Cars and Carbon Payback

I appreciate that terms like "Machiavellian asshole" get bandied around people who write articles about topics like this but I'm going to run with it anyway.

Some days ago I was discussing F1 cars - specifically, whether they're an environmental help or a menace. I've had this discussion with a couple of people recently so I can only conclude Jeremy Clarkson said something about it once and that particular episode of Top Gear has recently been on the repeats.

The gist of the argument is that F1 technology trickles down to regular automobiles, thus leading to massive fuel efficiency gains and more than offsetting the emissions from a few F1 cars spinning around the track for countless hours. I haven't seen numbers, but it intuitively makes sense.

So, I got to wondering whether there might be some kind of environmental economics that does a similar job with helping to justify car ownership. Specifically - to what extent does the road toll offset car emissions? Please note, I'm not condoning this as a suitable tool for public decision making - though I am broadly in favour of things that promote loosening up some of our draconian road loaws.

The annual road toll in Australia in 2008 was 1,464, comprising 1,075 males and 388 females with an average age of 40 years (1). Given that the average life expectancy for males is 79 and females is 84, the weighted average life expectancy for this group was 80 years. Being a part of the 2008 road toll effectively wiped off an average 40 years of life per person.

On the carbon front, the average Australian emits 28.1 tonnes of CO2 per year (2), so cutting out 40 years for 1,464 people translates to saving of around 1.7 million tCO2 for that year.

Meanwhile, there were 15.7 million cars on Australian roads at last count (3), emitting an average of 4.3 tCO2 per year (4) for a total of 67.5 million tCO2.

Conclusion: each year, Mother Earth claws back around 2.5% of the CO2 emissions that cars put out in this country. This would suggest that our road toll would need to increase by a factor of 40 before cars started to pay for themselves on the carbon emissions balance sheet.

(1) http://www.infrastructure.gov.au/roads/safety/publications/2009/pdf/rsr_04.pdf
(2) http://www.garnautreview.org.au/chp7.htm
(3) http://www.abs.gov.au/ausstats/abs@.nsf/mf/9309.0/
(4) http://www.bendigobank.com.au/generationgreen/carbon_offsets/index.asp
(5) http://en.wikipedia.org/wiki/List_of_countries_by_traffic-related_death_rate

rebuilding

Economics is not a zero sum game. The beauty of it, in my mind, is that if you do things well you can create value out of nothing; labour transforms into useful products which in turn can be used to created more useful things. Productivity is compounding; creating useful things today doesn't just benefit you today, it puts you in a better position to be even more productive tomorrow.

This "compounding effect" is something of a two edged sword; if you do things well you can compound your blessings. However, it means that if you don't maximise your opportunities you not only don't progress as fast as you could in absolute terms, you can also end up a long way behind your more productive neighbours in relative terms.

Basically, building an economy is kind of like raising a child; if you nurture it, teach it and guide it with love and care it will grow into a functional member of society that loves and trusts you and will care for you in old age. If you don't it will eventually start shooting up drugs and wind up stealing your plasma telly and your grandmothers wedding rings and all manner of other things which will travel holusbolus down the gullet of the nearest pawn shop to exchange for a 24 hour reprieve from the DTs.

Progressing at an above-average rate of economic development is not about brilliance. It's about consistently not screwing up and occasionally being a little better than average.

Australia has an annual GDP of around $1 trillion, so the forecast $20 billion rebuilding effort in Queensland is looking like costing around 2% of annual GDP. There's no problem, per se, with a levy to cover the costs of paying for this. Costs will be paid from either a levy, higher taxes or lower social spending; there's no "free money".

The issue is that there are ways of tackling the problem that translate to "a little better than average" at economic management and there are other ways that sound a little too much like "Queensland is a swing state and we know it".

A comprehensive list of measures involving the trimming of "lower priority" and "low return" projects (National Broadband Network, anyone?) would probably be the best way to go about funding reconstruction. Not only would this provide funding, it would provides an opportunity to back down on a bunch of policy initiatives that were probably pretty batty in the first place.

The other point that seems to have been lost is that by funding massive amounts of government spending concurrently in an otherwise healthy economy you fuel inflation. Which fuels interest rates. Which is going to cost me a whole lot more than a flood levy.

