Monday 31 July 2023


We're all used to standard NIMBYs. 

But now the Ministry of Education and NZTA have gotten into the game.

Fulton Hogan wants to turn an end-of-life quarry into a new development.

Well, that just doesn't fit the plan.

Early plans had shown more than 500 residential sections would be in the development and there would be space for shops and a restaurant/bar.

Waka Kotahi said in its submission it considered the proposed location of the site was quite remote from the existing main urban environments within the Central Otago district.

The Waka Kotahi submission said the subdivision would be about 10km from Cromwell, 40km from Alexandra and 45km from Wānaka and, since there was no public transport, heavy reliance on the use of private vehicles was expected.

It also said the proposed development was outside the future growth areas identified in the Cromwell spatial plan.

The area was not identified for future residential zoning recently notified in plan change 19 of the Central Otago district plan. The spatial plans were developed to manage urban growth in a manner that promotes an accessible walking and cycling town.

It also highlighted further consideration had to be made for carbon emissions and potential climate change effects for the future development.

It said the development of the site was unlikely to result in a significant uptake of active transport modes such as walking and cycling nor a reduction in a reliance on private vehicle trips. There was no provisions made for public transport.


In its submission, the Ministry of Education said the proposal would place pressure on schools in Cromwell with an influx of people coming into the region.

“The boost in dwellings constitute a sudden large addition to the number of total dwellings and total rating units, at a scale and pace that is larger than projected numbers. This growth is at a faster rate than that anticipated by the Ministry of Education,” it said.

Nothing can be allowed to grow faster or slower than the Ministry of Education projected. 

And even though transport emissions are fully covered in the ETS so residents of car-dependent places will have to pay for their own emissions, NZTA doesn't want to let it happen. 

What a mess.  

Friday 28 July 2023

These are not serious people

If you believe it to be a good idea to remove GST from food, whether all food or just some food, at least one of three things is true.

  1. You have not thought this through or read anything from anyone who has thought this through. Labour's 2018 Tax Working Group showed that, for the same cost to government revenues as a food-sized hole in GST, you could provide a transfer to every household. That transfer would provide twice as much benefit to poor households as taking GST off of food. Please read Paragraph 33 of the TWG report and reconsider your position.  
  2. You have tried to think this through but are, in fact, an idiot. You are neither able to do basic math nor to listen to anyone who is able to do math. Not being able to listen to people who obviously know more than you do about a specialist topic suggests you really are unfit for politics. You will do harm to the people you purport to represent and wish to help, through willful stupidity. This will be a general problem across all policy areas, if you have revealed that this is your type. 
  3. You are pandering to people who you think are unlikely to think this through, or who you think are unable to think this through. In this case, you are, in fact, evil. You are proposing something to people who you think are too dumb to know any better, that will make them far worse off relative to other policies that cost just as much. 
I can believe that Te Pati Maori have not thought this through and have not bothered to read anything from anyone who has thought this through.

Too much of the rest of their tax policy sounds like Trump promising to build the wall and make Mexico pay for it. 

If Labour goes for this, it's firmly Category 3. They know better. They have time to reconsider. I really really hope they reconsider. 

Thursday 27 July 2023

The ETS and its enemies

In the weekend papers [ungated], I despaired at sets of policies that work to undermine how the ETS works. 

Investment in decarbonisation should be driven by carbon price signals; instead, it's turning into subsidy-seeking. Using your own money for decarbonisation was looking more and more like a mug's game. 

The government threw carbon forestry into chaos with speculation around eroding all the underlying rights. 

And decisions on ETS unit supply threw further uncertainty into the mix. 
The Zero Carbon Act set the country with a target of net zero emissions by 2050. The Emissions Trading Scheme was designed to target net emissions.

But reviews of the role of carbon forestry, and of the role of carbon removals as compared to gross emissions reductions, have driven deep uncertainty about the property rights that underlie the scheme.

Earlier this month, carbon prices dropped from about $55 per tonne to $35 per tonne. Regulatory changes could particularly hit carbon credits generated by growing trees.

In CarbonNews, one carbon market participant reported, “We’ve been speaking to some very angry forestry people and some very confused emitters. Foresters don’t know if they can plant and emitters don’t know if they can use those units to offset after 2025.”

