A bet about the future of Bitcoin recently took place on the the podcast, Planet Money. The bet took place between Ben Horowitz, a venture capitalist backing Bitcoin ventures, and Felix Salmon, a finance blogger at Reuters. The bet was made in response to a blog post by Felix in which he said we’re in the middle of a Bitcoin bubble.

Not surprisingly, as an economist I tend to side with Felix’s take on things. There are good reasons why Bitcoin is an economic disaster waiting to happen. Here are three reasons why Bitcoin will never replace traditional means of financial exchange, and why it’s highly likely we’ll see more “MtGox“s.

1. Bitcoin is not backed by anything tangible

People often lament the good old days when currency was backed by things of ‘real’ value like gold. But they forget that currency is still backed by something tangible and ultimately more valuable than gold.  Currency is backed by the ability of governments to tax their citizens.

Bitcoin on the other hand is entirely lacking in any kind of tangible backing. No real assets and no government stands behind Bitcoin. The latter is in-fact part of the appeal to technological utopians, though as an economist I think this is just silly.

2. It would be easier to hack Bitcoin than to print fake currency

I’m not a programmer and I don’t know how Bitcoin mining and encryption works. But security weaknesses will be exploited and each time it happens, confidence in Bitcoin will erode. In-fact, a quick Google shows that a Polish Bitcoin exchange was recently the target of hackers.

And the bigger the market for Bitcoins gets, the greater the incentive for fraud and hacking.

Compare this to trying to print forged US Dollars or any other currency printed with modern facilities. You need the expertise, the facility and machinery, the raw materials and the ability to launder the money. This is very very hard. Supposedly the best fake USD came out of North Korea.

Hacking Bitcoin on the otherhand would pretty much just require a computer and Internet access.

3. Bitcoin doesn’t solve any really big problem

The final reason (in this post) why I think Bitcoin isn’t such a big deal is that it doesn’t solve any big problem in the World. It just isn’t a significant enough improvement on existing mediums for transaction. The global economy has been doing just fine with traditional (and slightly disruptive) products for international trade and online payment.

The Bitcoin website lists several advantages of Bitcoin but I’m not convinced any of these are worth the potential disadvantages. One day when you eventually want to buy something requiring hard currency, you better hope the Bitcoin exchange rate is on your side.

So, prove me wrong technological utopians, because I’m a bit dismal about Bitcoin.

What is the Trans-Pacific Partnership (the TPP)?

The Trans-Pacific Partnership (TPP) is a the most important trade agreement you’ve never heard of.  The TPP involves 12 countries representing approximately 40 per cent of global GDP coming to an binding agreement in areas of intellectual property, foreign investment and capital movements, state owned enterprises, market access in goods, rules and specific rules of origin, textiles, sanitary standards, the environment, international law, financial services, agriculture, and Information Technology.[i]

Which countries are involved?

The original signatories to the TPP were Brunei, Chile, New Zealand and Singapore in 2005. Between 2008 and 2013 Australia, the US, Peru, Vietnam, Malaysia, Mexico, Canada and Japan have become members, and in 2013 Taiwan and South Korea expressed interest in joining the treaty. Canada’s membership was initially blocked by the US and New Zealand due to concern over both intellectual property rights protection and their agricultural policy with concern to dairy.

What is a trade agreement?

Trade agreements are generally intended to help resolve trade disputes, provide consistent rules and generally to encourage freer movement of goods and services, money and people, what economists refer to as factors of production.

Why do economists think free trade is a good thing?

Economists think that making it easier to move factors of production between countries makes us all better off and can lead to higher rates of economic growth, decrease the cost of goods and services and increased choices for consumers. Economists think that by removing restrictions on trade, the factors of production will move to where things can be made at least cost, allowing resources to be used most efficiently. For example, if it takes less money and labour to produce cars in China than Australia, economists think that from a global perspective, the world is better off if China produces cars and Australia produces something else, such as higher education.

Following World War II, free trade was also seen as a potential tool to reduce the likelihood of armed conflict in the future by forging closer economic relationships between countries.[i]

To remove restrictions on trade, attention is typically paid to what are known as tariff and non-tariff barriers. Tariff barriers are simply a tax that is imposed on imported goods by a particular country. For example, to protect domestic car manufacturers, Malaysia imposes very high tariffs on imported cars.

Non-tariff barriers are, as the name suggests, all other barriers to trade that aren’t tariffs. Australia is often accused of maintaining non-tariff barriers to fruit and vegetable imports by imposing strict quarantine rules.

