The Greenhouse Policy Coalition and Business NZ have both managed to make crucial errors in their attempts to play down the massive subsidy from taxpayers to large emitters that is embodied in the National/Maori version of the ETS. And the NZ Business Council for Sustainable Development has said nothing since reporting on 2 November that most Kiwis oppose the plan.

Fortunately, there are a few sane voices out there. Here are four:

Labour members of the Select Committee Considering the Bill:

The process adopted in respect of this bill is the worst that any of us have experienced in our time in Parliament.

…

The Treasury, the Parliamentary Commissioner for the Environment, our independent expert adviser, and the vast majority of submitters are critical of the bill. We uphold their criticisms. The bill significantly dilutes the effectiveness of the ETS, and will have a significant negative impact on the New Zealand economy and environment for many years to come. The bill ought not to proceed.

Simon Terry & Geoff Bertram: Taxpayers 84% Emitters 16%

Rod Oram: A costly exercise in hypocrisy

Brian Fallow: the ETS will cost our children

There has been a view that NZ should not seek to lead on climate change policy, but instead aim at being a “fast follower” so we don’t compromise our economy. I think this is poor economics. Apart from the deniers, we all expect relative prices to change in ways that reflect carbon (and other emission) constraints. The opportunity is to react now, so we have more time to get good at operating in that world.

There was an impressive line-up of speakers: lots of senior bureaucrats and academics from Europe, and Sir Colin (Pine Tree) Meads (left) as after-dinner speaker. Col said his son had converted to organics a while back and while initially sceptical he’d been very impressed with the results.

Its true that locks are not usually selected for their brains, but neither are NZ sheep farmers noted for their gullibility or willingness to break ranks. So it is surely significant that Colin Meads fronted up to speak at an organic sector conference.

Other bits from the event:

• The organic market in the USA has been experiencing double digit growth (18% in 2008) but it looks like 2009 will break this trend and come in at around 7 – 9%. Still damn good in a market where “flat is the new growth“.
• Compared with conventional methods, organic agriculture sequesters much more carbon in the soil, but the science for measuring it is still deficient
• On average, Swiss farmers get 43,000 Euros/year from the state to provide public goods such as a nice landscape, soil conservation, animal welfare etc
• NZ’s organics industry organisation OANZ was lucky to score 3 years of government funding, which has now been cut.

But there may be more to it. The SMH is reporting speculation that Air NZ has devised a cabin fitout that would allow two economy class seats to convert into something resembling a those wonderful lie-flat beds they have in business class.

Because this is a world first, the idea also has the potential to earn millions of dollars for Air New Zealand in export revenue. Its aircraft interior design subsidiary Altitude Aerospace Interiors, set up last year, plans to sell its economy seat-bed design to other airlines.

My conclusion is that it could, if designed well.

My starting point is the idea that we all collectively invest in (i.e. pay) our government(s) and therefore we own/control our governments. TABOR is legislation would regulate the terms of this bargain between we kiwis as investor/owners of government, and our position as beneficiaries/victims of the system of government that results.

Viewed this way, the TABOR idea is similar to price-cap (CPI-X) regulation of natural monopolies, which also involves a bargain between investors and the general public, so lets start there. We can then use the logic of regulated private investment to get an idea of what we should and should not accept from regulated government.

Price (or sometimes revenue) caps are calculated so that the regulated firm has just enough cash to (a) cover essential operating costs and (b) earn a reasonable but not excessive return on capital. Prices are allowed to trend at the rate of CPI inflation minus some efficiency factor X to account for reasonble differences in (unavoidable) cost changes between the regulated firm and the broader economy.

If the regulated firm can be more efficient (i.e. cut costs), it may continue to charge at the price cap and retain the benefit of any cost reductions. So it has an incentive to keep costs down. Then, every five years or so, the model is reset based on current information. The regulator considers and may mandate a one-time price adjustment (which could be down) and a new X factor, and the whole thing kicks off again for another 5 years.

Its an imperfect system for sure, but it has the great benefit of getting efficiency and discipline into what could otherwise be a recipe for rampant profiteering (which has happened) or outrageous waste (which can also happen).

In this utility regulation context we can think of the regulator as procuring services on behalf of the population. It is obviously in our interests for it to be done efficiently. And since the same applies to local government, maybe similar ideas could work.

After all, government is a natural monopoly. Democracy is the process of competition for the right to  govern, but 2 governments at once is a recipe for civil war, which is not an efficient way to compete for power!

Although they are both natural monopolies, there are big differences between a government and a powerlines company. And those differences are very relevant to how you regulate them.

The most obvious ones that matter are service definition and service quality. Unless you can define what is to be provided, and in what quality, it makes no sense at all to regulate prices or revenues. Firms will just redefine/degrade the service to maintain profits without charging high prices.

