Messing up investment signals

My column over at Newsroom this week picks up on a post looking back at Hotelling pricing and carbon forestry. It concludes:

Insecure property rights can undo the optimal paths that Hotelling described.

And we’re already seeing it in carbon forestry. The Government keeps sending worrying signals about the place of carbon forestry in the Emissions Trading Scheme. Will it ban new carbon forests? If so, you might want to plant in a hurry, to get ahead of a ban. Will it mess up how existing forestry credits are treated? If so, you might want to dump those credits in a hurry if you cannot bear that risk.

CarbonNews reported that carbon market participants are switching to non-forestry carbon credits, and a split-market is developing, because the Government has been scaring the hell out of small forestry owners. Those owners are dumping their credits because of worries about what would amount to expropriation.

And others, who expect existing forests to be grandparented after a rule-change, will be turning paddocks into forests as quickly as possible – in case government bans future conversions.

One sure way to screw up Hotelling’s Rule is by messing around with the underlying property rights.

By threatening those property rights through the Emissions Trading Scheme review, the Government is bringing about some of the outcomes that it claims to want to avoid: a current tanking in ETS prices combined with a lot of forestry conversions.

The Government ought to be bulletproofing the Emissions Trading Scheme. Perhaps if the Government, and the climate commission, read a bit more Howard Hotelling, they’d be less likely to accidentally shoot holes in the thing.

The problem is hardly restricted to carbon forestry. 

EnergyNews reports that NZ now has less than a decade's worth of gas reserves. 

Why? Strong likelihood that any investment is effectively expropriated through regulatory changes. 

Consequence?

Carnegie says that electrification of transport and industry can’t continue without enough domestic gas supply.

“Large manufacturers will close, and there will be no energy source capable of firming up renewables in the depths of winter other than high-emissions coal.

“That will be our reality if we continue down this track.” 

Ivory cycles

Brendan Moyle explains the surge in elephant poaching.

All else equal, we should expect that poaching increases with political instability that makes it harder to enforce an optimal permitting system. We should also expect that poaching increases where shipping costs drop, as the returns to poaching then increase. Finally, where interest rates drop substantially, we should expect greater investment in lower orders of ivory production rather than higher orders: the poaching, rather than the carving. Building a stockpile of ivory for later carving makes more sense than ramping up carving at increased cost but getting little return on the proceeds of those sales.

And that's what Brendan finds.

The recent and rapid increase in elephant poaching has caused international alarm. A panel-data regression model was employed to identify possible causes of this upsurge. The large decline in shipping costs after the GFC is strongly correlated to the rise in large shipments interdicted in recent years. Other factors include the decline in global interest rates, which motivates increased stockpiling by criminal organisations. A sharp decline in stability in Africa, especially Central Africa can also be linked to the raw ivory seizures. This evidence also indicates that the recent upsurge is more supply-driven than it is demand-driven. Criminal organisations appear to be taking advantage of current conditions to transfer and store ivory in stockpiles out of Arica. This raises doubt that the upsurge is demand-driven event related to the current markets for ivory. 

I love this kind of rich institutional story paired with empirical analysis. Brendan spends a lot of time in China figuring out just what's there going on. 

He also warns that things could easily get worse: the greater the poaching, the more risky is the option to store tusks on live elephants for later poaching. Worse, some of the recent supply-side measures may be reinforcing poachers' expectations that future price increases mean they should poach more now for stockpiling.

Helium futures

Matt Yglesias points to a potential coming helium shortage.

None of the stories about peak helium have made much sense. Even if the U.S. government is selling its helium off cheaply, surely others have incentive to store helium for later sale.

But I think I get it now. The US Federal Government controls a big geological formation that provides really cheap helium storage; by legislation, they're selling down those reserves at relatively cheap prices. Funding pressure then might shut down the whole reserve. Then, the private sector is left with more expensive storage options.

I don't believe the nightmare scenarios around MRIs running out of helium. Anybody who puts high value on having reliable access to helium can buy and set up storage tanks. The cost of helium for those users will be much higher, given differential storage costs, but it's pretty hard to believe that some private storage solution wouldn't come up for those really high value users.

