Cementing allocations

Recall that New Zealand issues industrial allocations under the ETS to avoid inefficient carbon leakage. 

Basically, if emissions are charged here but aren't charged abroad, and production shifts from here to there because of our charges, net emissions can increase rather than decrease.

That is obviously counterproductive. So industrial emitters facing competition from places with unpriced carbon get allocations of NZU. Done right, it maintains the incentive to reduce your emissions because you can sell off your surplus NZU. But it has to be done right.

The obvious way of doing it right would be to scale industrial allocations not by the NZ plant's emissions but by emission intensity overseas. If a tonne of cement abroad has x tonnes of associated CO2 emissions, then allocate x NZU per tonne produced here. Basically. Then, if emissions intensity abroad reduces, the plant here gets fewer NZU for its own production. It maintains an incentive to reduce your own emissions intensity, and avoids getting into spots where it would actually be carbon-efficient for production to shift to plants abroad that have lower emissions than plants here.

It gets messier if the import mix has stuff from places that are cleaner than here and stuff from places that are dirtier from here. If you scale to the average emissions intensity of the import mix (weighted by proportion of imports), there's still a potential problem. Suppose average intensity overseas drops and so allocations here drop. The NZ producer reduces production. But if that hole is filled by product from the dirtier plants overseas rather than the cleaner ones, you've wound up having inefficient leakage again. 

Carbon border adjustments are an alternative. But it gets messy with trade agreements. And you have to find a way of scaling the adjustment to the emissions intensity of the product. 

New Zealand's industrial allocations seem to have a bit of a problem in cement. 

Here's Energy News:

In a presentation to investors in June, Fletcher Building said a carbon border adjustment mechanism would level the playing field.

Currently, only goods produced in New Zealand face liability under the emissions trading scheme.

As an energy-intensive, trade-exposed emitter, Golden Bay Cement is eligible for an annual allocation of free carbon credits.

Data released last week shows that for last year's production, the company received 488,575 New Zealand Units, worth almost $27 million at the current spot price of about $55.

But the company says that a 2023 law change means that as the country's only cement manufacturer, it is now effectively being "rebaselined" every five years against its own emissions - which means that every time it cuts emissions it reduces the rate at which its free allocation is calculated.

"Significant investment in decarbonising local manufacturing is not viable without certainty a carbon border adjustment mechanism will be in place in the medium-term," it said in the presentation.

"Given regulatory settings, we have reviewed our capital plans for Golden Bay.

"The current investment plan retains flexibility to remain a domestic manufacturer or transition to an import model."

That just doesn't make sense.  

The government is reviewing the settings. Scaling to international emissions intensity would seem obvious. A carbon border-adjustment could also work but I have no clue whether it can be squared with trade agreements.

The annual allocation of free carbon credits to trade-exposed, energy-intensive emitters like Golden Bay Cement was last adjusted in 2023.

The company says that, in the absence of a CBAM or an equivalent mechanism, it would likely need to consider transitioning to an import model by the early 2030s.

That could result in a non-cash impairment and write-down of assets of up to about $165 million, as well as potential make-good and cash redundancy costs of up to $180 million.

For last year's production, Fletcher received 488,575 New Zealand Units, worth almost $27 million at the current spot price of about $55.

The company says it is engaging "productively" with the Government on the issue.

If cement produced abroad is more carbon intensive than cement produced here, then shifting to imports is the kind of carbon leakage that we ought to be avoiding.  

I'd love a Kalshi market on this one

There isn't really international law. 

There are treaties, there are conventions, there are norms, there are customs. 

But all of it is against a particular backdrop. 

If a country's government just doesn't wanna and it matters a lot to it, you're going to have a hard time making it unless you're ready to impose sanctions or invade. And if one of the ones that just doesn't wanna is on the security council, good luck with the invasion option. 

So international bodies work within that constraint. There are bounds on what's achievable based on countries' tolerance about being bound. 

And it seems important to stay within those bounds lest the whole thing collapse. 

I'd love to see a Kalshi or Polymarket contract on whether China or the United States or the Saudis will ever pay a fine assessed by the International Court of Justice for producing greenhouse gases. 

Here's The Guardian:

Today, Australia has found itself on the wrong side of history.

The International Court of Justice has handed down a landmark ruling in the most significant climate decision ever issued by a court. As a barrister representing Solomon Islands in the case, I was in the courtroom to hear the judges reshape the global fight for climate justice.

The world’s top court resoundingly rejected conservative arguments made by Australia and other high-emitting countries such as the United States, China and Saudi Arabia seeking to justify continued fossil fuel extraction. Instead, the court made a slew of progressive statements – ones that will have far-reaching implications.

Under international law, countries are now bound to rapidly reduce their emissions below 1.5 degrees of warming. Failure to do so could result in developed countries like Australia having to pay monetary compensation to developing countries or being required to rebuild infrastructure and restore ecosystems damaged by climate change. This means we could be entering a new era of climate reparations.

My bet: if claimant countries are careful, they will only sue countries like New Zealand, Canada, and some European countries. Ones that might at least pretend to comply with a ruling and provide some kind of transfers in response. Canada might promise to pay and then hand out coupons for Canadian cheddar, redeemable only on one single Tuesday afternoon between the hours of 13:45 and 13:46 at a Canadian Tire outlet in Iqaluit - subject to availability of cheddar and whether there is a Canadian Tire there in the first place. But it'd be something. 

If they sue the US, China, or the Saudis - they're not going to get compensation. 

