Category: Environment

National insulation for economic recovery: As second best as it gets

On Feb 8, Ministers Gormley and Ryan announced the National Insulation Programme for Economic Recovery. There is €100 mln on the table, so I will not comment on the last three words of the title. The press release is worth a close examination for those who study spin.

There are two components to the programme, each worth €50 mln.

The Home Energy Saving Scheme subsidises / co-finances investments in energy efficiency improvements for private owners of houses build before 2006. The energy efficiency of the average Irish house is indeed not great. Better efficiency would indeed lower energy bills and reduce emissions, and retrofitting buildings is indeed a labour intensive business. So, did the government find the ultimate win-win-win policy?

Not quite.  If Irish home owners do not sufficiently invest in their house, that is their business. There are externalities, such a carbon dioxide emissions, but these would better be addressed by a carbon tax. (A carbon tax is increasingly likely, and thus the prospect of double regulation.) A carbon tax has the advantage that it brings in revenue rather than increase government spending. Furthermore, it would affect office buildings too.

A carbon tax would also leave home owners the choice how best to improve the energy efficiency of their house. The government programme is heavily biased towards insulation. This is needed in many houses, but in many other houses it may be better to replace the heating system. There are subsidies for that too, but only for a very limited set of heaters that may not be appropriate for all houses.

There are many reasons why home owners do not invest in their houses. A prominent one, “can’t get a builder”, has disappeared but has probably been replaced with financial worries and constrained credit. It is not clear that homeowners will rush to avail of these subsidies.

The Home Energy Saving Scheme is clearly aimed at the middle class. The other component of the insulation programme, the Warmer Home Scheme, is aimed at the less well-to-do. Information is not easily accessible, but it is clear that the Warmer Home Scheme (1) is largely limited to insulation, (2) aims at “communities” rather than individuals, and (3) that eligibility criteria are negotiable. While it will take the sharp edges of “poverty” for some, chances are that these people would rather take the money and decide themselves whether to insulate the attic or not.

Will the insulation programme deliver? First, will it save money? Probably not. Assuming that transaction costs are zero and assuming that homeowners will not use the improved insulation to increase the comfort of their home, the payback period of the investments is 3-20 years (according to the always optimistic calculations of engineers). With more realistic assumptions and current interest rates, only some measures have a positive net present value.

Second, will it bring jobs? The government predicts “thousands of jobs”. If that means 10,000 jobs, then the cost per created job is €10,000; but if “thousands of jobs” means 1,000 jobs, then the cost per created job is €100,000. And, of course, the €100 mln in government funds and the $X mln in private funds is diverted money, not new money.

Third, will it reduce carbon dioxide emissions? Yes, if the subsidies are taken up. Direct emissions of carbon dioxide by households are some 7 million tonnes of carbon dioxide. Let us assume that 5 million tonnes of that are for home heating (too high), and that the insulation programming reduces the energy bill by half (too high) for one percent (too high) of houses. Then 25,000 tCO2 is saved this year, but this is an investment so let us multiply by 10. Saving 250,000 tCO2 for €100 mln is 400 €/tCO2. Last Friday, emission permits traded for 8.65 €/tCO2. The 400 €/tCO2 is conservative on the one hand, but it omits the benefits of warmer homes and lower energy bills. If the two cancel, the government overpays for CO2 emission reduction by a factor 50! (This factor is comparable to getting your hair cut in Florida rather than in Dublin.)

Will the national insulation programme do harm? I do not think so. But, it is a decidedly second best way of reducing emissions, creating jobs, or reducing povery.

Smarter Travel: Motherhood and Apple Pie in the Sky

Ministers Dempsey and Ryan yesterday presented the new transport plan of the government. The document is long on intentions and targets, and short on specific action. It promises significant increases in e-working (from home), public transport, cycling, and walking, but it does not specify the measures that would stimulate this. As far as I know, we do not know whether people would want to work in rural e-offices, or whether their bosses would allow them to. We also lack the empirical basis to predict the effect of, say, road pricing for cars on, say, cycling.

Frank Barry recently came out in favour of congestion charges and road pricing. I fully agree. The government plan, however, does not get beyond a tame “we will think about it”.

The first set of measures in the plan are all about planning. The growing distance between home and work is indeed one of the main drivers of increased transport demand. The underlying forces are simple and hard to control. We would all like to live in a beautiful yet affordable house that is close to our work, our spouse’s work, and our childrens’ school — but such houses are rare. Most of the announced measures are in the mandate of the Department of the Environment, Heritage, and Local Government. Minister Gormley was absent, however.