So why have a levy? As alluded to earlier - Queensland is a swing state. My bet is there are a good many polical wonks out there in the Labor offices pointing out the policial merit of a large symbolic gesture.

I'm feeling a bit like we've just found a small white plastic zip lock bag in the back pocket of our kid's jeans.

Oh, and welcome back for 2011.

Buying Australian

There are generally only two places where I buy books. One is an independent bookstore on Bourke St in Melbourne and the other is a major US online retailer.

The former is my favourite; the store is not large but I don't ever recall them ever not having a book that I was looking for. If that ever did happen, I strongly suspect the staff would recommend something that would turn out being better than the thing I was looking for. It wouldn't matter which member of staff I spoke with, either. They all seem very switched on. This isn't a place for discounted books, but I don't mind. This is the type of institution that I support because it's useful; but also one whose existence makes me feel a bit better about the world.

My second bookstore is so practical that I still find it a bit disconcerting. I order from my desk. They have pretty much everything I could ever think of. It arrives on my desk at work within about a week. And it's cheap.

I buy from both and both delight me, in different ways.

Last week, I turned on the 7.30 Report and heard the CEO of a major Australian "big box" bookseller decrying my second favourite bookseller. Apparently, a combination of avoiding GST and the strong AU dollar is driving them out of business. The Big Box is considering sending online sales offshore to avoid GST and help the compete.

I found this man and his interview very annoying.

The simple fact that any Australian who's been shopping in New York or Hong Kong will quickly realise is that, even at historically moderate exchange rates, Australian get screwed when it comes to shopping. Part of this surely has to do with low economies of scale for serving the Australian market. However, I recently spoke to someone in a bike store about a particular brand of bike shoes that the store was now charging customers $20 to try on. "These cost half the price online," he confided "we know everyone will buy them online. The guy who owns the licencing in Australia charges such an exorbitant price that we can't drop our prices; charging people to try them on is the only way we can make money from them". So perhaps, opportunism in this market is also playing a part.

Clearly, retailers not having to pay tax from overseas is an unfair imbalance in the market and perhaps one that will eventually demand correction. Obviously, it does not make sense to let industries be destroyed when the dollar is high when they will be critical again if the exchange rate backs off.

However, big book stores aren't losing market share because of international competition; they're losing it because they're paying for a warehouse size area of prime retail space and they still can't manage to stock the book I'm after. As a friend who works in the industry once commented "when a book hits the bestseller list, they buy in a thousand copies, but no one there realises that this book is the second one in a series and that people will also want to buy the first book. They don't buy any of those and people come in and want both.". Who'd have thought - it seems that knowing about books might be of benefit in selling them.

This morning, again, in the Australian, Gerry Harvey of Harvey Norman was bemoaning the inequities of being an Australian retailer. I suppose that's his job and is new found concern with the Government's tax coffers is only to be expected. The point he perhaps misses is that shopping at the types of stores he operates is, for many including myself, a sort of retail hell. The staff are unhelpful. Either they ignore you, or they're trying to sell you crap you don't want or need to boost their commissions or move rubbish floor stock that no one else is dumb enough to buy. It's big. It's confusing. The store is in an unpleasant location, usually on a main road, and the bleak, bare frontage is a beacon of (sub)urban distress. I shop in these places - sure. But I don't want to. The fact that buying online means I can avoid this is an integral part of the attraction.

My life as an Industry

My parents keep bothering me about getting married and having baby

Persoanlly, I'm not too fussed about the whole business but I do understand their perspective. They have three children, ranging in age from their mid-twenties to their late-thrities. All have been in stable live-in relationships with their respective partners for at least three years. None are making any signs of "getting on with it".

As the youngest of these three I feel like I should be given the greatest leeway, but I think they've reached the point where they want grandchildren to tell their friends about and being deprived on them makes them feel a bit maligned. I can empathise with that, too, because I want to get a kitten and my boyfriend keeps telling me I have to wait until we can committ to being in the country for at least 10 years. Boo.

In any case, I now have a new argument for when they ask when I'm getting married - I'm waiting for an economic downturn.