And if they sue a mix of countries, some of which play nice and some of which don't, the whole ICJ process risks looking like a mug’s game. That risks delegitimising a court that might be better off maintaining a more modest, more enforceable remit.

I'm not an IR guy though. Weakly held view that this whole thing is a terrible idea with serious downside risk, happy to be convinced otherwise. 

The Guardian piece was from a couple of weeks ago; I'd had this post in draft. I was reminded of it though by comments from Labour's Deborah Russell in Carbon News, where Labour promised to reinstate the oil and gas ban:

Speaking in the general debate in Parliament last week, as the government was set to pass the bill to repeal the oil and gas ban, Labour Party list MP Deborah Russell slammed the coalition government’s lack of action on climate change.

Russell recalled Climate Change Minister Simon Watts’ comments earlier this year that “no one sends you an invoice” for climate change liability.

“But just last week,” Russell said, “the International Court of Justice delivered its judgment on the obligations of States in respect of climate change… it says that States must act on climate change or be held responsible.”

Russell referenced several of the judgement’s findings, including that States must regulate private actors' emissions, States have a responsibility around climate change and that climate action can trigger legal consequences.

Significantly, the finding opens the door for nation states to sue other countries for climate damages – legal consequences could include “full reparations to injured states”, including “restitution, compensation and satisfaction.”

I would hope that a sufficient defence for New Zealand would be:

"Every tonne of New Zealand emissions from any new gas well must be accompanied by the surrender of one NZU. If people burn gas, the ETS means that either someone else has reduced some other emission, or someone has sequestered a tonne of emissions - probably in a forest. So the new well has no effect on New Zealand's net emissions. The only thing that affects New Zealand's net emissions is the number of unbacked NZU that the government chooses to issue or allocate. And if you think that number is worth suing us over, whether new drilling is allowed or not is irrelevant."

Afternoon roundup

The closing of the tabs...

• Transport is in the ETS. Therefore, bus networks do not need decarbonisation strategies. Councils can just assess the all-up costs of different options - with a measure for the cost of particulate matter pollution in places that are less windy than Wellington. I don't know why NZTA has funded research to models weighing up 'different bus decarbonisation strategies'. 


• Canterbury's Mike Grimshaw on the fundamental underlying problem with NZ's universities.


• Ryan Bourne on the War on Prices


• The CFTC had been the safe harbour that let the IEM run. They've since been taken over by Vogons. 

Afternoon roundup

A closing of some of the tabs

First, a set from closing a pile of the week's accumulated stories from the Stuff papers. I wonder whether the people who complain about the absence of real journalism bother reading what The Post and Sunday Star Times have been putting out lately. 

• National's 'tax relief' won't be a tax cut "because the only real cut is a spending cut, anything else is just rearranging who pays what and in which generation."
• "If Health New Zealand can't find doctors, his iwi will." Some of the social services already being provided by Ngāti Toa.
• Andrea Vance asks "How did the cost of moving two schools blow out to more than $400m?"
• Promising work on methane vaccines for cows. Including great context from Dave Frame. [And here's Dave Frame and Adrian Macey over at Business Desk on methane]
• A path from John Birch through to anti-fluoride activism in NZ that runs through ZAP - a group I'd not heard of for at least a decade. Just great stuff from Charlie Mitchell here. 
• Poor response rates in the 2023 Census, and speculation that it might be the last census as we know censuses. 
• This one is just beautifully written. Joe Bennett on a walk up a hill.

  There’s a lot to be said for being a cattle beast. You live with friends. Your food is all about you. You own nothing but an ear tag. And castration frees you from the main source of worry and expense. Admittedly you make one bad journey in the end, but you don’t see it coming, and your mates go with you. And you’re spared the horrors of old age.

And the rest of the tabs. Or some of the rest. I'm drowning here but the computer needs to be rebooted.... 

• One hypothesis on why Google Search doesn't work as well as it once did.
• Another climate stress test, another finding of zero systemic risk justifying RBNZ's continued prudential excursions into climate issues. Unless prudential reg now is meant not to guard against systemic risk and instead starts from assuming that bank directors are idiots and that bank shareholders need to be protected against bad decisions.
• NZ's NPS-UD doesn't go hard enough. British Columbia's enabling apartments up to 20 stories near transit stations. 
• A new (to me anyway) metastudy on workforce diversity. Effects are significant and positive, "but insubstantial."
• "If the government believes making it more difficult to recruit offshore is going to get 50,000 people off the dole they are as deluded as all those who came before them who wanted to believe the same thing. I get the politics. I don't get the economics."
• RBNZ now investigating whether we should have a central bank digital currency.
• The Government really ought to push ahead with the Rule of Two for Medsafe Approvals. It would unlock access to RSV vaccines. Come on......
• Taiwan wants NZ to do more in supporting anti-authoritarianism. I wonder whether we ought to be doing more in supporting scholarships for promising students from the Islands to study in NZ.
• After my Insights column on the Christchurch Cathedral cost-benefit assessment, a reader pointed us to the business case for a major Tauranga city redevelopment project. I'd hope that, if central government is putting money into this, it pushed hard on checking whether the increases in tourism are plausible (and net national rather than within-country diversion). And whatever arguments one wants to have about appropriate discount rates for social projects as compared to infrastructure projects, expect infrastructure spending (like museums) to be portrayed as social investment where the lower discount rate allows a higher NPV for purported benefits. Bit of a Lil Lisa's Slurry problem here. 
  
  
  

Afternoon roundup

More bits as I clear through the tabs. 

