Thursday 25 February 2021

For a bigger carbon dividend

New Zealand has an excellent Emissions Trading Scheme covering everything except agriculture - a non-trivial exclusion, but we can come back to that later.

The ETS has a cap. Net emissions from the covered sector cannot exceed the cap. So any other regulations that affect sectors covered by the cap only shift things around within the cap and affect the ETS price. They do not affect the quantum of net emissions. 

The Climate Commission has been proposing a lot of things that look a bit nuts when we recognise that the sectors they're hitting are encompassed by the cap. The Climate Commission has been advancing what seem untenable justifications for things like banning new houses from having gas heating systems - they claim to be protecting consumers against having stranded assets when ETS prices make gas too expensive to run. Consumers aren't idiots though - put a sticker on the gas appliances warning about the coming expected price increases and be done with it.

The more tenable justification for non-ETS measures has always been political economy. I don't think the argument works, but here it is anyway. 

If we relied solely on the cap, then prices would have to rise a lot. If prices rose a lot, there would be political backlash against prices. Consumers would be mad about high power prices, both at the petrol station and on the power bill. Industries exposed to carbon charges here higher than carbon charges elsewhere might leave. And it would be even harder to get agriculture into the ETS. Plus, if ETS prices rose anywhere near that much, people would plant a pile of trees and there would be political backlash against trees in some rural areas. Therefore, we should do a pile of things that we know will cost more than it would cost to just use the ETS, but they're sneaky and opaque enough that they won't let the ETS price risk to ETS-breaking levels. Except for banning tree-planting, which will absolutely make ETS prices rise by far more than they need to, but trust us - we have the model, and you don't. 

There are lots of problems with that, apart from my gratuitous snark about their secret-data modelling.*  ETS prices should be a neutral in agricultural accession into the ETS: just grant existing operators a bundle of credits to ease the transition. They're no worse off, and they face relative prices that would encourage them to shift to lower-emitting options where possible.  

But there's another problem. The Commission leaps to third-best ways of dealing with equity considerations when first-best mechanisms are available. All the backlash - that's because of equity issues in the burden of carbon prices. But the government auctions NZU it creates into the market. It gets money when it auctions those revenues. It could choose to implement a carbon dividend. Take all the money it collects at ETS auction, divide it five million ways, and send everybody a cheque at the end of the year. 

It is an absolutely obvious move. It's the kind of thing that's been advocated by economists in Club Pigou for ages. Here's George Schultz and Gary Becker arguing for a carbon dividend way back in 2013. This isn't some new thing. This is canon for people who like carbon pricing. If Rod Carr doesn't know about it, it would be surprising. I'd also written about it last year

Anyway, run the carbon dividend and higher ETS prices can become a progressive tax and transfer system. While poorer people will spend higher fractions of their budgets on home heating and petrol, they will spend far less in absolute terms on ETS charges because rich people spend more on everything, and carbon is in everything. 

Like, imagine that we increased GST by a percentage point, took all the money, divvied it up 5 million ways, and sent everybody a lump-sum cheque. It would absolutely be a progressive transfer because rich people spend a lot more money, and an extra 1% share of rich person's total domestic spend will be much bigger than 1/5,000,000th share of the pool of revenues collected, and that 1/5,000,000th share will be bigger than an extra 1% share of a poorer person's total domestic spend, right?

Similar for a carbon dividend. 

But the carbon dividend can be even bigger. 

Marc England at Genesis Energy has been worrying that higher ETS prices will mean higher electricity costs across the board. The marginal units of electricity come from thermal generation that include an ETS price, and that means that other generators will ramp up their offers at ETS auction and earn inframarginal rents. 

Maybe. It's possible, but it's also very likely that higher expected returns to investment in renewables will draw more investment in renewables, unless the threat posed by the government's contemplation of building the Lake Onslow scheme wrecks investment incentives. 

But let's take the inframarginal returns as a potential issue. 

The government owns 51% of Meridian. Who's the one that gets the biggest inframarginal return if ETS prices push up generation prices at auction because of those thermal units at the margin? It's the giant hydroelectric guys, right? 

So. If the government gets the lion's share of any excess returns that happen to obtain if ETS prices rise faster than new generation comes onstream, it can just plug that money straight into the pool for the carbon dividend, right? The government gets a 51% share of any of those extra dividends. Use them to make the carbon dividend bigger. 

Imagine that, at the standup, the Minister gets some cloying question about the terrible impact of higher power prices on poor people. The Minister could simply say, "Our government has absolutely recognised those kinds of problems. That's why every household got a carbon dividend cheque last year of over $500 last year. The dividend more than covers most households' increases in costs, leaving them free to decide whether to put the extra money into keeping the thermostat up, getting a start on insulating the attic, or to help cover some extra groceries. We trust Kiwis to make the decisions that are right for them, and the carbon dividend will help enable those choices."

