Common sense and the CityCycle launch

I am pretty sure no one in Brisbane has ever said they do not ride for want of a bicycle. Nevertheless, Campbell Newman has spent $10million of ratepayers money on hire bikes to solve this none existent problem.  

I could be argumentative and say that if access to bikes was a problem, you could have bought 20,000 of them for Brisbane residents for that price (at $500 each – 33,000 at $300 each). 

After a dramatic week repairing bike stations that were installed backwards, today, Brisbane’s CityCyle scheme was launched, with 500 bikes at 50 stations across the inner city.  To my surprise there were actually some people waiting to use the scheme today.

There are few optimists left in discussion of bike hire schemes in Australia. Melbourne’s scheme, for example, is not quite off to a roaring start – 0.5% utilisation or 70 trips per day after three months.  I could repeat myself and highlight that the success of this scheme depends on its convenience to users.  Helmet laws and lack of road space are key impediments to convenience. Indeed, I proposed that a car hire scheme would be a better way to encourage cycling.

Brisbane is trying to overcome the helmet problem by giving away 2000 of them, but Council admits the helmet requirement shrinks the potential user base.  Tourists are apparently they are not a target market for the scheme. 

I have used these schemes in Europe and have only ever used a credit card swipe to join.  I can recall in Vienna the bike hire price was 2euro for two hours with no helmets, no upfront fee, and plenty of bicycle lanes.

These schemes are very popular with tourists who obviously want to explore the city and haven’t brought a bike with them.  If they are not a key user group, who is left? Who exactly will use the scheme? Has anyone conducted any surveys or background research into attitudes to cycling, and reasons for cycling (or not)?

I predict that bike use will be mainly from Central Railway Station to office buildings and the QUT campus in the morning, and back in the afternoon.  People riding the wrong way down one way streets will annoy drivers and make Courier Mail headlines, leading for call to register bicycles, crack down on all bike related laws (even though cyclist who run red lights are less likely to be killed).

I fear more anti-cycling scare-mongering like this in the press in the coming months –

In France, inexperienced cyclists have ended up crushed under the wheels of trucks

On a positive note, the scheme could really activate the inner city if some further supportive actions are taken.

1.      remove, or stop enforcing, the helmet law (see Sue Abott’s story)

2.      add bike lanes to CBD roads connecting to riverside bike tracks and other routes in and out of the city (take out one car lane on a few critical streets)

3.      remove the membership fee for the scheme and instead take a credit card swipe in lieu of a deposit

4.      adopt the Idaho Stop law

For some inspiration, maybe the Council can look to London’s cycle superhighways.  They are spending 24million GBP/year, or about 35million AUD/year which, if Brisbane matched that in per capita terms, would be about $11million per year.

The Queensland government is budgeting $14million for 19km of cycle network in the coming years for the whole of SEQ.  Not only is the amount low (given it is not an annual payment, but a lump sum for the planned works), they must be building gold-plated cycle boulevards at a cost of $730,000 per kilometre of bike path, or $730/metre of concrete! And some of that will just be a splash of paint on the side of existing roads.  Even making allowances for lighting, signage and paint, the per metre rate should be far less.  One suspects that for the same cost of the CityCyle scheme to Council, they could have built at least 20km of high quality bike lanes and paths.

I’ll leave you with a film explaining the new London Cycle ‘Superhighways’.

Too good to be true environmental solutions

... roughly 42 percent of U.S. lighting energy (in Canada the fraction might even be a little higher) goes to incandescent bulbs. ...compact fluorescent lamps in all sorts of sizes and shapes that have roughly quadrupled efficiency -- 11 watts replacing 40, 18 watts replacing 75, and so on. They last about thirteen times as long as a regular light bulb; therefore each one of them saves you not only three quarters of the electricity, but also a dozen replacement bulbs and trips up the ladder. That more than pays for them, even though these things are rather expensive.

