MBIs

Mar 162015
 
Hepatitis A
Typical of the confusion Australian consumers face

In the wake of the Hepatitis A scandal, which as at this point has infected some 26 people in Victoria, New South Wales, Western Australia, Queensland, South Australia and the ACT. There has been a great deal of debate about food labelling laws, protocols, and food safety.

A potential cause of the outbreak and a potential solution fall within what readers of this blog might be familiar with – water quality and market-based instruments.

At this stage, it looks likely that the source of the infection was and is imported frozen berries from China.

Sufferers of Hepatitis A are likely to suffer gastro-intestinal problems such as nausea, vomiting, diarrhoea and fever and in some cases may suffer acute liver failure.*

Hepatitis A is spread through the “oral – faecal route”. So, there are perhaps two mechanisms for which Hepatitis A can be passed onto another person through ingesting food. One, involves an infected person exhibiting poor hygiene practices (such as not washing hands), and then directly handling the food. The second is contaminated water being used to wash or prepare food.

The outbreak and the poor quality control standards for food production and packaging shouldn’t have come as a surprise. China has had a well documented, if not at times overblown record of food contamination. Ranging from contaminated milk formula, to poisonous pet food, and garlic sprayed with outdated and harmful (to human health) fertilisers and pesticides. Frozen berries were thought to be the cause of Hepatitis A infections in the United States and European Union. These are problems in practices that would not be allowed to occur in countries like Australia.

Calls for better food labelling laws as a result of the Hepatitis A outbreak have been made by consumer groups. It is often a battle for consumers to understand where their food is sourced. Confusing labels such as “Made in Australia from local and imported ingredients” make food labelling meaningless and devalue the system as a whole. The federal government initially rejected such calls and deemed them an unnecessary regulation. However, it appears that a proposal is going to be made to cabinet by the end of March.

I support such a move, but I argue that it is positive and productive regulation. As opposed to restrictive regulation. Companies that import food products would be well aware of their supply chain – meaning a low cost of implementation for the companies involved.

The benefits are obvious. Consumers would be able to make better choices as a result of the extra information. It is unusual in any given market, that a consumer is unaware and cannot know the source of the product purchased. For example, if an oil company is selling oil, it is graded and sold on an exchange, with the details of the product known. Some oil grades will command a premium over other oils.

It should be the same with food. But because of our food labelling regulations, this is not the case. It is what is known as a market “friction”.

Friction occurs in a market where the buyer – in this case, the consumer – has to make choices based on insufficient information. The gaps between information between the seller and consumer in the market lead to an inefficient transaction of goods. Meaning that products that should sell for less, may sell for more and products that should sell for more, sell for less. These are transaction costs.

This is where Friction Reduction market-based instruments, or as I prefer to call them: Information based market-based instruments become relevant.

Information based MBIs or Friction Reduction Instruments reduce the transaction costs by creating a more efficient market. These instruments might include certification, labelling, education campaigns or any number of other related schemes. Many of these schemes are voluntary, on the part of producers, in response to demand from consumers.

A classic example is “fair-trade” coffee. This resulted from ethical considerations of coffee drinkers towards the growers and workers on coffee plantations.

One might ask why if it such a good thing, that local producers don’t already label their products more specifically, or precisely. The answer is that many if not all, already do.

The efficient functioning of a market relies on the underlying regulation. In this case, Australian growers and producers have their products devalued as a result of the lack of information. Those already providing the information are having their products lowered in value by those who don’t have to accurately state the source of their products. The confusion in the labelling raises the value of imported product, and lowers the value of local product.

There is something being missed out on as a result of the lack of informative labelling. Australian food and locally sourced food fetch a premium overseas and at home. Yet, when these products are in supermarkets, the value is less.

With the explosion of local farmers markets in Australia and so on, it is obvious that there is high demand, and an expectation of locally sourced and grown product. And people don’t mind paying a premium for the assurance that that provides.

If Australia looks to increase the value of our agricultural exports, we could probably learn a thing or two about increasing the value of our domestic premium produce sales. All this would take, is a simple change on the label.

 

*This is not a medical blog, or recommended advice. Please seek other advice or treatment if concerned.

Apr 162014
 

Market Based InstrumentsIn a previous post I explained that the Carbon Price is not a Carbon Tax. That it was an Effluent Charge with a Tax Differential component. Regardless of this, they are all examples of Market Based Instruments. What they are is actually known as Price Based Market Based Instruments or just Price Based Instruments. There are generally three kinds of Market Based Instruments: Price Based Instruments, Quantity Based Instruments (or Rights Based Instruments) and Information Based Instruments.

