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Archive for June, 2010

(or, Betsy attempts to explain the concepts of baselines and additionality by explaining how the writers of Doctor Who failed to account for either concept within the latest series)

(Small) spoiler alert: In the following blog post in order to make a point I may include a spoiler or two, but they are early on in the series and are neither very big nor very important.

For anyone who doesn’t follow the show, the latest Doctor Who series finished on Saturday.  The series mainly revolved around a mysterious crack in a little girl’s bedroom wall – which turned out to be a crack in the universe.  This crack in the universe (let’s call it the CitU from now on) would swallow things and anything it swallows is wiped from the universe and ceases to exist, not only in the present and future, but the past as well.

Throughout the series the CitU managed to swallow up multiple people wiping out their lives from the history of the universe.

While I enjoyed the series (the first one I’ve ever watched), my main gripe is that as individuals were wiped out of existence the writers did not consider ‘ripple effects’.  For example, think of Frank Capra’s “It’s a wonderful life”.  When George Bailey gets shown what would have happened were he never to be born, he sees that his entire town and the lives of people he loves would be very different had he not lived (it would make a very boring movie if they were the same)!

In other words, when wielding the CitU, the writers were not taking into account the concept of ‘additionality’ – an issue in economics where the question is basically “If there had been no intervention, would it have happened anyway?” (i.e., “What is the future baseline?”)

So, for example, in the episode ‘Flesh and Stone’ soldiers were set the task of guarding Amy (who is one of the main characters).  One by one, they disappear into the CitU and Amy is eventually left alone.  So, if we account for the baseline, we should ask “If the people who were guarding Amy in their capacity as a soldier were never born, would that mean there would be no soldiers guarding Amy?”  Almost certainly not, there would be other people who would have been made soldiers were it not for the ones occupying the role, or other soldiers who would have been sent on the mission and set the task of guarding Amy.  The task of guarding Amy was not (or at least shouldn’t have been!) ‘additional’ to those original soldier’s existences.

Coming from another angle, and using an example in the same episode where the writers actually get it right, you could ask “If a creature that had infected someone (let’s say it is a very unique infection) were wiped out from ever existing, would that person still be infected?” No – that (unique) infection is additional and depends on the existence of that creature.

So how do baselines and additionality apply to economics?  They are actually very important concepts in the created markets side of environmental economics. Imagine for example that you bought carbon credits to offset a year of driving your car.  These credits can then either help fund a project that would happen anyway without the funding (the project is not additional), or a project that would not happen without the funding (the project is additional) depending on the baseline.  Finding out where the baseline is and hence whether a project is additional or not can lead to allocating the money you paid for carbon offsets to where it makes the most difference.

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Environmental economics principles are in the headlines again today. BP, following meetings at the White House, has promised to meet in full its obligations to those affected by the ongoing Deepwater Horizon oil spill. This ‘obligation’ relates to ‘polluter pays’, a key principle of environmental economics. It makes the party responsible for producing pollution responsible for paying for the damage done to the natural environment.

Traditionally, definition of damage has been limited to commercial losses of others. In environmental legislation in the US and much more recently in Europe [1], this definition has been widened to include wider environmental damage estimated as decline in human welfare. Welfare changes experienced by both those who are directly affected by pollution and those who are not directly (physically or financially) affected but nonetheless suffer a welfare loss, are included.  In the BP case, this extended definition is used.

It’s good to see the polluter pays principle used in US policy making. Hopefully it will remain there, hand in hand with a political principle – consistency. So when the US arrives at the next UN climate change negotiations in Cancun in November, and discussions turn to funding actions to deal with the impact of climate change on the welfare of people around the world, what position will they take: promising to meet in full its obligations to those affected by pollution? Or political hypocrisy?

[1]Environmental Liability Directive, April 2007

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The breaking news this week is that Canada has finally, with less than 2 weeks to go, added climate change to the G8 agenda.  The lateness of this addition is shocking, but perhaps Canada is desperately attempting to avoid having to talk about the Alberta oil sands.

That’s okay Canada, we’ll talk about it for you.

It is probable that you have heard of the term ‘oil sands’ or ‘tar sands’, but you may not know exactly what they are. In short, these are mixtures of sand or clay, water, and importantly, bitumen (a form of dense petroleum).  The bitumen is difficult to extract and in past years when oil prices were lower, this resource was given little thought.  However, as oil prices have risen and known oil reserves start drying up, energy companies such as BP and Royal Dutch Shell have turned their investment sights on extracting bitumen from this resource.

