Macro economic prediction and errors

31 October, 2006

I have been looking at this research report from ABARE on their forecasts for different scenarios of Global Warming effects and the cost Australia in terms of GDP. As someone trained in science one thing that I find striking about this is that whereas scientific estimates include some estimate of uncertainty, eg the IPCC’s estimate of the effect on AGW to 2001 of 2C and 4.5C. The forward estimates of GDP do not.

This strikes me as bizarre that no attempt to quantify the error band for GDP estimates is made particularly over such a long time frame. Even over the time period of one year forward we could expect a standard deviation of perhaps +/- 0.5% on the GDP estimates and that is probably generous. Over the 50 year time frame this error (assuming they are independent random errors) would scale to around 3.5%. Given that the differences in the outcomes between scenarios for all but the most punative carbon tax are mostly smaller than this it would tend to suggest that the model isn’t really accurate enough to distinguish between the different scenarios and instead they are quoting false precision.

Perhaps I have missed something and there is some footnote explaining this, or some standard assumption but I can see it and if so can someone please point out the relevant information. More likely I think they don’t want to admit inability of their models to clearly distinguish between different courses of action.

The Stern Review

31 October, 2006

By now its been all over the news and some discussion at other sites. Still for my own and other’s references here I will briefly discuss some things about what it says about AGW. Firstly the full report can be seen here. As well as the full document there are long and short summaries. I hope to get around to discussing some of the meat about emissions markets and so forth later.

The main conclusion can be seen in this extract taken from the short summary.

Climate change will affect the basic elements of life for people around the world – access to water, food production, health, and the environment. Hundreds of millions of people could suffer hunger, water shortages and coastal flooding as the world warms.

Using the results from formal economic models, the Review estimates that if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more.

In contrast, the costs of action – reducing greenhouse gas emissions to avoid the worst impacts of climate change – can be limited to around 1% of global GDP each year.

The policy outlined in the full executive summary advocates three main policy directions as necessary to properly tackle the problem. Carbon pricing, investment in technology and measures to assist in behavioural change including labelling for energy efficiency. I’ve discussed most of these before although I have been less positive about the role of government in the technology investment.
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Congestion Charging

31 October, 2006

Harry Clarke has an interesting piece on the need for congestion charging, how it might be done equitably and the importance of paying for curbside parking in this. I have an excerpt below but I suggest people read the whole thing for themselves.

For pricing to be politically feasible governments must demonstrate that tolls are not a tax grab. Governments must show that all groups are advantaged with efficient pricing. Economists know that with appropriate compensations they can be but this needs to be spelt out to those affected. Tolling charges can be explicitly linked to tax savings elsewhere or to ear-marked infrastructure improvements, such as improved public transport, that benefit transport consumers.

The net benefit of a revenue-neutral switch to congestion pricing roads in the cities stems from the ‘double dividend’ green tax advantages of such charges. Congestion charges yield a revenue dividend but target a social ‘bad’ congestion rather than other taxes which target work effort or savings.

Government plays Enviro-Santa

26 October, 2006

The government announced yesterday $75 million dollars for a 154 MW concentrated solar power plant to be built in rural northern Victoria. Although the Peter Costello claims its going to cost $280 million, the company building the project Solar Systems, say it will cost $420 million. An additional $50 million is being contributed by Victoria. Perhaps PC is talking about the private costs and has missed $15 million?

The company describes the technology like this.

The power station will use technology known as ‘Heliostat Concentrator Photovoltaic’ (HCPV). It will consist of fields of heliostats (sun-tracking mirrors) focusing sunlight on receivers. The receivers house photovoltaic (PV) modules, which consist of arrays of ultra high-efficiency solar cells that convert the sunlight directly into electricity. Photovoltaic literally means ‘electricity-from-light’. The heliostat control system, PV modules and cooling system are patented by Solar Systems.

Solar Systems has collaborated with US company Spectrolab (a Boeing company) to optimise ultra high efficiency space technology for earth based power stations. The resulting photovoltaic cell arrays are three times more efficient than typical solar panels. Further cell efficiency improvements are underway.
This is a new generation of solar technology,” Mr Lasich said. “The secret is to be able to make a solar power module work about 1500 times harder than typical solar panels. If you can do this at high efficiency using low cost materials, you have the recipe for an infinite supply of clean energy at an affordable price. “This new power station will demonstrate these principles and produce the most affordable solar energy yet generated.”

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More on the Guns Study

26 October, 2006

Andrew Leigh’s thread continues to generate interesting comments on the recent study on gun deaths, including this one by Christine where she analyses the data. In particular she examines the log return (ie. percentages) rather than the absolute return which the study focused on, and finds firstly there is close to a break in the trend in 2004 if you consider the log return, and comments that the finding appears to be closer to “there is no definite effect” rather than there “was no effect”.

Don Weatherburn has an op-ed in the SMH where he discusses the study and the effect of the laws saying:

It doesn’t follow, however, that restrictions on firearm ownership should be dropped. The gun buyback may not have had any effect on the rate of firearm homicide but any policy that permitted large increases in the supply of guns in the community could still produce untoward effects.

The Port Arthur massacre graphically demonstrated the catastrophic effects that result when the wrong people get hold of guns. This is dangerous ground and we need to tread carefully.

Also Andrew has another post examining the study’s interpretation of the analysis of suicide by firearm.

Carbon Emission Trading

25 October, 2006

There have been a few interesting pieces around recently on the subject of carbon emissions trading. The first is The Economist (subscription only) noting some of the failures of the European carbon trading market, which has seen prices of CO2 emissions collapse due to the issuing of too many free permits.

In order to get industry to swallow this scheme, allowances were handed out free to companies, rather than being (as economists wanted) auctioned. In power-generation (Europe’s most-polluting industry) companies passed the price of carbon credits on to customers and pocketed the value of the allowances. According to a report by IPA Energy Consulting, Britain’s power-generators alone made a profit of around £800m ($1.5 billion) from the scheme in its first year.

As the article notes, this failure is not a reason to rubbish the idea of emission markets altogether, but it is a good lesson in the mistakes that can be made and the need to either slash the number of permits or auction them off if the scheme is going to be worthwhile.
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The wealthy dead

25 October, 2006

A friend pointed out this new list of the highest earning dead celebrities, and as this article proclaims Elvis has been unseated by Kurt Cobain.

That musicians earn lots after they die comes as no shock, but I am very surprised by number 5 on the list.

Rounding out the top five were Beatle John Lennon at $US24 million ($31.76 million) and groundbreaking physicist Albert Einstein at $US20 million ($26.47 million), whose estate profited from such licensing deals as the popular Baby Einstein educational videos.

You can publish ground breaking work in several areas of physics, win a nobel prize, revolutionise the way we think about space and time and then your decendents make a fortune by lending your name to some children’s educational videos!