Globally, tariffs are usually minimised by the existence of bilateral and multilateral free trade agreements between countries, however non-tariff trade barriers have persisted and have proven more contentious.

TPP arise due to non-tariff barriers to trade

Although the TPP aims to reduce remaining tariff barriers, the bulk of the agreement, and the cause of controversy, are measures aimed at reducing non-tariff trade barriers.

In particular, the TPP has a strong focus on intellectual property and digital copyright issues .

Controversies surrounding the TPP

The TPP agreement has attracted controversy for several key reasons, most pertaining to the potential for reduced sovereignty of participating countries.

Domestic law must be congruent with the TPP

Under the TPP a company would have the right under international law to sue the federal government when domestic laws are not congruent with the company’s rights under the treaty.

This is currently being experienced in Australia in regards to the 1993 Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Protection of Investments; whereby the tobacco company Philip Morris is suing the Australian government for the damage to their tobacco investments that was done as a result of its Tobacco Plain Packaging Act of 2011.[i] The issues surrounding this are mainly concerned with sovereignty and the fact that the Tobacco Plain Packaging Act of 2011 was passed with bipartisan parliamentary support, and following the tobacco companies losing their High Court claim for compensation.[ii]

Intellectual property implications for healthcare

The TPP has a heavy emphasis on the protection of intellectual property. This has been viewed by some parties, including Médecins Sans Frontières, as excessively restrictive and there is significant and widespread concern about the impact the TPP would have on the access to affordable pharmaceutical medication.

This may also impact the Australian Pharmaceutical Benefits Scheme (PBS), which keeps the cost of medicines in Australian pharmacies low. During 2011,, the United States (US) proposed an annex to the section of the TPP on transparency which focussed specifically on programs and companies that subsidise medicines. Reports at the time indicate that this proposal was rejected by other TPP member countries, however that it resurged under an insignificantly different proposal during later negotiations. The annex eliminates the use of the pricing mechanism used by the PBS to maintain lower pharmaceutical prices, It has been suggested that this is an attempt to extend  patent monopolies owned by large US pharmaceutical companies.[iii] Under the previously discussed investor-state arbitration, foreign companies would be able to sue the Australian government if they felt their profits were being impaired by this government scheme.[iv]

Intellectual property implications for the digital economy

Groups such as the Australian Digital Alliance (ADA) and Public Knowledge have raised concerns about the impacts of the TPP on the digital economy. The ADA has claimed the TPP is “Overly prescriptive and technical” and will “reduce our domestic flexibility and leave us with little room to negotiate in future international agreements”[vi].

Public Knowledge, a US-based organisation, has even gone so far as to set up a website, www.tppinfo.org as a resource about the TPP and copyright. Public Knowledge sums up its concerns about the TPP as follows:

Excessive copyright rights and enforcement adversely affect that ability of creators to create content, the ability of technology companies to make innovative products, and that ability of users to use content in new ways.
Source: http://www.tppinfo.org/

Reducing restrictions on the movement of capital between countries

The TPP aims to contribute to major reductions of barriers restricting global movements of capital. This is a point on which the US have been thus far considerably inflexible[v], and for example in the case of Chile and Malaysia, while both countries have taken steps to protect regulation on their capital accounts, the proposal put forward by the US would provide a significant challenge for these countries to regulate cross border finance.[vi]
The moderation of global financial trade barriers facilitates the movement of production internationally, which has concerns associated with it regarding minimum wage laws and standards and their evasion, environmental protection standards and workplace safety regulations.[vii]

Secrecy and a lack of public or civil society consultation

The most consistent criticism of the TPP is the way in which the detail of negotiations has remained undisclosed to the public for debate or scrutiny. The convenor of the Australian Fair Trade and Investment Network Patricia Ranald claiming the Australian public has been left out of the debate.

“Trade agreements shouldn’t tie the hands of government, prevent them from regulating in the public interest. And they shouldn’t be making agreements which require Australia to change its domestic law about things like medicine or copyright, which is done in secrecy when these things should normally be decided through an open, democratic, parliamentary process. Domestic law should not be decided in secret negotiations in a trade agreement.”[viii]

What are the implications of the TPP for Australia?