My theory is that if I wait for a downturn, my marriage could turn me into my country's saviour. The tourist interest generated by the wedding will invariably bring a flood of vistitors, thus propping up the economy. In addition, my countrymen will be so delighted that it will buoy the public mood and probably generate a confidence-led economic recovery.

At least, that seems to be how it works in the UK.

I don't mind the British monarchy - I find it bafflingly peculiar, but I think it says more about the empire's subjects than it's rulers. Perhaps, however, this example of inhereted privelege doesn't offend people because it doesn't need to; it's anachronistic, certainly, but appears relatively benign.

However, I can't help but feel that the monarchy is more than just benign; it's a national industry. Why give up a living tourist attraction that commands no real power but brings in so many tourists each year? Would would become of the souvenir salesmen if we did that?

Whose Side Are You On?

As politics has moved to the centre (in this country and others), ideologies seems to have grown a bit muddy. The political ideologies of "left" and "right" are both seeking to answer the question of how to land on the most economically productive use of society's rescources. the division of ideologies used to be quite clean cut:

On the right, you believed that markets were very good at solving problems and should be left to their own devices.

On the left, you believe that governments should intervene to improve areas where markets aren't very efficient.

Ideologically, the right believes in low taxes and low government sending to incentivise individuals to strive to obtain the things they want. The left believes that sometimes people end up in difficult situations through no fault of their own and that public services can be used to avoid these inequalities from becoming entrenched. Neither side is right or wrong; they're just different ways of looking at the world and at people. For my own part I find I switch between them in different situations.

As far as political parties go, the problem with having distinctions like this is that it can shut down good political ideas that don't conform to the party ideology. The advantage, though, is that you know what you're voting for when you go to the polls.

Over the last couple of years, we've had a Labor government pushing for an emissions trading scheme, while across the floor the Liberal opposition was pushing to introduce a carbon tax instead. For those expecting their Liberals to behave like it, this has been a particularly weird situation. We now have the Liberal shadow treasurer trying to out-do a Labor government on bank regulation.

Stranger still, however, is Tony Abbott's new "flat tax" proposal. Tony has suggested that a more equitable tax scheme than the current tiered system would be to have a tax free threshold for all households earning less than $25,000 per year, then a flat tax rate of 35% for incomes between $25,000 and $180,000. For income earners on above $180,000 both schemes propose a tax rate of 45%.

Here's what the proposal looks like:

What this shows is low income households (less than $46,000pa) paying a lot less tax, middle income households ($46,000 to $165,000) paying a lot more and high income households being largely unaffected. To summarise:

- the majority of people pay more tax;

- middle income earners subsidise low income earners (relative to their current levels); and

- the fastest way to increase the proportion of tax you pay is to to earn about an average income and get a raise.

There's nothing wrong with this, per se, it would just make more sense if it was coming from the other side of politics. if it was, I'm sure the Liberal would be talking about another "Great Big New Tax".

Sharing

A new fad appears to have emerged; in line with our new post-consumerist society apparently people now want to share stuff.

There is now a bike share scheme in Melbourne (at a ridiculous cost taxpayers, but that's a topic for another post) and several commercial car-share schemes that I occasionally hear people raving about in the papers, but I don't know anyone who actually uses them.

The thing is, I don't know if I want to share. I don't think that I'm overly selfish or overly precious about things - I wish that I could be swept away in the hysteria of all of this sharing. I wish that I could trade in my bike and car and just keep the money to spend on other luxury consumables - then save even more by learning to share those, too. The thing is, sharing just isn't stacking up for me.

1. People Wreck Things
Train stations are made of concrete and the only furniture is made of metal and bolted down. However, in my lounge room, there's carpet and a couch. I am hardly a neat-freak, but I take care of my stuff and I like it to be in good condition. Whether malicious or negligent, hire car schemes fill me with dread about showing up to my allocated car to find a pool of vomit in the passenger seat.

2. Quality
I can live on pasta and avoid eating out. I can restrict my clothing purchases to things that are already discounted and sell old clothes on eBay, if I must. However, I do own a very nice carbon fibre road bike and a fixie in cute colours with wheels expensive enough to be given their own bike lock. I am also, in my old age, getting a bit picky about cars.

