ANU Economics Showcase Slides

I'm presenting on Thursday in the ANU Economics Showcase. I'll be speaking in the 1:30-3:00pm slot. You can find a draft of my slides here and my abstract over there.

And then a Reject...

Right after getting a revise and resubmit I get a "reject" for my paper "Between Estimates of the Environmental Kuznets Curve". Understandably, referees and editors are unwilling to publish more papers on the EKC and this paper apparently confused people as to whether it was a comment on Vollebergh et al. or a new econometric method for estimating EKCs (it's both) and if it was the latter I didn't apparently do a very good job of explaining why that is justified and worthwhile. I'm going to turn round pretty fast to submit this somewhere else... I also have two revise and resubmits to do...

Revise and Resubmit...

I got another revise and resubmit today. This time for my paper on interfuel elasticities of substitution. The most important point the referees want me to address is the weights I use in the meta-regression. I use the square root of sample size. They would like me to use the standard errors of the parameters from the original studies. However, one referee admits that when the statistics that are being compared in a meta-analysis are complicated nonlinear functions of the original estimated parameters as is the case here this may in any case not be desirable and provides a reference for backing up my view.

For example, some authors only provide standard errors for the original parameters that they estimate, not the elasticities they present, which are already nonlinear functions of the original parameters. In order to derive an estimate of the standard error of the elasticity I need to know the covariance between the parameters (which is almost never presented) or assume it is zero, which introduces another source of error into my study. In any case, my study uses shadow elasticities of substitution, which are share weighted means of the Morishima elasticities of substitution. In many or most cases, authors do not present the cost shares and I calculate them from the authors' parameter estimates. So even my cost shares are non-linear functions of the original parameters.

Does the Natural Resource Curse not Apply in Democracies?

One of my colleagues, Sambit Bhattacharya, has an article out on natural resources and corruption. Their conclusion is:

"Resource-rich countries are often cursed by corruption and governance problems. This column shows that the natural resource curse burdens non-democracies, but countries with better democratic institutions are not corrupted by such endowments. For governments accountable to their citizens, resources can be a blessing."

Democratic countries are mostly less corrupt and they argue that if democracy is established before resources are discovered then the resources do not promote corruption. Maybe that explains Indonesia where democracy has been established only recently and corruption is high.

I've been looking at the relationship between resource endowment and carbon emissions with a couple of other colleagues recently (more on this if and when we get a working paper out). Definitely the economies with large resource endowments tend to have higher and apparently faster growing carbon emissions. Partly this is due to mining being a very energy intensive industry but probably also due to these countries (e.g. Australia) not regulating or taxing resource use as stringently as countries with small endowments. Is this due to a difference in perceptions of resource security? Or is this due to the resource lobby actively preventing regulation? And if it is the latter is that a form of corruption? It's not included in indices of corruption but it is definitely "rent-seeking".

Fenner Presentation Slides

Here are the slides for my presentation at the Fenner School today. Because of the way I set things up to allow me to have an "animation" in a pdf file there aren't actually as many slides as there are pages in this document. But I didn't delete the extra pages because this is my emergency copy if my flash drive fails!

Nigel Jollands

Nigel Jollands, the head of the energy efficiency unit at the International Energy Agency gave a presentation today at the Crawford School. He talked about three main ideas the first of which was the relationship between changes in energy use, changes in well-being, changes in energy efficiency. This diagram is a revised version of his:

The y-axis is the percentage change in well-being, the x-axis the percentage change in energy use. All points on the top left have rising energy intensity because wellbeing is rising faster than energy use and all points on the bottom right falling energy intensity because well-being is not rising as fast as energy use. His point was that people often have preconceptions about energy efficiency, thinking that increasing energy efficiency must mean falling energy use or falling well-being. Neither is the case.

Of course, the whole point of my Hub project is that energy efficiency is more complicated than this and shouldn't be measured by energy intensity

My Fenner School Seminar: Thursday 12th November

As I mentioned a couple of months ago I'm giving a seminar at the Fenner School of the Environment and Society at ANU tomorrow, Thursday, at 1:00pm in the Forestry Lecture Theatre. As usual the slides will go up on the web as soon as I've completed them... I'm still working on model runs to put in the presentation as I wasn't pleased with the results I presented in Darwin. I'll show those results tomorrow and then some of the new ones. I'm also thinking about radically restructuring my Environmental Economics Research Hub project in order to be able to get it done in the time available. I would relegate the structural modeling I discussed earlier on this blog to future research and take a more reduced form approach here. There is plenty still to do on this project including the new obligation of producing a policy brief, which we'll present at AARES.

Review of Prosperity without Growth

Here is a draft of my review to be published in Ecological Economics of Prosperity without Growth:


Prosperity without Growth: Economics for a Finite Planet

By Tim Jackson, Earthscan, London, 2009.

Reviewed by David I. Stern

Usually, I find myself disagreeing with advocates of zero economic growth (defined as non-increasing GDP). First, a large part of the world’s population remains poor by any objective standard and second, I think they have the wrong end of the stick. If the reason that we are concerned about growth is its impacts on the environment we should control resource use and then let the economy determine the optimal level of output within the constraints that are set. And controlling resource use, hard as that has proven to be, is still likely to be both politically and practically an easier goal than somehow directly controlling growth. So, I was a little surprised to find myself agreeing with quite a lot of what Tim Jackson writes in Prosperity without Growth. Jackson is Economics Commissioner for the UK’s Sustainable Development Commission and Professor of Sustainable Development at the University of Surrey.

