for the difference between the private and the public cost of petrol. These people are making a transfer to the suburban commuter now. 

In most of these cases, these are transfers from the poor to the rich. The poor are hit hardest by climate change and the effects of pollution. They have no choice about these transfers. In this respect, the current situation is comparable to plunder at the very least and potentially an act of war. It is a little as if the suburban American commuter is plundering a defenceless farmer's field and then complaining that his life would be difficult if he didn't do this and he cannot afford to do otherwise. And when we say that we need to provide him with better public transport (which might be true), we are validating his continued plunder. This is unacceptable and cowardly. 

Obviously, not all pollution should be banned and humans cannot exist without polluting but there needs to be a compensating mechanism. More money needs to flow from wealthy countries which do most polluting to poorer ones that suffer most. And individual people, including our suburban commuter, must think twice before infringing on others' rights. The best way to make sure that it is really worth it is to pay the full social cost. Taxes on petrol need to begin rising slowly starting now.

(HT: JM)

Question Time on Climate Change

"future economic growth requires us to tackle this issue successfully" (William Hague, Foreign Secretary)

"climate change undermines the basis for achieving the MDG" (Ambassador Mxakato-Diseko, South Africa)

"when means of income generation suddenly disappear because of flooding [people's] means to educate their children disappear before they eyes" (Ambassador Mxakato-Diseko)

Climate change offers new business opportunities - for example E-idea, Jakarta (Martin Davidson, Chief Executive of the British Council.

Need to reduce carbon emissions without compromising growth, poverty or job creation (Ambassador Mxakato-Diseko)

"[Climate change] is a reality that we experience every day" (Ambassador Mxakato-Diseko)

Watch it HERE.

HT: JT

Environmentally-friendly hot water in Bucharest, Romania

Below is a cityscape photo I took of Bucharest. The building in the foreground has black pipes which absorb the sun and heat the water inside them. Cool :)

Water in yoghurt pots

I keep going places in Turkey where water is given to you in these little plastic containers, like yoghurt pots. It probably uses less plastic than a small bottle of water, so that must be 'a good thing' if that is the right comparison. Only, I think that the alternative should be either filtered tap water or else a large bottle of water. Unfortunately, I've been in a few restaurants where the water is poured into your glass from a really small bottle of maybe just 200ml. I grit my teeth when I see it...