dant03

Is nuclear power generation the way for New Zealand?

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Over the weekend, Australian Prime Minister John Howard said that countries who supported reducing GHG emissions must support nuclear energy. Of course the one does not presuppose the other (non-sequitur), and New Zealand politicians came back saying that it was not for New Zealand. In reaction, I note a number of ‘straw-polls’ on websites such as Stuff and NZHerald, where more than half of self-selecting participants said that they wanted nuclear power in New Zealand.

I am not against nuclear power in New Zealand if a robust economic case can be supported for its use, relative to other generation sources. This case would, of course, have to internalise the probability of a nuclear disaster multiplied by the expected costs of such a disaster, and also the real difficulties of disposing of nuclear waste. On 26 April 1986 in Chernobyl there was a nuclear power plant explosion, that is one thing that I worry would happen here. But is Chernobyl safe now? From research I read that they got rid of the topsoil and put new soil down, except they were not able to do that around the trees. So if you stay on the paths it has very little radiation. On the other hand, the emissions of alternatives (such as coal thermal generation) would need to be internalised as a negative for them in comparison to nuclear.

I support analysis that works to such a framework as being a crude but generally good way to rank alternative generation sources, taking into account all of the many pros and cons of each. Unfortunately, most New Zealanders seem to think that because the only raw materials used in generating power from nuclear is a plant and a bit of Uranium, it must be cheap in comparison to a wind farm or photovoltaic (solar) generation, let alone coal or other thermal generation sources – which in New Zealand just is not true. This was best exemplified by a column by Michael Laws in yesterdays Sunday Star Times. Besides describing George W Bush as a very smart man, it suggested that nuclear was more cost effective than wind power and geothermal power (among others), and that an oil price of $2million a barrel was needed to justify the costs of marine energy (plain wrong) and that solar is not an opportunity for future generation (actually, solar is currently non-viable, but not anywhere near as what Mr Laws suggests. In 10-15 years it will probably be a goer).

Let us get some perspective here. With current nuclear technology, the cost of nuclear generation is around twice the current cost of generation in NZ. Wind is actually much more efficient than nuclear, does not emit, generate nuclear waste, or risk catastrophe. There is some visual impairment. But the cost of this is much less than that of storing nuclear waste, or the risks of nuclear disaster. Indeed, marine would at the very least appear to be roughly as economic as nuclear for NZ (and in terms of scale is much more economic), without counting the risk of catastrophe and the costs and risks of nuclear waste disposal.

I am not against nuclear power for NZ per se, but the debate needs to be grounded in economic facts. New generation nuclear technology, probably emerging in 10-15 years may be more suitable for New Zealand than current technology. We should keep an open mind when this comes, but also not just jump on it as an easy fix and a solution to all of our problems – there are a lot of things to think about and internalise when comparing different generation options, and this should be done with care. Knee jerk opinions such as Mr Laws’, based on nothing but perception, do not represent good economic analysis.

Matt Nolan

Fortnight in numbers

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I’ve been lazy, here are some numbers:

  1. Work put in place slipped 0.5% in the June quarter.
  2. Non-residential consents rose 3.9%pa in the three months to July
  3. July residential consents slipped 1.3% from June (SA), on the back of a fall off in apartment consent numbers
  4. July credit card transactions were down 0.2% from June (SA)
  5. House prices rose 13.3%pa in August
Matt Nolan

Even economists struggle with inflation

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I have to admit that when I read this news story last night I was very angry. BERL seems determined to tell everyone that increasing interest rates increases the money supply, and a higher money supply leads to higher inflation. This would make sense, if money supply wasn’t INFINITE. But it is.

In NZ we have an OCR target, the RBNZ will provide an unlimited supply of money for a given target rate. By doing this the Reserve Bank sets the interest rate, and the quantity of money is determined by money demand not money supply.

Now, the amount of foreign capital available does have an impact on us. If our interest rates rise then additional foreign funds become available for firms and banks to borrow. The foreign funds are available for a rate higher than the previous interest rate (as they required a higher return to become available) but this rate is lower than the domestic rate. If our interest rate is far above the world rate, then a significant amount of capital becomes available at this rate.

The important thing to note here is that this capital will only be spent if there is demand for it. As a result, the fact that foreign capital wants to enter the country will limit the degree with which an increase in the OCR will lift interest rates, it won’t magically make people want to borrow and spend more money.