You can even start imagining carbon dividends end-year big enough that people start wearing "I Love The Emissions Trading Scheme" t-shirts. 

High ETS prices, if you run this all properly, could help embed the ETS rather than break it. 

Right now, it's the darned Climate Commission that risks breaking the whole thing with needless "Hey, let's ban all gas connections and gas bottles, it's for your own good and for the climate - and by the way, you're banned from having a ute" kinds of policies. 

* On the Climate Commission's secret data policy, I encourage you to read Auckland's Prof of Stats Thomas Lumley. He's the one the government turned to when they botched the census and needed people who knew what they were doing to oversee the repair work. And he also thinks the Commission should just publish its model. 

Reader mailbag: quarantine edition

This morning's Inbox comes with a plea that I advocate for self-isolation, rather than MIQ, for visitors coming in from Australia - doing so would vastly increase MIQ capacity, enabling a lot of visitors from actually-risky places to take up scarce slots in MIQ, and enabling more family reunification. My correspondent is in that latter situation. 

I've copied my reply below, lightly edited. I'm getting more than a little frustrated by the state of the border. 
Thanks for your kind words. 

You are absolutely right that taking Australia out of MIQ would free up a lot of space for others to enter.

We have been working on and advocating for a far more risk-sensitive approach since this whole thing started. Our views on it have been in line with the public health researchers at Otago as well, for the most part. 

A rather more risk-sensitive system would:
  1. Recognise the reduction in risk achieved through pre-flight testing.
  2. Triage inbound passengers by risk: where they came from, and the route they took to get here;
  3. Complement existing nasopharyngeal PCR testing with daily saliva-based PCR testing for every single person in the border system, from the people who do laundry for the airlines through to every airport worker and every person in MIQ.
  4. Recognise that daily testing reduces the risk inherent in the use of some facilities. Ventilation is a big risk if you’re letting infected people sit there for days before they get caught, if they’re asymptomatic. Daily testing means that infections are caught promptly and there is far less risk of transmission within MIQ, both to other guests and to staff; recognise also that daily testing of staff means the risk of infection jumping out of MIQ drops to trivial levels. Things get caught before they’re a hop away from the border.
  5. Given (4), expand MIQ to include a lot more facilities. The shift to saliva-based testing reduces burden on nursing staff, which has been a bottle-neck in the system. Facilities that would have otherwise been ruled out because of cross-infection risk would be manifestly suitable, in conjunction with daily testing, for low-risk travellers.*
  6. Maintain data from daily testing. If after 10,000 people have gone through the augmented system, we find zero infections emerge after some day earlier than day 12, consider shortening the duration of MIQ for travellers from lower risk places while requiring that those travellers present for a post-isolation Covid test, just to be sure. Put in the post-isolation testing requirements well before any shortening of MIQ duration, to testbed the system's robustness as an addition to current measures. 
  7. Stop requiring MIQ for visitors from places without Covid. While we don’t have much travel from Taiwan currently clogging up MIQ, we would get a pile of tourists coming in on direct routes from Taiwan if we were the only safe place for them to visit. We should have been doing this since July of last year. No time like the present to start though. 
  8. Start adding MIQ abroad for visitors from high-risk places, with daily PCR testing for three days before travel. Saliva testing makes this entirely feasible. Arrive in LA on Thursday, get tested. Get tested on Friday. Get tested on Saturday again before hitting the Saturday evening flight to Auckland, with secure transit to the terminal. Let AirNZ run it to NZ spec.** 
I see next to no chance the government would agree to self-isolation for arrivals from Australia. Taiwan is able to manage it because they couple it with real monitoring and real penalties for breaches. The government here is unwilling to do that. They also worry about risks where those self-isolating people could have visitors, so even if a tracking bracelet were in place, they would need additional monitoring to prevent family from popping in and then risking spread. 

I can imagine ways of doing it, like adding security cameras at the doors, but it would not take long for something to go wrong. Travellers from Australia include the broad cross-section of New Zealand society, as the government likes to put it. That includes people who consider it appropriate to get early release from MIQ to go to a gang funeral and then breach all of the conditions that were placed on that early release. That so easily could have turned into an impossible superspreader situation. I’d bet, under an “Australians isolate at home” rule, it would be less than a month before a report about a party at one of those houses, and the whole thing would fall over. 

Because the government feels itself constrained against the kinds of monitoring and penalties that let things work in Taiwan, they won’t go near it. The best we can hope for, I think, is the scheme outlined above. And I only put maybe 1 chance in 5 that we can get to that system. 

It has been incredibly frustrating how little progress has been made. Saliva-based PCR testing has been feasible since August and has been in place privately since January. Better systems are possible. There’s no appetite for them; most people take it as a benefit, rather than a cost, that foreigners are kept out. There’s a deep underlying xenophobia driving some of it. That, combined with nervousness about MoH capabilities in managing any change to the system whatsoever has made the status quo very sticky.
Politik yesterday reported that the government's looking at 12-18 months before borders might start "more widely opening". The MIQ system has to be fit for that longer haul. It cannot currently accommodate need, and the costs of that will be increasing. 