Carbon prices have since rebounded, but not because forestry issues have been resolved.

The High Court last week told the government to look back over last December’s decisions about ETS auction settings. Those decisions had resulted in the carbon price falling by almost 60%. They had also resulted in consecutive auctions of government-issued carbon credits this year not meeting the government’s reserve price.

And the next carbon credit auction will happen before the government is due to respond to the High Court.

If the government had wished to throw sand into the ETS’s gears, both to make the ETS work less well and to make everyone less responsive to the signals carbon prices send, it could hardly have done a better job.

A sufficiently advanced incompetence is indistinguishable from malice, but the former still seems the more likely explanation.

Let’s hope the government’s response to the High Court, and the final review on forestry, shows a bit more competence. Getting this right matters.

But things have moved quickly! Tuesday night, the government adopted the Climate Change Commission's advice on ETS auction settings from December. And carbon prices jumped. 

Let's hope they manage not to wreck carbon forestry though. 

Morning roundup

The morning's worthies:

Monday 24 July 2023

Roads and PPPs

Had a chat with RNZ's Wallace Chapman and The Panel this afternoon on the ACT Party's proposal for reform to how roads get built and maintained.

I usually put a few notes together for myself ahead of these things, mainly to sort out my own thinking rather than to be able to convey every nuance for a light afternoon radio talk. 

Those notes are here, in part so I can find them again next time I need to think about this stuff. 

Biggest-picture: there is need for fundamental restructuring to get to a system that’s responsive to user-demand and is consequently able to deliver projects where road users are willing to pay the cost of the service and to bat back projects that aren’t cost-effective. 