There are two reasons why many people feel this is a bad idea:

  1. Extracting oil from tar sands is energy intensive and more polluting than extracting oil from other sources and therefore extremely damaging to the environment (did I mention plans include removing a standing boreal forest currently on the site?) and population onsite; and
  2. The investments are financially risky, and therefore potentially extremely damaging to Shell and BP (and therefore a majority of pension funds in the UK).
Far less attractive than boreal forests, isn't it?

Tailings pond for tar sands

While extremely valid, many many people have addressed the first point and we do not wish to recap it here (although we will hasten to point out that much can be done in terms of economic analysis of these damages).  The second point, however, is less well-known and possibly brings some much-needed context to recent news stories.

It turns out that:

1) A few concerned investors have undertaken some financial risk analysis and it doesn’t look good (PDF link):

  1. Bitumen extraction is expensive, even given new technologies.
  2. This means that profitability from oil sands is dependent on high oil prices and low carbon prices.
  3. Even if oil prices stay high, which fulfils one of the above requirements, there is a risk that these high oil prices could lead to the development of new non-oil dependent technologies replacing current oil-dependent technologies.

2)     These investors have provided information to other investors at BP and Shell shareholder meetings, asking them to stand with them in tabling special resolutions to BP and Royal Dutch Shell to provide more information through a report on investment risks associated with their Canadian tar sands investments.  Both BP and Shell recommended shareholders to oppose the motion. Only 15% and 11% respectively of shareholders voted against the board to oppose the motion. This means that 85% and 89% respectively of shareholders of BP and Shell, including many UK pension funds, do not care enough about the long-term financial viability of their stock holdings to ask for more information!  We have already seen that they blame US President Obama rather than BP for the collapse of their BP shares following grossly negligent behaviour.  I wonder who they will blame when the investments in tar sands go wrong and the shares collapse again?

Information on protecting your pension

Fair Pensions – What you can do

More information on oil sands

Article from The Telegraph on environmental destruction and its effects on the local population

Toxic Fuels – 3 films from 3 different perspectives about the Alberta tar sands

Toxic Fuels Campaign

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As we await the next budget – and the cuts in public spending it will involve, we were listening to the BBC Radio 4 Today programme (that was last Tuesday but the pasture is rather busy these days and hence the delayed posting)…

A consultancy company seems to have gotten there before the government and made some recommendations on how there could be huge savings in public spending just by increasing the efficiency of public services.

The idea of ‘efficiency’ is central to economics. We have unlimited needs and wants and limited (at least in comparison) resources. In order to meet as many of our needs and wants we have to allocate our resources to their most efficient uses – to get more bang for our buck as they say in the US…the more you can do per £, the more efficient you are.

It then follows that an efficiency rule should apply to public sector service provision. We should invest in services which generate more benefit than others. This is all good but how it should be used in practice depends on how we define ‘service’ and ‘benefit’.

An example the authors of the report have given is public libraries. In an interview in the above mentioned programme, one of the authors said

“public libraries are very important in the national psyche. But they are not very much used and are very expensive to run. So very often the cost of borrowing a book is more than the cost of just buying the book, giving it to the person and saying ‘don’t bother bringing it back’”

The cost of borrowing may very well be more than the cost of purchase. But comparison of costs alone is a partial analysis and can (and often does) lead to wrong conclusions about policy (e.g. should at least some public libraries close or be given over to volunteers to run – which in some areas may mean closure anyway)…

While the benefit of purchasing of a book can be said to be close enough to the cost of purchasing that book, the same cannot be said of borrowing it from a library. There are many benefits of a library:

–          Those associated with using libraries (call this ‘direct use value’):

  • Visiting libraries to borrow books / CDs / DVDs etc.

–          Those associated with using libraries for other reasons than borrowing (call this ‘indirect use value’):

  • Visiting libraries as community centres to meet neighbours and friends and others which helps build the community spirit or social capital (including learning social responsibility like looking after the books and returning them back on time etc);
  • Visiting libraries for the ‘library ambience’ to do work and study;
  • Visiting libraries for the exhibitions and other activities they provide etc.

–          Those that are not associated with any type of use of libraries (call this ‘non-use value’):

  • Benefits that arise due to knowing that there is a library in the community that we may want to visit in the future (this is also called ‘option value’)
  • Knowing that there are others who visit the library (altruistic value)
  • Knowing that the library will be available for future generations (bequest value)
  • Simply knowing that there is a library in the community (existence value).

Cost of purchasing or providing a service can be a proxy (and a very weak one) for direct use value. All other benefits that are provided by libraries are not captured by the cost of providing those benefits and are NOT delivered by purchasing the books and giving them away.

So before reaching conclusions like the above about libraries that imply closure, we must make sure we have accounted for all these difficult to measure but equally real benefits.  This is precisely the kind of work that keeps this pasture busy…

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