* I think this is where there might be disagreement with folks at Otago. They've been arguing for severe reductions in the number of people allowed through, on very good grounds: the new variant is far more dangerous when combined with leaky systems. I'm here arguing for allowing more, but only with strengthened systems that reduces that risk. The new variants are riskier. But with daily testing of everyone in the system, that risk is sharply constrained. While the new variants are more infectious, there's far less chance of it making it through if pre-flight testing has triaged out people who are going to be infectious on arrival, and if daily testing in MIQ catches people very quickly on becoming infected. That reduces the risk of transmission to border workers. And daily testing of border workers massively reduces the risk that it then gets out. And recall that the border workers are all now getting vaccinated. Vaccination reduces the likelihood of infection by about 90%, from early reports. 

** OBVIOUSLY this would be in addition to the current MIQ here, not instead of it. But if it turned out that we just stopped seeing positive cases in MIQ here consequent to that change, we could start revisiting the duration of MIQ here. And, I'd hope, also obviously, if it turned out that visa issues made it impossible to stay at an MIQ facility abroad, we'd be maintaining a tighter-protocol one here for the riskier people who hadn't gone through MIQ abroad. 

Wednesday 24 February 2021

Border Costs

Cecile Meier walks us through some of the costs of a border system that has neither been able to safely scale up to meet need, nor able to find any reasonable way of prioritising entry into those scarce MIQ spaces.

When Zane Gillbee hugged his family goodbye in South Africa before moving to Wellington, his daughter Lyla was still a baby and his son Callum a happy seven-year-old.

Lyla is now a potty-trained, walking, talking two-and-a-half-year-old and Gillbee has missed it all.

Callum, who is about to turn 9, has been diagnosed with separation anxiety and is on medication for it.

Zane Gillbee is one of the hundreds of skilled migrants who moved to New Zealand for a better life before Covid-19 hit, expecting his family to follow.

There are a lot of people in this situation, but not so many that it would be impossible to fix. 

A Facebook group for families split from New Zealand migrants counts 1600 members sharing increasingly desperate stories.

Immigration lawyer Katy Armstrong conducted a survey through the group, which 700 odd people completed, including 500 who had children.

She estimated the total number of split families of temporary visa holders in New Zealand to be about 2000.

The MIQ system has 4500 rooms. If there are 2000 split families, then that would be about half of the system's fortnightly capacity to get the job done.

The government provided hundreds of MIQ slots for the Auckland boat race. As of late January, Immigration had issued 753 visas for the Cup, including at least a couple hundred dependents of Cup workers. But MBIE can't say how many rooms they've taken up. I suspect it's because they don't want anyone to know. It would be feasible to know. The Immigration side of MBIE knows to whom visas were extended for the Cup. The MIQ side of MBIE knows who was in each room. All it would take it running the one list beside the other to see if the names from the one list match up with names on the other list. 

There simply is no good way for the government to be picking and choosing who should get these scarce spaces. Lots of Kiwis just hate foreigners and are happy for migrants with families abroad to get the shaft, so there's little political pressure to solve this. Lots of Kiwis like boats. So we get the outcomes we get. 

But there is a good way to expand capacity in the system so that more people can travel safely. Testing before travel will knock back the number of positive cases arriving here. If the government ever gets around to implementing the most obvious way of strengthening safety in the border system, that too can help enable greater capacity. 

Daily saliva-based PCR testing makes each person in MIQ far less risky because they can quickly be shuttled to JetPark if they're found to be infected. That means far less risk of infecting an MIQ worker or another MIQ visitor. Combine it with daily testing of every border worker, and there's far less risk of the virus getting out of the border system. You just won't get into spots where you're not sure where it came from, if every single person in the border system is tested daily. 

Because saliva collection doesn't require nurses, another bottleneck in the system is eased.

Because each infection is less likely to be transmitted, some facilities that might not have been safe as MIQ facilities could be safe when combined with daily testing, with pre-flight testing, and with triaging of visitors by Covid-rates in their country of origin. Australia is going to be low risk even when they're having a minor outbreak. America is going to be higher risk for a while. Safe the more secure facilities for the folks coming in from riskier places, open up a few more facilities for people coming in from less risky places, and run daily testing to keep the whole thing in order. 

Safely expanding MIQ capacity matters. We're likely to be stuck with this for the rest of the year, if vaccine roll-out will only be happening in the second half of the year. The costs of keeping things as they are for families like the ones Meyer has spoken with - they're just too high. 

Tuesday 23 February 2021

Blessed are they that have not seen the model, and yet have believed

The Climate Change Commission's recommendations span the breadth of the economy. They are required to come up with sector-by-sector climate budgets consistent with getting New Zealand with net zero emissions under the Zero Carbon Act. 