• Kevin Rudd's view on south Pacific security.
• 20,000 hard refusals on the 2023 census, up from 6000 in 2018.
• Andrew Heaton talks with Zach Weinersmith about space settlements.
• General Practitioners really ought to be allowed to prescribe for ADD/ADHD. 
• TVNZ in financial trouble, but still doesn't offer a subscription-version of its streaming offering for those who can't abide the ads. 
• The demographics of Parliament
• Climate Commission recognising potential for carbon sequestration through reinjection in geothermal wells. Excellent. 
• The Gods of the Copybook Headings always slouch up to explain it once more. They've been explaining it in education system results. Good that we're starting to recognise it. 
• If there's a right to be protected from the effects of climate change...
• Infrastructure Commission doesn't mince words on Auckland light rail. 

Net zero means net negative?

Will look forward to reading the Climate Commission's latest report. This bit, from Jim Rose over at Carbon News, is a bit concerning:

The world is not on track to meet the Paris Agreement’s 1.5 degrees target, the commission says, and New Zealand is likely to continue contributing to global warming after 2050.

That’s because the country’s current target doesn’t require biogenic methane to reach net zero by 2050 and has no requirement for long-lived greenhouse gases to be reduced beyond net zero.

“This means that it is possible to achieve the 2050 target and still have net positive emissions of 700–1,000 KtCH4 – and the associated contribution to global warming – in 2051 and every year after,” the commission says.

The commission says that when New Zealand’s net zero target was set in 2019 it was seen as ambitious but that’s no longer the case.

I had always understood Net Zero 2050 to mean that the unbacked NZU issued before 2050 would represent the sum total of net emissions from the covered sector from now until forever. An NZU might be redeemed after 2050; it's the quantum of unbacked units issued through 2050 that determines the amount of net emissions overall. 

If the Commission is shifting to a view that Net Zero implies undoing the emissions that have obtained from an indeterminate start point through to 2050, that's of course a much bigger job, and one that Parliament certainly didn't authorise.  

A clean ETS is certainly capable of driving beyond net zero. The government or others just need to buy credits through the system and retire the credits, unused. And if tech follows some potential paths, doing so may well be cost-effective in undoing some accumulated emissions. But probably a good idea to wait and see what the cost paths wind up looking like before committing on that one. 

Making coal

Trees are very good at sucking carbon out of the atmosphere. Unfortunately, they eventually release it back into the atmosphere. Some gets stored for the longer term, but our ETS pretends it's all released at point of harvest. And there can be a good case for that if most of it does and if it's hard to track.

But there are other options.

I have no clue whether the economics of this option would stack up, but it should be allowed in principle.

Suppose a carbon forest owner harvested the forest, dug a very deep pit, put the harvested trees into the pit, and covered them with layers of clay so no gasses would seep up. The process takes carbon from the atmosphere and sticks it back into the geosphere. Give it time and it'll be coal.

I've always figured that if a carbon forest owner did that properly, that permanent sequestration ought to count against any surrender obligations that come with cutting down a carbon forest. For every tonne durably sequestered, a one NZU reduction in surrender obligation.

Turns out Bill Gates is backing a neater version of this. Story from December 2022 but I only just caught it.

A California startup is pursuing a novel, if simple, plan for ensuring that dead trees keep carbon dioxide out of the atmosphere for thousands of years: burying their remains underground.

Kodama Systems, a forest management company based in the Sierra Nevada foothills town of Sonora, has been operating in stealth mode since it was founded last summer. But MIT Technology Review can now report the company has raised around $6.6 million from Bill Gates’s climate fund Breakthrough Energy Ventures, as well as Congruent Ventures and other investors.

In addition, the payments company Stripe will reveal on Thursday that it’s provided a $250,000 research grant to the company and its research partner, the Yale Carbon Containment Lab, as part of a broader carbon removal announcement. That grant will support a pilot effort to bury waste biomass harvested from California forests in the Nevada desert and study how well it prevents the release of greenhouse gases that drive climate change. 

It also agreed to purchase about 415 tons of carbon dioxide eventually sequestered by the company for another $250,000, if that proof-of-concept project achieves certain benchmarks.

Whenever I've suggested "Why don't we consider just letting people bury trees," NZ climate people look at me like I'm crazy. 

Meanwhile:

A handful of research groups and startups have begun exploring the potential to lock up the carbon in wood, by burying or otherwise storing tree remains in ways that slow down decomposition.

Trees are naturally efficient at sucking down vast amounts of carbon dioxide from the air, but they release the carbon again when they die and rot on the ground. Sequestering trees underground could prevent this. If biomass burial works as well as hoped, it may provide a relatively cheap and easy way to pull down some share of the billions of tons of greenhouse gas that studies find may need to be removed to keep global temperatures in check in the coming decades. 

One of the usual objections from the kind of climate people who love to grope for excuses to ignore things that might help the climate (because those things don't force Radical Structural Change and Deep Decarbonisation) is that forests are risky because a forest that offsets emissions from a tonne of coal means a transfer of carbon from the geosphere to the biosphere, and the biosphere is risky. 

Well, carbon stored in trees can be stuck back into the geosphere. 

Look at all these approaches being tried. 

Burial costs

Other startups and research efforts are taking different approaches to the problem. 

The Australian company InterEarth believes that allowing trees to soak up salty groundwater before burying them will effectively pickle the wood, preserving it for extended periods.

The Carbon Lockdown Project, a public benefits corporation founded by University of Maryland professor Ning Zeng, has proposed creating pits that are lined with clay or other materials with low permeability.

