For a sense of proportion: datacentre water use

I like this chart, from Andreas Heuser and Phil Whittington's excellent piece making the case for datacentres.

Nobody has a sense of perspective on industrial-scale water use. 

Afternoon roundup

A closing of the browser tabs:

• New Zealand's space industry keeps growing. Here's BusinessDesk on Dawn Aerospace. So neat. 
• America's economists are very sceptical about the latest round of tariffs on imports from China.
• Ancient bugs hiding in NZ amber.
• Statistics New Zealand is shifting out of central Auckland because of increasing levels of 'intimidating behaviour' in the neighbourhood. Police victimisation stats had a surge in crime in Auckland Central West in 2023 that's since abated, but the number of victimisations there remains far higher than in the Lambton area around the SNZ Wellington office. 
• Easy to find claims that public ownership is better than private because private operators are too short-term oriented. Meanwhile, half the board of Christchurch City holdings has resigned. Why? "...the decisions council has subsequently taken over 2024 to maximise short-term dividends at the expense of paying down group debts and investing in the future of its companies has caused us to lose confidence in council's ability to responsibly own core strategic infrastructure."
• Satya Marar at Mercatus on America's populist turn in antitrust policy. 
• Modern desalination is pretty cheap. The energy required for desalinating a household's water is roughly on par with the power needed for its refrigerator.
• Whenever you're depressed by NZ problems like deteriorating council infrastructure, messes in government IT systems, and crises in public media funding, always worth checking over at Canada's seemingly worse problems in the same areas.
• Concrete is neat.
• There is no good version of a central bank digital currency.
• Eli Dourado wants floating cities.
• Worried about the de-banked - people who can't reasonably access normal banking serives? Fix AML.
• If I were still teaching Public Choice, this would be added to the syllabus. If you want the implicit models behind critiques of the left's shift into identity politics from folks like Chris Trotter, it's a good read.
• Cass Sunstein's 'Economic Constitution of the United States' would also hit the syllabus. I've viewed the Public Finance Act and Reserve Bank Act as being part of New Zealand's economic constitution. Sunstein here makes the case around the rules around regulation and regulatory impact assessment.

Morning roundup

The tabs did accumulate. A couple of worthies. 

• There will be no bailouts of local councils that neglected their pipes. Good. 
• Me, over in Newsroom, reminding everyone of the mess Canada made by trying to turn Facebook into a media funding entity. It's now sounding like National, who had been very sceptical about the proposal during the election campaign, are warming to the darned thing. Pretty disappointing if so.
• Like I told y'all last year, it was always pretty obvious what National's plan for council water reform would be. It would be based on Castalia's work with Communities for Local Democracy. Like they said it would be.  
• Canada's Conservative Party pandering to loonies on the right. 
• Alison Andrew's talk at the Waikato Economics Forum was excellent. She's CE of Transpower. Transpower just works in ways that council water just doesn't. Consider the incentives both face. Transpower is self-funding through charges on users of its transmission lines, under standard utilities regulation that allows them a return on their capital. Council water, well, no. But that doesn't meant there aren't problems for Transpower. I hope that the proposed fast-track consenting solves some of this mess.

Charting a course

My column in Newsroom this week makes a few guesses about where NZ local water policy may be headed. 

Labour forced the amalgamation of water services into new entities that National promised to throttle before they can get going. What happens next?

No election platform survives contact with post-election coalition negotiations.

But one outcome seems rather obvious – the Labour government’s Three Waters reforms will be repealed. In its place will be a model based on the Castalia model commissioned by the set of councils that objected to Labour’s reforms – Communities 4 Local Democracy.

The change could come reasonably quickly. The parties likely to be in coalition agree, at least at a high level, on a reform agenda. And an incoming government will have a head start on the necessary policy work and legal drafting.

...

Normally, this kind of policy reform work can take years. The set of officials who were strong advocates for Labour’s policy reforms may not be likely to deliver workable replacement legislation in any kind of hurry.