Jackson draws parallels between the global financial crisis and the looming ecological crisis. Anglophone (and some continental European) economies artificially boosted consumption in recent years by promoting very lax credit standards and low interest rates. Borrowing from the future to fund today’s fun. This irresponsibility, which met its denouement in the credit crunch is matched by the irresponsibility of borrowing resources and assimilative capacity from the future to fund today’s economic growth. In the case of mineral resources and even fossil fuels we could argue that we are developing the technology with which to “pay back” our borrowings but no such argument can be made on biodiversity and habitat loss and the build up of carbon in the atmosphere.

Jackson then reviews the lack of impact of income on national happiness after subsistence needs are met and asks whether growth is still necessary in order to maintain prosperity. Would a zero growth economy have rising unemployment as technology continues to advance (assuming technology does still advance and as implicitly assumed by Jackson in the main text that GDP is produced by a Cobb-Douglas function of capital and labor)? Such an economy will require less and less labor if wages rise. Either wages have to be constant or average hours worked would have to decline. Such an economy could be a utopia or a dystopia depending on which of these dominates and how the reduction in work hours is distributed. Following the lead of Peter Victor (2008), Jackson advocates some regulation of working hours. But, if we restrict the use of natural resources and resources are not good substitutes for capital and labor, as Jackson himself proposes in the Appendix, labor-augmenting technical change (on its own) in fact becomes rather futile (Jackson assumes technological change augments all inputs equally). This is because adding more effective labor to fixed resources has limited results when labor isn’t a substitute for resources. There is then no increasing labor productivity problem to solve. And if resources are good substitutes for labor then there really isn’t a problem with growth per se. Controlling the use of resources would have limited impact on growth and limiting growth would be the wrong focus.

Jackson also highlights the “myth of decoupling”. Though there have been improvements in the energy and resource intensity of GDP in many economies over time, in very few economies have these gains been more rapid than economic growth. Therefore, global energy and resource use and carbon emissions have continued to rise. Decoupling or environmental Kuznets curve effects are the exception rather than the rule. The rebound effect means that a focus on improving environmental efficiency will reduce impacts by less than one would naively think. Neither is there salvation in the service sector – most services are still fairly energy intensive in both their production and consumption. But, in order to achieve the ambitious goal of stabilizing atmospheric concentrations of carbon dioxide at 450ppm by 2050, global carbon intensity will have to decline by an unprecedented 7% per annum from now till then if population and income grow as expected under business as usual scenarios. Put another way, carbon intensity will have to improve 21 fold in the next 40 years. Jackson believes that that is more than can reasonably be achieved and, therefore, growth must come to an end.

Unfortunately, Jackson misinterprets the estimates of the cost of climate policy generated by computable general equilibrium (CGE) models, writing: “The Stern Review famously argued that “the annual costs of achieving stabilization… are around 1 per cent of global GDP.” After mentioning some other estimates he writes: “Though all these numbers look rather small, there’s something very confusing about cost estimates like these: they are already about the same order of magnitude as the difference between a growing economy and a non-growing economy. So if these costs really represent an annual hit of around 2-3 per cent of GDP they would essentially already wipe out growth” (83-84). It is hard to believe, but CGE models actually state that climate policies would cause GDP to be lower by 2-3% in 2050 than it would otherwise be rather than grow at 2-3% less each year. An economy that grows at 2% less each year has GDP that is 54% lower after 40 years.

This is actually a central point. Prosperity without Growth argues that decarbonization with growth is too hard. Therefore, growth must halt. But leading mainstream economics policy models state that the costs of climate policy are very low and, therefore, there is no incompatibility between growth and decarbonization. I suspect that the truth is somewhere in the middle. Moderate cuts in emissions (20-30%) are likely to be very cheap. But once efficiency and fuel-switching options are exhausted the switch to solar and nuclear energy may have much higher costs. Reviewing the parameter values in CGE models, I think that they may overestimate the ease with which consumers can substitute away from fossil-fuel intensive goods and services.
On the other hand, as Jackson points out, growth as we know it looks set to continue the trend to higher resource prices that we saw leading up to the record oil prices of mid-2008. Can business as usual growth continue anyway in the face of rising resource scarcity?

The book is an easy read and despite my disagreements on some points has plenty of substance. There is also much more in this book – discussions of consumerism and governance for example – than I can cover in this review. Jackson rounds off the book with a set of specific policy proposals and a vision of the transition to sustainability. The policy proposals (presumably directed at developed economies such as the United Kingdom) are:

Establishing the limits: caps on emissions and resource use and targets for reduction; green tax reform; support for ecological transition in developing economies.

I wholeheartedly agree with all these suggestions.

Fixing the economic model: Here Jackson proposes a mix of changes to the practice of economics – green accounting and developing an “ecological macro-economics” – and practical measures like investment in green infrastructure and new financial regulation such as the Tobin tax and increasing bank reserve ratios.