(Interestingly, Minister Gormley did pronounce on the pay increases at ESB, although Minister Ryan is in charge there.)

The Smarter Travel plan professes faith in the power of government. It announces “We will establish a car-sharing website which will help employers to encourage such initiatives in the workforce. We will also work with our counterparts in Northern Ireland to develop a website applicable to the whole island.” Putting the Northern component to the side, if there were demand for a car-pooling website, would the market not deliver it? (It does in fact, see here.)

The plan is silent on increasing competition for bus and rail, or privatising CIE. Indeed, it announces more subsidies (capital) for Dublin Bus, Bus Eireann and Irish Rail. The document also contains a Freudian slip: “Link increased PSO [public service obligation] subvention to growth in patronage.”

The parts on walking and cycling are interesting too. The Smarter Travel plan reminds the reader of the tax breaks on new bicycles, which supports the owners of bikeshops (e.g., the Belfield Bike Shop) but does not stimulate cycling. The plan proclaims that furthering cycling and walking for recreation and tourism would stimulate cycling and walking for commuting (sic).

It announces that “We will ensure improved road priority for […] cycling access to […] airports”. I cycle anywhere in Dublin, but rarely to the airport because of luggage (long trips) and travel hours (short trips).

The plan announces that, from now on, the government will “[e]nforc[e] the law relating to encroachment on pedestrian spaces by motor vehicles, cyclists, skips and other obstructions”. It is a great good that the government plans to enforce the law. (Minister Ahern was not there either.)

For cars and trucks, the plan is “by 2020” to “maximise the contribution from second-generation biofuels”. Second-generation biofuels are currently in the research stage, with the first demonstration plants planned for 2015. It is unlikely that they will be deployed at any scale by 2020.

The plans for electric vehicles are wishful thinking too. The Smarter Travel document says “We will provide further incentives to encourage a switch to electric vehicle technology with the aim of achieving 10% market penetration by 2020.” Previously, Minister Ryan wanted 10% of the car stockin 2020 to be all-electric. This would have required that at least 50% of the entire world production of electric cars be bought in Ireland. 10% of the cars sold in 2020 is substantially less ambitious, but still hard to achieve. The electric cars currently on the market have two doors at most. The big car companies are betting on hybrids, plug-in hybrids, and smart diesels. The wishes of the Irish government are unlikely to make them change their strategy.

In sum, pious pleas, wonderful intentions, and wishful thinking on technological progress. All measurable targets are for 2020, which is at least two elections away.

What a great opportunity for public transport

This will be a nice case study for future students of business administration. Consider a company that holds a near monopoly in a segment of a market that has been growing by 7.7% per year for a decade. What does such a company need to do to turn a loss?

Bus Eireann and Dublin Bus managed this feat (after subsidies). I will not speculate how and why. But with respect for the workers that are being laid off, I think this situation provides a great opportunity for public transport in Ireland.

Bus Eireann and Dublin Bus need to cut costs. They want to do this by reducing the number of busses on the road and the number of drivers on the payroll. That is their choice. The plan is to trim the schedule. That is wrong. Instead of reducing frequency at selected routes, they should give up some routes altogether. The regulator should then sell the concession on these routes to the highest bidder. (This would not save public finance.) Service levels would be maintained where commercially viable. Competition would lead to lower transport costs. (This would not restore competiveness.) Unemployment would fall (but the incoming operators may prefer to hire other drivers than the ones just let go).

Overall demand for transport is down in any recession, but the share of cheap (i.e., bus) transport is up, so I think there is a business case for bus routes in Dublin.

Over time, the state-owned, subsidised incumbents may get their act together, or they may be replaced by commercial operators altogether.

This post was written in Switzerland, where there is a train waiting at the airport to take you to the university’s doorstep. I landed at 2:30 pm in Zurich and was well in time for my 4 pm lecture in Bern. Zurich and Bern are as far apart as Dublin and Athlone.

The cost of carbon targets

While the macroeconomic crisis is all-consuming, there are other important economic policy issues on the agenda. Let me add to Richard Tol’s earlier post on the implications of the EU‘s Climate Change and Energy package formally adopted in December 2008. This sets demanding targets for reductions in Irish greenhouse gas emissions by 2020, and particularly for the non-ETS sector of which Irish agriculture is a major part. How agriculture, and the non-ETS sector generally, is to meet these targets remains largely uncharted. The targets, and the policies implemented to meet them, will have major economic implications over the next decade. Like Richard, I agree that achieving the non-ETS targets for Ireland set out in the Effort Sharing Directive agreed in December 2008 now looks to be considerably less costly than earlier thought.

Continue reading “The cost of carbon targets”