The Australian Department of Foreign Affairs and Trade (DFAT) have, in their official report, a list of anticipated benefits for Australians as a result of engagement with the TPP. These  benefits include:

• “The potential to form a building block for Asia-Pacific regional economic integration
• Regional rules of origin providing new opportunities for Australian exporters to tap into global supply chains
• Potential for providing additional market access for goods and services into the markets of existing FTA and TPP partners
• Potential for improved opportunities for Australian financial services providers by mitigating barriers such as foreign restrictions on capital and investment flows
• Provision of a framework for engaging with countries with which we do not have an existing bilateral trade agreement; for example there is potential for better access for dairy products and mining services to Peru through the TPP.”[i]

DFAT claims that “Australia’s decision to participate in the TPP in 2008 followed an extensive public consultation process. Overall, there was widespread interest in and support for Australia’s participation in the TPP”.[ii] No statistical information or data could be found to support this statement. Indeed, a survey conducted by the Australia Institute in 2013 revealed that Australians are mostly unaware of the TPP and remained sceptical about the claimed benefits. The survey showed that

• Only 11 per cent of respondents said that they ‘definitely know’ about the TPP.
• 85% of people surveyed thought Australia should set the standards for the quality of goods sold in Australia
• 73% of people surveyed thought Australia would benefit from stronger regulation of the quality of what can be imported into Australia
• 50% of people surveyed thought Free Trade Agreements between Australia and other countries were likely to reduce choice of locally produced products
• 52% of people surveyed thought Free Trade Agreements between Australia and other countries were likely to have a negative impact on jobs in Australia
• 40% of people surveyed didn’t think Free Trade Agreements between Australia and other countries were likely to improve human rights, labour rights and environmental standards around the world
• 87% of people surveyed thought the details of Free Trade Agreement should be made public before the Australian Government signs them

67% of people surveyed voted ‘no’ when asked whether they trusted the government on their promise that Free Trade Agreements will not increase the cost of specific goods such as prescription medicine

Implications for Australian Consumers

The Australian consumer representative group CHOICE has outlined concerns for Australian consumers under the TPP.

The biggest issues in discussion are those of banning parallel imports – the importing of authentic goods that are imported without the permission of the intellectual property right holder and banning the evasion of geoblocks that prevent consumers viewing and downloading material based on their geographic location.

Parallel imports and the evasion of geoblocks both allow consumers to buy products where they are cheapest – hands up if you have ever bought any electronic products through eBay from an international seller in Hong Kong.  So banning these things is inherently bad for consumers.

Implications for Australian Industries

Because of the secrecy involving the TPP, it is very difficult to get a clear picture about the impacts on particular industries.

As the particulars of the TPP have not been made public, speculation on the implications of the completed negotiation can only extend so far. There have been leaks of documents, however, exposed by WikiLeaks, and these have raised concerns for the Australian pharmaceutical, entertainment, information technology and intellectual property industries.[iii]

Australia’s agricultural industry is likely to benefit from any reduction in trade protection. Jennifer Westacott, Chief Executive for the Business Council of Australia stated that, for example in respect to the recent free trade agreement concerning South Korea, Australian farmers will experience an elimination of tariffs on 98 per cent of Australian exports to Korea.[iv] While not referring explicitly to the TPP here, there are expected benefits for Australia’s largest exporting industries. The National Farmers Federation of Australia and New Zealand similarly noted the benefits of a free trade agreement with China, articulating expected benefits for the Australian agriculture, food, manufacturing and mining industries.[v]

Final thoughts

The Trans-Pacific Partnership (TPP) is understandable contentious. Despite the far reaching ramifications of any final agreement between participating countries, negotiations for the TPP have taken place amid great secrecy.

While free trade is generally supported by economists, the TPP is unique in that it is focusing heavily on so called non-tariff barriers to trade. When these barriers are examined in more detail, they appear to be attempting to fix issues faced by producers in a globally connected economy. In this way, the TPP is not so much concerned with reducing barriers to trade, but rather with fixing problems created by overly free trade. The net impact of this is likely to be that individuals, consumers and smaller businesses are likely to be worse off. Companies that have the resources to enforce global intellectual property rights under the agreement will be the primary beneficiaries.

Certain industries in Australia, Agricultural primary producers for example, are likely to benefit from any reductions in tariffs among participating countries. But it is equally likely that other industries will be adversely affected by changes to tariff and non-tariff barriers. Industries likely to be affected by changes to intellectual property laws such as healthcare and digital economy companies (ISPs, content producers and distributors etc.) may be most at risk.

It is difficult at this time to assess the impacts on the Australian economy in more detail than this. We hope this post is a useful starting point for further and more detailed research.

