Kent Wind Farm – A dead loss to society

The Kent wind farm subsidy is mostly a waste of money, even measured by UNIPCC’s case for taking drastic action on CO2.

First, two statements and a bit of data.

“… the Kent windfarm. £780m invested to chase £50 ROCs. Offshore is double bubble, so £100/MWh generated.” (Sep 25, 2010 at 1:41 AM | Atomic Hairdryer at BishopHill )

“An effective carbon-price signal could realise significant mitigation potential in all sectors. Modelling studies show global carbon prices rising to 20-80 US$/tCO2-eq by 2030 are consistent with stabilisation at around 550 ppm CO2-eq by 2100. For the same stabilisation level, induced technological change may lower these price ranges to 5-65 US$/tCO2-eq in 2030.” (P.18 UNIPCC Summary for Policymakers)

An alternative for a wind farm is a small power station consisting of diesel engines. The most modern diesel engines can produce less than 500kg of CO2 per MWh. (See note)

So the subsidy should be no more than the trading credit CO2 of 12.5-50 £/tCO2.

Based on these figures, it is possible to state that of the £100/MWh subsidy, at a very minimum £75 is a dead loss to society. At most it could at much as £95. This is before you undertake a present value calculation on the trading credits value in 2030, or start questioning the underlying economic assumptions. Further this is whilst accepting UNIPCC consensus position in its entirety.

For an alternative take, see Christopher Booker in the Telegraph

Note on CO2 output for a diesel power plant

A large container ship engine has around 470kg to 560kg of CO2 output per MW (emission comparison table on page 13), with around 58% engine efficiencies. (See a MAN Diesel & Turbo paper “How to influence CO2” – 5MB pdf). Power-plants can higher up to 90% more efficiencies by heat recovery processes, potentially cutting the CO2 out per MW to 350kg. However, this would need to be verified by actual measurements.

Note on carbon credits v Subsidies

A carbon credit aims at adding to the cost of producing CO2 directly, with the objective of encouraging the most cost-effective means of saving CO2. That is if cost saving is less than the cost of the credit, you purchase the credit. If it is greater, then you make the investment. For power plants it might be very effective for bringing forward investments in newer power plants. It would not be so effective in choosing between new power plants with massive differences in cost per unit of output.

Royal Society lacks rigor in 20% cuts hypothesis

The New Scientist reports that the Royal Society believes that a “20 per cent cuts to British science means ‘game over’”. (Hattip BishopHill)

In the article, some of the scientists point to the need for innovation to promote the high-tech industries on which our recovery depends. I quite agree. However, I would profoundly disagree that government-funded research science is the best way to achieve this. Firstly, because government-funded research is notoriously bad at producing the job-creating outputs. In fact, the public sector tends to specialise in pure research, with only distant business opportunities. Second, is that government-funded research tends to be long-term. Most politicians would agree that currently we need the new jobs in the next few months, not a decade or more down the line.

As an aside, the idea that a 20% cut “would cause irreversible destruction” is a hypothesis that should be expounded in a more rigorous & scientific manner, with empirical evidence to back this up. I believe that it is analogous to the notion of tipping-points in climate science, so the Royal Society would do well to exchange notes with the folks at the Climate Research Unit at UEA. In trying to model their separate issues they will find that positing of such turning points relies on disregarding the real-world background “noise”. Such “noise” renders the turning points both unpredictable and highly unlikely.

My counter-argument is that, historically, Britain has been very good at the creative elements of pure science and invention. We are not so good at turning that into the reliable world-beating products that create the jobs. We are the country of Newton, Marconi, Whittle and Turing. We are not the country of Apple, Toyota, Nokia, Siemens or BMW.

Considering Uncertainty in Climate Science

Sir John Bedddington, provides the introduction to a summary of “The Science of Climate change” on  UK Business Department website. He states

            “The fact that uncertainty exists in climate science, as it does in other fields, does not negate the value of the evidence – and it is important to recognise that uncertainty may go in both (or a number of) directions.”

This may be true in a new field, but there is evidence that where the consensus is concerned, when assumptions have to be made, or choices made between different scientific conclusions, there has been a very strong bias towards the more alarmist conclusions. For instance,

  1. The emphasis on positive feedbacks;
  2. The over-statement of climate sensitivities;
  3. The promotion of the hockey stick as secondary verification of recent warming being largely due to anthropogenic factors.
  4. Further there has been a public relations failure to challenge unsound science, or wild predictions, or false confirmations.
  5. Neither have there been any consensus scientists standing up to emphasise that the model scenarios of future temperature changes are not forecasts

The consequence of recognising uncertainty means that an audit is required of the total picture. Each part of the science needs to be graded according to the certainties. Most certain is that a massive increase in greenhouse gases will, ceteris paribus, cause a rise in temperature. At the other extreme are predictions that within a generation the Arctic Ocean will be ice-free in summer, or the Himalayan glaciers will have vanished, or the Maldives will disappear beneath the waves. The rhetoric needs to be replaced by establishing the case on a scientific basis. It is not sufficient to say that there is uncertainty and move on as is nothing had happened. The presence of uncertainty severely weakens the claim that the science is established and settled. We should now see the consequences for policy.

