The answer is “very”, here.
Month: November 2009
The Government charged the banks €1 billion for the two-year guarantee announced on 30 September 2008. How was this amount arrived at, and does it represent good value for the taxpayer?
According to the Annual Report of the Comptroller and Auditor General issued in September 2009 (available here), the charge of €500 million per year appears to have been calculated as:
{The increase in the cost of funding government debt due to the guarantee}TIMES {The liabilities covered by the guarantee}
The former was set at 0.15%. Liabilities at the end of December 2008, as shown in Figure 23 of the C&AG Report, came to around 345 billion. The product of these two terms comes to around 500 million. (Not an exact match because average rather than end of quarter figures would presumably have been used).
The 0.15% figure comes from the “the advice of the National Treasury Management Agency .. that the cost of funding Government debt would rise as a result of the guarantee by between 0.15% and 0.3%”.
Note that the lower figure was chosen, while many might argue that even the higher value is low, given the extent of the spread over German rates (though part of this is due of course to the budgetary crisis).
Figure 23 of the C&AG Report indicates that the expansion in the Deposit Guarantee Scheme announced on 20 September 2008 (which raised the guarantee per depositor from around €20,000 to €100,000) was not charged for. This would have raised the second term in the equation from 345 billion at end December 2008 to 427 billion. (According to footnote 15, the Deposit Guarantee Scheme is apparently “not regarded as a State guarantee”).
Note also that the charge is based on the cost to the government, not on the value to the banks, which would have been very high. Section 7.23 of the C&AG Report reports however that “account was also taken of the capacity of the covered institutions to pay the charges”!
Minister Ryan has mandated that 4% of transport fuels be renewable from July 2010 onwards. The Irish Times covers the story three times (1, 2, 3).
There are a number of things that strike me. The Department’s press release states that “[t]he obligation will be on the companies in question and at no cost to the taxpayer”. True. The cost will be to the traveller.
The opposition and the farmers quickly noted that biofuels would be mostly imported and called for support for domestic production. That could well violate EU and WTO rules. It would pose a cost to the taxpayer, and make biofuels even more expensive.
The Irish biofuels target of 4% by 2010 anticipates the EU biofuels target of 10% by 2020. It is not clear whether Ireland is engaged in prudent preparation for the EU target, or whether it is marching ahead of the music.
The biofuels target is justified on two grounds. The first is climate change. This is doubtful. A carbon tax would appropriately incentivise biofuels. The biofuels target is double regulation from a climate perspective. It is also not guaranteed that biofuels reduce greenhouse gas emissions. The rules state that biofuel emissions should be at least 35% below the emissions of the petrol or diesel replaced. This 35% per litre of fuel. As biofuels have a lower energy density, the saving per kilometre driven is less than the nominal 35%. More importantly, the nominal emissions from biofuels explicity exclude the nitrous oxide emissions from soils. N2O may turn the climate balance in favour of fossil fuels.
Biofuels may not be produced from crops grown on land that was converted from virgin forests. That rule is pointless. If history is any guide, the Brazilians will put corn on soya-land, put soya on pasture land, and chop down the trees to make way for the cows. (This is because of relative transport costs, not because of EU rules.) The “Sustainability Criteria” ignore such second- and third-order implications.
Security of supply is the second justification for the biofuels standard. Diversification does not necessarily bring security. Four percent is small, and most of the biofuels will blended into petrol and diesel. A shortage of oil would increase the costs of agricultural production, and would have everyone scrambling for biofuels. The correlation between the price of oil and the price of biofuels is so high that diversification brings few benefits.
There is great hope for biofuels, however. We have spent the last 10,000 years perfecting plants for food. We have ignored plants for energy. We can therefore expect rapid progress. The promises of second- and third-generation biofuels are astounding — but not ready for the market yet. The current regulation protects an infant industry at the risk of locking it into outdated technologies.
The crisis has led to a new wave of interest in research that seeks to add financial realism to macroeconomic models: this WSJ article provides an interesting overview.
John O’Hagan writes in today’s Irish Times on the topic of public sector pay: you can read it here.