In a paper this year, Zeng and a colleague also highlighted a number of other potential approaches, including storing biomass in frozen sites, underwater, or even in above-ground shelters. His earlier work found that harvesting and storing wood could potentially remove several billion tons of carbon dioxide a year at a cost of well below $100 a ton.

You don't need all of them to work. Or even any of these ones - there's lots of other projects being tried, including mineralisation. 

Run a clean ETS focused on net emissions and run the accounting properly. If any of these techs can scale up at low cost, we hit net zero at a low carbon price and could push for net negative, to undo the damage already done. If none of them do, we still hit net zero - just at a higher carbon cost.

I was on a panel discussion earlier this week about COP28 hosted by the NZ Institute of International Affairs - remotely, as daughter currently isolating with Covid and I don't want to impose risk on others (she's fine).  

@ClimateMorgan had an engaging exchange at Vic Uni last night with NZ experts @KaedenWatts @ZEALANDIA @EricCrampton on how to keep 1.5° in sight @ #COP28 🌏🌡️ Change is urgent & possible if we act quickly & decisively together! Thanks to @NZIIA_live for facilitating this panel pic.twitter.com/0Hr4UtdrVf

— Germany in New Zealand (@GermEmbWell) November 8, 2023

But the whole discussion was so frustrating. 

A friend who'd attended said my presence there was felt, like a fart in Church, despite my being remote. 

I talked about the ETS, changes to help it drive to net zero durably, tech bets NZ should be making, other tech underdevelopment. 

Germany's climate rep wanted to focus on gross emission reduction. But when I asked about Germany turning off its nuclear plants and now having to rely on coal, she said nuclear is bad because of Chernobyl. I have a very difficult time taking these people seriously. Unfortunately, they set the agenda at COP.  

Anyway - burying trees isn't as crazy as it might have seemed. 

Afternoon roundup

A closing of the browser tabs

• Dave Frame batting back the usual (often older) arguments from those who don't like climate science. 
• Alice Evans on the origins of 'Dayooth'
• Ben Kepes on the Māori parallel to the Jewish experience
• Consumer NZ figures that if one of our grocers lowers its back-end costs, there could be zero passing-on of savings to consumers. Even a standard monopoly model would have a reduction in price. It would be a fun microeconomics problem set question: come up with conditions under which Jon Duffy could be right (if any), and provide an answer simple enough for him to understand. Consumer NZ just keeps getting more absurd. 
• I like that NZ's Accident Compensation Commission is hiring a Lead Advisor, Econometrics.
• Pharmac's posted its final decision about pulling 27 drugs from funding consideration, 24 of which were proposed to be pulled because there was no apparent prospect of Medsafe registration. They've decided to pull 24 drugs, 22 of which are because there's no prospect of Medsafe registration. Tafamidis and Cefuroximine might get onto Medsafe's radar. This system is so stupid. 
• But the new stadium would really put Christchurch on the map, just like Ogdenville and New Haverbrook. 
• Interesting proposal around investment in buying out IP rights to make lower-carbon tech more affordable in developing countries. Loyal readers may remember that I've long argued that NZ could do something similar as moonshot on ag biotech. If AgResearch figures out low-emission pastoral systems, GE or otherwise, with government funding, don't try to earn money on any patent. Release it globally on a royalty-free licence that simply requires that a small fraction of the resulting global emission reduction credits to NZ's account. Lowish chance it pans out, but if it did, it would have high return. 

Afternoon roundup

The tabs. There are too many.

• Dan Brunskill asks 20 economists how they'd define recession. A bunch of us pointed to how NBER does things. 
• Believing that recycling does much of anything to reduce GHG emissions is wrong and gets you laughed at. Believing that reducing your consumption of things covered by the ETS will reduce GHG emissions is also wrong, but generally gets you plaudits. 
• A paranoid person might start to think that government-funded media goes on crusades to name and pillory pseudonymous critics of the government who do not share their cultural views. 
• The last $5b of the Covid fund was blown on a bunch of populist vote-buying exercises. Good luck getting cross-party consensus to take on just-in-case debt in the next crisis. Labour has really poisoned this well. It is very bad if you think that future governments need to be able to do this. 
• Harvard should protect whistleblowers.
• Michael Gordon has a substack. And he provides a helpful reminder about SNZ's work trying to figure out why the jobseeker numbers are so out of whack when compared to the unemployment figures. 
• Susan Edmunds checks on CTU Craig Renney's claims that the economy's doing great. I pointed to a couple cautions, but also one area where he might have understated things: employment rates were at or near historic highs before Covid hit. 
• Oliver Lewis points to the ways that National's housing policies will likely fail. I still wish National and Labour could have maintained consensus on MDRS by setting a price target for exemptions. 
• There were a lot of appropriate condemnations of poor forestry practice leading to bad outcomes during the recent floods. And a lot of that turned into the usual "it's all neoliberalism's fault" nonsense. Anyway, here's Queenstown Council doing exactly the same thing, causing similar problems.
• I still think the funniest chaos outcome for the election would be Labour winning, but only because it loses enough party votes to the Greens that it gets a substantial overhang from its electorate seats. One can engineer scenarios where National and ACT get 51% of the vote and still lose. It's not entirely plausible, but it would make for a chaotic election night. Here's Greg O'Connor stumping for the electorate vote.
• Remember how I wanted a public health agency laser-focused on contagious disease so it wouldn't just shift back to its usual BS? Pandemic's still going, and they're already back on their usual nonsense. 
• Ngāi Te Rangi is importing houses from the US to build here. I still think that iwi should declare themselves to be their own consenting authorities and tell naysayers to sue them if they don't like it. If council makes it tough for iwi to build houses on their own land...
• BusinessDesk has a series on cost blowouts on infrastructure. On average infrastructure costs have been 23% over their initial budgets. The paper's really worth the sub. 