The sector-by-sector budgets rest on underlying models. The models build predictions about what will happen as ETS prices rise, and what will happen when some additional constraints are put into the system. Some of the CCC's recommendations then mandate what they think are their best guesses about what a carbon price would do, subject to those constraints.

The scope is vast. The entire economy, really. 

And the Government has already signaled that it will just do whatever the Commission says to do. 

So getting things right seems to matter and is rather high stakes. 

In that kind of situation, you'd think that the underlying models would be available for checking and testing. Getting bits wrong could be really really expensive, whether you want to frame it as economic costs, or as carbon mitigation forgone. 

But the Commission is not in a sharing mood. Here's Kate MacNamara.

Critically, the commission has not provided either sensitivity analysis nor the marginal abatement costs, broken out by industry.

That data matters. Sensitivity work helps economists to understand just how precarious that "less than 1 per cent of GDP" figure is. Will it alter significantly with slight adjustments to inputs? And the industry data for abatement cost would allow interested parties to properly test the assumptions the commission has made.

A commission spokesperson said it was unable to answer questions before the Herald's deadline on Monday. But one reason Carr has given for withholding information is the use of some US$6000 worth of proprietary global trade data from the Department of Agriculture Economics at Purdue University. It isn't clear why this data can't simply be stripped out.

In an emailed response to the letter signatories, Carr also said the board of the commission will consider the request for more time. But he didn't sound hopeful.

"As you know the commission has a deadline to deliver its final advice on or before 31 May 2021. Evaluating submissions and determining the impact of submissions on our draft advice also needs adequate time," he wrote.

You might have hoped that plans that have potential to re-engineer the entire economy would have more provably robust underpinnings. 

A couple years ago, our shop started putting out some new measures on school performance, based on work in the SNZ datalab by our excellent Joel Hernandez. We put up a technical report to go with it to show our workings, and we made all of our code available to anyone else in the datalab to check over and build on if they wanted to. 

If Joel's work turns into policy, we'd be really happy about it, but there isn't a direct channel there.

The Government has signaled they'll just do whatever the Commission tells them to do. But the Commission has done less to make their workings available for testing and checking than we did for a report on school performance. Our remit was small. Theirs is, potentially, the re-engineering of the entire economy. 

Blessed are they that have not seen the model, and yet have believed the results as described by their analysts in a series of webinars. 

Friday 19 February 2021

Covid loans?

The excellent Richard Meade makes the case for Covid loans instead of wage subsidies. You can read the journal article on it, or his column over at The Conversation

Richard and I independently came up with the idea way back in March/April. I'd included it in our first comprehensive pandemic response policy paper, 26 March, with a bit more detail in a second short policy piece on 27 March. and he emailed me his two-pager on it about a week later. He'd not seen my version of it beforehand; his was better worked-up than mine was. Richard cites our version in his journal article. 

I'd liked it as a complement to the wage subsidy programme. We'd pitched a slightly different version of the wage subsidy scheme, based on Germany's short-time work scheme (see our short piece of 27 March), but given the time pressure it's impossible to fault the government for putting out the system it did put up. They made it work incredibly quickly, and the officials who got it through deserve medals. It avoided a pile of scarring. 

At the time, we all expected far worse employment outcomes, even with the wage subsidy programme. You can't just turn off tourism for what looked likely to be at least a year without having a pile of problems right? 

I'd figured that opening the student loans scheme to non-students, for borrowing up to a capped amount, with penalty interest applying ex post to any amount of borrowing that was above realised income losses, would likely work. 

There would be huge admin cost in trying to expand the student loans scheme; I'd thought this way of backloading a lot of the administration would make it more feasible. Easy approvals up front, but knowledge that penalty interest (recouped through the tax system, just like student loans) applies if you borrow more than your income loss would discipline. And it would mean that a lot of the admin would come at the end of the tax year, rather than while the bureaus were up to their eyeballs in trying to sort through the wage subsidy scheme. What those folks got done late March - just amazing. 

The big advantage in relying on something like extensions of the student loan scheme is that it automatically targets assistance to where it is needed, if you apply penalty interest for borrowing above realised income losses, and because it lets the government deliver more assistance in a hurry for any amount of cost it is willing to front in providing that assistance. If the government gives out a dollar as a grant, that costs a dollar plus the deadweight cost of taxation. If the government gives out a dollar as a loan, it gets some of that back. And that means it can loan out rather more than a dollar for the same expected one-dollar cost. 

Richard has it up as a substitute for the wage subsidy scheme. And I expect that's where policy has to turn over the longer haul: credit support rather than wage subsidies if we get more lockdowns, but government-funded Covid leave (now in place!) so workers and firms don't bear the costs of workers staying home while waiting on test results. 