First, summary of ACT’s proposal:
  1. 30-year plans for major infrastructure set by local, central, and infrastructure commission. Sets out expected timelines for NLTF projects and which could be fast-tracked if PPP;
  2. Public consultation on draft plan;
  3. Private sector bids to deliver kit, with tolling on the road, are entertained – they’d have to beat public sector timelines/spec;
  4. Then Waka Kotahi has to get consent and acquire land;
  5. Public sector could reconsider a proposed route if private sector gives it a pass at toll rates that users find acceptable;
  6. Could add tolls to existing roads to help cover maintenance, with a focus on congested roads to help spread traffic to other routes;
  7. Not in the ACT proposal here but mentioned by Simon Court on LinkedIn: shifting ownership of the state highway system to a new SOE, Highways NZ, which would be expected to be operationally self-funding out of user fees and deliver a return on capital to the government. 
Big picture things this gets right:
  1. Funding for land transport and its management are currently a mess that contribute to poor quality roads. NLTF increasingly a bucket for sundry transport funding and spending rather than dedicated mechanism for user-pays
  2. Getting price signals into the mix would be really useful. Far too much transport debate ignores it. Is a second harbour crossing a good idea and who should be able to use it (car, bus, bike, pedestrian) ought to depend on whether the kit can pay for itself through user fees collected over the decades of its life, like the Auckland Harbour Bridge, rather than who can make the most convincing case to a Minister. Benefit-cost ratios can be a useful proxy for this, helping to figure out user priorities. If traffic volumes are high enough to justify the cost of collecting tolls, that’s even better. 
  3. Toll roads get us closer to user-pays, and it is better to be closer to user-pays. Remember though that RUC for cars is 7.6c a km, and petrol excise averages that. Neither vary by time or location – though RUC could get there for heavy commercial on telemetrics. 
  4. Reducing admin costs of running a tolling system would also be very helpful. But it’s a big hurdle. RUC has collection costs of about 3%; tolls have been closer to 30% [at least according to the experts I've talked with]. You need high traffic volumes on a road to justify the kit for monitoring and billing. Those costs could come down as tech improves. But it’s still a high hurdle unless there is a lot of traffic on the road. 
  5. Setting interest in running a PPP as one market test of a roading proposal is one way of knocking back bad projects and making sure very valuable ones get built. But there will be others where the cost of tolling, relative to RUC, could prevent good but not superb projects from going ahead.
Potential fishhooks:
  1. Acquiring the land for routes only after extensive consultation can make it a lot more expensive to run projects at all. The Infrastructure Commission has pointed to some of these problems in its own work on corridor designation. Normal drill has been that land is only designated and acquired when the project is ready to go, which means that the value of the project gets bid into the price of that land, which makes everything more expensive. Early corridor designation can help, and 30-year horizons could help with that as well. Option contracting on potential routes, ahead of designations, could help. Corridor designation can be done much earlier, well in advance of any project being viable, so the option is maintained. 
  2. Rather than 30-year plans, long-term corridor designation and flexibility to press ahead whenever circumstances warrant could do more good. Right now, one of Tauranga’s larger housing growth areas is being held up because nobody’s allowed to build to the density that makes sense because the roads aren’t currently up to it, but the SH29 overhaul isn’t planned until 2050. Housing demand can shift more quickly than 30-year horizons. Lots of lead time in designating corridors, and flexibility to build/upgrade as demand comes into the system, may be a better mix. 
  3. The proposal conflates user charging with congestion charging, making the toll charge do both jobs. It’s better to keep the separate objectives separate, even if charges wind up being collected through the same system. A user charge or toll is set to cover the cost of the road – its building and maintenance. A congestion charge should be set to maximise traffic throughput: it should be zero when there is no traffic, and potentially high when there is a lot of traffic. The congestion charge should be designed to encourage changes in times of travel. A dynamic toll that can vary by time of day might be able to do both. But keeping the two separate keeps the incentives clearer and provides other alternatives for dealing with potential equity considerations.  
  4. Consultative processes risk leading to gold-plating requirements that make routes unviable. The proposal has the consultation process in place as a way of gauging real user demand. But that could also be done by setting congestion charges on existing roads and seeing what actual willingness to pay looks like. The example I love to use is a second Mt Vic tunnel in Wellington. I have no clue whether a second tunnel makes sense. But imagine if we had a congestion charge on the existing tunnel set to make sure that the thing doesn’t get plugged. If it only took a $0.50 charge to clear congestion and nobody saw any way of building a second tunnel that could cover its costs on a $0.50 user charge, then it would be dumb to build a second tunnel. But if it took a $5 charge to clear congestion, and if that charge would be enough to cover the tunnel’s cost over time, then that could be a reasonable option – noting you’d also want congestion charging over alternative main routes – or a downtown cordon.
Potential alternatives: 
  1. ACT’s proposals are a step in the right direction. But it’s high time the overall system be reconsidered. 
  2. NLTF is meant to cover road building and maintenance out of payments by road users. But excise is increasingly disconnected from road use / burden imposed. Would be simple to shift away from petrol excise and put everything onto RUC. Note that excise is also increasingly inequitable: a new hybrid imposes no more burden on the road than an old Toyota Estima, but the latter pays a hell of a lot more for the same amount of road use and road burden. There’s weird status-quo bias where people freak out about equity implications of any change from status quo, but never question the biases built into the existing system. But it would also require tighter enforcement of RUC – potentially integrated with WoF. 
  3. ACT is looking at toll charges as one way of alleviating congestion, with public feedback mechanisms aimed at improving social license. If people were worried about equity, you could instead run congestion charges cleanly on their own basis – and use the collected revenues to fund a congestion dividend that rebated collected fees to road users irrespective of their time of use. There is already cross-party agreement for congestion pricing in Auckland/Wellington. 
  4. In 1998, the government proposed substantial transport reform under Maurice Williamson. “Better Transport, Better Roads.” A lot of what was proposed was before its time – the tech wasn’t there for low-admin-cost road user charge collection, and we’re still not 100% of the way there yet. But the system was elegant. Rates would no longer fund roads. Road use levies would be paid into Transfund, a Crown-Owned entity, responsible for recommending road use rates to Minister of Transport. Regional road companies would take over running local roads; a Crown-Owned company would run the state highways and motorways – and this part sounds like what Simon Court had suggested on LinkedIn. It was a straight user-pays system. Transfund would commission roads based on user needs; the public road companies would operate them. The link between user payments and what they get from those payments would be a lot clearer. 
  5. Under the 'Better Transport, Better Roads' option, the road companies would introduce pricing as cost and feasibility were demonstrated – rather than it being a political decision for ministers.
  6. Currently, a PPP can help solve two different problems: infrastructure delivery & management, and financing. If the government instead issued debt tied to specific roading projects, so that road users could pay those costs off over time through either tolls or road user charges, that would be a more direct way of solving the financing problem. And then PPPs would only be chosen if the road companies [Under something like 'Better Transport, Better Roads', or Highways NZ under ACT's extended proposal], or Waka Kotahi under the status quo, thought it would be better value. 