Forestry and the ETS

I got our submission in on the ETS review and forestry just under the wire last Friday. 

For those interested, it's here.

I really hate the precedent that the government is setting here. 

Farmers are mad about afforestation, and afforestation can have adverse consequences that have nothing to do with net emissions. But those can and should be dealt with by the parts of government best suited to dealing with each of them as they arise.

The alternative to sound Tinbergen-style policy is that we wind up in consultations about different ways of breaking the ETS every time changing carbon prices lead to changes in activities that have their own potential externalities. 

I go through a few examples:

2.12 Consider the perils of the alternative approach, which would require the ETS to reconsider which forms of carbon sequestration or gross emission reduction it might recognise or to what extent – because carbon prices encourage ‘too much’ of the activity resulting in other ancillary problems. A few simple hypothetical examples follow: 

2.12..1 Carbon sequestration through olivine transformation proves highly cost-effective, but olivine mining causes changes in land use and community concerns about heavy truck traffic. Rather than use consenting processes to mitigate externalities from mining or appropriate road-user charging and roading upgrades to deal with truck traffic, the Climate Commission is asked to pretend that this form of direct-air capture carbon sequestration does not sequester carbon – to reduce the incentive to engage in olivine mining. 

2.12..1.1 A new methane inhibitor for livestock proves highly cost-effective in reducing biogenic methane emissions. For sake of argument, let us imagine that this happens after biogenic methane emissions are brought fully into the ETS as CO2-e and are subject to the ETS cap – or are subject to their own methane trading system. The new methane inhibitor unfortunately increases nitrogen concentration in cattle urine. And because dairy farmers face lower methane charges with lower emissions, dairy farming becomes more profitable and there is an increase in dairy conversions. All of it puts increased pressure on overburdened water catchments. Rather than appropriately regulate water quality, the government asks the Climate Commission to put a thumb on the scales to discourage use of the methane inhibitor. 

2.12..1.2 A new type of cement is developed that produces vastly fewer emissions. The technology for producing the cement powder is owned by an overseas company who can easily deliver the powder to New Zealand; when used here, emissions from cement are trivially low. But because the overseas company will not licence the powder to large domestic incumbent cement producers and because it will outcompete domestically produced cement, the incumbent faces difficulty. The Climate Commission is asked to level the playing field by requiring surrender of NZU for use of the new cement as though it had the same emissions profile as existing cement – to avoid unemployment at community cement plants. A ‘just transition’ path is suggested that would allow the new cement to be treated fairly in twenty years’ time. 

2.12..1.3 A new direct-air carbon capture technology is developed. It can sequester carbon at a cost of $50/tonne and can scale infinitely. It could not only offset the entirety of New Zealand’s gross emissions, but also prior emissions if allowed to run at scale. The Climate Commission is asked not to recognise this new technology because, if it were allowed to generate NZU at $50/tonne, there would be weaker incentive to reduce gross emissions and New Zealand would not achieve the wholescale industrial, social, and economic transformation that some might otherwise desire. 

2.12..1.4 A high carbon price makes people wish to avoid housing that has high carbon cost and prefer apartments and townhouses near the city centre. However, cultural concerns are raised about the shift away from suburban living, with commensurate concern about potential reductions in family size and an aging population. A conservative government encourages the Commission to consider a higher NZU surrender requirement for electricity used in apartments as compared to electricity used in detached suburban homes to avoid this undesirable change in housing use. 

2.12..1.5 A rising price on biogenic methane emissions in agriculture, when those emissions finally face an emission price, results in reduced herd sizes and changes in rural land use. The Commission is asked to redo methane accounting to reduce the likelihood that emission pricing results in land use change, because of a view that emissions prices were not intended to result in land use changes. 

It is also interesting that the agricultural sector, which has been able to successfully evade pricing on biogenic methane for ages, is also lobbying for changes to the ETS that would sharply increase the marginal cost of reducing net emissions within the covered sector.

Afternoon roundup

The worthies, on a long-overdue closing of the browser tabs:

• Colby Cosh explains to Canadians something Kiwis have known for some time: the Party commanding the confidence of the house gets the Prime Ministership. And that might not be the largest party in Parliament. 


• New Zealand's judges keep bringing the administration of justice into disrepute. 


• Attempts to stop people from renting their houses to tourists on AirBnB. If cities just let people build more housing, none of this would be any kind of issue. 


• Agriculture emission pricing gets punted to post-election. It would have been heroic for Hipkins to hit this while milk prices are tanking.  


• ACT proposes weakening the medical licensing cartel. 


• The government adds a pile of cost-increasing conditions for receipt of film subsidies. It may have the laudable effect of reducing demand for film subsidies. Or, perhaps down the track, lead to higher subsidies to offset the cost imposed by stuff like carbon footprint audits. 

A Ramsey twist

Catching up on open tabs and stuff I'd not managed to blog.

Olivia Wannan dropped me a line asking about a UK proposal to vary carbon charges with price elasticity, the idea being that consumption of luxuries was more elastic than necessities. If we define necessities as having very low price elasticity then I suppose that works.

But it seemed a fun kind of idea. Not a good one in practice, but a bit fun to think about. 

I'd sent this back, a small bit of which made it into the final piece (there's no way the whole thing could be used; I'd sent it more as background and to think it through).