Hattip to BishopHill

A (weak) case against the Sceptics weakens the AGW Case

Deutsche Bank tries to answer the sceptics by attempting to demonstrate the the AGW is not completely refuted.

The sceptics arguments do indeed fail to amount to a complete refutation of the AGW case. Most of the “sceptic” arguments are against the idea that there has been no anthropogenic warming at all and that there is no evidence at all for the case. This would be hard to establish, and most “sceptic” scientists would never make this case. But almost equally hard to establish is the case that there will be extreme warming in the future, with likely catestrophic and irreversible consequences. At the very least there must be a clear demonstration that the likely economic impact (valuing the flaura and fauna as well), will be greater than the economic impact on human society of reducing CO2 emissions. Being able to demonstrate that the extreme opposite is implausible (in the vaguest terms) does not establish a position without unambiguous evidence and relying on unstated assumptions. There are some analogies that might highlight my perspective.
1. In medicine to have a reasonable expectation that the “treatment” will leave the patient better off than the cure. Simply showing that a few patients survived the treatment and recovered from the illness does not mean that the treatment worked. Nor does showing that some patients suffered adverse (non-fatal, but painful) side effects from a generally successful treatment to a condition that is 100% fatal without this treatment mean, that the treatment should not be used.

2. In considering a loan to finance a new business venture, the lending bank would want to see more in the plan tham that revenues will be generated. It would want to see a reasonable expectation that even with some set-backs, it could both deliver an income to the borrowers and sufficient surplus to repay the loan.
3. In a criminal case, if all the prosecution had to do was
   (a) present a case, that could not be challanged by the defence no matter how weak.
   (b) demonstrate that the defence had not proved their case beyond reasonable doubt, whilst being able to dismiss any evidence they presented on the flimsiest of evidence, including that defence counsel are paid to be biased.

4. A child caught smoking behind the bike-sheds is told that they have shortened their life by up to a decade. This will happen on average if they smoke heavily throughout their adult lives, but will not happen, on average, if it is ten cigarettes a week for five teenage years. They may have minor health issues, such as less ability to fight off the common cold.

What they have missing here is the huge middle ground – not of some truth on either side – but the middle ground where there is a an insufficient case established and / or, an insuffiently coherant plan, and demonstrated capability to carry out the plan, to gain a signficantly positive outcome. That is to give a reasonable expectation that the solution will leave the planet and the human race the better off for having acted.

Put another way, without a clear-cut case that an imminent, catestrophic disaster can be averted with a clear-cut plan, that has little adverse consequences, then there is ground to be made in actively trying to clarifying the extent of our collective scientific knowledge and the improving on the solutions.

Hatip BishopHill

ASI on the Minimum Price for Alcohol

Uncharacteristically, the Adam Smith Institute has made a serious error in its economic analysis. The idea of alcohol being a Giffen good is certainly a contestable one. There are a couple of pertinent areas here. The first is whether alcohol in the UK meets the requirements of a Giffen good. The second is whether the pattern of discounting is such that installing a minimum price will create the Giffen good conditions.

The Conditions for a Giffen Good. (Descriptions here and here)

  1. A staple on which people spend a significant part of their income.
  2. Applies to the very poor.
  3. There are no close substitutes

The current state of play in the UK market.

1. The major supermarkets concentrate their promotions on premium brands. Most of the promotions for cider & beer are for premium brands. The wine promotions similarly are mostly for the more expensive (& often branded) varieties. Own brand (especially the budget brands) are less frequently and less deeply discounted.

2. Many promotions do not involve a gross loss for the supermarket. By allocating space for high volume promotions a small gross margin can generate a larger net profit than the full price low turn product. It is all about overhead absorption.

3. Promotions made more profitable by promotional & volume discounts from the suppliers.  As I regularly shop at more than one major supermarket I notice similar promotions across different supermarkets.

4. Many promotions are partly spurious. For instance I recently noticed a bottle of standard Cava at half price. The full price would significantly more the vintage variety. Or compare the undiscounted price per litre for large packs of beer with the smaller pack sizes. You will find the “undiscounted” price is often more expensive, indicating the discount is exaggerated.

5. Many people pay the top prices at clubs and pubs in city centres. Cheaper prices are obtained at local pubs (known as bars in the USA & on mainland Europe). Much cheaper still is the supermarket. So for English bitter beer, you pay £5 per pint (568ml) in a club in town centres, £3.50 in a local pub, £2 equivalent for a 500ml bottle, £1.40 for a 4 pack cans and £0.99 for the best offers of 3 x 8 440ml can packs. Therefore, there are many close substitutes without change of brand, though the quality and ambience may not be the same! Higher prices lead to the next best substitute, which is why many choose to drink at home, or on the street, rather than in the more sociable public houses.