Of course, I think ecological macro-economics should be encouraged but I am less enthusiastic about green accounting – more data on the state of the environment is of course valuable but aggregating that data into the national accounts using monetary valuation can give us false indications about sustainability (see Stern, 1997). 100% reserve banking appears to be favored by some ecological economists but is a complete non-starter as it literally means that banks cannot make loans. These are then money warehouses rather than financial intermediaries. Outlawing short-selling and imposing the Tobin tax are likely to make financial systems less efficient. But we should look at limiting the size of financial institutions and regulating credit more tightly again.

Changing the social logic: Policies on working time, inequality, “measuring capabilities”, strengthening social capital, and dismantling consumerism.

If reduced growth in a resource-constrained economy does lead to reduced labor demand we may need new policies to address increasing inequality. Not all societies and individuals will prefer the approaches advocated by Jackson. Limiting employment hours along French lines would drive the more entrepreneurial into self-employment perhaps increasing inequality further. On the other hand, competition for status probably really does result in “positional externalities”. But incentives are more appropriate than blunt one-size fits all regulation.

In conclusion, I think that we should not treat this book as a necessarily correct diagnosis of our predicament and prescription for our future. But it does provide a very thought-provoking research and policy agenda for ecological economists who understand the size of the challenges we face.

References
Stern D. I. (1997) The capital theory approach to sustainability: a critical appraisal, Journal of Economic Issues 31, 145-173.

Victor P. (2008) Managing without Growth: Slower by Design, not Disaster, Edward Elgar, Cheltenham.

EERH Working Paper Statistics for October 2009

We saw an increase in both abstract views and downloads this month over last month. This is the first full month of participation in RePEc - data started being collected midway through September. Only a few papers were included in NEP reports this month (which tends to increase downloads). So these numbers might be representative of the expected performance of the series. We ranked 276th out of 2677 working paper series in October.

Rudd's Speech to the Lowy Institute

In his speech to the Lowy Institute on Friday the Prime Minister lashed out at climate change skeptics but lumped them together with those who agree on the natural science but disagree on the policy response to climate change:

"The opponents of action on climate change fall into one of three categories.
· First, the climate science deniers.
· Second, those that pay lip service to the science and the need to act on climate change but oppose every practicable mechanism being proposed to bring about that action.
· Third, those in each country that believe their country should wait for others to act first. "

The second of these is open to interpretation, but would it include people who oppose emissions trading schemes in general and favor other action? Rudd followed up with:

"The second group of do-nothing climate change skeptics are those who purport to accept the scientific consensus, but in the next breath are unwilling to support any of the practicable plans of action that would actually do something about climate change. This group plays lip service to the climate change science but when push comes to shove refuse to support climate change action. In Australia, these naysayers have successfully blocked the development of an emissions trading scheme for more than a decade."

and:

"The logic of these skeptics belongs in a casino, not a science lab, and not in the ranks of any responsible government. "

Of course, Spash is attacking the ETS from the viewpoint of heterodox not conservative economics and most of Rudd's attack was very specifically against conservatives.

Still More on Spash Case

This from the ABC includes more quotes from Clive.

The Australian Weighs in on the Spash Scandal with an Editorial

Here it is.

AARES 2010 Abstract

I just submitted an abstract for the AARES 2010 meeting in Adelaide. You have till Friday to submit... I also expect to be presenting at the Environmental Economics Research Hub Workshop that precedes it. Here is the abstract:

How Feasible are Developing Country Energy and Carbon Intensity Targets? An Econometric Analysis

Frank Jotzo, Resource Management in the Asia Pacific, Crawford School of Economics and Government, Australian National University
David Stern, Arndt-Corden Division of Economics, Crawford School of Economics and Government, Australian National University and Centre for Applied Macroeconomic Analysis

Abstract:
China has adopted a target of reducing the energy intensity of its economy by 20% in the period 2005-2010 and will likely adopt further targets for 2015 and 2020. At the UN Summit on Climate Change in New York in September 2009, President Hu Jintao announced that China would also adopt a carbon intensity target of so far unspecified level. Other developing economies might also adopt energy or carbon intensity targets as part of the post-Kyoto climate policy regime. Yet the energy intensity of the Chinese economy was essentially unchanged from 2000 to 2007 when a long period of declining energy intensity came to an end. How feasible are the proposed reductions in energy intensity and/or carbon intensity for China and other developing economies? In this paper, we use a production frontier model of energy intensity to decompose energy intensity in a number of major developing economies into input and output mix, climate, and scale effects, and a residual technology variable. A second stage model decomposes the technology residual into the energy efficiency of installed capacity and of new investment and measures the implicit cost of energy efficiency technology in each country. We then evaluate how feasible various targeted reductions below business as usual trajectories would be, assessing what they would imply in terms of changes in the pace of technology adoption or changes in the fuel mix towards lower carbon fuels, and comparing these required changes to historical performance.

CSIRO Doesn't Seem to Understand What Social Science is All About

ABC reporting on the Spash controversy. If the comments here accurately represent CSIRO's position then they don't have much of a grasp about what applied social science and certainly economics is all about. Some more information from Clive was also published in the Australian.