Think of such a compact bulb, with 14 watts replacing 75, as a 61 negawatt power plant. By substituting 14 watts for 75 watts, you are sending 61 unused watts -- or negawatts -- back to Hydro, who can sell the electricity saved to someone else without having to make it all over again. It is much cheaper to save the electricity than to make it -- and not only in thermal stations. It is cheaper for society to use these bulbs than to operate a Hydro plant, even if building the dam were to cost nothing. Each bulb has a net cost of minus several cents per kilowatt- hour, and no dam can compete with that! - The Negawatt Revolution 

The crackpot with a mo, Amory Lovins, wants people to be paid to not consume electricity as a way to promote energy efficiency and decrease the demand for energy. He has been pushing the negawatt bandwagon for twenty years, yet for all our dramatic increases in energy efficiency, we consume more energy than ever (or more correctly, we use more natural resources to generate more electricity, heat and motion than ever). 

The term negawatt describes the fact that in a capacity constrained electricity generation system, reduced energy consumption by one customer allows an increase in consumption by another customer. Without the reduced consumption by one customer, the increased consumption by the new customer would only have been possible by investing in new generation capacity. Thus, the energy saved is as good as energy generated - so much so that the energy generator could pay users to reduce their energy consumption.

From an engineering perspective there is little wrong with this concept. Unfortunately, an economic perspective reveals many flaws.

First, we have a baseline issue. Customers use electricity over time in an irregular manner. If I was being paid to not use electricity I would make sure my baseline measure was extremely high by leaving on all lights and appliances all day and night. Then, when I go back to normal use, I would be paid.

Second, there is a pricing issue. If someone reduces their consumption of electricity they save the cost of electricity. The new users would then pay the same price for their electricity. Thus revenue is unchanged for the generator and they have no incentive to offer payments to reduce electricity consumption.

Third, if new customers are willing to pay more for electricity then the price can be increased. Existing users then have greater incentive to reduce use to save a now greater electricity cost. Further, with higher prices, electricity will be directed to higher value uses.

Finally, there is a problem of rebound effects when electricity consumption is reduced through economic adoption of energy efficient technology. Increased spending elsewhere, and increased demand for electricity from new appliances need to be considered.

In light of these extensive problems, nega-incentives are becoming quite popular in other areas. Recently a QUT Professor proposed that paying the Japanese to stop whaling – for negawhales – would be a good idea.

Hang on. I don’t whale. Where’s my money? There is clearly a severe baseline problem here, let alone a problem of equity. 

Why stop there? If this approach is so effective, why no pay criminals not to commit crimes?

Maybe I’m being cynical, but if a something sounds too good to be true, it probably is. As a rule, never pay anyone to not do something.

Lessons for the RBA on their blunt instrument

RBA Governator Glenn "I''l be back - with higher interest rates" Stevens has been softening up the public for his next interest rate move. He warns that his toolkit contains only a blunt instrument, and we will all be affected. I guess if the only tool you have is a hammer, every problem looks like a nail.

... we only have one set of interest rates for the whole Australian economy; we do not have different interest rates for certain regions or industries. We set policy for the average Australian conditions. A given region or industry may not fully feel the strength or weakness in the overall economy to which the Bank is responding with monetary policy. In fact no region or industry may be having exactly the ‘average’ experience. It is this phenomenon that people presumably have in mind when they refer to monetary policy being a ‘blunt instrument.

I think poor old Glenn is taking his hammer to a screw.

While he wisely notes we have one set of interest rates, not one interest rate, he seems to ignore the fact that differentiation of interest rates on debt should reflect the risk for each particular loan. The problem for the RBA is that those who actually lend in the marketplace are failing to properly price the risk premium associated with their particular loans. Housing is surely a risky investment at the moment, yet interest rates do not reflect the risk premium.

The obvious alternative to shifting the whole set of interest rates is to better manage the risk premium rate for a particular industry of concern, or forcefully adjust risks taken with other measures to suit the rates adopted in that industry.

For example, if banks insist on lending for housing at relatively low interest rates, they can reduce risk by keeping lower LVRs and more conservative income estimates. If they won’t do it voluntarily, because they suffer from extreme moral hazard associated with guaranteed government bail-outs, maybe the RBA can seek to have banks better regulated with regards to housing loan risks, particularly qualifying income and LVRs.