Here's Richard:

Furthermore, since any firms and households borrowing against their own future incomes will ultimately be repaying their debt, COVID loans represent an asset on government balance sheets.

This offsets the extra liabilities governments take on by borrowing to finance these loans — something wage subsidies do not do. This increases the affordability of a loans-based approach from a government perspective (even allowing for defaults and subsidies implicit in student loan schemes).

Using illustrative data for New Zealand, my paper shows COVID loans are 14% cheaper than wage subsidies (and small business loans) in terms of their impact on net government debt.

More importantly, they are almost 2.5 times as effective in terms of the level of support they offer. And since 67% of the cost of COVID loans ultimately falls to those who make use of them (allowing for defaults and implicit subsidies), they place less of a burden on future taxpayers than deficit-funded wage subsidies.

The point of the wage subsidy scheme was to make sure firms could have a rapid reboot after lockdown. Making it the go-to in any outbreaks risks providing too much support in places like tourism where resources should shift to other uses. 

Hopefully this will all soon be irrelevant. But it is fun looking back through the email correspondence on it from back then. 

Thursday 18 February 2021

MIQ and the America's Cup

I was curious how many spaces in New Zealand's Managed Isolation and Quarantine system were taken up by folks coming in for the America's Cup.

It looks to be unknowable, at least for now.

Immigration NZ has a list of people who were invited to apply for entry visas for the Cup, and another list of people who subsequently applied, and another list of those who were approved. There were 753 people whose entry visas were approved as of late January, with another 16 applications then under consideration. 

But we don't know how many rooms that takes up. A lot of those 753 will have been dependents of arriving America's Cup workers. Sometimes dependents travel with the worker. Sometimes they arrive at a different time. If they come in together, that would be one room. If they come in separately, it would be more than one. 

And some of those 753 might have decided not to bother coming through after having gotten their visas.

And some will have self-isolated on boats.

On the other side of MBIE, the MIQ people have lists showing which people were in which rooms and when.

But they've never looked to compare names across the two lists. It would seem likely to be pretty easy; you could even brute force the thing by just sorting the two different lists alphabetically and then eyeballing it. 

Anyway, Immigration told me their numbers, and I wrote on them in last week's Insights newsletter in our 3 slot - the one we reserve for satire or dark humor

The Aristocracy of Pull

If you want to get into New Zealand during the pandemic, it’s not that hard.

The government just needs to consider you to be a priority for a scarce managed isolation space.

Simplest is to be attached to a subsidised government programme. If a government programme falls over, there are real consequences. Political consequences. If private projects fail for want of critical staff, that is obviously less important.

Back in August, being a racetrack specialist mattered. The Provincial Growth Fund considered horse tracks critically important, so those workers got in.

But government racing priorities change with new coalitions, and the America’s Cup is on in Auckland. Its importance is as obvious as the dollars government and Council have thrown at it – about a quarter of a billion of them, regardless of business cases that struggled to show benefits in excess of cost even before Covid.

The argument for subsidising and prioritising the Cup is so powerful, they don’t need to explain it in a business case that stacks up, and they don’t need to revisit it when circumstances change.

Immigration New Zealand tells me that, as of the 21st of January, 753 people had been granted visas for travel into New Zealand for the Cup and a further 16 applicants were waiting on decisions. That is roughly equivalent to one in seven arrivals over one MIQ cycle – though MBIE has not yet told me how many MIQ spaces have been needed.

Being vital for projects involving racing or films could help your prospects for getting a space. A film about a horse race on a boat could tick all the right boxes.

Alternatively, if you worry that urgent need to enter the country might arise, cultivating a sympathetic media profile could be helpful. When 1.2 million Kiwis were born abroad and another million Kiwis live abroad, the number of legitimate urgent travel cases will always exceed capacity. Selection will be impossibly hard. Being featured on the news could help you while making the government’s selection job a bit easier.

Finally, if all else fails, being elected as a list MP might help, but it’s hard to tell. One MP took a spin on that roulette wheel in desperate circumstances and won, despite long odds. Lucky spins do happen.

Fortunately, scarce spaces in MIQ are allocated according to democratically chosen priorities. A bit of political pull is all you need to ease things along.

The Herald's Tom Dillane asked about the numbers; here's what I told him. 

Priority at the border has been and should be returning Kiwis. The government consequently reserves only a small number of spaces for workers essential to a wide variety of industry and business needs. Taking up hundreds of MIQ spaces for what is fundamentally a large government project – a boat race that would not be occurring in the absence of some quarter of a billion dollars in public funding – means fewer spaces are available for workers critically important for other projects. That is the real cost of these spaces: the opportunity lost when the government prioritises workers and dependents for its own projects over anyone else’s. We regularly hear not only of essential skilled workers unable to get a spot in MIQ, but also about critical skilled migrants in New Zealand deciding to leave because they have not seen their families for a year and have no hope of bringing them in. Prioritising the entry of hundreds of dependents of boat race workers, over workers already here who have not seen their families for ages, suggests the government’s priorities are out of whack.