Share schemes seem to trend towards to mean - they don't seem to acknowledge that in most respects I tend to be either a complete tight-ass or an elitist snob.

3. Where are these things?
Car share schemes are like petrol stations. Apparently they're all over the place, but when you start looking for one they mysteriously all vanish.

4. Demand
These schemes, like anything in infrastructure, are about balancing supply and capacity. If you buy enough cars/bikes to meet demand during the highest peak periods, most of your fleet will be idle the rest of the time. If you buy enough to get a good level of utilisation then there's nothing available during peak periods.

So, if you join one of these things then observe that there "never seems to be a car/bike available when I need it" you can reassure yourself that it's designed to work like that. If there is one available, you can rest assured that either there won't be once more people join up, or you're paying too much in fees.

Onwards and Upwards!

3 June 2007 was a milestone for carbon pricing in Australia: this was the date when putting a price on carbon finally became a bipartisan policy objective. Environmental types may harp about how Australian coal generators and energy companies "should have seen this coming for decades" but the fact is that as recently as four years ago the notion that a national carbon price (through a cap and trade scheme or a tax) was somehow 'inevitable' was by no means a foregone conclusion.

This point is by no means irrelevant to the current debate.

No material infrastructure investment decision in Australia will get past an Investment Committee process without a detailed financial model based on the well-founded principle of discounting cash flows (DCF). This is equally the case for investments by corporates, super funds and private equity (perhaps with the occasional exception in the more risk-loving mining states). For those not familiar with the logic behind DCF, here's a quick run-down:

- The only reason you invest money is because you expect to get money back at some time in the future. It is assumed that by making a series of well-reasoned assumptions about future performance, you can make a reasonably reliable estimate of how much money you will receive in each future time period.

- Not only do you expect to get your money back, you expect to get a bit more to compensate you for risking it in the first place. The more risk, the more you expect to get back. The return is usually expressed as a percentage return on your investment and by working back from the future date to the present and reducing each of your expected future cash flows each year, you can figure out how much you should be willing to spend on something now to receive the forecast payment in each future year.

- Adding up all of these "present value" numbers gives you a target price - if you can undertake the investment for less than this, you should do so, otherwise you shouldn't.

The DCF method of valuation is ubiquitous. The problem is that it's only as effective as the values that you plug into it and it implicitly relies on being able to make a relatively reliable forecast of future earnings.

When guys like Marius Kloppers (CEO of BHP) come out in support of a carbon trading scheme on the basis of "reducing uncertainty for business" they are not talking about a vague, qualitative type of uncertainty. Not knowing whether a project is going to have a substantial new cost tacked onto it means not being able to predict future cash flows and not knowing what annual percentage return you should expect to earn.

Companies can respond to this in several ways:

- Use a 'worst case scenario': in this case, many good projects that should be undertaken, won't be.

- Delay: given that the uncertainty will be removed once the political decision is made, many companies may simply delay the investment decision in the hope the policy is resolved quickly.

- Consider a range of policy outcomes and come up with a probability weighted outcome: this will reduce the level of underinvestment by consider both the best-case and worst-case scenarios. However, while there is an option to delay, delaying would generally be more favourable.

There has been no substantial new electricity generation infrastructure built for a very long time now. The impact of delaying and under investing in projects is that supply is constrained, which forces up the prices paid to existing electricity generators and eventually this rise in prices must be passed on to consumers.

So, at this stage, it appears we're faced with a bit of a Morton's fork:

1. Bring in a carbon price and energy prices will go up because of the added cost of carbon.
2. Don't bring in a carbon price and energy prices will go up because of a supply shortage.

It could be argued that there's the option to take a firm policy stance against any sort of carbon pricing but I would suggest that since 3 January 2007 this suggestion would be less than credible.

For those who took issue with coal generators receiving substantial compensation under the Rudd Government CPRS proposal, consider this: under the CPRS the proportion of compensation to generators was a minor portion of the total expected cost of a CPRS (perhaps around 25-30% for the first five years) and came from a much larger pool of revenues being delivered to Government. That Government revenue could be redistributed through welfare payments to those most dramatically impacted. While carbon pricing is being delayed, higher prices from underinvestment means that existing coal generators will be getting a bonanza - and they won't be sharing any of it.