At the moment increasing interest rates will simple increase the interest burden on current debts, high risk or not, decrease take up of borrowing for productive purposes, and fail to curb the mispricing of risk and crude lending criteria of housing loans with the major banks.

What I have found interesting lately

Bizarre findings in advertising:

“...in a relaxed situation like TV watching, attention tends to be used mainly as a defence mechanism. If an ad bombards us with new information, our natural response is to pay attention so we can counter-argue what it is telling us. On the other hand, if we feel we like and enjoy an ad, we tend to be more trustful of it and therefore we don't feel we need to pay too much attention to it.

"The sting in the tail is that by paying less attention, we are less able to counter-argue what the ad is communicating. In effect we let our guard down and leave ourselves more open to the advertiser's message.

"The findings suggest that if you don't want an ad to affect you in this way, you should watch it more closely."

Responsible lending?

Genworth’s acting chief executive Paul Caputo said yesterday the group had relaxed its view on earnings from overtime and second jobs in loan serviceability calculations...

Caputo said: “We support loans up to 95 per cent LVR. One of the lessons of the global financial crisis is that where a borrower has skin in the game the behaviour is very different.

“I don’t think we will get back to underwriting 100 per cent LVR loans.

“Another factor is the National Credit Act. It would be hard to see how a 100 per cent LVR loan would fit into the responsible lending criteria.”

Why of course, lending 95% of inflated values to people who need second jobs and overtime pay to meet repayments on teaser mortgage rates epitomises responsible lending.  

Why are German home prices so stable? It is something they aspire to. Unlike Australia, where high prices are frowned upon everywhere except in housing.

Amazing graphic on the daily activities of Americans

Helmet laws back in the headlines - a good introduction to the debate

Leading indicators for the housing market - a website tracking advertising history to give up to the minute data on vendor discounting and days on market.

In the spirit of environmental month, a short must see video on global commercial air travel. What would be an economist environmentalist view?

Gaming leads to unintended consequences when governments try to stimulate housing supply

Australia’s excessively priced housing gave rise to the housing shortage myth, which in turn led governments at all levels amending planning policies to allow for greater scale of development. Densification, transit-oriented development, growth corridors and other buzz words, were drip fed by property lobby groups to politicians in search of an elixir for the ailing mortgage belt voter. The media, and by extension the public, bought into this supply-side ‘solution’ to housing affordability. Very few realised the irony of the situation – a policy on housing affordability that was a gift to existing property owners and ‘land banking’ developers.

The aggressiveness of changes to planning instruments to allow for greater heights and densities, and allow fringe areas into the urban footprint, provided opportunities to profit simply from speculation on the next change to the planning scheme. For landowners it became more profitable to wait three years for the local government to update the planning scheme to allow greater density of development, than to actually develop the site.

One example, South Brisbane, epitomises this situation.

At this prime location, within a stone's throw of the CBD, the previous limits of 12 and eight storeys were already conservative. 


The planning scheme for this precinct has changed from allowing four storeys, to seven storeys, then proposing eight storeys, then twelve storeys in the latest draft plan, and now the UDIA is calling to increase the heights much further. With the approval of a 30-storey tower adjacent to Milton railway station, one could assume there is a long way to go in this saga.

Expectations were for this pattern to continue. A landholder in this area recently mentioned they have no reason to sell or develop when the council keeps increasing the value of their land by changing the planning scheme. Landholders are gaming the Council, waiting for a signal that the gifts will soon expire before selling up to developers.

Maybe that signal is here.

The State government has intervened in the latest round of planning scheme changes to request the proposed height limits be cut back – where 12 storeys was proposed, they will allow seven.

For anyone aware of the standoff taking place the flood of development sites onto the market in the month since the State government decision would come as no surprise. Who would have thought reducing height limits would promote so much development activity?

The moral of this story is that certainty (or lack thereof) can greatly change real outcomes. Economists often foolishly assume that all government decisions are taken at face value by the marketplace. Few realise the time element and that parties affected will already be anticipating the next decision, or gambling on a political backflip.