Bibliography

Office of the United States Trade Representative, 2011 “The United States in the Trans Pacific Partnership” retrieved March 2014 http://www.ustr.gov/about-us/press-office/fact-sheets/2011/november/united-states-trans-pacific-partnership

Australian Government Department of Foreign Affairs and Trade, 2012 “Trans Pacific Partnership Agreement Negotiations” retrieved March 2014 http://www.ustr.gov/about-us/press-office/fact-sheets/2011/november/united-states-trans-pacific-partnership

New Zealand Ministry of Foreign Affairs and Trade, 2005 “Trans Pacific Strategy Economic Partnership Agreement” retrieved March 2014 http://www.mfat.govt.nz/downloads/trade-agreement/transpacific/main-agreement.pdf

Australian Government Attorney Generals Department, “Investor-state arbitration- tobacco plain packaging” retrieved March 2014 http://www.ag.gov.au/internationalrelations/internationallaw/pages/tobaccoplainpackaging.aspx

The Australia Institute, 2013, “MR: Aussies in the dark about risky TPP trade deal” retrieved March 2014 http://www.tai.org.au/content/mr-aussies-dark-about-risky-tpp-trade-deal

The Australia Institute, 2014 “MR: Consumers likely to lose out if Australia signs secretive trade deal” retrieved March 2014 http://www.tai.org.au/content/mr-consumers-likely-lose-out-if-australia-signs-secretive-trade-deal

EconomixComix, “The Trans Pacific Partnership and Free Trade” retrieved from http://economixcomix.com/home/tpp/

Amon, I 2013 “How would the TPP agreement affect Australia?” SBS World News Radio retrieved March 2014 http://www.sbs.com.au/news/article/2013/12/23/how-would-tpp-agreement-affect-australians

Public Knowledge, “Timeline of the Trans Pacific Partnership” retrieved March 2014 http://tppinfo.org/resources/tpp-timeline/

Hay A, Gomez E, 2013 “Australia: Agribusiness aspects of the Trans Pacific Partnership negotiations” Mondaq retrieved March 2014 http://www.mondaq.com/australia/x/274580/international+trade+investment/Agribusiness+aspects+of+the+TransPacific+Partnership+negotiations

Dorling, P 2013, “Australians may pay the price in Trans Pacific Partnership free trade agreement” The Sydney Morning Herald retrieved March 2014 http://www.smh.com.au/federal-politics/political-news/australians-may-pay-the-price-in-transpacific-partnership-free-trade-agreement-20131113-2xh0m.html

Kelsey, J 2012 “Thailand’s quest to join the TPPA will strengthen opposition” Scoop Independent News retrieved March 2014 http://www.scoop.co.nz/stories/WO1211/S00295/thailands-quest-to-join-the-tppa-will-strengthen-opposition.htm

[i] “The 10 benefits of the WTO trading system” World Trade Organisation http://www.wto.org/english/res_e/doload_e/10b_e.pdf

[i] “TPP state of play after Salt Lake City 19-24 November 2013 round of negotiations” WikiLeaks https://wikileaks.org/IMG/pdf/tpp-salt-lake-extracts-.pdf

[i] “Investor-state arbitration- tobacco plain packaging” Australian Government Attorney-Generals department http://www.ag.gov.au/internationalrelations/internationallaw/pages/tobaccoplainpackaging.aspx

[ii] “Aussies in the dark about risky TPP trade deal” The Australia Institute http://www.tai.org.au/content/mr-aussies-dark-about-risky-tpp-trade-deal

[iii] “The TPP negotiations could be a bitter pill to swallow for Australians” The Guardian http://www.theguardian.com/commentisfree/2013/dec/06/the-tpp-negotiations-could-be-a-bitter-pill-to-swallow-for-australians

[iv] “Consumers likely to lose out if Australia signs secretive trade deal” The Australia Institute http://www.tai.org.au/content/mr-consumers-likely-lose-out-if-australia-signs-secretive-trade-deal

This isn’t Georg. As soon as he wears lederhosen to the office we will replace this picture.

For much of this year Economists at Large has been lucky to have Georg Molz helping out on various projects.  Now he turns his Teutonic talents to examining his homeland, EXCLUSIVE to the Ecolarge blog.  Danke, Georg!  

In 1993, German electricity providers ran a media campaign cautioning against the closure of nuclear power plants. In a series of ads appearing in newspapers around the country, suppliers claimed that shutting down nuclear power would lead to Germans becoming more reliant on coal-burning for their electricity. An increase in CO2 emissions, they argued, would be the inevitable outcome of doing so.