You may have heard the Minister for the Environment explain that they will replace the “Carbon Tax” with a market based mechanism, insinuating that the Carbon Price is not a market based instrument. He is quite wrong; my master’s thesis was entitled ‘Market Based Instruments for Reducing Pollution Loads Entering Darwin Harbour’ and I will explain in basic terms what these actually are.

Price Based Instruments

Market based instruments that set a price, a charge or a fixed unit cost are known as Price Based Instruments. As previously discussed, Price Based Instruments might include policy mechanisms and instruments such as effluent charges and taxes. But they may also include:

Full Cost Pricing (and include different pricing structures)

Tax Rebates and Tax Differentiation

Insurance Premium Charges

Reverse Deposit Schemes (Container Deposit Schemes)

Subsidies, Rebates and Grants

User Charges

Performance Bonds

Covenants

These are what is known as Pigouvian Taxes. And I think the term Pigouvian Tax is where a lot of the confusion has entered the debate. However, all this term means is that the polluter absorbs the full cost of the production (or consumption) process. How this is done most efficiently and effectively is to be determined by the policy maker, and will be the subject of a later post. How price based instruments act as a market based instrument will also be discussed at a later stage, because it isn’t necessarily intuitively apparent – which is partly the problem that gives rise to comments and purchase in the population that pricing is not a market mechanism.

Quantity and Rights-Based Instruments

Quantity and rights-based Market Based Instruments are what most people think about when they think of ‘Market Based Instruments’. There really only a few types of instruments in this category and it is probably the narrowest policy set for Market Based Instruments. There really are only two types of Market Based Instruments in this category:

Cap and Trade Schemes, Permits and Tradeable Permits

Total Maximum Daily Load Schemes (including accounting and budgeting schemes)

These Market Based Instruments contain a strong regulatory basis as well as frequent market transactions. Offsets can be created and in this sense they operate both as a futures exchange and also a quasi options exchange, with regulatory bodies acting as market-makers. The exchange’s effectiveness is successful or not successful depending on the interaction of these elements.

Theoretically, such Market Based Instruments are most suited to environmental policies where there are a large number of diffuse polluters, and the impacts of pollution are not isolated. That is, a reduction in pollution in one area will benefit the whole, not just the local environment. I will discuss this dynamic at a later date. But in short, it is why Australia’s carbon pollution reduction policies have favoured a cap and trade scheme.

Information-Based Market Based Instruments

Information based Market Based Instruments are also known in the literature as Friction Reduction Schemes, or Friction Reduction Market Based Instruments.

You may ask why these are included as Market Based Instruments. The simple answer is that markets function on the basis of information. There are two things that move a market – noise, and information. Companies listed on stock exchanges are regularly releasing information. It is a legal requirement. There is legal recourse for some buyers when they have been sold something under false pretences in many different kinds of transactions.

These Market Based Instruments are said to reduce friction because they are designed to provide the user or the transacting parties with the available information. Available information is an important component of rational choice making in decision theory in classical economics, and I have some level of qualms with this philosophical position. But for the purposes of policy making, it is at least a worthy aspiring goal for policy.

Information based Market Based Instruments include:

Right to Know legislation

Eco-labelling

Public Information Campaigns

Accreditation

Summary

I hope that I have had some success in helping shed light on what actually Market Based Instruments actually are in environmental policy. There is a broad range of policy options at the hands of decision makers. The pros and cons of each and in what circumstances each market based instrument is likely to be effective will be discussed over time in this blog. But don’t be fooled by politicians and their use of jargon when discussing Market Based Instruments and the underlying philosophy for addressing environmental problems.

If you have any questions or queries, leave a comment, or suggestion. Or if you want me to go over anything in detail, let me know!

Mar 252014
 

I came to Steve Keen’s Debunking Economics after dabbling in reading what I would call “alternative economics”. I’m not someone involved in economics as a profession, but pointing out flaws in economic theory has become a personal hobby of mine. I have read much of Joseph Stiglitz and Nicolas Nassim Taleb’s work, and although I adore reading Taleb’s work, I have not found something I could completely relate to. That is until I found Debunking Economics.