Oh wow. 

This sounds like a mirror-image of a standard Ramsey drill. 

Background: Under a Ramsey model, we wouldn’t have a uniform 15% GST. We’d instead follow an inverse elasticity rule that put a higher tax on goods with inelastic demand and a lower tax on elastic demand. The idea is that it would aim to minimise overall distortions caused by consumption taxes by putting higher taxes on goods where demand wouldn’t shift much with the imposition of the tax, because it’s the shifts in consumption caused by tax that are distortionary and cause deadweight loss.

It sounds like they’re flipping that on its head, because if you’re wanting to reduce consumption of a bad, the substitution effects aren’t a distortion, they’re what you’re trying to induce. So flip the inverse elasticity rule. 

But it will wind up hitting the same problems that the Ramsey model hits. First, Ramsey starts breaking down when you get beyond undergrad treatments of it. Recall that the ultimate cause of distortions that Ramsey is trying to deal with is substitution from labour into leisure. So you then don’t really want an inverse-elasticity rule in consumption, you want to base it on cross-elasticities of consumption with leisure and labour: the Cortlett-Hague result. But more substantially, it’s just horribly horribly impracticable and incredibly risky. Doing it right would require getting elasticity estimates on everything and constantly updating them. And every one would be opened to lobbying. Commission an expert to come up with a different elasticity estimate. One of my econometrics profs in grad school joked, in antitrust context, that he'd been offered a boat if he could get an elasticity measure to show up on the right side of a line (he turned it down of course, and just used it as example for us of the perils of this kind of thing). 

If you went down this route, you’d wind up with all of the same stupid fights that the UK currently buys on deciding what’s essential and what’s luxury for application of their VAT – interminable lawsuits over tea cakes. One group would argue that driving is really essential for them rather than a luxury. Then you wind up with something like rural zones where a low carbon charge applies and urban zones where a high carbon charge applies – but how in heck would you ever run that system? It would be thoroughly rorted in minutes. Business groups would claim that their travel is really essential, as compared to tourist travel. Everyone would be commissioning experts to produce reports – great for economists with flexible morals, not so hot for the country. 

So while I’d buy that it’s entirely plausible that a blackboard exercise could show advantages from having a carbon pricing model that’s sensitive to price elasticity of demand, it would be a terrible idea in practice. And it’s not easy to see how you’d square it with an ETS: what, pretend that a tonne of emissions from one sector is different from a tonne of emissions from another?

Ugh.

Afternoon roundup

A long-delayed closing of the browser tabs:

• A compilation of the Official Information Act requests that Health New Zealand ignored or delayed. I doubt anything gets fixed without penalties for OIA non-compliance.


• CarbonNews ($) reports more investments into Ruminant BioTech, which has a slow-release bolus that massively reduces cattle methane production. 70%. If this thing winds up being able to be delivered at a reasonable price-point, that's agricultural methane emissions solved. Nitrates will still be a problem. But 70% reduction is well beyond any of the targets for long-lived gas reduction. 


• Who is Dril?


• Learning from Houston's townhouse reforms.


• If you take away combustion's harms, there's no particularly good reason to worry about people enjoying nicotine. Do you complain about their caffeine? The excellent Clive Bates. 


• And on the same topic, note too the speech by UK Minister Neil O'Brien on avoiding NZ-style prohibitionist approaches.

  Now of course some would go further - to stop people to start smoking in the first place. The Khan Review last year advocated the New Zealand approach - a full phase out of smoking, with the age of sale increasing over time to cover all adults.
  This would be a major departure from the policy pursued over recent decades which has emphasised personal responsibility and help for people to quit. And it is the help for current smokers to quit that we want to focus on. 

• An older piece by Pete Boettke that I'd missed on the genius of Armen Alchian. Certainly one of the Pantheon of the Econ Gods. Really important points on markets as a filtering tech. It doesn't matter if people are stupid, obnoxious, or daft. You can still model them as rational and the model tracks because that's what survives. Read!

And in honour of the Boettke piece...

Presenting...

GMU Balenciaga -- Economics with attitude 😎 pic.twitter.com/wzWiOnnd73

— Samuel Hammond 🌐🏛 (@hamandcheese) April 9, 2023

Evening roundup

The closing of the tabs:

• By 2030, Canada's carbon tax and carbon dividend combo might have households seeing a net loss, rather than net gains, because high carbon prices are by then expected to reduce economic growth and household incomes. Of course, it would be even worse without the dividend. 


• An excellent visualisation of Wellington Council's proposed budget. So you can see that they're planning on spending $4.8m on the Khandallah swimming pool upgrade, as compared to $17.4m on wastewater network renewals. Spending on the library and on Town Hall are very large relative to spend on the wastewater pipes that keep failing. And they're expecting to spend about $10m more on running the new expensive convention centre than they'll receive in revenues from it. 


• Kate MacNamara goes through the government's spend on the Three Waters programme. 


• Didn't get a chance to submit on the Therapeutic Products Act. It really doesn't look good. Right now, doctors can prescribe medicines that aren't approved in NZ and patients can privately import them. Looks like that will end. Getting a "Must approve if two other countries have approved" rule will really matter if this goes ahead.

Morning roundup

The morning's worthies, as I try to trim the tabs...

• Alcohol available for consumption, per capita, continues its long slow decline.
• Noah Smith on how America became the build-nothing country. The rant would apply well in New Zealand too.
• Great piece on minimum wages and crime, wading through a mess of seemingly-conflicting results. 
• Nikki Mandow with some nice examples of co-governance working well.
• Another solar plant planned. Just the electricity market working as it should. 
• Genesis power cutting its carbon emissions and planning more low-carbon generation. Just the electricity market and ETS working as they should. 
• NZ emissions increasingly decoupling from GDP growth. Just look at this track. 