So if you cap local government rates, you might just get really crappy service. Some would say we already have that, but it could be worse and we need to make sure it isn’t.

Also, investors expect to get their money back. One aspect of the Colorado experiment that would not be tolerated by private investors is the ratchet effect referred to in Wikipedia, whereby if revenues fall due to recession they stay down. I can’t see any reason to have a ratchet.

Another issue relevant to local govt in NZ is that central govt keeps passing it obligations that are costly to manage. There would need to be an allowance built into any TABOR to allow (efficient) costs of this type to be passed on to ratepayers.

Still, if these issues were managed well, the concept could work. It will be interesting to see what (if anything) emerges.

New Zealand performs poorly relative to advanced economies on several of these innovation measures. Our relative performance indicates that we do not yet have the conditions in place to compete successfully.

I’m sure there is scope for improvement, but here are a few reasons to be a bit more cheerful…

First, to the extent that the WEF report makes sense, we’ve done OK, moving from up 4 places to 20th in the world over the last year. Second, all the WEF rankings are heavily influenced by surveys of selected business people, so they’re susceptible to a fair bit of sampling error if not actual bias. Also, for some reason NZ was under-sampled (47 instead of the average of 97 per country). Third, some might quibble with the answers those 47 gave, which among other things result in NZ being ranked in 1st place for

corporate ethics, the strength of auditing standards, and protection of shareholders

I find this a bit hard to square with finance company meltdowns, the Securities Commission’s weakness and  investor protection issues more generally.

Turning to the inferences NZ Institute draws for policy, the list starts out well with this idea

Focus on the requirements for innovative economies where we can make an improvement

But then it rapidly descends into a possibly worthy but very question-begging list that includes:

• Increase the availability of scientists and engineers
• Develop business clusters
• Penetrate more layers of the value chain
• Increase FDI and technology transfer
• Address the brain drain
• Improve hiring and firing practices

After that, I needed something uplifting. So naturally I thought of two NZ entrepreneurs who are doing exactly what we’re supposed to be hopeless at: turning science into business.

First up is Peter Beck from Rocket Lab in Parnell, who (among many other things) is preparing NZ’s first space rocket launch scheduled for November. It is expected to get 100km high.

Second is Glenn Martin from the Martin Aircraft Company in ChCh, which has built and is now selling a functional JetPack.

The punchline seems to be this.

the committee believes that reductions in VMT, energy use and CO2 emissions resulting from compact, mixed-use development would be in the range of less than 1 percent to 11 percent by 2050, although the committee disagreed about whether the changes in development patterns and public policies necessary to achive the high end of these findings are plausible.

Set alongside similarly small agglomeration benefits, these low transport efficiency estimates do not help the case for a compact Auckland. The USA authors do endorse compact urban form policies, but as an article of faith rather than a deduction from their analysis.

All Kiwis have an interest in the economic success of Auckland. For those living here, the reasons are obvious. But even staunch mainlanders, who know in their bones that Auckland sucks, would get more of that wonderful solitude if more of its residents were attracted north by better prospects. So lets assume it’s a common goal. How do we get there?

Many trees have died to produce the reams of reports and submissions addressing this question over the years Mostly it comes back to the same basic prescription: create an environment that attracts highly skilled workers and entrepreneurs. But its much less clear how that should be done.

Agglomeration has become pivotal to this question, mainly because there is empirical evidence that productivity is higher in densely populated areas. So there is now something of a (publicly funded) industry investigating this stuff (example, example, example), and transport infrastructure projects that push people together can get extra points (pdf) in the battle for funding. Even the Royal Commission tipped its hat to agglomeration.

While I am fully on board the productivity express, I have severe reservations over the policy implications that might emerge from the agglomeration industry. To me, the public money being poured into this industry has the look of an ex-post rationalisation of the ‘compact urban form’ notions that have dominated planning documents in Auckland for at least the last decade. Agglomeration is mentioned in passing just once in the regional growth strategy (1999) that underpins regional land-use policy.

Auckland has pursued a compact urban form by preventing development beyond the metropolitan urban limit (MUL), in the hope that doing so will force intensification along corridors and in centres. That outcome would economise on infrastructure and make public transport more viable. But what about the costs: congestion, higher land prices, shortages of industrial land? Are we ever going to have a serious debate about this?

Agglomeration is a by-product of urbanisation, not a reason to force it. Apart from anything else, the productivity benefits are modest and linked to the population of cities more closely than population density of cities. The literature suggests that doubling the population of Auckland would increase productivity by between 3% and 8%. Not huge, and not obvious how much the MUL will influence the outcome.