But what about renewables? Energy providers had that covered. “Renewables cannot cover more than 4% of the future energy demand in Germany” the advertisements confidently proclaimed. Further sources of energy supply were not considered. Electricity from solar panels and wind turbines seemed neither as technically feasible nor economically justifiable as staying nuclear.

Twenty years later the energy landscape in Germany has transformed. By 2011 the share of electricity generated by renewables had reached 20.3%. This rise in renewable energy, particularly electricity from solar and wind power, is the result of the 2000 Renewable Energy Act (EEG). The Act was the product of a coalition formed in 1998 between the Social Democrat Party and the Green Party. Along with the phasing out of nuclear power and introduction of an eco-tax, the EEG was one of the most important energy projects of the coalition.

The aims of the Act were straightforward: sustainable development of energy supply; internalisation of external effects; reduced reliance on fossil fuels and enhancement of technologies to generate more electricity from renewables. Back in 2000 electricity generated by renewables accounted for 6.8% of Germany’s total gross energy consumption. The new legislation aimed to double that amount by 2010.

Feed-in tariffs were introduced in order to achieve this target. Under the terms of the tariff, producers of renewable energy would be paid a fixed rate over 20 years for electricity they fed into the public grid. The rates paid to renewable energy producers varied depending on the energy source, plant capacity and construction type. In 2001 electricity producers from wind electricity received between €0.062 ($0.091) and €0.091 ($0.0133) per kilo Watt hour (kWh), while producers of electricity from solar power were paid €0.506 ($0.739) per kWh.

Thanks to fixed rates, investment in renewable energy at last became profitable and many households and farmers became electricity producers on a small scale. The total nominal power of wind farms in Germany climbed from 6.06 gigawatt (GW) in 2000 up to 30.75 GW by 2012. Nominal solar power rocketed from 0.07 GW in 2000 up to 32.41 GW over the same period. With the total nominal power for solar facilities worldwide estimated at 100 GW, Germany now accounts for almost one-third of nominal solar electricity across the planet. Aside from the feed-in tariffs, take-up has also been driven by the decreasing cost of solar plants, with prices halving in the last three years alone.

By June 16 this year electricity generated from solar and wind power accounted for a record 61% of total electricity generated in Germany.

However, this rapid expansion in renewable energy has not occurred without one or two less positive outcomes. Obviously much renewable energy is weather-dependent; electricity from solar and wind power is only available while the sun continues to shine and the wind to blow. So far disruption has been minimal, but energy providers are concerned the supply might be too uneven and has the potential to cause trouble in the future.

Another consequence of renewable energy’s popularity is already being felt by the public: power prices have risen markedly. Back in 2000 an average household consuming 3,500 kwh/a paid €40.67 ($59.37) per month for electricity. By 2011 the same amount of electricity cost €72.78 ($106.23) per month. Experts are forecasting another drastic price hike in 2014.

The rising cost of power is partly – but not entirely – due to the introduction of fixed rate feed in tariffs: growth in the amount generated by renewable sources leads to a higher amount paid to the producers. Consumers pay the total sum of these tariffs minus revenue generated when excess electricity is traded and sold at the European Energy Exchange (EEX) in Leipzig. The final amount paid by consumers is called EEG-surcharge (EEG-Umlage).

Public discussion often deceptively confuses the EEG-surcharge and the amount paid to producers. While renewable electricity producers were paid €17.96bn under the feed-in tariff scheme in 2012, only €14.11bn was paid by electricity consumers as €4.96bn was traded on the EEX.

It is now common for German newspapers to lay the blame for higher prices wholly on the surcharge for renewable energy production. One factor that is too often overlooked, however, is the increasing number of exemptions from the surcharge, which results in the remaining, non-exempt consumers paying more. In 2010 approximately 650 companies were not required to pay the whole EEG-surcharge. The electricity consumption by these companies represented one-third of Germany’s total industrial electricity consumption for 2010 (ca. 67 gwh out of 237 gwh). To qualify for exemption (introduced so that the international competitiveness of German companies would not be damaged), companies had to prove that they consumed more than 10 gwh/a and that their ratio of consumed electricity to gross value creation was higher than 15%.

Overall, half of the electricity used for industrial production in Germany was either exempt or partially exempt from the surcharge. Companies that generated their own electricity were also completely exempt.