Insufficient biofuels

This is closer to right than most pronouncements on it but it's still deeply wrong.

Climate Change Minister James Shaw said he supported the move, and he and Woods had now been tasked with quickly finding a way to fill the big hole in the budget.
“This is why we have a carbon budget right, is to say, when we make these choices, actually, we've got to plug the gap somewhere else,” he said.
"The most straightforward thing that we could do is to tighten up the ETS [emissions trading scheme] unit supply, so you simply take it out that way. But there may be other policy interventions that we could make as well.”

A biofuel mandate is neither necessary nor sufficient for a reduction in net national emissions. 

If you ran the mandate without cutting the cap, you'd just shift where emissions happen. If you ran the mandate while cutting the cap, you would reduce net emissions while also shifting where emissions happen. But it's the cutting of the cap that's both necessary and sufficient, all on its own. A biofuels mandate just shifts the location of emissions, regardless of whether you cut the cap.

So yeah, Shaw's right that you could cut the cap to reduce emissions. But there's no 'hole' created in anything by cutting a biofuels mandate. Compared to a counterfactual in which we'd have had a mandate, we get a few more emissions in transport, a few fewer emissions everywhere else, and a lower overall cost of getting down to net zero. 

Any 'hole' from not having a biofuels mandate is like the hole you make in a T-1000 if you shoot it. The thing fills itself in all on its own. More emissions in transport? There'll have to be fewer emissions somewhere else. That's how the ETS works. 

Want to stop T-1000? You don't do it by shooting at transport, or shooting at power generation. You do it by cutting the cap steadily over time to hit net zero. 

Circular hydrocarbons

Want to make hydrocarbons part of the circular economy? Terraform Industries has a whitepaper. 

Basic deal: use solar to power kit that sucks CO2 out of the atmosphere. It'll also pull some water out of the atmosphere while it's at it. Turn the water into hydrogen and oxygen. Then make CH4 (or any desired hydrocarbon) with oxygen and some surplus water as waste product. 

They're aiming at an all-up carbon sequestration cost of USD$43/T. 

Afternoon roundup

The worthies:

• Google helping test whether seagrass pastures can help with carbon sequestration.
• A satellite launched by Rocket Lab from New Zealand is about to enter lunar orbit.
• The government's launching another carbon exchange. Hard too see the point where existing secondary markets seem to work well. 
• BNZ's drawing more from the RBNZ's Funding for Lending programme, which continues to provide cheap funding to the banks while the RBNZ is otherwise trying to tighten monetary conditions. 
• Josh Hendrickson's explanation, as at 11 November, of what the heck was going on with FTX. 

Reader mailbag: the tricky maths of being inclusive

A loyal reader sends through a bit of math checking one of the standard bits of boilerplate on policy reports around climate change and adaptation strategies. 

I've seen the claim all over the place too. It's one of those things that feels like it was never meant to be taken literally, while simultaneously hinting that it should be taken literally. 

What does disproportionately even mean? If it isn't pinned down before someone goes in to try to make sense of it, it'll turn into a motte-and-bailey thing. 

My reader writes [with minor edits from me to anchor links]:

The tricky maths of being inclusive 

Adapt and thrive: Building a climate-resilient New Zealand – New Zealand's first national adaptation plan was published on 3 August 2022, and released on their website.

The webpage contains the extraordinary claim that:[1]

No two communities will experience climate change in the same way. Communities that are less able to adapt and disproportionately affected by climate change – including Māori, Pacific people and ethnic communities, low-income groups, disabled and older people, women, children and youth, and rural communities – are considered throughout this plan.

Why do I say this claim is extraordinary? Well, leaving aside the fact that the report does not contain any data to back it up, the claim is all but impossible mathematically.

Exploring further:

First, we need a scale on which the effect is measured. In the context of climate change adaptation, let’s call this scale expected adaption costs (A). This scale starts at zero (no expected costs), with positive values representing larger expected costs.

Second, to say that a group (G) is “disproportionately affected” the average A (Ā) for individuals in G has to be different from the average effect on individuals in the population (P) from which the group is drawn. I will use G to mean all people in the communities listed in the claim.

Third, the plan asserts that the communities G will be more adversely affected than others, i.e. Ā_G > Ā_P.

Fourth, let’s define another group R, consisting of everyone else, i.e. those in P who are not in G. Simple maths tells us that Ā_R < Ā_P < Ā_G. That is, the average effect for R has to be less than the population average. This means that R is also “disproportionally affected”, just in the opposite direction from the effect on G.

If G had a small number of members relative to P, then in most situations Ā_R would be roughly equal to Ā_P.[2] In that case we could ignore the disproportional effect on R for practical purposes. But what about a situation in which most of the population is in G? In that case, the advantageous effect on those in R must be of a significantly greater magnitude than the adverse effect on those in G.

Let’s make a rough stab at working out the numbers in P, G and R. I’ll call them p, g and r.

Using the 2018 census data in NZ.Stat,[3] p = 4,699,755 (usually resident population count).[4]

The NZ.Stat standard breakdown by personal income, ethnic group, age and sex gives us a first estimate of r.[5] If I use total personal income below $30,000 as the “low-income groups” criteria, and age below 30 years as the “children and youth” criteria[6],  age 65 years and above  as the “older people” criteria, and everything other than “NZ European” and “New Zealander” as the “Māori, Pacific people and ethnic communities” criteria, then I get a first estimate of r = 582,210 (i.e. 12.39% of p).