UPDATE: More evidence of rewarding land banking rather than productive land use, from the Local Government Association of Queensland -


The LGAQ today criticised a key provision of legislation introduced to state parliament on Tuesday which retained a 40 per cent rate subsidy for large companies holding big tracts of land approved for development but not yet formally subdivided.


The money at stake is not the issue here. The issue is the massive contradiction of rewarding developers for not sub-dividing land to increase supply when the state government says it is championing housing affordability issues

Flow-on effects of recycling - are there net benefits?

It is widely claimed that recycling “saves resources.” Often, recycling proponents claim that it will save specific resources, such as timber, petroleum, or mineral ores. Sometimes particularly successful examples are singled out, such as the recycling of aluminum cans. Both of these lines of argument rest on the notion that reusing some resources means using fewer total resources.

Daniel K. Benjamin

Like efficiency, the word recycling reflects positivity from all angles. How could anyone say a bad thing about recycling?

I propose not to say a bad thing for the sake of cementing my identity as a super-sceptic, but to examine in detail the potential flow-on effects of recycling and determine whether the espoused benefits can theoretically be delivered.

Generally two benefits of recycling are proclaimed. First, waste will be diverted from landfill, thus we can reduce the space required for this purposed and reduce the threat of leaching from landfill sites into groundwater systems and other environments. Second, recycled material will substitute for raw materials and thus reduce consumption of natural resources which may have associated negative environmental externalities.

These are two distinct benefits, and achieving one does not necessarily imply achieving both.

There are also two different economic scenarios for achieving recycling with different outcomes – the profitable recycling scenario, and the unprofitable recycling scenario that requires government support.

The profitable scenario represents an improvement in overall economic efficiency, thus, like the case of profitable energy efficiency, it facilitates future economic growth and improves our productive capacity.

In this scenario, recycled material cannot be said to be diverted from land fill, because it would never have been put there in the first place due to the material’s value to remanufacturing. If the material was simply dumped on the street there would be an opportunity for a business to emerge to collect the material and sell for a profit. Without a counterfactual we cannot estimate the effect on either of our two recycling claims.

If we assume instead that the counterfactual scenario is one where the technology had not yet emerged to make recycling profitable, then we can now consider the flow-on effects from the technology. It is best to have a single material in mind, say glass, when thinking of these effects.

First, the price of the final goods (windows, bottles etc) using the newly recyclable material will decline due to the reduced cost of recycled instead of raw materials. Thus we will see an increase in demand (not a shift in the demand curve, but a new point on the demand curve at a lower price) for these final goods and therefore an increase in demand for recycled and/or raw materials (recycled glass or silica from natural sand deposits). Depending on the availability of recycled material compared to the total quantity of raw materials, this can lead to greater demand for natural resource itself (sand mining).

We can now say we have probably diverted waste from landfill leading to a greater quantity of material circulating in the hands of society (as either capital equipment – glass in buildings perhaps- or soon to be recycled consumables – maybe bottles), but we cannot say with certainty that the new recycling technology has reduced demand for the particular natural resource in question. Nor can we say that demand for, and consumption of, other natural resources remains unaffected. In fact the new recycling technology, since it improved overall economic efficiency, is likely to increase demand for all natural resource inputs to the economy.

The alternate unprofitable scenario represents a decrease in overall economic efficiency, and will reduce overall economic activity compared to scenario where government did not use its coercive power to enforce this unprofitable venture.

In this scenario we are likely to see a decline in waste to landfill compared to the economically efficient situation where recycling is not subsidised. We face the same situation of compensatory demand due to price declines of final goods manufactured using the cheaper subsidised recycled materials. This scale of this offsetting behaviour cannot be readily estimated and is likely to strongly depend on the relative prices and quantities of the recycled materials and raw material inputs are a particular point in time. A decline in overall demand for raw materials in the economy as a whole is certain in the unprofitable scenario due to the overall reduction in economic efficiency.