Morning roundup

The morning's closing of the browser tabs:

Friday 21 July 2023

A depressing NZAE keynote

Auckland University of Technology’s Professor Rhema Vaithianathan's keynote at the NZAE meetings was depressing. 

Her work is great: better data tools to help child protection workers better triage cases. One result: a one-third reduction in child hospitalisation. 

What's depressing is that it could have been happening here, but the New Zealand government chased the work away. 

I covered it in my column over in the Post; unfortunately, some snafu on their side resulted in a short version in print. The online version has all of it; ungated here

I also summarised it in our Insights newsletter:

The New Zealand Economics Association annual meetings are a great way of keeping abreast of what the country’s economists are working on. 

And sometimes they’re downright depressing. 

At last week’s meetings, Auckland University of Technology’s Professor Rhema Vaithianathan’s keynote explained what she’s been up to over the past decade. 

Her team has been helping American child protection services to do a better job protecting kids.  

Child protection work is grim. Officials balance two terrible kinds of errors.  

Over-zealousness means a lot of families will be put through a painful wringer unnecessarily. But under-intervention means some kids who could have been helped will wind up abused, hospitalised, or killed.  

Unless you can find a way of reducing both types of errors. 

And Prof Vaithianathan’s team found a good one. 

Child protection workers have a mountain of administrative data for making decisions on whether to intervene in response to a call, but only about ten minutes to make each decision – then on to the next case.  

It is impossible to regularly make good decisions faced with that much complexity and that little time. 

Prof Vaithianathan’s team reduced complexity by turning data into a predictive score laying out the risk each case posed, to help child protection workers make the right call.  

They started the U.S. work in Allegheny County, Pennsylvania, because Allegheny wanted to use data to make better decisions. The programme’s success inspired others to try it out.  

And a later randomised control trial showed that the system reduced child hospitalisation by a third.  

It also reduced the bias that case workers otherwise bring with them in making assessments. The risk scored meant more high-risk white families received help and fewer low-risk black families had to deal with child protection services. 

It’s a great story.  

The depressing part?  

The work started here in New Zealand. It was killed by Anne Tolley as Minister, who described it as experimenting on kids. And the subsequent Labour government showed even less interest in data-based approaches.  

One third fewer hospitalisations for children in risky families.  

But not here.  

In America instead.  

Thanks to Kiwi researchers, who were chased away from doing the work here.  

An innovative American county can try something new and let others follow. New Zealand’s centralisation means a single bad Ministerial decision can cause a lot of harm for a very long time. 

Far better policy, and outcomes, are possible. Even here. But voters have to demand it. 

I also had a two-part podcast with Prof Vaithianathan about it (Part 1, Part 2).

I take all of it as exemplar of why centralised systems fail relative to decentralised ones.

In New Zealand, MSD botched its handling of the system, leading a risk-averse Minister to kill it.

That kills it for the whole country. 

In the US, all you have to do is find one county that isn't full of freaking idiots. When you find that one county, demonstrate that your idea works. Second-movers pick it up, showing that it can work in other places. And then others follow along. 

And every trend in NZ has been toward greater centralisation. 

Thursday 20 July 2023

New Zealand is a developing country

There isn't much in this excellent piece from Sam Bowman that doesn't also apply in NZ. 

We don't have Brexit, and at least some of our political parties are pro-immigration. And there's more support for planning liberalisation here, at least in principle.

But otherwise, scratch out UK, write in NZ, and tell me this doesn't apply:

The UK is thinking like a frontier economy when it should be thinking like a developing country. We’re well off by global standards, but poor by the standards of the frontier. And how rich we get mostly won’t be determined by the Great Stagnation, but by more mundane factors like the cost of energy, the supply of housing and infrastructure, and returns on capital investment.

