Tuesday, 17 May 2022

Cash for Clunkers with New Zealand Characteristics

Monday's column in the Stuff papers went through America's failed experiment with Cash for Clunkers, anticipating that the government was about to announce our own version. 

A snippet:

As an economic stimulus, it failed. Rather than encouraging a lot of new car purchases, the programme mainly subsidised purchases that would have happened anyway. Some households brought forward a new car purchase by a few months to get the subsidy; others had already planned on purchasing a car during that period.

In other words, it was a very expensive way of getting people to slightly change the timing of a new car purchase. It did not otherwise succeed as a stimulus – it had no effect on employment or other indicators.

And because it only really shifted the timing of new car purchases, it was not particularly effective as support for the car industry.

But it also failed as an environmental programme, unless cost really is no object. People did buy more fuel-efficient vehicles, but the programme was far less effective than a carbon tax in encouraging emission reductions. Every ton of carbon dioxide avoided cost between $106 and $335 in 2009 US dollars – or between $245 and $772 per tonne in current New Zealand dollars.

On a related topic, Tom Puller-Strecker has a bit of a whip-round on the waterbed effect; I'm quoted in it. As refresher: this is the effect where a regulation targeting things inside the ETS cap just frees up credits for others to purchase instead, so has no effect on net emissions.

I do better sending in emailed comments rather than bits on the phone that are transcribed correctly, but could have been worded better. Ah well. 

I wouldn't have viewed it as a 'concession' to say that if your basic model of the world is that future governments will renege on cutting the ETS cap in line with getting to Net Zero, then policies that cost more than the current ETS price could make sense. It's the main sane reason for preferring those measures. 

Similarly, Crampton says the best argument against the waterbed objection to emissions reductions measures that sit outside the ETS is “a political one”.

“If you believe that future governments will lack the commitment to maintain the reductions in the cap and you want to ‘lock things in now’ to force changes, then you would want to use regulatory moves even if they are far more costly than just working through the ETS.”

That sounds like an important concession?

It does.

But Crampton argues that a better option than “a bunch of clunky regulatory interventions” to shore up confidence in the ETS would be a bipartisan agreement on the total quantity of net emissions that the Government and Opposition would be willing to allow between now and 2050.

Arguably that might be a bit like setting a 5-year-old a total quota of screen time to see them through until they were 16.

Crampton also believes that if the Government followed the example of Canada and gave the money it received from selling carbon credits back to the public, then that would improve the popularity of the ETS and in turn might make people more confident its targets would stick.

Some Associate Prof of Finance at Otago has at me in the piece as well. 

It’s a heated debate.

Diaz-Rainey sees the waterbed argument against targeted emissions-reduction policies as “a way of trying to kick things into the long grass”, arguing that impressive cuts to emissions in the United Kingdom would not have been achieved through an emissions trading scheme alone.

Those who oppose such policies should take “a hard look at themselves”, he says.

“Given what's going on in the world and looking at what is happening again in Brisbane at the moment, it's scary. We really don't have time to play these games.”

Not fair, Crampton suggests.

“One of the biggest mistakes in Wellington is viewing that the degree to which one cares about something is best reflected in the amount of money you want to spend on it, or the amount of regulatory effort you want to put into it.

“That is a very poor measure of caring. The best measure of caring is effectiveness. Climate change is too big to try to approach it through radically inefficient measures,” he says.

This is basic maths. The government issues X credits. A policy reducing demand within the covered sector means fewer bids for credits from that sector, which means the next bidder in line gets them instead. 

And while government can decide to reduce the cap even more to offset that effect, it could do so even without the policies - which would be more cost-effective than using the policies unless there's a darned good reason to think that the specific policy abates emissions at lower cost than the going carbon price. 

Where government really likes running populist messes like Cash-for-Clunkers, or corporate welfare like paying companies to buy boilers that were already cost-effective for the company to buy on their own, there needs to be a decent bar for rigour in these things. 