For the better part of this year, the New Zealand Taxpayers’ Union has been coordinating policy work to flesh out the Communities 4 Local Democracy/Castalia model – including drafting instructions and drafting for a replacement Local Water Infrastructure Bill.

Malcolm Alexander, former Chief Executive of Local Government New Zealand and with a background in electricity reform, chairs the Technical Advisory Group for the bill. I have assisted on the group, along with David Hawkins, formerly of Watercare and former Mayor of Papakura; Christchurch Councillor Sam McDonald, and NZ Taxpayers' Union economist Ray Deacon – who formerly served on the Major Electricity Users Group..

The proposed reforms would shift drinking water and wastewater assets into Council-Controlled Organisations (CCOs) – for councils where water is not set as a CCO. Stormwater is fundamentally different – with assets plausibly including parks, recreation areas, ditches and roads – and is left out of the proposed structure.

A CCO can be owned by a single council, or by a set of councils. If councils find it more effective to deliver water services through a shared service model, they retain ownership of the shared entity.

But unlike Wellington Water, council water CCOs in the proposed structure would own the water assets and earn revenue through water charges, rather than be stuck like Wellington Water in attempting to manage the underlying councils’ water assets on whatever funding the underlying councils might wish to provide.

It’s a far sounder model. And, at the outset, they could be required to satisfy the minister that they are appropriately capitalised and that councils have not loaded them with non-water debt.

Water CCOs would prepare and publish their own asset management plans and be accountable for outcomes.

They would also be subject to commercial regulation by the Commerce Commission ensuring that the Council-owned monopoly water providers were setting appropriate water rates..

Councils like Wellington have slowly stripped their water infrastructure assets by failing to maintain and renew the network, allowing Wellington Council to fund all manner of showy above-ground projects while not increasing rates proportionately.

The proposed CCO structure would mean water would stop cross-subsidising other council activities. Water utilities would be able to charge what is needed to bring their networks up to standard and to keep it at standard.

It would also mean that other councils, or taxpayers more generally, would not be on the hook for some councils’ long-term negligence.

An incoming coalition government that broadly supports the Communities 4 Local Democracy proposal can then have a running start. Much of the legal drafting for a potential replacement bill has already been completed, along with drafting instructions for sections requiring technical detail held within government.

That running start will be needed. National has committed to repeal Labour’s Three Waters legislation in its first 100 days, but legislation for a replacement regime will be needed quickly. Councils will need to know the regime within which their water services will operate if Labour’s Water Service Entities are abolished.

Post-election coalition negotiations usually make it hard to predict just what will come of parties’ campaign promises. But, in this area, the waters are reasonably charted.

Afternoon roundup

The worthies, on the closing of the browser tabs

• I still have great difficulty understanding why it is worse to draw up to 5000 cubic meters of water per day from an aquifer to put into bottles for people to drink than it is to run the same amount of water through cows.


• We have a desperate shortage of nurses. Meanwhile, the Nursing Council is blocking a nursing school from training new nurses. It's just nuts that ComCom is likely going to waste its next market study on a populist beat-up on bank mortgage interest rates. The opportunity cost is high.


• Lianne Dalziel on the review into the Auckland cyclone response. Good thoughtful piece from someone who's been there [should ungate tomorrow by removing the /pro from the URL]. 


• Transpower's increased the expected amount of solar generation coming onto the grid by 2030. In 2020, they expected about 1 GW by 2030. Now they expect over 7 GW. Wow. 


• Ice cream is associated with lower risk of diabetes. Unsurprisingly, the NZ public health people aren't having a bar of it - their latest recommendations on diabetes stick to the ban-and-tax stuff. Why not make ice cream part of school lunches? 


• Good summary from Pattrick Smellie on the work that Robin Oliver commissioned from Sapere looking at effective tax rates (average and marginal) across different income bands and family situations. I had a chat with Robin about that work yesterday. 

Morning Roundup

The tabs...