In a way this is optimistic: the UK has a policy problem, not a fundamental scientific one. 

But there is one problem. There is virtually no recognition of how bad things are among British elites. Stefan Dercon, author of Gambling on Development, has a theory about what allows developing countries to experience sustained economic growth: they need their elites to come to an agreement to pursue it. The reforms needed to grow are painful and unpopular in the short-run. Regimes that do them without an “elite bargain” behind them are opening themselves up to being removed. Similarly, when one party in the UK proposes planning liberalisation, almost inevitably the others swing heavily Nimbyish.

In the UK, the preoccupations of the “elite” – by which I mean the people, left and right, in politics, government and media whose views shape those of the country – are with things like Net Zero (above all), inequality, obesity, delivering Brexit, regulating Big Tech, data ethics and privacy, cutting immigration, gender and racial pay gaps, and other priorities that are either unrelated to, or diametrically opposed to, making the country richer. If growth gets mentioned at all it is usually to support some unfunded and poorly targeted tax cut. On the flip side, every proposed tax or spending cut is assessed in terms of its distributional impact, not its effect on growth.

There is no recognition of the UK’s poverty and low growth relative to the frontier, and a lack of seriousness about how important this is.

 Even degrowth is a fashionable idea in some circles.

Shipping the good apples out - an Alchian reminder

I need to get back to blogging my columns. Been using Twitter for too much microblogging and linking to them, not enough archiving of them here. 

At Newsroom this week I'd reminded folks about Hotelling and pricing of non-renewable resources over time - with application to carbon forestry.

Last time around at Newsroom, I'd reminded folks about Armen Alchian and shipping the good apples out - with application to ag exports and complaints about shipping the good apples out. 

The piece concludes:

Even consumers with identical incomes and identical preferences will be more inclined toward the higher quality goods in situations where the purchase of a good or service comes with an added fixed cost – eg transportation. Or, in the case of parents with children, hiring a babysitter.

“If they hire baby sitters at, say, $1 an hour [remember that Alchian was writing decades ago!] and are out for four hours, it will cost $4 just to leave the house. Now, add the cost of two movie tickets at $1 each, and compare that total cost with the cost of going to the theater (at $4 per ticket). The theater costs a total of $12, and movies cost $6. The theater, then, costs twice what a movie costs. But if a couple has no children and can avoid the baby-sitter fee, the movie will cost $2 and the theater $8 – a ratio of 4 to 1: the theater is relatively more expensive. In our original question, we did not assume parents will go to the theater more than people who have no children; we said, when young parents go out, they will go to the theater a larger fraction of the time than will childless couples. QED.”

Beautiful and concise. Once you see it, you can’t stop seeing it. And you can’t help but notice when others fail to notice this ‘Third Law of Demand’.

There is a very good reason New Zealand’s farmers ship out the best produce. If transporting top quality produce doesn’t cost much more than transporting more standard fare, then our best will always be relatively less expensive, as compared with standard goods, in our export markets.

And these effects work in both directions. New Zealand will import a lot of other countries’ good grapes, or good oranges. Their lower-grade produce will be less likely to be exported.

You could try to undo these effects in some ‘rethinking’ of food systems, but it really wouldn’t be a good idea.


Wednesday 19 July 2023

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. 


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.” 

Just watch what you say

The Minister of Revenue did not like a couple of columns in the New Zealand Herald from National Party affiliated people - Ministers of former National governments. 

Recall that the Herald also runs columns from the left, including Labour-affiliated. But that isn't the point here. 

Here's the letter, signed by the Minister of Revenue as Minister of Revenue, courtesy of Simeon Brown on Twitter.

The Government is currently progressing legislation on media regulation, and will be introducing legislation on media funding (the Google/Facebook link tax mess). 

The newspapers are generally supportive of stealing from Google and Facebook to help pay their bills, but have expressed concerns about the media regulation bill

Stuff chief executive Sinead Boucher said the moves had the potential to “significantly impact independent New Zealand media companies and our journalists”.