Afternoon roundup

So many tabs across so many windows. A selection:

Stupid government tricks: supply chain rigidities edition

America has a big shortage of baby formula. 

Simplest explanation: piles of regulatory and procurement decisions worked to make it effectively impossible to shift supply chains in response to shocks, and one of their larger manufacturers suffered a shock. 

In the midst of the shortage, Department of Homeland Security is seizing baby formula like it's cocaine. 

NZ could laugh at stupid US Government tricks, but Customs here is seizing Covid tests that are good enough to be used to get you into the country, but not considered good enough for use here. 

And NZ's current plasterboard shortage comes down to the exact same kind of mess: protectionist regulatory constraints that combine to make it impossible to import and use plasterboard. so the system is highly fragile to shocks. 

Thursday, 12 May 2022

Mystery solved?

Over at Newsroom, AUT lecturer William Cheung wonders why Kiwis don't seem to worry much about flood risks when buying a house.

Similarly, a few years ago, Arthur Grimes found that the Christchurch earthquakes meant that properties in Wellington subject to liquefaction traded at a discount for a couple of years, and then that risk stopped being noticed.

Maybe I'm nuts, but there seems a pretty simple explanation.

  1. The Earthquake Commission covers damages from natural disaster events. The EQC cap is high enough to cover most stuff that isn't going to be a major structural issue. 
  2. EQC premiums vary with the sum insured, not with underlying risk. The EQC premium will be the same for a $2m house that sits underneath a cliff that's ready to collapse, a $2m house that's right beside a flood-prone river, a $2m house in Petone that'll get wrecked by the combination of tsunami and liquefaction in any real earthquake, or a $2m weatherboard house in the safest part of Karori. 
  3. Commercial insurers could very reasonably fear that the government would slice them in two with breadknives if they charged premiums that reflected actual risk in places like Petone. That whole model starts to fall apart the second some new entrant comes in and decides only to insure safe places at lower premiums. But there are regulatory barriers to entry that can result in low-risk places being overcharged and high-risk places being undercharged, and less competitive pressure than there might be in getting finer risk gradations. 
If that's all right then there's no mystery at all. 

If you live in a flood-prone place, you'll deal with the hassles of being flooded, and maybe people who haven't experienced dealing with insurers in a really bad event affecting lots of properties underrate just how much they should be trying to avoid that. 

But insurance in those places is at a hefty discount relative to the real risk, and if you set policy to subsidise living in risky places, expect that people will do so and that property prices won't much reflect that risk. 

Wednesday, 11 May 2022

Chats with Plunket

I had a decent chat with Sean Plunket yesterday morning over at The Platform. I'm going to have to start checking their daily podcast list; I'd missed Richard Meade's bit there on the rumoured Cash for Clunkers scheme

I've embedded the video below. 

They'd asked me to come in and talk about income tax rates and fairness; I'd prepped a bit around what inflation-adjusting the tax thresholds would look like - also the topic of my column this week over at Newsroom. I'd there suggested hooking the tax thresholds to percentiles in the wage-and-salary distribution, but keying it to either CPI or HLPI would be fine too.

The chat with Plunket wound up hitting a far broader range of things, from immigration to congestion charging. I'd managed to forget that I'd written a submission on Auckland's proposed congestion charging.

Hadn't realised going in it was video rather than just audio; might have worn a prettier mask for video. But I'm indoors, so I'm masked. 

Fun times. My 4pm yesterday, which I'd asked to have at an outdoor beer/coffee spot because I'm Covid-averse, got punted to Zoom because he'd gotten Covid. If he'd been infected a little bit later, we'd have had the meeting before he'd tested himself. It's worth being careful out there. If you make a habit of being unmasked in risky places, your likelihood of catching Covid's got to be approaching 1 - or higher given potential for repeat infection.