But recently the conditions for surcharge exemption have eased considerably. The threshold for electricity consumption has been slashed from 10 gwh/a to only 1 gwh/a. The ratio of consumed energy to gross value creation has also been lowered to 14% (down from 15% in 2010). As a consequence of these changes, 1,550 companies have already qualified for EEG-surcharge exemption this year, with authorities reportedly considering a further 500 more applications in the pipeline. The ministry overseeing these applications allegedly employs 50 assistants solely to work on the assessment process.

Due to the growing number of exempt users, the EEG-surcharge payable per household and per non-exempt company will climb this year. And, with 2,367 applications for exemption in 2014 already having been lodged, the price of electricity is on track to climb still further.

Certainly more electricity from renewables results in an increasing payments to producers. But the partial amount every consumer must pay for the EEG-surcharge is affected by the total number of exempt companies. Other effects which have an impact on electricity price are too rarely considered, such as transmission, generation, grid access and trading at the EEX.

A growing chorus of politicians are now calling for adjustments, if not a complete halt, to feed-in tariffs for renewable electricity producers. This would only affect prospective producers; households and farmers who set up their solar panels or wind farms 10 years ago receive guaranteed rates for 20 years. Be that as it may, claims that the rising costs of renewables are driving low-income households to the wall are bogus. Hikes in the EEG-surcharge are as much the result of more and more exemptions being granted to the German industrial sector and not solely due to the popularity of small-scale renewables.

I still think the “Mc Camp” gag is funny.

Economists at Large are celebrating ANOTHER VICTORY!!!…..or are we??

First, the good news.  Singleton Council have recommended to a joint regional planning panel to reject a development application by The MAC group to build a temporary worker camp on the outskirts of Singleton.  A few months back, we reviewed the socio economic assessment that the proponents had commissioned and made a submission on the development application.  We recommended that they reject the application as:

• No cost benefit analysis of the application had been done
• The input-output modelling of the application overstated the economic case for the project
• The modelling failed to incorporate the negative economic effects of the project on the rental market, local home owners and potential environmental costs.

So we were pleased to read that part of council’s reasoning was:

The socio economic impact statement makes a number of assumptions that are not substantiated and as a result the assessment is inadequate. (p50)

We’d like to think that our submission had some influence on this….but before getting into the champagne, read on!!

The applicant submitted a socio economic impact report, prepared by Western Research Institute, as a part of the application.  Council engaged Hunter Valley Research Foundation (HVRF) to undertake a peer review of this report.  A summary of the key findings of the peer review by HVRF are as follows:

(several dot points omitted)

The main limitation of the information provided relates to the singular use of the [input output] methodology and the absence of any assessment that may account for the other costs and benefits of the proposed development against alternative options.  (p36)

Now, I know what you’re thinking.  “Hunter Valley Research Foundation…..now where have we heard that name before???”

That’s right, it was the HVRF who did the input output modelling for the Warkworth case, which was found to be “inadequate”, and their same model has just been thrown out of the Ashton coal case, and criticised by the Ashton’s new economist (no links yet).

When the HVRF get given lemons, they sure know how to make lemonade.  When your own input output modelling is under fire, what better way to make a buck than by criticising someone else’s!?!?!

You can’t make this stuff up.

Here is the Singleton Council’s full recommendations:

Singleton Council 2013 Recommendation of rejection MAC camp

Hilarious/offensive image from this blog.

Totally published, bro!

Earlier this year, I (Rod) contributed to an article published in the journal Biological Conservation, Valuing individual animals through tourism: Science or speculation?  The article examines some of the problems with economic valuation of individual animals through tourism revenues.  Like most of the coauthors of the article, Economists at Large have written such studies, so it was an interesting exercise in re-examining our work and its relevance to science and conservation.  The article has sparked some animated responses from other authors in the field, at least one of which has been published in the same journal.  Here’s a link to the article on Science Direct and I’ll paste the abstract below.

Thanks to lead author, James Catlin of Curtin University for inviting me to be a part of an interesting project.

Abstract

Non-consumptive wildlife tourism plays an important role both in raising conservation issues and in providing economic support for conservation initiatives. Although the direct value of wildlife has been historically associated with its consumption, tourism is increasingly being used to value wildlife for its economic and environmental qualities. There are various methods by which these values can be assessed. In particular, there is a recent trend towards ascribing tourism values to individual animals. Such approaches enable direct comparisons with the extractive of use animals. These calculations can depict clear contrasts in value in tourism’s favour which can then be publicised to a wider audience. Whilst this method may appear desirable, this paper demonstrates that valuations made at the scale of single animal are frequently based on assumptions that may not withstand critique. In turn it is argued, that given the flaws in this method, instead of enhancing arguments for conservation it has the potential to weaken its case. It is contended that using tourism to value wildlife should be conducted at a destination or higher level where the arguments have a firmer scientific basis and thus more impact and relevance.

