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green lite Ergas « Previous | |Next »
December 10, 2008

Henry Ergas's response to the economists open letter to Kevin Rudd commends their initiative in engaging a debate on these issues and says that it takes courage to make proposals as bold as those they recommend, and that courage helps illuminate the choices that lie ahead. Ergas is not persuaded however, as he says that the three key recommendations are unconvincing and, if implemented, are likely to make things worse rather than better.

On the issue that I was concerned with, namely substantial incentives be provided to boost spending on energy efficiency, Ergas says:

The letter claims that firms and households underinvest in energy efficiency, but that claim is controversial. Firms have every incentive to minimise unnecessary costs and there is little evidence that they systematically fail to do so. As for households, some are constrained in their access to credit and cannot finance investments that would otherwise seem worthwhile at market interest rates. However, it is reasonable to believe that what investment funds those households do have are allocated efficiently among competing uses, including energy efficiency. There is, in other words, no market failure reducing household investment in these types of assets relative to other equally durable capital goods.

True, there is no market failure but there is little retro fitting of the existing stock of buildings and little regulation to ensure high standards of energy efficiency in new offices and houses. So energy efficiency is not really happening in a systematic way, even though it is a good way to address global warming. There is a need to introduce energy efficiency standards (green ratings) to inform consumers of the extent of the retro-fit and upgrade of the property they are planning to buy.

Ergas continues:

Given that [lack of market failure] and especially with an emissions trading scheme providing price signals for emissions abatement, it is not clear why public subsidies for household capital spending should be compulsorily allocated to outlays on smart meters, insulation and solar hot-water systems rather than to renovating kitchens, extending patios or painting roofs. After all, once price signals are properly set, subsidising households to reduce their energy use is no more sensible than subsidising them to reduce their consumption of toilet paper, cat food or tinned beans. To suggest otherwise is to attribute a magical status to energy, as if it were uniquely worthy of being economised on. The costs of throwing money at energy efficiency are likely to be compounded by the forced pace of the subsidised spending.

Attributing magical status to energy? The way that energy is currently produced from coal fired power stations is the problem, because it causes greenhouse gas emissions and global warming. This pollution is classic market failure and is the reason for government intervention---- even if the carbon trading scheme has a low reduction target of 10% when it starts in 2010.

Secondly, the public subsidies to reduce energy use is not the equivalent of economising on cat food because we are dealing with market failure on energy usage. Thirdly the point of solar panels ls on roof tops with a feed-in tariff is not to increase energy efficiency; it is to make the shift to alternative forms of energy production that do not cause greenhouse gas emissions.

Making that shift is difficult in Australia because of the market power of the coal fired power stations and energy intensive uses that is being used to prevent the shift to lower carbon economy. They are using their power to look after their sectional interests at the expense of the public good.

| Posted by Gary Sauer-Thompson at 4:59 AM | | Comments (3)


all the economics loses me, but my gut feeling is that Ergas doesn't think much of global warming. He's a sceptic and uses economics to fight it.

I'm patiently waiting for Ergas to write a trenchant economic argument against public subsidies for coal fired power stations, aluminum plants and other energy intensive industries.

Isn't that government interference in the market's efficient allocation of resources?

So why not a an article in defence of creative destruction and letting the coal fired power stations go to the wall. Or an article against the protection of the aluminum industry to prevent it from going offshore. Let the market rule.

The main market failure with household investment seems to be with rental housing, where any linkage between capital expenditure by the owner and additional rental income is loose, at best.

As for the Ergas claim that, "Firms have every incentive to minimise unnecessary costs and there is little evidence that they systematically fail to do so", what a load of bollocks.

You only need to see what happens time and time again when a firm with a profitable track record suddenly makes a loss. People are retrenched, the CEO "resigns", bits are sold off, premises rationalised....

Okay, if all this carry-on is going to reduce costs, why didn't the firm do it years ago so that it would have made even more profit than it actually did?

Most executives and boards respond to serious adversity but initiatives like Woolworths, where for a number of years it has been steadily squeezing costs out of the business and sharing the benefit between shareholders and customers, are the exception rather than the rule.