• Australia considering changes in governance at the Reserve Bank, including setting a Monetary Policy Committee. Hope that they avoid the errors NZ made around unqualified Board members and ruling out monetary policy expertise on the Monetary Policy Committee.
• Regulations shifting toward open banking are coming. It seems in-principle a good idea.
• Vic Uni's Martien Lubberink with some cautions about attempts to tax bank profits.
• The government's delaying biofuel mandates. That's great, but better would be abolishing them. When tech and carbon prices make them a cost-effective way of mitigating emissions, fuel companies will pick them up to avoid paying for carbon permits. National says it would scrap any mandate - good!
• Jem Traylen at BusinessDesk points to a path through on Three Waters; includes a bit from me on revenue bonds. 
• Canada playing silly buggers with tariff-rate quotas under CPTPP to freeze out NZ dairy. It's going to arbitration. 
• Oliver Hartwich on collapsing education results. 
• Michael Reddell on RBNZ Governor appointments. Bottom line: better to find a Governor that has respect from all the main parties rather than either a short-term extension or reappointing the one who hasn't got it. 
• Geoff Mortlock on Orr's reappointment.
• Immigration NZ's computer systems remain a mess so the backlog in visa approvals gets worse. If that can't be fixed in a hurry, why not just ditch the rule banning non-residents from buying houses so that living here as a non-resident is less bad?

Afternoon roundup

It's been a busy week of lockdown. On Monday, we released my report looking at cap-and-trade solutions for freshwater quality. Yesterday, Matt and I sent in our submission on the Commerce Commission's inquiry into supermarket competition. 

Don't think the computer's shut down this week. The browser tabs....

• It's a shame that rapid antigen tests are illegal in NZ. They aren't nearly as accurate as PCR. But when people are waiting six days for a test result and, in some cases, trying to run at-home isolation from the rest of the family during that period, having rapid antigen testing as a complement would be really good. RNZ reported on nurses living with close contacts being told to turn up for work even where those contacts' results hadn't come in yet. We could have had rapid antigen tests rolled out for staff starting shifts in hospitals and care homes. MedSafe banned them in April 2020 and re-upped the ban in April 2021. 
• I love this. North Canterbury's MainPower is telling staff to "Take Two for the Team". If 90% of their workforce is fully vaccinated by 1 December, every vaccinated staffer gets an extra day of special leave. Vaccination isn't just for you, it's for the team. Perfect. 
• I had a bit of fun in our Insights newsletter comparing the stringency of SmokeFree rules with the stringency of rules for MIQ exercise facilities. I'm pretty sure the Crowne Plaza's exercise area would not have been approved as an outdoor smoking patio for the bar.
• Meridian is putting in battery storage. Presumably they'll use it during times of peaking demand when power prices are through the roof. And of course, screwing around with the electricity market with price caps would discourage these kinds of investments. 
• Scientific American makes the case for the combination of carbon prices and carbon dividends. The Climate Commission pretends this option doesn't exist. It's depressing. I suppose the advice from NZ for Americans looking at this option: make damned sure that they're actually going to distribute the money back as a dividend, because the political establishment very much prefers to turn that money into its own discretionary slush fund to target to their voters. New Zealand's Green Party understands the case for carbon dividends. But they'd rather give their own voters a subsidy for a Tesla. It's depressing. Standard logic-of-collective-action stuff: concentrated benefits to Tesla-buying people, distributed cost to everyone who doesn't get a carbon dividend. And it'll make it easier to claim that reg measures on carbon are needed because of political pressure on ETS if prices rise - the sign on which would reverse if we had a carbon dividend. 
• The Atlantic continues to be great on Covid coverage. Best case, stupid endemic Covid becomes more like colds and flus because everyone will have some protection through vaccination and our immune systems will be able to handle it. But the virus could mutate to evade vaccines and immunity from prior infections. 
• My Dom column on the freshwater management report.

JEEM

Getting to Browser Tab Zero so I can reboot the computer is awfully hard when the one open tab is a Table of Contents for the Journal of Environmental Economics and Management, and every issue has more stuff I want to read.