We are delighted to read in the news today that the NSW government is pulling out of the Cobbora Coal project, proposed for near Dunedoo.  The original idea was that the government would own and operate the mine (yes, we’re in NSW, not North Korea) and sell the coal at “cost recovery” (ie a loss) to selected power generators.  Rod has ranted about this project in person to the Planning and Assessment Commission in Dunedoo, on ABC radio Dubbo, in the SMH and on our blog.

From the media and brief discussion with people in the region, we understand that the project is still in the assessment process and if approved the government will try to sell or lease the mine, but has, at a cost of $75m, terminated contracts to supply cheap coal to generators.  Thats $75m well spent if it gets NSW taxpayers out of paying for a loss making mine with capital costs estimated in the original economic assessment at over $1b and later revised upward.

In the original economic assessment, by Gillespie Economics, a net present benefit of $1.9b was estimated.  Responding to our submission pointing out the loss that taxpayers would incur, Gillespie Economics said:

There is no requirement for the [economic assessment] to consider the financial implications of the Project for the proponent. (response to submissions p274)

We argue that financial viability is important to major project assessment, as if the project is marginal it may not go ahead in the form or timing being assessed by planners.  Particularly when the proponent is the NSW government and Gillespie Economic’s calculation of net benefit relied on the subsidy from “cost recovery” coal being passed through to NSW electricity consumers, surely financial viability is a relevant consideration.

Other issues in the original assessment:

• Assumption that “in a competitive market, all of this benefit would be passed through to electricity customers”
• Assumption that other generators are not crowded out by subsidised generators
• Approach to greenhouse emissions, assessing only those from mine operations
• Inclusion of a “social value of employment” based on studies recently rejected by the Land and Environment Court
• Flawed analysis of noise, dust, vibration and amenity impacts
• Assumption that ecological offsets perfectly offset destruction of ecosystems, against the opinion of nearly all ecologists
• No consideration of health impacts of open cut coal mining and coal-fired power generation

Depending on politics and coal prices there is still a chance that this project may go ahead.  This would bring negative effects for the local and global environment, but at least NSW taxpayers have been spared the indignity of funding it.

Mc Camp…..get it?

There’s a proposal to build a 1500 person temporary accommodation facility in Singleton, Hunter Valley, which is causing a bit of fuss.  The company proposing the project is The MAC, who have built similar camps in other mining towns, such as Narrabri (pictured).

The fuss is because the camps are to house fly-in-fly-out (FIFO) or drive-in-drive-out (DIDO) workers to mine sites.  The camps are usually a bit out of town with their own shops, bar, etc, meaning the well-paid miners are kept away from local businesses and communities who therefore gain little from having mining projects near them.

MAC village at Narrabri, taken Dec 2012

You wouldn’t really know that from the economic assessment prepared by the Western Research Institute, a consultancy in Bathurst.  Rather than doing a proper cost benefit analysis, they’ve used input output modelling to give, we believe, a misleading impression of economic benefit from the project.

Special thanks to new Economist at Large, Marc Fegredo, who did most of the work on the submission.

Here’s our submission

Ecolarge 2013 Singleton MAC DA submission FINAL

Here’s HRI’s original assessment

WRI 2013 Singleton mac camp econ analysis

A few of us at Economists at Large have lived in China and we all learned the hard way that when someone gives you a high denomination bill, it’s a good idea to hold it up to the light and check the watermark, making sure that Mao is looking back at you from the right spot.  Similarly, when a major coal company, Chinese or otherwise, slips a government an economic assessment claiming to deliver $1.6b in economic benefits to the public, its a good idea to take a close look.

We did just that to Shenhua’s Watermark Coal Project economic assessment, on behalf of the Caroona Coal Action Group.  After a good look, we don’t think the Watermark (get it?) is quite right.  The summary is below and here’s a link to the full report. Ecolarge 2013 Watermark submission  Here’s the original assessment by Gillespie Economics.  Gillespie 2012 Watermark assessment.  And here’s a hat tip to where I got these images.

Summary

Does the Watermark look right to you?