CSIRO Tries to Ban Paper Critical of Emissions Trading

Just got back last night from the ANZSEE conference in Darwin (yeah we went to Kakadu too) where I saw Clive Spash present the paper in question that CSIRO have tried to ban from publication. From the presentation the paper is just a long list of different criticisms of emission trading schemes, none of which were new to me and not all of which I really agreed with. Most cogent is the issue of how reliable so-called offsets are. Do these schemes to reduce carbon really result in people doing carbon sequestering or emission avoiding things they otherwise wouldn't have done and how sure can we be that carbon really is really being sequestered or avoided. Standard criticisms. I put it to Clive that any real world carbon tax would likely end up with a heap of exemptions and credits generated under a tax are not necessarily any more reliable. So is he suggesting we should just regulate or what. He said that all he is asking is that we should think more about these things when designing the scheme.

At the conference I commented that if he worked for the Treasury he would have been fired instead. But if it is true that: "under the agency's charter scientists were forbidden from commenting on matters of government or opposition policy" how can social scientists at CSIRO do any meaningful research in policy areas? Isn't policy evaluation part of what the agency should be doing? Apparently not.

ANU Economics Showcase

Here is my presentation for the ANU Economics Showcase - a two day event that presents the range of ANU research to potential students, members of the public service, other ANU economists, and the general public (i.e. anyone who wants to come along :)). The showcase is on 25th and 26th of November. I'm scheduled for 26th November in the session from 1:30-3:00pm.

Signals or Noise? What Does Meta-Analysis Tell Us About the Reliability of Individual Econometric Studies?

David I. Stern

Arndt-Corden Division of Economics
Environmental Economics Research Hub
Centre for Applied Macroeconomic Analysis

Econometric studies can appear to be well conducted by the usual standards of the economics profession but still not provide results that can be relied upon for theory or policy purposes. The technique of meta-analysis can combine the results of many individual studies to provide more reliable results. I illustrate these points using a meta-analysis of more than forty studies of inter-fuel elasticities of substitution – a measure of the difficulty of switching between different fuels and electricity in production. These studies show a very wide range of values for any given elasticity. This dispersion of values reduces as the sample size of the original studies increases. This shows that to get reliable results we either need a very large sample or conduct a meta-analysis of existing studies. The results also show that the type of data – time series, cross section, or panel data - and the type of regression model used have a very significant effect on the estimated elasticities. This shows that we also need to have a good understanding of econometric theory in order to select an appropriate estimator.

ANZSEE Presentation Slides

Here are the slides for my presentation at ANZSEE in Darwin on Wednesday. I only have 20 minutes to talk including questions so I'm going to have to cut something here. But thought I might as well put everything up for now. I'll be giving a longer version at the Fenner School at ANU on 12th November. Also coming up this month is a presentation at the ANU Economics Showcase 2009. I will be talking about the effect of sample size and estimator selection on what we think we know about economics - i.e how useful meta-analysis can be.

P.S. 11:45pm
I just cut a bunch of stuff out of my presentation for ANZSEE including all the early stuff about the EKC and put the shorter version up on the web.

Energy Intensity Again

There is a stronger relationship between energy intensity of GDP and GDP per capita when you plot both of them using ordinary exchange rates rather than purchasing power parity adjusted exchange rates:



I think that the relationship is mainly due to the tendency for currencies to overvalued relative to purchasing power parity in most wealthy countries and the reverse in poor countries rather than any real energy related behavior.

Levitt Hits Back

Steven Levitt hits back at his critics in this new post in the NY Times. The post is a bit revisionist I think as to what exactly is in the chapter in Superfreakonomics. The tone of that chapter is clearly that carbon taxes or cap and trade won't work (for unclear reasons) and, therefore, we need geoengineering. This post places geoengineering as a method for quickly cooling the Earth (which I agree could be a useful tool in our toolbox). And I found myself mostly being able to agree with what he wrote until we come to:

"But that is not the question that Al Gore and the climate scientists are trying to answer. The sorts of questions they tend to ask are “What is the ‘right’ amount of carbon to emit?” or “Is it moral for this generation to put carbon into the air when future generations will pay the price?” or “What are the responsibilities of humankind to the planet?”"

That may be true to some degree but the main question most of us are asking is "What is the best long-term solution to the global warming problem?" Geoengineering can only be a short term fix. It reduces the sunlight that plants need for growth and does nothing to address ocean acidification (I'm a bit skeptical that the latter is as bad as most people make out but it certainly isn't a good thing). But if the ice sheets melt too fast while we try to get carbon emissions down, geoengineering may well be an appropriate response...

World Values Map

I was visiting the World Values Survey website in the process of collecting more data for my EERH project.Thought I'd post this fascinating "map" from their homepage:



Not surprisingly, the English speaking countries (sorry Quebecois) are found grouped together. I found this was also the case for levels of sulfur abatement technology. Similarly the Germanic or Protestant countries occupy a common zone and Japan isn't far removed, ditto. Mediterranean Europe is also tightly grouped (with the exception of Portugal), ditto.

Israel isn't that different to Italy or Greece. That makes a lot of sense to me.

Quality of Economics Research Funded by the ARC

The ARC has carried out an evaluation of the citation impact of the publications derived from ARC funded research. The main finding (full report on ARC website) is that ARC funded publications receive more citations than other Australian publications and other global publications. That is good, but it is hard to have an intuitive sense I think of what the Australian or global averages are. So I looked at the data for economics to get a better idea. The ARC counted the number of publications and the number of citations received by them in the Web of Science from 2001-2005. This means that the average publication had two years in which to receive citations.