For unprofitable recycling the net result will be a reduction in waste to landfill of both the recycled good and other goods (since we can now produce fewer goods in total across the economy), and a reduction in resource consumption of the recycled material and all other resource inputs to the economy.

In what is becoming a familiar environmental theme at this blog, it should be clear that indirect measures to curb negative environmental impacts from our activities, such as promoting conservation behaviours, profitable energy efficiency, and recycling, have questionable net impacts on the environmental issue at hand.

Returning to our two main environmental goals of recycling – reduce negative impacts form landfill sites and reduce resource extraction that involves an environmental burden – we can clearly offer more direct measures which are both easy to establish and have certain environmental benefits.

The first environmental goal can be achieved by setting minimum environmental standards for landfill sites to address leaching (or any other associated problem depending on local conditions) including, perhaps, restrictions on location. In response to these criteria, landfill operators (public or private) would need to adopt appropriate measure to limit external impacts – possibly lining their pits with impermeable material, sorting, washing or removing particular types of waste, or some other creative response. These extra costs of waste disposal – the internalised environmental cost – will flow through to the cost of disposal, and may render some recycling programs profitable.

For the second environmental concern, resource extraction, similar direct controls can be used. Sticking with the glass example, the scope of sand mining can be limited through planning controls where natural environments which are valued by the community. Once this limit is established, sand mining in that area can proceed, at any particular rate, with certainty that there is a finite limit to the environmental cost.

These limits would never be, strictly speaking, perfect. They would at best reflect the perceived value of the environment to the community. There is no reason that the limits should not be stricter in some areas than others.

As an indirect environmental measure with questionable benefits, recycling, like efficiency, is claimed to be a panacea for a variety of poorly defined environmental ills. We often forget to critically examine the link between this indirect environmental ‘remedy’, and the target environmental illness.

A closer look at Australian incomes and predictions from Google Trends

Income distribution fascinates economists.  The release of the new ABS personal income estimates for small areas gives a complete picture of the geographical spread of incomes in this country for the first time.  Given the amount of media attention to Australia’s recent economic success, these figures surprised me.  They are extremely low. Australia’s average gross personal income for 2007/08 was $44,402 or about $853 per week. 

Let’s take a closer look.

The calculation of this income figure is an average of individuals with any of the following sources of income in the 2007/08 financial year -wage and salary income, investment income, unincorporated business income, superannuation and annuity income. It does not include individuals whose sole income comprised government benefits.  It therefore includes all casual, part-time and full-time workers, self-funded retirees and business owners. What it doesn’t include are the government benefits many of these groups may also receive.

If government benefits received by this group were included the average would be higher.  After tax incomes would, however, be much lower.

It is important to be clear that these are gross incomes after deducting losses, remembering that there are 1.7million residential property investors with net losses in 2007/08 of $8.6billion. Averaging across the population does not clearly show the diversity of investment income and the severity of many negative investment incomes.

We must also note that these are all average numbers, and as is typical for these types of (assumed) distributions, the median income would be much lower. 

Why is this important?

Much of the mainstream economic establishment has latched on to the idea that incomes have been rapidly rising in Australia, yet the data does not to support this optimistic view.

If we examine, for example, total earnings of full time employees, we can see that in the period 1995-2010, annual growth in before tax total earnings was a mere 3.9%.  In real terms, a 1.3% annual increase in full time wages since 1995.  Total earnings of fulltime employees in 2007/08 were $67,860 (wage plus other income), and from recent data, it looks like private sector earnings are pretty flat since then. That’s about $52,000 after tax.

The ABS capital city house price index on the other hand, rose by an annual rate of 9.4% since 2002. RPData-Rismark currently has Australia’s median dwelling price (detached and attached) at $405,000 and the ‘trimmed mean’ home price at $435,000.

Anyone who claims home prices are rising in line with incomes either has not seen the data, or is being intentionally deceptive.  The RBA can be counted amongst this group.

Australia’s current housing situation is truly unsustainable.  It would take two above average fulltime workers to buy one median priced dwelling.  If they want to live in or near a capital city, the situation is more severe.