Ever since I studied first year economics, I have been a strident critic of the way economics is taught. I guess this is perhaps the product of teaching myself Marxian theory during year 12 maths, and having studied philosophy at university. I remember telling a lecturer, who had commented that I should continue with economics (after a good paper on environmental externalities), that an idiot could spot the logical flaws in what was being presented. It is perhaps somewhat ironic that I now find myself grappling with what could be deemed an “alternative economics” field, in environmental economics or some such.

I was a little reluctant to read Steve Keen’s work, given his partiality to public nudity and attention grabbing statements. But I shouldn’t have been. I found Debunking Economics almost completely sums up the way I feel about how economics is taught at university level. How it has been elevated to a science, and how it holds sway over the other social sciences of which it is most certainly a part, has me scratching my head.

Keen does an excellent job of explaining how the rise of economics in academia has come about. The exploration of the history of economics is enlightening, as well as frightening. Keen’s natural ability to outline historical progression in economics allows him to critique the brain washing tactics initiated by economics departments in a similar fashion to what faith based institutions invoke on their subjects. By providing evidence and tested and defended hypotheses, he contrasts his own positions against those which hold sway in the academic world and amongst central banks.

But mostly, this book is an attack on the prevailing paradigm of neo-classical economics and its sway in the political arena.

Keen invokes a common sense approach to economic critique which will appeal to the layperson. Terms such as “efficient markets” are attacked, as they mean something completely different to those in finance and economics to the layperson. Which Keen quite rightly emphasises is problematic, because economists actually play on this gap in knowledge to manipulate those on the outside to follow what is actually a falsity.

For mine, Keen’s book is a must read for anyone interested in economics, or economic policy. It is a truly enlightening read on the likely future of economics as a worthwhile intellectual endeavour. Anyone that has a natural inclination to be sceptical of economists, or even those that don’t, would be well advised to read this book. I think it’s also a must read for those studying or have studied economics.

I don’t think I can do Debunking Economics justice in such a short space of time. It is actually quite a dense read for something that is actually very accessible. It definitely does add to the appeal of his positions. From time to time I will have to look at individual arguments in Debunking Economics to further the arguments being made in my exploration of market-based instruments.

Mar 192014
 

Ben Elton’s Gasping is a satirical and poignant play looking at the world of business and free-market economics. It is brilliantly crafted and constructed, analysing what happens when the provision of an environmental service is taken to its extreme.

A fictional company, ‘Lockheart  Corporation’ has invented a product which sucks the oxygen out of buildings, ‘Suck and Blow’, and provides privatised air to the inhabitants of these buildings. The benefits of such for private consumers of air are not made explicit, aside from the marketing of “deserving your own air”.

Inevitably, problems occur. The atmosphere is sucked of its oxygen, and sudden winds result in the suffocation of people as the thin oxygen is removed from the area. In the end, local authorities have to provide oxygen for the local environment, which is conveniently provided by Lockheart.

Africa is pillaged for its natural resource, oxygen, and that is where the greatest hardships occur, as locals begin to run out of their own oxygen. This is contrasted with the African famines that regularly occur, whilst the excess of the west and the wastage of food goes on. It provides a striking comparison with today’s world, in particular the protection of natural and environmental services, and how the burden for this falls on the most disadvantaged in the world, whilst at the same time facing the most pressing, immediate concerns that place the most amount of pressure on the natural environment.

Gasping is just as relevant today as when it was written nearly 25 years ago. With the ongoing policy debate surrounding climate change and global warming, Gasping gives an example of what might happen into the future, if the ownership of carbon sequestration, carbon sinks and other public goods become privatised and monetised.

Unfortunately, property rights over environmental services are a double edged sword. On the one hand, the “the tragedy of the commons” is a problem which results in the pollution and over-fishing of our oceans, for example. On the other, exclusive and unfettered use and rights to the environment can lead to over-exploitation and other serious negative environmental impacts, penalising the societies that rely on them.

More specifically it has relevance to the controversy generated by the former CEO and current Chairman of Nestle Peter Brabeck-Letmathe when he said that “access to water is not a public right” or a human right. It’s a classic case of life imitating art. The problem being, that at some level there is a distinct logic to it. It’s not a basic human right to water the garden with fresh drinking water, but taken to its extreme, it becomes absurd. And policy that interacts with free-markets, finance, the environment and the business world invariably ends up being somewhere in the middle.