A few highlights:

• Gugler et al demonstrating the effectiveness of British carbon pricing over German regulatory interventions in the electricity market. Carbon prices were far more effective in getting to a cleaner power grid. 
• Steven Smith on prior appropriation versus proportional division in allocating water rights, leveraging a neat natural experiment (the formation of Colorado forcing a change in water rights). They suggest proportional rights (think: NZ's way of divvying up fishing rights within a total allowable catch) can get you to higher yields and higher-valued crops; water markets can work around inefficient allocations in either property rights system; but, that transactions costs hinder water trading. 
• Banerjee et al showing that exporting firms in Indonesia do more to abate pollution than non-exporting firms.
• A cost-benefit assessment of cost-benefit assessment! Newbold et al find that the value of information provided by water quality valuation will almost certainly exceed the cost of the study. 
• Manning et al suggest that water rights retirement may not always be worth the cost.
• More evidence for the merits of tax over command-and-control regulation: Lade et al have a look at flaring regulations in the Bakken fracking fields in North Dakota. The regulations reduced flaring. But Lade concludes "taxing flared gas at the existing public lands royalty rate would achieve 99% of the flaring reductions at 46% lower cost."
• Did moving away from Canada make me smarter? Cook et al find that people do worse in testing when it's cold outside, despite the indoor testing environment being entirely climate controlled. 
• Edenhofer et al on stranded assets and climate policy. Bottom line: you want policy to provide a lot of certainty about the future path. They warn stranded assets are most likely to lead to welfare losses if: "(i) policy is a stochastic process, (ii) government policies are subject to rent-seeking, (iii) governments cannot commit to future policy paths or (iv) asset losses hit poorer individuals." One upshot for NZ: sticking with the ETS with a binding published declining path solves (i-iii), and providing a carbon dividend mitigate (iv). 

Afternoon roundup

 The afternoon's worthies on the closing of the browser tabs for a system update:

• This mess has been a long time coming. There are piles of small rural water schemes that largely supply stock water. The government has been trying to figure out how to apply water quality standards to that sector where the number of people on those water supplies is tiny, where treating huge volumes of water intended for stock is just stupid, but where government and councils worry that cost-effective solutions could leave them legally liable if anything goes wrong. You'd think there'd be some way of letting households on those schemes install their own UV filtration on a caveat emptor basis. Three cheers for the Local Democracy Reporting fund that helps this kind of journalism. 

• Getting a tenant who terrorises the neighbours evicted apparently takes long enough that the neighbours have all gotten security cameras installed, there have been multiple police calls, and finally the tenant breaking into the neighbour's house at night. It's great that the Tenancy Tribunal granted the immediate eviction, but you've got to wonder about a process that takes all that to get there. I wonder what things would look like if landlords, including state housing providers, could evict a problem tenant on having letters requesting it from a supermajority of neighbours. 

• The Ministry of Health does not like to comply with the Official Information Act. Just read through this mess. Some journalists wanted to be able to map out vaccination rates by neighbourhood. The data exists. It wouldn't have been hard for the Ministry to aggregate it up from meshblock to neighbourhood if it wanted to confidentialise, but nothing really enforces the Official Information Act. 

• I am still angry about an old Circa Theatre play that cast developers as moustachioed villains, and NIMBYs as heroes. Continuing to try to get housing built in a housing crisis, despite the best efforts of the politically powerful, is heroic. So three cheers to Ian Cassels, and brickbats for everyone else trying to stop Shelly Bay.

• The RBNZ is again talking about LVRs. House prices are terrible, and RBNZ policy is exacerbating things because of the existing supply constraints. But Michael Reddell's critiques the last time through remain pertinent. Is there really a plausible financial stability / prudential regulation basis for the rules? They never made much sense to me on that basis, or at least the case for them hadn't seemed to have been made. I could kinda see how they might make sense if the Bank were targeting not just CPI but also wanting to pull the peaks down on asset price inflation. 