There were 202 ARC funded publications which received 320 citations in the period. This is, therefore, an impact factor of roughly of 0.79 (i.e. 0.79 citations received per year). There were 1311 other publications from the university sector receiving 1569 citations for an impact factor of 0.60.

Referring to ISI's "Journal Citation Reports" economics journals with a two year impact factor of 0.79 were ranked 93rd out of 209 economics journals. Kyklos has the closest score. Economic Development and Cultural Change, Review of Income and Wealth, Quantitative Finance, Cambridge Journal of Economics, and Journal of Economic Dynamics and Control are examples of other journals with close scores.

An impact factor of 0.60 resulted in a rank of 133rd out of 209. Canadian Journal of Agricultural Economics is closest. Journal of Economic Issues, Journal of Macroeconomics, Geneva Risk and Insurance Review are some of the journals in this neighborhood.

I think this gives a more intuitive understanding of the quality of average Australian and ARC funded research in economics.

Pedigree Bias in Economics

At least anecdotally I think it is true that economics has a pedigree bias. Good departments tend to hire people from a limited subset of top schools. This is just as true in Australia as in the U.S. There are very few ANU economists who don't have a PhD from either a reasonably decent or even top U.S. school, a top British university (few if any less senior people) or ANU itself. The bias in geography, environmental science etc. certainly seems to be much less. When I went to grad school I wasn't aware of such biases at all. If I'd followed the advice of my masters' adviser (Department of Geography, London School of Economics) I would have applied to a top U.S. economics department. But as my undergrad alma mater wouldn't have accepted someone with as low a GPA as me in economics to do a masters' degree even (my third year undergrad GPA in econ was 90% or so but the first two years were a lot lower; my geography GPA was more than 90% in each year) I didn't think I stood a chance of getting a funded place. So I headed to geography. Again if I had been more aware of "pedigree" I probably would have headed to Ohio State (which made me an offer I didn't take up at the masters' level) for my PhD and wouldn't have been exposed to ecological economics at Boston University.

Climate Sensitivity and Expected Temperature Increase

My response to C S Norman questions' about yesterday's post was getting so long I decided to turn it into a blog post.

The climate sensitivity is the expected temperature increase for the equivalent of a doubling of carbon dioxide in the atmosphere from the pre-industrial level of 280ppm to 560ppm. My understanding is that the confidence interval (the expected range about which we can be 90% or 95% confident say that the actual temperature increase will fall within that range) is still very wide and research hasn't managed to narrow it signficantly. Mean or mode expected changes in temperature have edged up in recent research as more historical data is examined and more feedbacks incorporated in modeling.

This situation explains a couple of things:

1. The attention given to Martin Weitzman's research which focuses on the potentially catastrophic impacts of the upper tail of the distribution of temperature changes. The deterministic cost benefit approach of Nordhaus and other economists who hated the Stern Review doesn't really address the correct problem at all. See also my post on who should win the Nobel Prize for environmental economics.*

2. The new emphasis on lower concentration targets like 350ppm and 450ppm of carbon dioxide equivalent rather than the formerly popular 550ppm. Even if the mean climate sensitivity was 3C there is a 50:50 chance that temperature would rise more than that likely resulting in the melting of at least the Greenland Ice Sheet among other impacts.

How can we relate climate sensitivities to expected temperature changes at any point in time? You can't just halve the climate sensitivity for a 50% increase in CO2, because:

1. Radiative forcing - the direct effect of carbon dioxide on the heat balance of the planet - is logarithmic in the increase in CO2. So a 50% increase in CO2 has more than half the effect of a doubling. A quadrupling has double the effect of a doubling etc.

2. Temperature changes very slowly in response to changes in radiative forcing. This is mainly due to the need to heat up the oceans which can store far far more heat than the atmosphere. In my model, the equilibrium climate sensitivity was 8C but, in an experiment that increases the CO2 concentration until doubling is reached, the temperature at the point of doubling had increased by less than 2C (this is known as the transient climate response). This is one of the factors that makes estimating the climate sensitivity from historical data very difficult.

Here is a chart from an IPCC report that illustrates this point:



For the doubling of CO2 scenario under a climate sensitivity of 3.5C, temperature had increased by 2C at the point of doubling. Even after 500 years the equilibrium increase hadn't been attained in the 3 layer GCM (global circulation model) simulation (red). The green curve is for a GCM with just a shallow ocean component and no transport of heat to the deep ocean.

This slow approach to equilibrium does have a positive implication - we can probably overshoot our desired long term concentration without too much damage if we can then bring concentrations back down again. For example, hitting 450 or 550ppm at 2050 and then bringing concentrations down to 350 or 450 by 2100. But this would probably require geoengineering of some sort.

* After Ostrom won the prize I wouldn't expect another one for environmental economics for a few years...

The Climate Sensitivity is Probably Really High

I'm not surprised by the trend for recent research to come up with higher values of the climate sensitivity - the change in temperature in the long-term for a doubling of atmospheric carbon dioxide. The piece I linked suggests that current levels of carbon dioxide are associated in the long-run with 25 to 50m higher sea levels, though we do need to be cautious in basing current predictions to paleodata for a world where the continents and oceans were configured slightly differently. My research found climate sensitivities in the range of 4-8C depending on model configuration. I gave up on publishing the second paper though in the climate literature and decided to focus on energy economics. It's hard to keep up to date in too many fields at once...

