Monday, November 24, 2008

The problem with Kyoto and such

Climate change issues have to be dealt with on a policy level by economists and not climate scientists. The role for climate scientists is to measure what is happening with as much accuracy as is possible but not to design and implement policy.

Policies have to be measured as to what sort of impact they have on society and the single best way to measure the impact on society is to measure the economic costs and benefits. Every policy has an impact and it needs to be quantified. Not doing something will in some cases be cheaper than doing something. All the policy options can not be enacted, so they need to be measured against each other and the ones that make the most sense are the ones that need to be enacted.

There needs to be an active international process to measure the policies. There is nothing better than using something like the Copenhagen consensus. An active debate before a panel to try and come to some agreement as to the best course is a good way.

More regulation and an attempt to reduce consumption is not going to bring positive results. Most policies are oriented towards these directions and are doomed to failure and cause more problems than they solve.

Solutions have to be focused on what will increase GDP, they have to be ones that can show measurable benefits to society. Everything says that the only real solution is to price green house gasses.

Pricing green house gasses is the only way to go that makes any rational economic sense. By putting a price on C02 of $30 to $60 a tonne, $700 to $1500 a tonne for methane and $9000 to $20 000 per tonne of nitrous oxide. Putting these sort of dollar figures on production of the gasses will make a significant difference to the cost of production of many things. The cost added to a pound of beef would be about 17 cents.

Adding the costs to the products by charging for the GHG emisions will cause businesses to figure out how not to emit them, consumers will seek lower priced alternatives.

If there is then a market for people to get paid for removing CO2 and other GHGs, there will be businesses working on how to capture and store the CO2. The more companies doing it, the better the technology and the cheaper the prices will get.

Tuesday, November 18, 2008

How many more cars are coming?

The November 15th issue of The Economist has a 20 age centre section on cars in emerging markets. If you can get a copy to read, do so as it is illuminating.

Here are some factoids that come out of it.

  • Even though 2008 is likely to be the worst year for total cars sold in the US since 1982, it will still set a global record for cars sold of about 59 000 000 cars.
  • Total cars sales in the BRIC countries (Brazil, Russia, India and China) will equal US sales this year at 14 000 000. In 2001 total sales in the BRICs was 4 000 000 cars.
  • There were 600 million cars on the road in 2005. In 2020 this will be 1.1 billion, 2030 it will be 1.5 billion and in 2050 it will be 2.6 billion cars. Details in this IMF report.
The emerging markets are going to be buying a lot of cars in the next few decades. The global car industry is going to be making its money off of the BRICs and countries near them.

What policy wonks and activists have to understand is that people want to own cars. To pretend that people in Chennai or Perm are not going to want to own cars as much as we do is folly. The new Tata Motors Nano is about 1/3 the price of the next cheapest car with a sales price of CDN$3000 each. It will be on the market in the next 12 months and will have a huge impact on car sales in India.

Anyone talking about climate change needs to work with the idea that there will be a lot more cars in the world. The solution has to be to work quickly towards cars that are very low or no emission vehicles.

The encouraging sign is that the battery technology needed for cars is a rapidly improving and getting to a point where fully electric vehicles is realistically in the next five years. The first generation were the hybrids like the Prius, the next generation is something like the Chevy Volt where the gasoline engine is only there as a generator to recharge the batteries.

The era of the gasoline powered car is coming to an end, in ten to fifteen years gas stations are going to start disappearing as demand drops. The era of cars is not only not coming to end, it is entering a new and bigger golden age.

Thursday, November 6, 2008

The Price of Oil

Over the last year or two I have been telling people that the price of oil would head back down again, a long way down. People did not listen, they assumed that the trend was one way and that this meant up with no end. People believed that this price rise meant we were dealing with peak oil and that the economy based on oil was coming to an end.

The reality is that demand for oil rose faster than the supply could keep up with. It is not that there was no potential for more oil to come onto to the market, it was simply an issue of the lag between the demand rising and the time for new supply to come online.

The higher price of oil has reduced demand, a natural part of the economic process. This has occurred as the supply has been rising. We are also now seeing a drop in demand because of the economic uncertainty in the world.

New technologies also come into play, as an example, the production of the ethanol is now equal to about 1.9 millions barrels of oil per day. I am assuming 20 gallons of gasoline produced from each barrel of oil, if assume that you need one barrel of ethanol to equal one barrel of oil, then it is only 900 000 barrels a day. This is about 1-2% of the global oil demand. As the technology gets better and the organic material used is not corn but something more productive, in ten years would could easily see 20 million barrel of oil equivalents of ethanol being produced, or about 20% of world demand.

The problem a lot of people have had when looking at the oil prices is that they do not apply any economic analysis to the situation.

The latest spike in oil prices have pushed innovation, but it has also pushed the tar sands in Alberta. Year in and year out there are going to more development of the tar sands. Only a long period of the price of oil being below $20 a barrel will halt the expansion.

The oil era is not at an end, the only thing that can be done at this time is for governments to price the cost of removing the CO2 from oil production and oil use. A carbon tax is the way forward and is a tool that will make business more efficient. Strong price signals will impact the supply and demand for oil. Nothing else will work.

BC is the leader in this. Opposition to the carbon tax in BC only makes sense if you do not believe there is an issue with global warming. I will admit I am not entirely convinced of the case for global warming or at all convinced that global warming will have as negative impact as people are saying.

You can take action by supporting the carbon tax on this facebook group.