• Jack Vowles starts parsing the numbers on party switching in the NZ election. For every voter National lost to ACT, it lost about 2 to Labour. And Labour pulled in a pile of votes from people who hadn't voted in the prior election. One bit relevant to some speculation:

  There has been speculation that many of those switching from National to Labour did so to keep the Green Party out of a coalition and thus prevent any possibility of a wealth tax being introduced. When asked the reason for their vote, five people who switched from National to Labour did mention the wealth tax and the need to keep the Green Party out of government. For only three of these was this the major reason for their vote shift; and these people form a small minority of the 500 National to Labour switchers in the sample. In their responses to another question in the survey, two thirds of those 500 switchers indicated they were actually in favour of a wealth tax. 

Fix the darned pipes

Wellington loses somewhere between 7 and 32 percent of its water because of leaks in the pipes. Nobody knows how much is lost because water isn't properly metered. Wellington has more than three times as many old cruddy pipes as the next worst council, Christchurch. 

Getting a new source to meet both new demand and the leaks will cost $250 million. Additional sources are likely worth having anyway for resilience against quakes, so long as they don't feed into the same potential fail point of the big pipe at the main faultlines. But the leaks mean supply costs are higher than they need to be. 

Metering makes an awful lot of sense - or at least I'm pretty optimistic that the business case will come out well. 

Wellington Council's decided to spend $200m strengthening the library rather than looking to the something more like a $90 million model based on the rather nice example in Christchurch. 

There are somewhere around 80,000 households in Wellington. The library then costs each household a bit over $3k in capital costs. There's a huge looming capital cost in fixing all the pipes. 

So long as voters keep rewarding councillors and mayors for flashy new convention centres ($180 million, or about $2,250 per household) and for deciding that 1990s libraries are actually historical monuments that have to be kept exactly as-is but strengthened every few years to new standards, and keep failing to punish councillors and mayors for letting all of the underground infrastructure rot out from under us, this is what we'll keep getting. 

Water is too precious to be so cheap

Me at the Dom Post on Auckland's water shortages:

Residential users in Auckland at least are charged for water use – something not true in all cities. But there is no difference in the price of water in a dry year as compared to a wet one. A thousand litres of water in Auckland, from July 1, costs $1.594; WaterCare assumes that 78.5 per cent of that water finds its way to the wastewater system and adds additional wastewater fees.

All up, a thousand litres of water costs $3.77 – less than a flat white. Filling up a 60,000 litre swimming pool, in the middle of a drought, costs a bit more than two full tanks of petrol – unless the neighbours notice and dob you in and you’re fined for breaking the water rules.

The same water shortage affects power generation and residential water use. But because electricity prices rise in dry years, councils find no need to try to police households to make sure that electricity is only used for the most important purposes.

Instead, Government just makes sure that poorer households are not too badly affected by rising power prices through things like Winter Energy Payments.

Moving to a more responsive water pricing system would not just encourage households and businesses to conserve when conservation is most important. It would also provide incentives to build water storage facilities, filling them when water is cheap and selling the water when shortages make water more valuable.

Prices that do not reflect underlying scarcity are a recipe for shortages. Water is too precious to be sold so cheaply.

My earlier report on cap-and-trade systems for water is here.  

An argument for mandatory retirement for academics of a certain age

Geoff Bertram didn't like my column on cap and trade regimes for water. Here's his letter in today's Dom Post. 

At last a New Zealand Government takes a couple of meaningful steps towards water regulation.

Right on cue, the New Zealand Initiative’s Dr Eric Crampton rushes into print (Sept 6) attacking the new policy because (i) he has a better idea – cap and trade, and (ii) some dairy farmers who have irresponsibly over-expanded might go broke (and so should be bailed out by the rest of us).

Right on cue. Hmm.