Freaking Out About Superfreakonomics

Around the blogosphere there seems to be quite a bit of freaking out about the about to be released book Superfreakonomics going on. Specifically, about Chapter 5 on climate change. Joshua Gans has a nice set of links to some of the comments and there is some response by Dubner here.

I'm not too surprised by this. I was never that impressed with Freakonomics. Reading through this chapter one of the problems is that they try to cram in way too many points without any or sufficient explanation. But mostly it is just a jumble of half-baked ideas the economics ones just as bad as the natural science ones. For example, the discussion of externalities and Pigovian taxes talks about compensating the victims with the revenue and rather a mixed up discussion conflating individual choices and the choices of countries... Maybe they could have done a better job on the latter with more space... And then they describe Mount Pinatubo as generating "positive externalities"! More appropriate terminology would be simply "economic benefits".

Given this I don't think anyone should be reading Superfreakonomics to learn anything about economics either.

Ostrom 12th Most Cited Book in Ecological Economics

According to the paper I coauthored with Bob Costanza (and Chunbo Ma, Brendan Fisher, and Lining He). One of her papers published in the journal also ranked in the list of the most cited papers published in the journal but was only ranked 52nd. Of course, our data end before 2004.

Looking for Academic Economics Jobs in Australia

In the past not many foreign institutions advertised on the American Economic Association's jobs website JOE. But this seems to have changed and now most leading Australian universities are advertising there. Not all these positions appear to be advertised on UniJobs, which I think is the leading Australian academic job site.

I've had a couple of recent discussions with people looking to do PhDs from around the world recently. I tried to convince them that if they want to work in Australia they need to either do a PhD in Australia (at a Go8 university) or do a PhD in the US. These are the two markets Australian universities are recruiting in. Not Britain or Sweden or anywhere else in Europe...

Rich Howarth Seminar at ANU: 4th November

Speaker: Richard Howarth, Pat and John Rosenwald Professor, Dartmouth College, Editor-in-Chief, Ecological Economics

Topic: Uncertainty, Ethics and the Economics of Climate Change

Abstract: Climate change is a long-term, complex problem that involves fundamental uncertainties. As such, the evaluation of climate change policies depends critically on the links between time preference, risk aversion, and the perceived rights of future generations. In economics, these issues are often addressed using models that assume high rates of time preference and low risk aversion. Such models support only modest reductions in greenhouse gas emissions. This presentation, in contrast, will argue that aggressive climate stabilization policies are justified on two separate grounds. First, people reveal high rates of risk aversion in real-world market decisions. Accordingly, reducing climate risks provides highly valuable economic benefits. Second, failing to stabilize climate would impose large, uncompensated costs on future generations. This violates the moral premise that future generations are entitled to protection against uncompensated, potentially catastrophic harms.

Time & Place: 4.30pm, Wed 4 Nov, Innovations Building, Eggleston Road.

Drinks and nibbles afterwards, 6.00-6.45pm

Paul Romer on Elinor Ostrom and Crucial Assumptions

Paul Romer makes some interesting comments on Elinor Ostrom's Nobel Prize win. He points out that many or most economic theories depend on what he calls "skyhooks" - what I called "crucial assumptions". According to Romer assuming that people follow rules is a typical "skyhook". Rather than assuming that people would follow rules, Ostrom tried to understand where the rules came from and why they worked or didn't work. Well, I think you must have some assumptions in your research. But they should be as innocuous and reasonable as possible.

Rather a contrast to Steven Levitt's comments for example. Let alone these guys :). Of course I've heard of Ostrom. My "Ostrom number" is 2.*

Peter Martin, who supplied the link to Romer, also has a more humorous take.

* She has coauthored papers with Bob Costanza.

Ostrom and Williamson Win Nobel Prize

After much speculation:

"The 2009 The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel goes to Elinor Ostrom "for her analysis of economic governance, especially the commons" and Oliver E. Williamson "for his analysis of economic governance, especially the boundaries of the firm."

Williamson was mentioned but Ostrom is a surprise. At 1:04 European Central Time someone had already updated Wikipedia to mention that she had won the Nobel Prize!

Of course, Ostrom is the first woman to win the Nobel Prize in Economics. Ostrom's most cited book has around 7,300 citations on Google Scholar and her h-index is around 73 or so. So she easily meets my criteria for predicting winners.

A Statement of Your Most Significant Contributions to this Research Field

I have to write this for the grant applications I'm planning on filing early next year. Usually, in job applications you have to write about your current and planned research. But this is different and a bit weird. It feels a bit like I'm writing my own obituary :)

For U.S. grants you just send them your (condensed) CV. Australia is much more into giving money to individuals than for specific topics. I once had to write a "scientific autobiography" for a job I applied for in Israel. That was the same idea more or less.

Omitted Variables Bias in Estimating the Rate of Global Warming

There has been a lot of discussion in the media and blogosphere of a supposed cooling of the global climate since 1998 that is being pounced upon by climate change sceptics. This supposed trend is almost certainly not a statistically significant break in the warming trend. Real Climate points out that whether you see a cooling effect or not depends on which data series you use. Apparently the Hadley data series is missing data from the parts of the Arctic where the most warming has been occuring:



The image shows the difference between the average temperatures in 1999-2003 and 2004-2008.