With an income picture less rosy than many make out, it is quite clear that current elevated house prices are not due to owner occupier demand - there is simply not enough income for that to be true.  They have risen strongly through speculative investment decisions backed by government support (including negative gearing). Anyone who claims that home prices are stable due to incomes fails to realise that prices are determined by investors who can abandon the market in droves as soon as returns start looking bleak.

Moving on.

Google has an uncanny ability to predict the future.  Google Trends allows users to plot search popularity over time for any search term you like.  I have borrowed this idea from various other sites, but what prompted me to post it was a line I read that went something like - ‘once the mainstream media is talking about a housing bubble it is ready to crash.’  As you can see below, this was definitely true in the US.  The recent attention to Australia’s precarious housing situation is a worrying sign for those recently leveraged into the market.

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):

"The lesson is inescapable that optimal allocation of the economic resources available to us—fuel included— and measures to reduce consumption of any given resource—fuel, for example—are two quite different exercises. Neither one implies the other.

If one’s object is to reduce fuel consumption to serve, for example, some environmental end, fallacious ideas about the economics of activities that involve fuel consumption do not help. Putting the economic spotlight on such activities is as likely to throw up cases where economic optimality calls for the substitution of fuel for other resources as cases where substitution in the other direction is indicated. The right course, given the object, is to bear down on energy use directly, outlawing it (if it is of a particularly damaging kind), rationing it (if you have in mind a total that you are not prepared to exceed) or taxing it (if you believe you can reflect in the tax the environmental damage that concerns you).

It would then be up to individual consumers—both producers and suppliers of services as well as final consumers - to make the best of all the resources available to them in the light of the new constraints and any others they may be experiencing. Only they know what is the best response for them in their own individual circumstances.

It is necessary always to distinguish between engineering efficiency and economic efficiency. To invoke cost effectiveness as justification for a change in resource relationships to achieve any given end is to embark on an exercise in the field of economic efficiency. Fuel can never be employed with greater economic efficiency than in a system in which the allocation of all the relevant resources is collectively at an optimum. Economic optimisation requires an even-handed approach as between all the economic resources involved in any given activity: there is no case for giving pride of place to fuel in such a quest. Seeking optimal allocation of economic resources and reducing national energy consumption for environmental reasons are two quite different exercises and should be treated as such.

Limiting the availability of fuel, whatever the purpose and the means chosen, involves an economic cost in the shape of a reduction in production and consumption possibilities. Not for the first time it has to be concluded that there is no ‘‘free lunch’’. Reducing energy consumption for environmental reasons can never be a costless option unless by chance the action taken happens to coincide with the action necessary to achieve general economic optimisation."

Dutch Cargo Bike Review

I convinced myself not long ago that a bicycle for carrying children was a completely unjustified expense.  Luckily, I soon convinced myself that it was indeed worthwhile, and that it wasn't actually that expensive, in fact, it represented value for money.

The sparkling new bakfiets.nl cargo bike, supplied through Dutch Cargo Bike, arrived several weeks ago to my local bike shop.  Since then, I have 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 and even became a promotional family for the Dutch Cargo Bike brand.

For the non-cyclist the prices of these bikes can be a shock.  We see so many bikes for sale for $500 and so many second hand cars for sale for $5000 - we have trouble seeing where all the money goes on a bicycle! Bikes are meant to be cheap, cars are meant to be more expensive. Avid cyclists would know, however, just how much high quality equipment can cost, and this bike is very 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 $1800 in five years time, you are looking at a total 5 year total cost of around $1500 (including servicing, tyres etc) or about $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 (the alert reader will note there is an opportunity cost to the forgone $3000 that could have been alternatively invested, say at 6%, which adds another $180 per year).

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 bikes shop, Good Concepts.  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 (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.

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. Even with my wife and son (80+kgs) 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.

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.”

One hundred and fifty years later the modern debate is fuelled by economic ignorance, with many of the most influential economists and environmentalists remaining confused - failing to acknowledge the parallel effects of technology on the resource called ‘labour’ and other resource inputs to the economy.