6. The UK is a rich country. In spending power (purchasing power parity) is at least 35 times richer than in 1750 (or modern day Ethiopia). In nominal terms at least 200 times richer. Someone on the minimum wage with the proverbial wife and two kids, will have in excess of £1200 per month disposable income. If an alcoholic drinking the cheapest booze – 3 litres of 6% cider (at £1 per litre) a day, they would spend just 10% of their income on booze. At 70p per unit minimum (10ml of pure alcohol) they would see this rise to a third of income. This is the most extreme case. In practice, most problem drinkers consume less and do not get the cheapest alcohol from the cheapest source. There are opportunities for substituting to cheaper forms of alcohol and reducing other forms of consumption.

In its flawed analysis the ASI actually understates the case against the minimum price of alcohol. Any proposed level of pricing would simply be ineffective in reducing alcohol consumption.  It will merely serve to hasten the decline in pubs and drive people down market. Most of the discounting in supermarkets is aimed at getting consumers to move up market, where the larger profits reside. The only effective levels of seriously reducing alcohol consumption would be far above the bounds of political acceptability.

Volokh Conspiracy on VAT in USA

Volokh Conspiracy posts on the proposals to introduce VAT into the USA here.

The essence of the post is that VAT is hidden, so it makes it easy to creep up revenues. Therefore it will not serve to reduce the phenomenal deficits of the USA, but  increase government expenditure. As the cousins over the pond are inexperienced in the workings of VAT, I made two comments.

The first was that VAT (at least in the UK ) encourages the black economy, gives opportunities for fraud and is often a tax on tax.

There are a couple of big issues with VAT here in the UK, that the US should be aware of. (NB the rate is 17.5%, soon to rise to 20%)
1. Small businesses do not pay VAT. The current threshold for registration is around $90,000. Therefore sole traders have a big advantage over larger businesses for decorating, plumbing etc. Due to this cost advantage (on top of avoiding around 35% marginal tax rates for self-employed up to $60,000 per year), the black economy is large. VAT exposes people to the fly-by-night rogues.
2. The UK has a large amount of trade with other EU nations. The Intrastat scheme for dealing intra-state VAT is open to fraud. Criminal gangs have made $m’s through carousel fraud. See http://en.wikipedia.org/wiki/Missing_trader_fraud
3. VAT is charged on other taxes. In the UK the current price of gasoline is GBP 1.13 per litre or $6.60 per US Gallon. With VAT at 17.5%, $1 is VAT, and around 60c is VAT on around $3.20 of excise taxes.

There are a couple of big issues with VAT here in the UK, that the US should be aware of. (NB the rate is 17.5%, soon to rise to 20%)
1. Small businesses do not pay VAT. The current threshold for registraton is around $90,000. Therefore sole traders have a big advantage over larger businesses for decorating, plumbing etc. Due to this cost advantage (on top of avoiding around 35% marginal tax rates for self-employed up to $60,000 per year), the black economy is large. VAT exposes people to the fly-by-night rogues.
2. The UK has a large amount of trade with other EU nations. The Intrastat scheme for dealing intra-state VAT is open to fraud. Criminal gangs have made $m’s through carousel fraud. See http://en.wikipedia.org/wiki/Missing_trader_fraud
3. VAT is charged on other taxes. In the UK the current price of gasoline is GBP 1.13 per litre or $6.60 per US Gallon. With VAT at 17.5%, $1 is VAT, and around 60c is VAT on around $3.20 of excise taxes.

On a comment on how wondering how to calculate the average rate of of tax, pointed out it was irrelevent. In theory the accounting is simple. In practice it is enormously complex.

jmaie, although I do not like VAT, the accounting treatment is quite simple. For any business, they charge VAT on sales and pay VAT on purchases.
It is the detail that creates a mindfield of complexity. The effective rate is superfluous.

The following is for the tax accountants and the insomniacs:-

If VAT is 10%, for a $1000 net sale the entries are CR Sales $1000, CR VAT payable $100, DR Accounts receivable $1100.

For a $500 purchase, then DR purchases $500, DR VAT reclaim $50, CR Accounts payable $550.

The business then pays $100 — $50 = $50 in VAT.

In theory the system is simple. With basic accounting software filling in a VAT form takes 15 minutes a month. The effective rate that is paid is therefore irrelevant.

The complexity comes with the exceptions. In the UK we have zero rate; VAT exempt; (One businesses can reclaim VAT on the purchases the other they cannot); non-reclaimable (e.g. business entertainment); and special rates (especially 5% for domestic gas and electricity).
Indeed, a supposedly simple tax has help manuals about as long as for income tax. So I would expect the accountancy firms in the USA are privately backing VAT introduction.

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