Our work on cap-and-trade was added to our 2017-2020 research agenda in 2016. The first report, on cap-and-trade in water abstraction, came out in May. My article extending it to nutrient trading came out in Policy Quarterly last month. All of that was well in advance of the government's announcement; the column was well-timed, but Bertram may not have noticed that I have a fortnightly column there. Seemed to make sense to hit that topic last week.

Take first cap and trade. Yes, it might have been a good idea over the past two decades, when Federated Farmers has had ample opportunity to implement it as a self-regulation device, and the NZ Initiative has had ample time to help it design and implement such a scheme.

The Initiative was formed in 2012. I joined in 2014, and added cap-and-trade to our research agenda in 2016 for the 2017-2020 programme. Not quite sure where Bertram's finding decades.

But no, it’s wheeled out only when it can be used as a roadblock to Labour-led Government policy. If you’re serious about the environment, beware Right-wing lobbyists touting alternative policies.

We planned this work when we thought National would be in government - they were odds-on to win the 2017 election at the point we started thinking about this project.

Second, that issue of compensation. Crampton would be on firmer ground had he previously been an advocate for compensating the workers and benefit receivers who were stripped of their life savings, their children’s prospects and health, and their hope of ever getting decently housed without crippling debt, by the unionbreaking and benefit-slashing of the 1990s – policies enthusiastically promoted and applauded by his organisation and its predecessor, the Business Roundtable.

Farmers, their leaders, and their bankers have had plenty of warning to get their house in order. Innocent victims they are not.
Geoff Bertram, Institute for Governance and Policy Studies, Victoria University of Wellington

Depends what you want, Geoff. If you want a system that will be hated by farmers and reversed with the next change in government, you just keep pushing that old barrow. If you want environmental improvement that can stand over the longer term, well, have a look at my report and article.

Refreshing water and valuing the priceless

The latest issue of Policy Quarterly covers freshwater management. My article in there makes the case for cap-and-trade systems for both freshwater abstraction and for nutrient/effluent management.

Here's the abstract:

The most promising way of reducing water use and nutrient load in overburdened catchments builds on the same kind of policy New Zealand is developing to reduce greenhouse gas emissions: cap-and-trade systems that operate at the water catchment level. Because cap-and-trade approaches are more cost-effective than other regulatory approaches, they allow us to do more good at less cost than other alternatives. Developments in smart-market technology and geospatial mapping allow for smart-market solutions that overcome barriers to success in existing trading arrangements. And, if initial rights allocations respect both the existing use rights of current users and incipient iwi water claims, they build a powerful constituency in favour of environmental management institutions that can withstand changes in government.

I'll be talking on similar issues at the coming WaterNZ conference in Hamilton.

I argue that:

• Cap-and-trade systems that provide allocations to existing users help ensure a just transition; if the government just abolished existing use rights in favour of either a water tax or nutrient charge, a pile of current users would be bankrupted. Current land prices are predicated on an existing rights and regulatory structure. If you want a system that can withstand a change in government, or its first experience with reality, you need one that can have buy-in from current users. 
• Current cap-and-trade setups for water abstraction (Canterbury) and for nutrients (Taupo) are stymied by high transaction costs. Council has to sign off on trades. It's all just too hard. Council has to be involved to be sure that the trade results in comparable environmental effects, but that process isn't easy. So we have rather illiquid markets. That can be overcome through a smart-market interface that runs the environmental constraints in the background. 
• But the whole thing has to start with a reckoning of iwi water claims. If there are claims that weren't extinguished by sale, contract or Treaty, those have to be dealt with; avoiding the issue with the fiction that water is either unowned or Crown owned is the main reason we don't have functioning cap-and-trade systems as yet. 
• Where the allocation to iwi and to existing users creates an overallocation, deal with it by attenuating existing users' rights over time, building up iwi rights over time, and using Crown buybacks through the system to get the rest of the distance - the burden cannot fall exclusively on current users. It has to be shared because the benefits of a cleaner environment are not solely enjoyed within the affected catchments, and to effect the kind of just transition that builds buy-in to the system.