More rigorous economists have reopened the debate, under the new term rebound effects, breaking down the transition mechanisms between greater efficiency and greater resource consumption.

1.      Direct rebound effect: Increased fuel efficiency lowers the cost of consumption, and hence increases the consumption of that good because of the substitution effect.

2.      Indirect rebound effect: Through the income effect, decreased cost of the good enables increased household consumption of other goods and services, increasing the consumption of the resource embodied in those goods and services.

3.      Economy wide effects: New technology creates new production possibilities in and increases economic growth.

Genius and UCLA mathematics professor Terence Tao explains the direct effect like so:

Suppose one has to decide whether to use one light bulb or two light bulbs to light a room. Ignoring energy costs (and the initial cost of purchasing the bulbs), let's say that lighting a room with one light bulb will provide $10/month of utility to the room owner, whereas lighting with two light bulbs will provide $15/month of utility. (Like most goods, the utility from lighting tends to obey a law of diminishing returns.)

Let us first suppose that the energy cost of a light bulb is $6/month. Then the net utility per month becomes $4 for one light bulb and $3 for two light bulbs, so the rational choice would be to use one light bulb, for a net energy cost of $6/month.

Now suppose that, thanks to advances in energy efficiency, the energy cost of a light bulb drops to $4/month. Then the net utility becomes $6/month for one light bulb and $7/month for two light bulbs; so it is now rational to switch to two light bulbs. But by doing so, the net energy cost jumps up to $8/month.

So is a gain in energy efficiency good for the environment in this case? It depends on how one measures it. In the first scenario, there was less energy used (the equivalent of $6/month), but also there was less net utility obtained ($4/month in this case). In the second scenario, more energy was used ($8/month). but more net utility was obtained as a consequence ($7/month). As a consequence of energy efficiency gains, the energy cost per capita increased (from $6/month to $8/month); but the energy cost per unit of utility decreased (from 6/4 = 1.5 to 8/7 ~ 1.14).

The indirect effect is more subtle and it is the environmental cost of consumption of other goods due to costs saved on, for example, lighting.  If, in the above example, lighting costs were reduced to $2 per bulb for the room, it would be rational to spend $4 on lighting (using two bulbs) and spend the $2 saved on lighting to consume other goods which themselves have energy use embodied in their production. 

Finally, the economy wide effect occurs due to stimulated demand for other goods and efficiency gains being shared across other sectors (due to the principle of the indivisibility of economic productivity – the linked article is highly recommended). 

These economy wide effects have gained recent attention in The Economist where it is estimated that energy efficient lighting will contribute to greater energy use in the long run.  You will note from the comments the cognitive dissonance of economists when referring to labour and other resource inputs remains. 

Conservation, using less at a given level of technology by giving up some utility, is equally ineffective (another great read at the link). We still face the indirect effects from conservation as we spend elsewhere in the economy, and if you believe all consumption has equal environmental cost per dollar (due to indivisibility once more and conceptually boundary problems to traditional input-output analysis of embodied resources – maybe more on this another time) you are back to where you started. 

Further, conservation, like waste, is a relative concept, and by definition we can’t all do it. And we wouldn’t do it either due to the tragedy of the commons problem, where it is in each person’s best interest to defect from a cooperative conservation strategy.  Terence Tao once again explains:

However, if there are enough private citizens sharing the same resource, then the "tragedy of the commons" effect kicks in. Suppose for instance that there are 100 citizens sharing the same energy resource, which is worth $1200 x 100 = $120,000 units of energy. If all the citizens conserve, then the resource lasts for $120,000/$400 = 300 months and everyone obtains $1800 long-term utility. But then if one of the citizens "defects" by using two light bulbs, driving up the net monthly energy cost from $400 to $404, then the resource now only lasts for $120,000/$404 ~ 297 months; the defecting citizen now gains ~ $7 x 297 = $2079 utility, while the remaining conserving citizens' utility drops from $1800 to $6 x 297 = $1782. Thus we see that it is in each citizen's long-term interest (and not merely short-term interest) to defect; and indeed if one continues this process one can see that one ends up in the situation in which all citizens defect. Thus we see that the tragedy of the commons effectively replaces long-term incentives with short-term ones, and the effects of voluntary conservation are not equivalent to the compulsory effects caused by government policy.