But the atmosphere is only a small part of the total heat budget of the planet. An excellent blog post from Climate Progress explaining the importance of the increase in ocean heat content in understanding global warming. These charts show the increase in heat content of the oceans till 2003 and from 2003-2008:





Climate Progress dramatizes this data nicely by pointing out that the ocean is warming at the rate of 190,000 GW... If you try to estimate the trend in atmospheric temperature while ignoring this massive storage of heat in the ocean you may fall victim to the classic econometric problem "omitted variables bias". When you estimate a regression model omitting some important variables that are correlated with those that you include in the regression your estimates of the effects of the included variables will be biased.

I wrote two papers on this topic. In the papers, I showed that taking into account the build up of heat in the ocean resulted in much higher estimates of the sensitivity of global temperatures to increases in greenhouse gases than when you just use atmospheric temperature to produce an estimate. Also, that just looking at the atmosphere you will estimate that temperature responds very fast to increases in greenhouse gases and that after just a few years the adjustment to a new equilibrium temperature is complete. These are symptoms of omitted variables bias.

Nobel Prediction Market

Here is a prediction market for who will win the Nobel Prize in Economics. My original pick, Robert Barro, is marginally leading, and all the other suspects are on the list.

I'd really like William Baumol to win it. My friend and colleague Astrid Kander wrote an interesting paper related to one of Baumol's ideas. Baumol gave her some good comments on it. Actually it was a chapter in her dissertation which I encouraged her to submit to Ecological Economics. She argues that the shift to a service economy is something of an illusion. The prices of services rise relative to those of manufactures over time and so the share of manufacturing in GDP falls over time. But this doesn't mean that material production as a share of GDP is falling when we use constant prices instead. Also, just as productivity growth in manufacturing is more rapid than in services the rate of increase in energy and environmental efficiency is more rapid in manufacturing. Therefore, it seems that emissions fall due to a shift to services but to some degree this too is an illusion.

IEA Lowers Projected Carbon Emissions

A New York Times article about an IEA report on future carbon emissions. They are lowering projections due to slower growth worldwide and Chinese efforts to reduce energy intensity. I've been thinking the same thing myself. I didn't buy into the Garnaut Review's idea that business as usual emissions would rise faster than the IPCC previously expected. Though the problem now is distinguishing between business as usual and "business unusual". Is China going for renewable and nuclear energy to reduce imports of fossil fuels and local air pollution or because it expects to eventually to be subject to binding restrictions on greenhouse gas emissions? Or because it wants to be a leader in selling the technology to the rest of the world? All of the above, I think.

Who Will Win the Nobel Prize in Economics? Update

Back in August I discussed who might win the Nobel Prize in Economics to be awarded on Monday. My pick then was Robert Barro as the most cited and not so controversial economist who had not won it yet. Others are now weighing in. Here are my comments on these suggestions:

Ernst Fehr Possible, though Kahnemann won the prize not that long ago.

Matthew Rabin Too young.

William Nordhaus Possible, though I don't consider his climate change economics work to be very deep.

Martin Weitzman I prefer him to Nordhaus, though on citations he is marginal as a Nobel Prize winner but could happen.

I also heard Nicholas Stern mentioned at lunch today. Until his recent work on climate change his citation record hasn't been at Nobel Prize level. And he only got into environmental economics in this recent period.

My pick for an environmental economics winner is Partha Dasgupta. Maybe Weitzman and Dasgupta?

All the macroeconomists mentioned are potential winners. But Gali (PhD 1989) seems too young. Gertler or Taylor is possible. Robert Shiller or even Nouriel Roubini are outside chances.

Marginal Revolution suggests Williamson and Tirole. They're possibilities too. This could be a pick if the committee decides against being topical. So this is my shortlist: Barro, Gertler, Dasgupta, Taylor, Tirole, Weitzman, Williamson.

P.S.
Note that the Fehr and Rabin, or Nordhaus and Weitzman, or Taylor, Gali, and Gertler prediction is from Thomson Reuters. They didn't get the Physics or Chemistry prizes right but they did guess the Physiology/Medicine Prize.

Environmental Economics Research Hub Research Reports Monthly Report

As I previously blogged, the Environmental Economics Research Hub Research Reports are now included in RePEc. Each month RePEc calculate how many abstract reviews and downloads each paper, author, and series got. You can track the downloads for EERH here. We got 157 downloads in our first month. Some caveats:

1. It's only a partial month.

2. All our papers were featured in NEP Reports and so had heightened visibility this month. NEP, New Economics Papers, is one of the RePEc services that helps get your paper seen in the research community.

3. We certainly had more downloads than this. Only downloads through RePEc services are counted and many of those are filtered out to circumvent the effects of web indexing robots and cheating.

To see how often individual papers in the series were downloaded check the ranking page.

Energy/Capital Ratio

There doesn't seem to be much of relation between energy intensity and GDP per capita. But this chart shows that there is a relationship between energy per dollar of (estimated) capital and GDP per capita:



The points off to the top right are mostly oil producers. Apart from those points there seems to be a clear downward trend. High income countries use less energy per dollar of capital than poor countries do. Some poorer oil producers (e.g. Libya and Algeria) also have very low energy/capital ratios. These countries have invested a huge proportion of GDP each year and so supposedly have a large capital stock but have little to show for it in terms of increased output.