Dillane's story is here. The headline isn't right - it's over 700 entries, with at least a couple of hundred of those being dependents. But Dillane wouldn't have written the headline. He goes through the numbers; I sent him through the OIA material. 

I still have a request in with MBIE asking whether they can compare across those lists. 

Wednesday 17 February 2021

Test test test

My column over at Newsroom this week points out the fairly obvious.

The government can add daily saliva testing for everyone at the border to the existing testing regimen. 

If daily testing winds up proving the swab tests to be redundant, ditch the swab tests when we find that out. 

If it turns out they're both useful, keep both.

And in the very unlikely chance that the saliva tests wind up being redundant, they won't have cost much.

From the column:

Saliva-based PCR testing is a game-changer. It is at least as accurate as the swab tests currently used, but has several advantages over the swab test.

Because it relies only on saliva collection, it does not need scarce medical professionals to gather the samples. Availability of nursing staff is a substantial constraint in the system – and especially since the government shifted border nurses back onto the lower pay rates available through the district health boards.

Swab-testing can make people sneeze in reaction to having a swab stuck up their nose. Saliva testing does not come with that risk. Sneezes are far riskier than some drool on a disposable spoon.

And, finally, because providing the sample is far less inconvenient and invasive for the person being tested, and because it comes at only a fraction of the cost of the swab tests, it is rather more feasible to require it as part of a daily testing regimen.

Suppose the tests cost on the order of $35/pop (the Milne article doesn't say, but notes that large-scale runs would be less than the $40-$50 range advertised for smaller runs. And suppose there are 5k people in MIQ and 10k people in the border system. 15,000 * $35 = about half a million a day in test costs. So about fifteen million a month. 

If we run it and find, after a month, it was useless, we might have wasted twenty million. Less than a tenth of what the government decided to throw at some stupid boat race in Auckland. 

If we run it and find it to be useful, we get to spend maybe twenty million a month for substantial reductions in the risk of the virus getting out into the community and future lockdowns. 

And, just as obviously, daily testing gives us way more information about what the heck is going on. Are the cases that are currently found at Day 12 ones that just took a long time to incubate, or are they cases that were transmitted within MIQ? If we knew what was going on at every day along the way, we'd see it right? The PCR tests would make it way less likely that people could transmit within MIQ. They'd reduce the inherent riskiness of potentially infectious people sitting in hotel rooms not designed as quarantine facilities and spreading infection through ventilation systems. Right now, somebody could be infectious and asymptomatic in MIQ for days and days before being caught. Daily testing would fix that. 

My working hypothesis has been that MoH is just a wall of "Computer Says No" because the whole system's held together with bailer wire and they know they can't trust themselves to try to adjust anything. But some moves reduce the riskiness of the whole shambles. Daily testing in MIQ makes the whole thing less risky. 

Tuesday 16 February 2021

Forests and intertemporal equilibrium

I'm a bit of an ETS-absolutist. Or at least a carbon-pricing absolutist, in a place the size of NZ. I think the Weitzman reasons for preferring a carbon tax to an ETS are second-order relative to political economy considerations, and any weight at all put on switching costs makes it ludicrous to want NZ to flip from an ETS to a carbon tax. 

But if a carbon tax were already in place, I'd be an absolutist about supporting the carbon tax.

There are fun and interesting arguments around tech-forcing, but NZ's not at the scale where that even really comes into play except maybe around ag biotech. So, prices are the way to go. 

One of the big things I hear from non-economists pushing back on it is around future generations. 

Here's my version of what I get a lot on Twitter, and as pushback from others. I hope I'm not providing a strawman treatment of it here. 

The ETS is fine in principle, but it is inequitable. In particular, it does not consider the interests of future generations. If we allowed the ETS to do its work without hindrance, a lot of the countryside would be planted in pine trees. Let's leave aside all of the biodiversity issues with that for now and just focus on one additional problem: intergenerational equity. If you plant trees now, that's a one-off. The land you've planted in trees has to stay in those trees forever as a carbon sink. If you harvest the trees, you have to re-plant them if you don't want to have the carbon released. That locks the land into forestry, unless some future person buys the ETS credits necessary as part of surrender obligations if they take the land out of forestry. So you're locking a future generation out of other uses of that land. Worse, you're only offsetting some current emissions. If gross emissions do not come down, then future generations either have to do more to reduce their gross emissions, or come up with new carbon sinks that could be even more difficult than forestry. This is intergenerationally inequitable. 

I hope that's an accurate representation of that particular concern.

I used to cover something similar in my 200-level policy course at Canterbury on intertemporal equilibrium. I don't think that this is at all commonly appreciated outside of economics, although the core paper establishing it is almost a century old.  

Imagine that you own a piece of land that's currently a sheep paddock but could be turned into a forestry block. There are only so many of these in New Zealand; it's a big country, but it is finite. When should you run a forestry conversion? 