I wish somebody would set up futures markets in delivered helium so the high value users could ensure longer term supply and so that we'd have a better sense of what the market expects future scarcity to look like. Why isn't there one?

There seems to be policy failure all over the place on this file.

By 1996, however, the Helium Reserve looked like a waste. Blimps no longer seemed quite so vital to the nation’s defense and, more important, the reserve was $1.4 billion in debt after paying drillers to extract helium from natural gas. The Republican-led Congress, looking to save money, passed the Helium Privatization Act, ordering a sell-off by the end of 2014.

Why was the federal government subsidizing the production of helium in the first place? I can see an argument for the government paying for helium extraction and on-selling it afterwards if they were the only reasonable owner of the big geological formation, but that sure doesn't provide an argument for subsidising the production of so much helium that they wound up selling it below total cost and running large debts.

Given Congress's handling of the project, are the potential losses from a private owner earning Ricardian rents on storage cost differences really that much worse than the deadweight costs of how the government's run things? In other words, it could have made more sense to sell off ownership of the field rather than the helium inside it.

And in prison news...

New Zealand's prisons go smoke-free today. Some inmates are smoking their nicotine patches. I'm not sure that's an improvement.

Inmates have not been able to buy tobacco, matches or lighters since June 1, and cigarettes are now in hot demand.

"Some prisoners have made their normal allowance last more than a week, by smoking half at a time," assistant general manager of prison services Brendan Anstiss said.

"Tobacco has become a more valuable commodity. Those who do have cigarettes are more likely to keep them to themselves."

...

Corrections Minister Judith Collins announced the health and safety-based smoking ban last June, giving a year for prisoners to get used to the idea and try to quit.

The impending ban has already forced a price hike for tobacco on the prison black market, with a packet of cigarettes fetching up to $300, according to sources.

Ok. So no new cigarettes into prison starting 1 June, with no smoking allowed after 1 July. And the price rises to $300 within a month? I wonder if there's any time series data on those prices. You could likely use them to back out a measure of prisoner time preferences. A non-smoking prisoner could get his allocation in on 31 May then has a choice to sell or hold the cigarette on each day up to 30 June, knowing the value goes wonky 1 July after consumption is banned. Every day the price is higher than the prior day. And it reaches $300 by 30 June. That suggests pretty high discount rates by non-smoking cigarette sellers in the black market, or systematic underestimation of how much of the prison's stock was being depleted in each period. It would be cool to run Hotelling's pricing model to back out implied discount rates.

Meanwhile, in Canada, female prison guards in male prisons are being given training in how to avoid having sexual trysts with prisoners. Roissy would likely claim it's mostly due to the alpha nature of many prisoners; I'd worry about the extent to which guards' power was being exercised over prisoners in unwelcome fashion.

Previously in prurient Canadian prison news...

Peak oil

TVHE has a couple of worries about peak oil. First, oil prices will go up and this could have negative economic consequences. Second, it's a non-renewable resource so we're eating up a capital stock.

It's hard for me to see severe consequences from peak oil.

Hotelling's work on pricing of non-renewable resources remains as salient now as when he wrote it almost 80 years ago. If he's right, we ought just to expect oil prices to rise approximately in line with interest rates, with adjustment upwards if demand is rising faster than that and downwards if technology makes extraction more efficient.

The best case I can think of for breaking Hotelling is that property rights over many oilfields are insecure, or that the ruling juntas in the mid-east have shorter time horizons dictated by keeping political power in the medium term, leading to inefficiently-fast extraction. The best counterargument I can think of is that OPEC seems to work to restrain production, keeping supply now lower than it would otherwise be, and that we're not seeing the big oil companies deciding to just sit on reserves in anticipation of big ramp-ups in prices once the mid-east slows down. If some folks with current rights over oilfields have insecure tenure leading to high discount rates, this leads to locational distortion of production rather than to intertemporal distortion unless those kinds of fields wind up being the whole of the market. And best I can tell, oilfields in the US and Canada are still pumping: if folks expected a big drop in Saudi production, they'd be holding those fields back in anticipation of big price increases to come.

So we shouldn't see sharp spikes upwards as supply dwindles; rather, our best expectation ought to be a steady rise in price. And those kinds of things don't cause big problems.