“Professional independent New Zealand media companies are already heavily regulated. Further regulation of the news media is wasteful and could impact press freedom.

“The Government’s focus should be on regulating the business practices, content and business models of the social platforms which are under-regulated, publish enormous volumes of harmful content, and are not subject to already strict laws governing New Zealand media companies and journalists.”
So media regulation is currently in-play, as is legislation that would affect media revenues. 

The Herald publishes a couple columns that Minister David Parker does not like, and they get a rebuke from the Minister in their letters section. 

Cabinet decisions are coming on bits of legislation directly affecting the Herald. Minister Parker is in Cabinet. 

Surely the Herald shouldn't infer from this rebuke that the Herald should be careful about criticising the government, lest the legislation that will directly affect them and that is currently in-play be affected.

Because you could only infer that in a banana republic - a tinpot little Pacific country. 

Maybe you should worry about it if you were in the kind of country where the Minister of Broadcasting and Media makes threats to platforms that they ought to 'voluntarily' give more money to his preferred media companies. 

But certainly not in New Zealand.

Because that sort of thing just doesn't happen here. 

A Ramsey twist

Catching up on open tabs and stuff I'd not managed to blog.

Olivia Wannan dropped me a line asking about a UK proposal to vary carbon charges with price elasticity, the idea being that consumption of luxuries was more elastic than necessities. If we define necessities as having very low price elasticity then I suppose that works.

But it seemed a fun kind of idea. Not a good one in practice, but a bit fun to think about. 

I'd sent this back, a small bit of which made it into the final piece (there's no way the whole thing could be used; I'd sent it more as background and to think it through).

Oh wow. 

This sounds like a mirror-image of a standard Ramsey drill. 

Background: Under a Ramsey model, we wouldn’t have a uniform 15% GST. We’d instead follow an inverse elasticity rule that put a higher tax on goods with inelastic demand and a lower tax on elastic demand. The idea is that it would aim to minimise overall distortions caused by consumption taxes by putting higher taxes on goods where demand wouldn’t shift much with the imposition of the tax, because it’s the shifts in consumption caused by tax that are distortionary and cause deadweight loss.

It sounds like they’re flipping that on its head, because if you’re wanting to reduce consumption of a bad, the substitution effects aren’t a distortion, they’re what you’re trying to induce. So flip the inverse elasticity rule. 

But it will wind up hitting the same problems that the Ramsey model hits. First, Ramsey starts breaking down when you get beyond undergrad treatments of it. Recall that the ultimate cause of distortions that Ramsey is trying to deal with is substitution from labour into leisure. So you then don’t really want an inverse-elasticity rule in consumption, you want to base it on cross-elasticities of consumption with leisure and labour: the Cortlett-Hague result. But more substantially, it’s just horribly horribly impracticable and incredibly risky. Doing it right would require getting elasticity estimates on everything and constantly updating them. And every one would be opened to lobbying. Commission an expert to come up with a different elasticity estimate. One of my econometrics profs in grad school joked, in antitrust context, that he'd been offered a boat if he could get an elasticity measure to show up on the right side of a line (he turned it down of course, and just used it as example for us of the perils of this kind of thing). 

If you went down this route, you’d wind up with all of the same stupid fights that the UK currently buys on deciding what’s essential and what’s luxury for application of their VAT – interminable lawsuits over tea cakes. One group would argue that driving is really essential for them rather than a luxury. Then you wind up with something like rural zones where a low carbon charge applies and urban zones where a high carbon charge applies – but how in heck would you ever run that system? It would be thoroughly rorted in minutes. Business groups would claim that their travel is really essential, as compared to tourist travel. Everyone would be commissioning experts to produce reports – great for economists with flexible morals, not so hot for the country. 

So while I’d buy that it’s entirely plausible that a blackboard exercise could show advantages from having a carbon pricing model that’s sensitive to price elasticity of demand, it would be a terrible idea in practice. And it’s not easy to see how you’d square it with an ETS: what, pretend that a tonne of emissions from one sector is different from a tonne of emissions from another?