But some of those people live in “rural communities”. The NZ.Stat subnational population estimates[7] for June 2018 allow us to estimate the proportion of males aged 30-64 that live in rural areas: 12.63%. This allows us to refine the estimate of r = 582,210 * (1 - 0.1263) = 508,677 (i.e. 10.89% of p).

But some of those people are disabled. The NZ.Stat disability tables for 2006[8] allow us to estimate the proportion of males aged 30-64 with “European” ethnicity that have a disability: 16.93%. So, my further-refined estimate of r = 508,677 * (1 – 0.1693) = 422,558 (i.e. 8.991% of p).

The claim doesn’t come with definitions, so I’ve had to make some assumptions. Further, the data on which I’ve made these estimates does not exactly line up with those assumptions. In particular, I’ve excluded people aged 25-29, which will bias the estimate downwards. And I can’t rule out some interactions between the variables I couldn’t control for when estimating the proportions in rural communities and with a disability.

Accordingly, I‘ll call the final estimate of 9% “about 10%”. So, the claim of disproportionate (adverse) effect applies to about 90% of the population. And, following the maths outlined above, the required disproportionate (advantageous) effect has to be around 10 times stronger.

Is this realistic? We’re talking about average effects here. Seeing as R is made up of middle-aged males with no recorded ethnicity, a middle-to-high income, living in an urban area, and without a disability, you’d think they were disproportionately more likely to own a home and to live near the coast. At least some of R are in the firing line for rather large climate-adaption costs. To maintain the group average for R, those coastal homeowners will need to be balanced out by others facing an even stronger advantageous effect. This will most likely require a subset of R to be facing negative climate-adaption costs – i.e. receiving a net positive benefit from climate change. This seems inimical to the Secretary for the Environment’s opening message in the report:

New Zealanders are already feeling the impacts of climate change… More change will come, and impacts will increase, disrupting nature and society, affecting people’s health and wellbeing and damaging livelihoods.

To conclude, the report makes a very strong claim of where climate-change adaptation costs will fall, which is mathematically implausible, perhaps impossible. The report contains no data to back up the claim, and the reasoning behind it is scant. Did the report go through a quality-assurance process? If so, why wasn’t this issue picked up? Are there other clangers in the report? Should readers trust anything it says?

[1] This claim, or a close analogue, is also made in the report’s text, but is less clearly stated.

[2] The exception would be if the effect on G was extreme.

[3] https://nzdotstat.stats.govt.nz/wbos/Index.aspx#

[4] NZ.Stat: Age and sex by ethnic group (grouped total response), for census usually resident population counts, 2006, 2013, and 2018 Censuses (urban rural areas).

[5] NZ.Stat: Total personal income, work and labour force status, and ethnic group (grouped total responses) by age group and sex, for the census usually resident population count aged 15 years and over, 2013 and 2018 Censuses (RC, TA, DHB).

[6] The standard NZ definition for “youth” is < 25 years. See, e.g. https://www.myd.govt.nz/documents/policy-and-research/policy-document-final.pdf. Unfortunately, the age categories available in NZ.Stat don’t align nicely.

[7] NZ.Stat:

Subnational population estimates (urban rural), by age and sex, at 30 June 1996-2021 (2021 boundaries)

[8] NZ.Stat: Disability status by place of residence, age group, sex and ethnic group, 2006 

Afternoon roundup

Minor notes on the closing of the browser tabs:

• Andre Brett asks good questions about Auckland rail. Don't agree with some of the conclusions, but they're good questions. 
• The Onion's Amicus Brief in favour of parody is excellent.
• The tertiary education union is going on strike, seeking an 8% cost of living increase. Perhaps a bit difficult for the universities to avoid declining real wages for staff when tuition fee increases were capped at 1.7% for the year and international students might still be trying to figure out how to get visas. 
• There are way fewer nuclear warheads now than there were in the late 1980s. Dropped from over 60,000 to about 10,000. It's still a lot, and Russia has about half of them. 
• Charlie Gates interviews perennial Christchurch local government candidate, and eccentric, Tubby Hansen. 
• Stefanie Stantcheva explains how to run surveys, if you want to create identifying variation. 
• Oooh, yeah. That'll matter. Productivity measures can be upward-biased if some of the labour cost has shifted onto customers: pumping own fuel, supermarket self check-outs. It has to be more efficient than having paid staff do it, or else it wouldn't be done, but the full labour cost of producing the output includes the customer's time. 
• Dileepa Fonseca wishes we had more ghost houses. It would mean there is a surplus of houses, rather than a desperate shortage. He is absolutely correct. It's on the back of a report finally showing that there really aren't that many of them.
• John Cochrane reminds central banks that there are risks out there other than climate change. 
• British power companies are pelletising wood from old-growth forests for use in power generation. I don't know whether the economics would stack up for shipping pine pellets from NZ, but we might wind up seeing more of that kind of power generation here. 
• "What made JASON possible was the convergence of two factors: a competent research community willing to strictly act as advisors, and political officials who wanted that advice to be truthful rather than convenient." When elite physicists advised Washington.
• Inflate grades or get fired at NYU. 
• Oliver Hartwich reminds us that, unlike Truss, Thatcher started by balancing the budget. 
• Jonathan Milne on problems at Ports of Auckland. 
• Between ownership and rangatiratanga: Thomas Cranmer on the Three Waters reforms