Let's think through the owner's incentives and decision, and then relate it back to the equity issue that non-economists like to beat me up about. It isn't that economists haven't thought about it, it's rather that it's already kinda taken care of by the system.

If I keep the land as a paddock, I can keep earning paddock-related income from it. I can maintain that as long as I like. Carbon prices in the ETS are increasing over time. If I keep the land in sheep, eventually I'll be facing a carbon price for emissions from those sheep. That cost will be increasing, but is reasonably predictable. The current carbon price is about $38/tonne and is capped at $50/tonne plus 2% per year after that. Some price will attach to methane, but that's yet in flux. 

If I flip the land to forestry, I face a one-off conversion cost that won't change a lot over time, unless somebody figures out far less costly ways of planting forests. I will get a one-off set of ETS credits for converting the land. I can hold onto those credits, or sell them into the system. I can sell them into the system now, or I can sell them into the system at some later date. 

From now until time t when I convert, I get paddock net earnings per year. From time t onward, I get some lumber earnings as forests mature and get replanted, but I have to keep the land in forest. As soon as I fail to replant, I have to surrender credits comparable to the bundle of credits that I got when I planted. I have a bundle of ETS credits when I flip; if I sell them, I get the interest rate as return on that investment. If I hold them, ETS prices could rise or fall; I take on that risk and potential return. 

How should I decide when to flip to trees? What sorts of things will matter? This is a rather standard application of the old Hotelling problem. 

Howard Hotelling wanted to figure out time paths for prices for non-renewable resources. He showed that those futures prices should be coordinated through the interest rate. How? Let's take a simple example.

You own a paddock that's currently in sheep. You can keep running it in sheep, but methane prices will eventually hit your returns. If you flip it to forestry, you'll get a wad of ETS credits for the forestry conversion, and thereafter you get forestry returns from the land. If you ever flip out of forestry, you have to redeem a pile of ETS credits to do so.

Suppose you think that carbon prices are going to be far higher in future than they are now. If you believe that, you do not want to flip to forestry today, unless the returns from running a forestry block are comparable to the returns in sheep, leaving aside the ETS credits. Why leave aside the ETS credits? You can get those anytime. The opportunity to flip from sheep to forest will be there as long as you own the land. Once you convert, you get that bundle of credits. The credits don't do you any good, really, until you sell them. And, once you sell them, you can earn the interest rate on the money you get from selling them. 

Suppose that the returns in sheep are the same as the returns in forestry. The only reason to flip to forestry now, instead of later, would be if you figured that you could earn more by banking interest on your ETS credits than by holding the option until later. And that will only be the case if you're expecting the value of ETS credits to rise more slowly than the interest rate. 

And that's an equilibrating process. 

Whenever it seems like carbon prices will rise more rapidly than the interest rate, people will want to hold off on forestry conversions until later. If you wait until later, you get a more valuable bundle of ETS credits for the conversion. Fewer forestry conversions now means fewer ETS credits now, which pushes up current ETS prices relative to future ETS prices, which pushes that time path to look more like the interest rate.  

Whenever it seems like carbon prices will rise more slowly than the interest rate, people will want to flip to forestry now so they can sell the credits, invest the money, and earn interest. That process means you get more ETS credits now, which pushes down the ETS price now relative to later, which again makes the time path look more like the interest rate. 

Interest rates provide intertemporal coordination. They're a law-of-one-price for the future, holding constant riskiness and other stuff. 

Expectations about technological change will also matter. If you think new equipment will make future forestry conversions more cost effective than they are now, that will have you leaning against current conversions. If you think regulatory changes will make future conversions more difficult, you'll want to bring those conversions forward before councils ban them or before the Climate Commission mandates something weird about what kinds of trees you're allowed to plant. 

So back to our opening worry about relying on tree conversions. The underlying premise there is not just that a lot of land will be flipped to forests as a way of generating ETS credits, but that doing so imposes an uncounted cost on future generations. But if people expect carbon prices, and consequently the value of ETS credits, to be a lot higher in the future, they'll want to wait to exercise that option. They only will want to bring forward that option if current ETS prices seem high relative to futures prices, given interest rates. So the equilibrating process encourages preserving the option to plant later in scenarios when future scarcity in carbon permits seems high, but exercising the option to plant now in scenarios when future scarcity in carbon permits doesn't seem high. And that's exactly the set of incentives that you want, right?

Now there are ways that that can all blow up. If you expect that somebody's going to ban forestry conversions, then you can distort that intertemporal decision. That will make you want to convert sooner rather than later, because later might not be allowed. If you expect that the government will blow up the ETS in future, then you'll want to plant now, sell the credits, and hope that whatever mess of a policy we have in future doesn't hold you to the surrender obligations if you flip out of forestry. Both of those point to the importance of credible reliance on the ETS, and of not continually making noises about future bans on forestry conversions. Talking up future bans brings forward forestry conversions. 