Tuesday 18 July 2023

Financing infrastructure

Last week, we put out a short(ish) research note on better ways of funding and financing infrastructure. Look back at NZ's history. It's how NZ used to do things.

A community wanting to build infrastructure, from roads and sewers to town halls and flood protection works, would hold a vote of property owners who'd be levied over decades to cover the cost of the debt taken on to provide the works. If those benefitting from the works were willing to pay the price for them, the works would proceed. 

Sometimes it would be coordinated through councils. Sometimes people would set special purpose local boards to run it. Either way, you got to what was needed: a way of triaging viable projects from white elephants, ensuring the support of those levied for the projects, and spreading the cost over decades rather than years. 

You'll have caught similar themes here and from me on Twitter before. But I also cover it in a column over at the Herald.

The research note drew heavily on work where I was a minor contributor a couple of years ago. Associate Minister Twyford set an Urban Land Markets Group to provide advice into the Resource Management Reform process. The group put out two reports and a submission on how carbon ought to be considered in council zoning and consenting. 

The second report, on infrastructure funding and financing, was publicly released a little while back via the University of Auckland. I drew heavily on this one.

The first report was on urban planning more generally

I'd attached the group's submission on carbon in consenting to a submission the Initiative made on the Natural and Built Environment Act and the Spatial Planning Act. 

The Group's submission argued that councils should be responding to their best guesses about how residents will want to live and travel when carbon prices are a lot higher, rather than trying to regulate for lower emissions directly. 

The two might lead to similar outcomes, but it's really a different way of thinking. You could ban new subdivisions while upzoning for a lot more density, figuring that zoning has to require people to live in low-carbon ways. Or you could remember that all urban emissions are in the ETS and that carbon prices will automatically encourage people to make choices. There could be less demand for suburban living, or there could be more demand for public transport to connect new subdivisions to town. 

Let carbon prices pull the rope, rather than trying to make zoning push on a string. 

I'd mentioned the Urban Land Markets Group in a book chapter a couple years back. I'm not sure now whether we put the chapter up anywhere ungated. The book's here though

Paris got fed, without a national food strategy

In Economic Harmonies, Bastiat marveled at the system of voluntary social order that resulted in a standard of living incomprehensibly above that which obtained in the state of nature, without direction or coordination. 

Every day, when he gets up, he dresses; and he has not himself made any of the numerous articles he puts on. Now, for all these articles of clothing, simple as they are, to be available to him, an enormous amount of labor, industry, transportation, and ingenious invention has been necessary. Americans have had to produce the cotton; Indians, the dye; Frenchmen, the wool and the flax; Brazilians, the leather; and all these materials have had to be shipped to various cities to be processed, spun, woven, dyed, etc.

Next, he breakfasts. For his bread to arrive every morning, farm lands have had to be cleared, fenced in, ploughed, fertilized, planted; the crops have had to be protected from theft; a certain degree of law and order has had to reign over a vast multitude of people; wheat has had to be harvested, ground, kneaded, and prepared; iron, steel, wood, stone have had to be converted by industry into tools of production; certain men have had to exploit the strength of animals, others the power of a waterfall, etc.—all things of which each one by itself alone presupposes an incalculable output of labor not only in space, but in time as well.

In the course of the day this man consumes a little sugar and a little olive oil, and uses a few utensils.


It is impossible not to be struck by the disproportion, truly incommensurable, that exists between the satisfactions this man derives from society and the satisfactions that he could provide for himself if he were reduced to his own resources. I make bold to say that in one day he consumes more things than he could produce himself in ten centuries.

What makes the phenomenon stranger still is that the same thing holds true for all other men. Every one of the members of society has consumed a million times more than he could have produced; yet no one has robbed anyone else. If we examine matters closely, we perceive that our cabinetmaker has paid in services for all the services he has received. He has, in fact, received nothing that he did not pay for out of his modest industry; all those ever employed in serving him, at any time or in any place, have received or will receive their remuneration.

So ingenious, so powerful, then, is the social mechanism that every man, even the humblest, obtains in one day more satisfactions than he could produce for himself in several centuries.

Without direction from any, Paris is fed.

I wonder whether any of the directors of the National Science Challenges have ever read Bastiat.