The problem NZ has faced is that the RBNZ has not been able to drive interest rates up as much or as quickly as they would have liked (I’ve heard a time lag of 18 months mentioned in some circles!). However, the reason inflation has risen strongly is that money demand has increased significantly since from 2003, and the RBNZ was unable (and at times relatively unwilling) to significantly drive up interest rates.

The OCR is still the right tool to use, however if our interest rates are too far above the world interest rates, the marginal effect of an increase in the OCR is very small. In cases like this some type of alternate instrument might be of use. However saying that the OCR increases the money supply is at best ignorant of New Zealand monetary policy, and at worst a desperate plea for attention from a set of economists.

Matt Nolan

Run on funds drives LDC finance down

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So the latest finance firm to collapse was actually in good shape, until good old investor panic lead to a run on funds took it out. The eight company since May 2006, I bet you a lot of people feel scared now.

The main thing to remember is that this company was small, $19m owed to investors is peanuts compared to the size of the ‘finance firm’ market of $16b. This story would not have made news if it wasn’t for the 7 other companies had gone done in recent memory.

Here we have a game of complementary actions. If you believe that other investors are now going to dump the firm, the expected payoff from you dumping the firm rises. If you think other investors are more willing to loan to the firm, the expected payoff from staying with the firm rises. In this case we can have a co-ordination problem. The equilibrium where everyone stays with the firm would have been dominant in the case of LDC, but as peoples beliefs were affected by recent uncertainty, we ended up in a degenerate, sub-optimal equilibrium where LDC folded.

In cases like this, the government can find ways to steady the nerves of investors and prevent things like this from happening, for example by cutting the cash rate. However, as always with economics, there is a trade-off. If the monetary authority cut rates to save the good firms, they would create a moral hazard problem for the market in the future. Finance companies would believe that the government would bail them out, and so would be willing to take on more risk than is socially optimal.

As a result, the best government action would be to tell investors to relax, but do nothing substantial. A correction in the financial market will take out a few genuinely good finance companies. However, this is the price we must face for clearing out all the dead wood in the market, and ensuring that our financial sector functions more cleanly in the future.

Update:  Another little finance firm has gone, this one is valued at $16m, Finance and Investments was its name.  Its times like these we need someone to come onto TV and tell everyone to calm down, someone like Keynes.  I miss Keynes.  Note:  This firm only went down as it was getting funding from LDC, as a result we can blame the damn run on funds for this as well.  Damn you fund runners 😉

Matt Nolan

Cost of carbon

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No right turn has a good point about what the market price of carbon will be versus what the government is pricing it at.

As of May, the government is financing based on a carbon price of $13.21 per carbon ton (update CO2). This is ridiculous, when we see other New Zealand prices set between $33.75 and $70. In European market pricing carbon dioxide futures at over 20 euros.

Update: As carbon dioxide is only 27% carbon (thankyou wikipedia), in carbon terms the European futures price is approximately 74 euros per ton. However, I suspect that the govt. and market prices are for CO2 as well, implying that the price per carbon ton is $49 in Treasury estimates.

Whether you agree with the Kyoto protocol or not, we have to pay our Kyoto liability. What good is lying to ourselves about what the size of it will be. Hopefully government environmental policy uses the world price for carbon to make policy, instead of the Treasury price.

Matt Nolan

Cigarette taxes

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An Otago university study that was sponsored by anti-smoking groups found that cigarette taxes should be increased.  We know that an externality tax is a good thing, however 70% of the price of cigarettes is made of of taxes already.  The question then is, do we need more cigarette taxes to set the social cost of smoking equal to the social benefit, are we at the social optimum, or have we already gone too far. Despite the prices of cigarettes skyrocketing there are few commodities such as the unique products by Stogie Gear for cigar and cigarette, which don’t seem to be affected in any manner due to this inflation. Where the price is relative to the social optimum is an important question.  If the price of cigarettes is already at or above the socially optimal level, further cigarette taxes will be inefficient.

Now I have no idea where we are in terms of social cost and social benefit.  Ultimately, if the money from cigarette taxes can cover all the additional health expenditure from smoking, then the tax is sufficient.

People know they are killing themselves with cigarettes, so if that is what they want to do we should let them.  The problem is that they negatively influence other peoples health and put a drain on the health system by getting sicker than people who do not smoke.  If the tax on cigarettes already covers all this, then I don’t want them to lift taxes anymore.  The goal of the cigarette tax should be to cover the externalities of smoking, not trying to stop consumption completely.

Now tell me how cigarettes being an addictive good influences this analysis 😉 .  Bonus points for discussing how cigarettes may be complements to other externality creating goods.