If your objection is that investors can err about whether to make the conversion, because they're underestimating future ETS prices, the solution to that isn't banning conversions, it's making sure that the binding cap tightening over time is credible and advertising likely price paths consequent to those conversions. 

The usual critique is that people don't think enough about the future because they're too selfish, so they don't think about the opportunities they take away from future generations. But every agent in the Hotelling setup is a pure profit maximiser. They only care about making money. And holding the option to convert later can be better than converting now, if you think that ETS prices in future will be a lot higher, and depending on the interest rate. 

And if you think that everybody else is wrong about the likely price path for NZU and that ETS credits are going to be way more expensive in future, you could go and trade in ETS credits to make a lot of money out of it. 

I worry a lot about policy initiatives where the underlying problem definition requires that markets somehow can't handle long term investment decisions. It winds up with an arbitrariness - it gets rolled out whenever a market outcome doesn't correspond to some bureaucrat or politician's vision of the good.

Anyway, bottom lines: 

  • intertemporal prices already provide incentive to consider the value of maintaining the option to convert to forestry later; 
  • these decisions wind up being guided by and coordinated by overall interest rates;
  • expectations about tech and cost paths can also matter, but all else equal it's going to be expectations around future ETS prices and interest rates;
  • you can break a lot of that setup by threatening to abolish the option to convert in future, as that will have folks rush to convert earlier. And if you're threatening to abolish that option, it's probably because you don't want them to be converting now, right? 

Tuesday 9 February 2021

Mismanagement of the highest order

Josh Gans's newsletter on Covid, testing, and vaccination continues to be excellent. 

Here's the latest from Josh, on failures in the Australian system that led to the most recent outbreak there.

However, let’s look at the testing. First of all, quarantined travellers are tested just twice (usually a few days after they arrive and a few days before they leave). Why aren’t they screened daily using rapid antigen screens? It costs very little and can ensure that cases are picked up quickly and extra precautions are put in place so the workers aren’t exposed.

Second, what about the employees? The workers are tested but not often. This one had symptoms before he got a test. From here the plot thickens. From WA Today:
Daily testing of hotel quarantine workers, which could have identified WA’s first community transmission case of COVID-19 in nearly 10 months several days earlier, was only rolled out on Friday, Premier Mark McGowan has revealed.

Following a National Cabinet meeting on January 8 all states and territories agreed to roll out daily tests of hotel quarantine workers after a Brisbane hotel worker was infected with the highly transmissible UK COVID-19 variant.

Victoria had already been doing daily saliva testing and Queensland enacted their testing regime three days later but Mr McGowan said on Sunday that WA had only just finished testing its new regime at the Novotel hotel last week.

“We put in place the saliva testing as quickly as we could using the health department and appropriate protocols, unfortunately, it didn’t start until late this week,” he said.

“It’s not easy, it is a big exercise to roll out.”
Well, that really cheeses me off. Yes, it is hard to get screening in place (I know it more than anyone). But it is not hard to do it in a rough and ready way while you work out best practices. So in WA’s case, they missed it by that much. But if this is your weakest link why did the Australian government wait until this year to decide to roll out daily testing? It boggles the mind. It is mismanagement of the highest order.
If it's mismanagement of the highest order that Australia only just recently started daily testing of workers in the border system, how should we describe a country that hasn't even considered implementing it yet?

Rapid antigen tests would be a fine addition, but the University of Illinois has had a saliva-based PCR solution in place for months, and it's at least as accurate as the nasal swab tests. 

It would be entirely feasible to add daily testing here for everyone in the border system, including those in MIQ. 

Back to Josh on Australia:
Nonetheless, this time around, you might be tempted to say, “it is what it is.” But it is February. A vaccine has been available since December. The Australian government has not rushed to procure vaccines. Nor should they necessarily do so as Australia is at Covid-Zero and doesn’t need mass vaccination as urgently as other places. However, Covid-Zero is a tough policy to maintain. You cannot tell me that it wouldn’t be possible to pay top dollar and procure vaccines for quarantine workers who, despite doing all you can, can still get infected and pass it through to the community. To be sure, if you have regular screening of everyone, there is a good chance leakages can be caught. But, there is a vaccine. The Australian government has sensibly placed these workers at the very front of the queue to get vaccines when they eventually arrive. But these workers and the country need them to have the best vaccines right now! The Australian government needs to be held to account for lockdowns and restrictions that occur that could have been mitigated by obvious, economically sensible actions.

Rather similar here.

New Zealand should have used advance market commitment orders to help secure an earlier spot in the queue while providing the funding that helps vaccine manufacturers scale up for everyone. But from where we are now, whatever your arguments around holding off on mass population vaccination in a spot where the virus is not prevalent, surely there should have been provision for enough early doses for workers in the border system.