The directors of six National Science Challenges call on the government to develop a National Food Strategy for Aotearoa New Zealand.

“Food is essential to our health and wellbeing but it can be a major cause of ill-health and disease,” said Professor Sir Jim Mann, director of the Healthier Lives challenge. “The food we produce also has profound effects on the environment and on climate change, and is vitally important to our economy. A healthy and environmentally sustainable food supply is essential for human and planetary health.”

As the National Science Challenges enter their final year, the six science leaders today announce their intention to bring key findings from their research together to support a future National Food Strategy.

A strategic, science-informed plan is needed to both reduce food production’s contribution to climate change, and adapt to future challenges.

I'd bin all of this. There is zero need for any national food strategy. Set a carbon price on agriculture. Set cap-and-trade markets on nutrients and sediment, or deal with them through regulation in catchments too small for cap-and-trade. 

The rest takes care of itself.  

Friday 7 July 2023

Afternoon roundup

The tabs do pile up. A few days out at the NZAE meetings, a couple days leave, and then digging out from under the pile...

A Hotelling collapse?

I used to teach Hotelling pricing of non-renewable resources when I covered environmental econ as part of my current policy issues course. 

I'd tell the students that one sure way to screw up Hotelling pricing is to introduce a lot of uncertainty about underlying property rights. 

If you think that the government will swoop down in a few years and cancel all oil drilling, you'll ignore the optimal Hotelling pricing paths in favour of selling as much of it as possible while it were still possible. If that happened in only one country that wasn't huge relative to the market, it would screw up the geographic location of extraction but not the overall time path. If it happened everywhere, you'd distort intertemporal choices. 

And that leads to a very plausible explanation for the collapse in NZ ETS prices. BusinessDesk and CarbonNews both report on it. Similar stories. Here's BusinessDesk:

One broker told BusinessDesk that he had even settled one off-market trade at nearly $35 with a forester who needed to raise some cash quickly by selling a small holding of NZUs.

All market participants spoken to by BusinessDesk had similar stories, with very low volumes, very little interest in buying and confusion – particularly from forest owners and those holding forestry-created NZUs.

Eligible forests get an NZU for every tonne of carbon their trees absorb.

Until now, there was, for all intents and purposes, no difference between the NZUs created by the government and those created by forests.

However, the government has become concerned about the amount of tree planting that was being driven by the carbon price, particularly over ‘carbon forests’. This is where trees, mainly pine, are planted solely for carbon credits and with no intention of harvesting the logs.

If you have a carbon forest and you think government is going to do something horrible, you'll want to dump your credits before it happens.  

The options put forward by the government to change the ETS range from tweaking the rules to some form of separation of forestry NZUs and government NZUs. This could mean emitters not being allowed to use forestry NZUs to settle all or part of their ETS obligations. Another option is to have two ETS systems, one using government-issued NZUs to settle their obligations and another where the government, and presumably others, would buy forestry NZUs. 

One broker said the situation was “chaotic and it is causing confusion”. The problem is, with so many options on the table, no one knew what their NZUs were worth now or what they might be worth in the future.

So NZU are now a punt on whether the government is going to renege on having a net zero emissions target and have the ETS shift to a focus on gross emissions, and presumably whether a change in government would stick with that. 


Here's CarbonNews:

Paul Harrison, managing director of Salt Funds Management, has switched their carbon fund out of forestry removal units to only non-forestry units to mitigate risk.


The government is consulting on changing the classification of forestry units as an option in its review of the Emissions Trading Scheme, so Harrison says non-forestry units might gain value. “We think there will be a premium for those units under option 3 or even option 4 [of the ETS review.]”

Harrison expects the government will allow some kind of “grandparenting,” where an old rule continues to apply to some existing situations while a new rule applies to future cases, so existing forestry units could retain their value.

But officials didn’t give out reassuring signals that would happen during webinars on the ETS review.


“There is a risk that they don’t grandparent. [Switching to non-forestry NZUs] is a bit of insurance on that side,” Harrison says.

Big ups for everyone involved in breaking the Hotelling price path here. Y'all are great. MfE, Climate Commission, James Shaw - take a bow.  

Update: more detail from Carbon News.