The socio-economic assessment of the Watermark Coal Project is not suitable for decision making in its current form.  It fails to clearly demonstrate the economic benefits of the project to NSW and Australia, overstating the financial case for the project, while understating impacts on agriculture, environmental and health.  It is not clear that the project represents a net present benefit to the community.

Key issues that need to be considered include:

• The assessment relies on the proponent’s unsourced forecast of semisoft coking/PCI coal prices of AUD$142.  This is substantially above other analysts’ estimates.
• The assessment assumes the project will be able to sell 86% of its production into metallurgical coal markets.  Historically, much PCI coal is not able to be sold into metallurgical coal markets and is instead sold more cheaply as thermal coal.
• Royalty revenue is the most important benefit from the project for decision makers to consider.  The assessment seems to overstate royalty revenue in present terms by $82m.  The assessment’s royalty calculations are not transparent or adequately explained.
• Estimates of tax revenue in the assessment rely on high prices and theoretical company tax rates rather than the effective tax rates that mining companies in Australia face.  This serves to overstate the likely tax revenue by around $700m.
  

  I realise I’m pushing the joke here, but there aren’t enough cute girls on our site anyway.

We estimate the financial benefits to Australia of the project are around $541m.  The economic impact assessment and cost benefit analysis do not present an accurate picture of the negative impacts of the project that need to be considered and could well outweigh this financial benefit.  Negative impacts include:

• Impacts on agriculture due to increased cost and reduced availability of:
  • Labour
  • Water
  • Freight
  • Impact of air quality and coal dust
  • Impacts on external costs such as:
    • Ecology, including threatened species and ecosystems
    • Aboriginal heritage
    • Human health
    • Greenhouse gas emissions – particularly if production is eventually sold into thermal coal markets
    • The assessment includes a misleading value on the social benefit of employment which has been widely criticised and is not included in standard cost benefit analysis.

In conclusion, the Watermark project is not accurately presented in the economic assessment.  The economic case for the project has been overstated, while its social and environmental costs have been understated.  Without considerable revision it is not clear that the project represents a benefit to the NSW or Australian community and should therefore be rejected.

In breaking news, the NSW Land and Environment Court has handed down its decision on the Warkworth Coal Project, overturning approval given by NSW state regulatory agencies.  The project will not go ahead.

The mine, owned by Rio Tinto subsidiary Coal and Allied, had applied to extend its operations through environmental offsets, endangered ecological communities, agricultural land and close to the village of Bulga.  The project was approved by the NSW planning department, but contested by local community group, the Bulga Milbrodale Progress Association.  Rod Campbell from Economists at Large appeared as an expert witness for the Association in the case last year.

This is the first time a coal project has been contested on economic grounds, along with environmental and social concerns.  Chief Judge Preston found:

I am not satisfied that the economic analyses provided on behalf of Warkworth support the conclusion urged by both Warkworth and the Minister, namely that the economic benefits of the project outweigh the enviornmental, social and other costs. (para 451)

Rod’s evidence focused on the Benefit Cost Analysis (BCA) and choice modelling study, contesting their accuracy and usefulness in decision making around the project.  CJ Preston found:

The BCA, and the Choice Modelling on which the BCA depends, are also deficient. They do not consider all of the relevant matters that need to be considered by an approval authority in determining a project application, the relevant matters at the level of particularity required, or in accordance with the factual findings and inferences I have made in relation to the relevant matters. (para 452)

The judgement is 170 pages long (full judgement available here).  We are still digesting it and the early afternoon champagne it just inspired!  Updates over the next few days.

Congratulations to the Bulga Milbroughdale Progress Association, all the team at EDONSW, barrister Robert White and other people involved especially Richard Denniss and John Quiggin who also appeared as economic expert witnesses.

We’ve made a submission on the environmental impact statement of the Stratford coal project, on behalf of the Barrington-Gloucester-Stroud Preservation Alliance.  The submission has already been getting some media attention, here’s the story in the Gloucester Advocate.

Here is the original economic assessment, by Gillespie Economics.  Our criticisms include:

• Misleading use of socio-economic assessment results in executive summary and project justification
• Viability of the project
  • Estimates of coal price and project net present value
  • Failure to justify return to 24 hour mining
  • Final voids
• Scope of the assessment  Particularly relating to:
  • Benefits accruing to Australia and overseas
  • Greenhouse gas emissions
• Social value of employment
• Noise, dust, air quality and amenity impacts
• Social impacts
• Flora and fauna
• Inappropriate use of input-output modelling in impact assessment