Fortunately for me, I've already sunk the costs of others' disapprobation for my idiosyncrasies, making being the only masked person at Wellington Treasury events no more uncomfortable than being one of the few who still think supply and demand are important. 

Tuesday, 10 May 2022

Cash for CluNZkers

The US Cash for Clunkers programme was a mistake. Intended as stimulus programme for the auto industry, it failed

Almost all of the effect was a bringing forward of purchases that would have happened anyway, so the effect was very short-lived. 

It also failed as an environmental programme. Looking only at the CO2 reductions, the cost-per-ton was $106-$335, USD, 2009. Inflation, exchange rate, tons to tonnes: that's $245-$772/tonne in current NZD. Or between three and ten times the going price of carbon abatement in the ETS.

The US didn't and doesn't have an ETS, so the scheme could reduce net emissions - albeit at very high cost. NZ has an ETS, transport is in the covered sector, and there's no domestic auto industry to stimulate even if you wanted to, so a cash-for-clunkers scheme here would be especially stupid. 

Richard Meade had a chat with Sean Plunket over on The Platform yesterday

Sean had got wind of that a cash-for-cluNZkers scheme is here in the offing, and could be announced at the budget. 

It'll be fun to see how the legislation handles this one, and whether they even try putting a cost-per-tonne on it. 

Whoever drafted the leg will have to have lots of things to think about. On a few short chats with others on it:

Could I buy a clunker now, expecting a voucher that's worth more than the cost of the car? Should the legislation anticipate that and restrict the voucher to cars purchased at least a year ago? 

Sounds like it'll be means-tested: only poorer households can do it. But they can on-sell any EV they buy to a higher income household right? And that higher-income household might help them front the rest of the cost? 

If you have a university-aged kid, could you strike a deal with that kid's household? Like, buy the kid the clunker now, let her turn it in for the voucher, loan the kid the rest of the money for the car (or top up a zero percent student loan), and have occasional use of the car that would, for convenience, be regularly parked at your house? It could quickly undo all the effort at means testing, and policing could be interesting. 

It'll also be fun to watch the price of used cars, and of EVs, given supply chain issues. 

Oh - and remember - because the ETS has a binding cap, the scheme achieves precisely nothing for emission reduction. The only thing that cuts net emissions covered by the cap is a reduction in the cap. The regulations aren't necessary to cut the cap, and cutting the cap is sufficient to reduce net emissions - and presumably does so for a fraction of the cost of a Cash-for-CluNZkers scheme. 

It just keeps getting stupider. 

A starter for 8 on the ETS

Keiron Greenhalgh of Net-Zero Business Daily news asked for my wishlist for the Emissions Reduction Plan. 

I provided a starter-for-eight. 

In some ideal world, the ERP would:

  1. Redo the price cap mechanism. Rather than set a nominal price, the price cap would be based on the volume-weighted average price of carbon in the set of international carbon cap-and-trade markets that the Climate Commission and EPA consider to be credible. NZU issued at the price cap would be backed immediately by the purchase and retiring of credits from credible systems abroad, unless the government had more cost-effective ways of immediately backing credits. 
  2. Set the total volume of unbacked NZU that the government is prepared to issue from now to 2050, with all auctioned or allocated credits being drawn from that pool. That makes the ETS’s binding cap also intertemporally binding. 
  3. Remove the quantity restriction on backed NZU issued at the price cap. The volume will be self-limiting because if NZ ever bids up prices in international markets, the price cap just goes up. This mechanism ensures that NZ abatement efforts find something a lot closer to global first-bests in emission reductions. 
  4. Rather than ban permanent forests from the ETS, reduce the total volume of unbacked NZU that the government might put into the pool in (2). Carbon accounting has to be clean, and not make arbitrary decisions not to count some forms of sequestration just because the government doesn’t like other consequences. Other consequences should be dealt with using additional non-ETS tools directly targeted at the undesired effect.
  5. Commit to rigorous cost-per-tonne accounting for any measures taken outside of the ETS targeting GHG emissions. It is easy to inadvertently set policies costing 10x to 100x the going ETS price to mitigate emissions. We can’t afford to do that. The problem is too big. We’ll bankrupt ourselves trying to get to Net Zero if we pursue methods of getting there that either are offset by the binding cap on the ETS or are just spectacularly cost-ineffective.
  6. Take all of the NZU raised at by the government at ETS auction, plus any money the government earns at the price cap under the proposed mechanism (if the cap is an average price, and the government buys at the lowest price, every trade at the price cap makes money), plus any excess dividends that the government receives from its share in the electricity retailers whenever carbon prices are high and feed through into power prices, and announce a carbon dividend. Rebate all the government ETS revenues back to households and tell households that the money is there to help them to effect their own transition to a higher carbon-cost world. The dividend not only mitigates the medium-term distributional consequences of higher carbon prices, but also by doing so provides political insulation for the system against rising carbon prices.
  7. Forbid local councils against considering emissions covered by the ETS when making zoning and consenting decisions. The government’s housing supply agenda requires a lot of building that councils are very reluctant to allow. Government has set two substantial pieces of legislation removing council discretion to block housing, but carbon will be a new way of doing that – if government isn’t careful. Councils have a huge job in planning for adaptation, and in planning for the changes that will come in demand for services and infrastructure with rising ETS prices. It should not attempt to redo the work that the Climate Commission and the ETS are already doing. 
  8. Take up the Productivity Commission’s recommendation to revisit NZ’s rules around genetic engineering, which are currently blocking some of the most promising ways of reducing agricultural emissions. Set a sunset on all current rules around GE such that the existing system is simply abandoned if a new one is not put in place in the next three years. 
Kieron's piece focused on the ProdComm biotech aspect; figured I'd hoist the rest of it up here so it's all in one place. 

Obviously, agriculture also needs to face a carbon price. And that's coming too, one way or another. 

Update: I need to add a 9th item. 

9. Some people get very worked up about whether an emissions credit is surrendered within one carbon budget period or the next carbon budget period. It all seems ridiculous. The climate prefers, if anything, that emissions don't happen until later because CO2 accumulates. Stockpiled NZU are emissions deferred. It would be strictly worse if all of those units were used in the year in which they were purchased, rather than being held as hedge against future carbon costs, because there would then be more carbon in the atmosphere for longer. And so we hear calls for regulations that would actually impede the climate response in order to meet arbitrary year boundaries on credit surrender. Just stop this. Decide how many NZU the government is willing to issue between now and 2050, while remembering that there is a stockpile that can be surrendered along the way too. I don't care what the number is. Draw a straight-line from now to net zero, take the integral under the curve, call that the number. Or make it convex, concave, whatever. I do not care. Remember how I re-jigged the price cap? It'll mean we can't go too wrong. You get some fixed total. That's all that matters. Then drop all the arbitrary fixed-window budgets. If government releases credits to auction next year, or allocates them to industry, it draws from that fixed pool. Fix the Net Zero leg to be consistent with this. Better to fix the legislation to enable the ETS to work better than to thwart the ETS to be consistent with dumb features of the legislation. 

Oh, and a 10th item:

10. If an additional regulatory mechanism can be rigorously demonstrated to provide emission reductions at lower cost-per-tonne than the ETS price, and the numbers are all sound, then that's fine. Hell, that should be the gold-standard right? Don't do anything that costs more than doing stuff through the ETS, but if you find some strange case where the regulation would be more cost-effective, fill your boots! Just make sure that the numbers actually stack up and aren't complete nonsense like the numbers backing EV subsidies. You can't just wish-up benefits or assume away costs. Treasury would have to be crazy careful in vetting this stuff. Remember the analysis on the feebate scheme, and how hard it was for Treasury to try and knock back nonsense claims from the Ministry of Transport?