I am thrilled that Gasping is being updated and performed later this year. I think it is extremely timely, especially for Australia with current political debates. One theme that I hope is reinvestigated is the reduction in demand of oxygen (in the original Gasping), and the business decisions that result from this. I would like to see the producers of carbon credits and offsets satirised and analysed in a similar way.

Unfortunately, I don’t think it is. In its new iteration Gasp will be taking a crack at mining and excess in the contemporary Australian life. Never the less, I am looking forward to seeing Gasp when it is performed by the Black Swan State Theatre Company later this year. In the meantime, if you are interested in a light hearted humorous read, poking fun at business, I highly recommend Gasping.

Mar 112014
 

Carbon Tax/ Price ModelUnless you’ve been living under a rock it has been impossible not to hear of the “Carbon Tax” debate in Australian politics. Given my knowledge of market-based instruments for environmental purposes, I feel compelled to explain many of the issues that confound the Australian public. If you require further detail, you can consult my thesis on the topic.

This post is the first in a series of posts explaining why the “carbon tax” is actually good policy and a different mechanism to what most pundits and voters think it is.

 

What is a Tax?

A tax is an enforced and unavoidable contribution to an authority.

Income tax for example (unless illegally manipulated) is a fixed contribution, or equivalent to, as a rate of money earned. $100,000 will be taxed the same (accounting for adjustments) as any other $100,000 earned from any other work. The tax is collected regardless of the outcomes of your work or the manner in which your work is done.

Tax revenue is consolidated into a revenue pool and is not set aside for specific purposes or programmes, such as 3rd party insurance.

For environmental purposes, a tax is usually applied to inputs. For example, fertiliser taxes apply a charge as a rate of a specific active ingredient. The resultant outputs and impacts of the fertiliser use are irrelevant to the way the tax is charged and collected.

Environmental taxes apply to what would be considered as the front end rather than to the emissions – or the back end. For this reason, an environmental tax is a blunt instrument and isn’t regarded as an effective policy choice for improved environmental outcomes due to the lack of consideration of outputs, limited influence on changing behaviour and or negative environmental impacts – known as externalities.

However, the “Carbon Tax” does not work in this manner and it has been shown to influence behaviour.

 

The “Carbon Tax”

Under the Clean Energy Plan the “Carbon Price” or the “Carbon Tax” was set.

This is where the confusion is allowed to reign supreme. The carbon price is a direct pricing instrument (more about this later, or see my thesis). Under which, by definition it is what is known as an Emissions Charge, or an effluent charge.

An emissions charge is a direct pricing mechanism for the outputs – the emissions. Not on the inputs. Not on the coal going to power stations, but on the estimated or measured emissions.

If we refer to the previous example regarding income and income tax, we can use the example of electricity generation to show the difference in how the Carbon Price works. The energy output is equivalent to income earned. And the CO2 emissions are equivalent to the work performed. The price is levied against the work performed – not on energy output.

The charge will vary depending upon the work performed, regardless of energy output. In this way it is avoidable.

And that’s how polluter behaviour is changed. Input choices are left to the polluter; however, it is the outputs and the emissions that are the important component and that which is assessed. So polluters can either reduce their emissions by changing the inputs, or end of pipe emissions reductions. That decision can be based on what achieves the most cost effective outcome, and at the same time, achieving an improved environmental outcome.

The revenue generated from the carbon price, or emissions charge, is recycled to compound emissions reductions. In Australia this is going to various grant schemes, offsets and renewable energy initiatives. It is designed to be an encapsulated system that will continually reduce carbon emissions.

Income tax reduction (tax differentiation) with the estimated revenue generated is directed to those who have a relatively inelastic demand for electricity consumption. I will write about this at another point. But there are multiple elements to the carbon price as a policy and as a mechanism.

 

What does it mean?

When broken down, and the topic is discussed with correct terminology, the rationale behind the carbon price becomes a lot clearer and the mechanism behind changing behaviour makes much more sense. What people think of as a Carbon Tax is actually at this time a hybrid Emissions Charge and Tax Differentiation Scheme.

I’m not sure why the debate was allowed to be manipulated without an actual understanding of the underlying mechanisms at work. Granted, they appear to be quite complicated policy instruments. But they are not at a fundamental level.

It is similar to the way car registration operates, but not how income tax is collected. It is another failure of our political leaders to get to grips with policy explanation and education of the public in the process, because these mechanisms are not foreign to us.

 

But now that you are with me, and over the first hurdle, we can progress further into other areas of the policy.