If energy efficiency is a counterproductive action for our environment, and personal conservation is useless, what should be done? As renowned ecological economist Blake Alcott points out

If Jevons is right, efficiency policies are counter-productive, and business-as-usual efficiency gains must be compensated for with physical caps like quotas or rationing.

It really is that easy. If you are concerned about greenhouse gases, a cap on greenhouse gases is what is required. If you are worried about deforestation, you create a cap by ‘fencing off’ areas that are not be touched.  If you are worried about over fishing, you create a cap. Whether these caps/quotas are tradeable is a secondary concern, but enable the cap to be met most efficiently.

What about a tax instead?

Many commentators argue that taxing negative externalities (such as a carbon tax) would not only reduce greenhouse gas emissions, but would provide a ‘double dividend’ of improved economic efficiency because more distortionary taxes could be reduced.  However, the very nature of reducing other taxes to make the tax revenue neutral would mean that other sectors of the economy where taxes were reduced now have greater purchasing power to pay for those goods now bearing the new tax burden.  Thus the double dividend comes at a cost to the primary dividend of reducing externalities.

Politics and ideology probably explain why the most basic economics is tossed out the window when it comes to the environmental protection.  Then again, maybe we just can’t acknowledge that such a thing of beauty, efficiency, could possibly have a downside. 


UPDATE: Recommended reading - The Jevons Paradox and the Myth of Resource Efficiency Improvements.

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. 

To truly assess the environmental benefits of these new laws, one must consider the final destination of the ‘green’ bags accumulating in our homes. No doubt, like mine, these end up in landfill just like any other plastic bag.  It is rare to hear views like the following:

"I've just retired after 30 years in the packaging industry and, frankly, I'm amazed at the constant rave about the 'environmental' green bags ... Doesn't anyone realise these bags are made of the same 'almost indestructible' materials used in car bumpers and wheelie bins? ... These bags replace the plastic bags, which were in the throes of changing to a safe cornstarch biodegradable form ... what happens when these 'cool' bags reach their use-by date? Will there be millions of them in circulation?" (from here)

After cleaning out the house lately I have found no less than 40 of these bags – about 30% supermarket bags, but mostly from other retailers and from promotional events.  There are almost 9million households in Australia, so I am guessing there are around 300million of these things floating around the country.  Have we simply substituted one litter problem for another?

A CSIRO research scientist, Dr Mike O'Shea, says the green bag's only environmental credential is that it is not the single-use high-density polyethylene plastic bag still given out in most shops and supermarkets.

The green bags, which are made from non-woven polypropylene, are designed to have a relatively long life but they are not designed to break down in the compost heap, he says. (from here)

The approach taken with plastic bags was very obtuse.  The plastic bag problem, as I understand it, is not about producing less plastic bags, but about having less plastic bag litter in our waterways and oceans.  If all plastic bags were in landfill, instead of floating around out oceans choking our wildlife, we would have no problem with these versatile little things (but maybe a problem with landfill in general).  Taxes and regulations affecting the plastic bag price at selected stores achieves nothing for other litter problems, while giving the illusion of strong action.

Unfortunately bans typically apply only to supermarkets, allowing other retailers to continue to offer plastic bags for free.  From my observations, supermarket plastic bags are the least likely to end up as litter.  They usually go straight from the store to home, and are likely to be reused for rubbish, or thrown out with the regular rubbish. 

The plastic bag ban has surely missed its mark, while providing the illusion of strong environmental action.  Maybe it is all too simplistic of me to suggest that we tackle problems in a simple and direct manner.  Perhaps instead we could invest in the prevention and clean up of litter entering our waterways by ensuring litter traps are on all stormwater pipes, investing in regular cleaning of rivers and riverbanks to remove litter and debris, and invest cooperatively in the cleanup of ocean rubbish (maybe with a little help from this guy).

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.