In a so-called "putty-clay" model, improvements in energy efficiency can only be implemented by investing in new, more energy efficient, capital goods. Once that equipment and infrastructure is in place, energy use is pretty much predetermined. So in countries with less energy efficient installed capital energy use per dollar of capital will be higher and vice versa. Intuitively we'd expect high income countries, ceteris paribus, to have higher quality capital installed and, therefore, lower energy use per dollar of capital.

Technical stuff :): It is also attractive to try to estimate a model for the energy capital ratio rather than energy intensity for econometric reasons. Given the putty-clay theory, capital per capita and the level of energy efficiency technology are highly correlated. If we run a regression where energy intensity (energy per $ GDP) is on the LHS explained by RHS variables that include capital, the unobserved state of technology will be correlated with the capital variable on the RHS leading to biased estimates of the parameters. Shifting capital to the LHS of the equation gets rid of this potential (and actually very problematic) source of bias. The challenge is now to come up with a theoretically rigorous model of the E/K ratio...

Fenner School Seminar: 12th November

I'm giving a seminar at the Fenner School on November 12th. It will be an expanded version of the presentation I'm giving at ANZSEE in Darwin. Here is the abstract:

Modelling Global Trends in Energy Efficiency

This seminar reports on ongoing research in the CERF Environmental Economics Research Hub funded project: “Modelling the Global Diffusion of Energy Efficiency and Low-Carbon Technology”. The environmental Kuznets curve has been a popular simple model of the relationship between economic growth and environmental quality. It is plagued, however, by significant econometric issues and explains relatively little about the differences in emissions between countries. The between estimator is a simple consistent estimator of long-run coefficients in panel data that avoids these issues and performs well in real world situations. I apply the between estimator to both environmental Kuznets curves for carbon and sulfur emissions and a more sophisticated production frontier model of energy efficiency. The latter model explains differences in energy efficiency across countries in terms of differences in input and output mix, climate, and differences in the level of energy efficiency technology. The residuals from this model are the underlying trends in energy efficiency technology in each country. In the final part of the presentation I will show how a social choice model can be used to explain differences in environmental technology across countries.

Drew Jones' TED Talk

Cool graphics (via Climate Progress) showing the relation between various emissions scenarios and atmospheric concentrations of greenhouse gases:



The results of my poll said that emissions would be the same in 2050 as today. You can see the results of continuing that until 2100 at around 9:20 in the video - 600ppm in 2100. Certainly better than supposed business as usual but still way too high. But I think that even if emissions in 2050 were similar to today they would come down strongly in the second half of the 21st century.

Energy Use per Capita

Yesterday I showed you a chart of energy intensity vs. GDP per capita. There didn't seem to be much relationship in that data. Today we have energy use per capita and GDP per capita:



Here there is a clear relationship. Unfortunately, for environmental Kuznets curve advocates it is pretty linear. Energy use is a first order proxy for environmental impact. For example, solar energy might be cleaner than fossil fuel energy but collecting solar energy requires taking up space (and views) to collect the energy and something environmentally disruptive is going to be done with that energy. First it is taken out of the natural ecosystem and second it is directed to moving matter around in other ways. There is no free lunch. Economic activity has environmental impact. Of course there are more disruptive and less disruptive activities and energy sources but they are all disruptive.

So don't worry about calculating "ecological footprints", just look at energy use.

Energy Intensity

Now I've put my database together we can have a first look at the data:



Energy intensity is energy in terms of kilogrammes of oil equivalent per dollar of GDP using purchasing power parity adjusted exchange rates in 2005 prices. There are 3663 data points. There certainly doesn't seem to be any simple relationship between the level of income and energy intensity. On the other hand we can see some clear downward trends in energy intensity in individual countries. The goal of my project is mainly to explain the differences between countries that we see here though not ignoring the causes of changes in energy intensity within countries.

UN vs. World Bank Data

I've finally put together the main database for my Environmental Economics Research Hub project on energy efficiency and carbon emissions. I have full data on energy use (by fuel), structure of the economy, GDP, investment, schooling, climate, emissions etc. for 99 countries for the period 1971 to 2007. For my 2002 paper on explaining sulfur emissions I only managed to put together data for 64 countries (for only 18 years), so I'm pretty happy with that.

Initially, I was going to use the World Bank Development Indicators for the economic structure data. However, this data has lots of missing years for many countries. I then discovered that the UN has freely downloadable data for 1970-2007 for most member countries. This data is split into seven industrial sectors vs. only four for the World Bank data. In the end, I am not using any data from the WDI in the first stage of this project.

IEA Data at the National Library of Australia

International Energy Agency data is essential for serious global energy research but is very expensive. The full database costs E1400 ($A2,400) per year. If you only need a small amount of data you can purchase a "datacard" but it's still expensive. In my previous position at RPI I purchased data when necessary using research grants. But Paul Burke told me that the National Library of Australia has a subscription to the data and that as long as you go in person to the library you can download anything you want for free. So I went there yesterday and downloaded all the data I need. You can get to the data from the SourceOECD website and select "IEA Databases" from the pulldown menu. Visiting different libraries to access data sources used to be a big part of the kind of research I do but with electronic access I don't find myself doing too much of it anymore...

Gilles Saint‑Paul

Gives a somewhat more modest response to the British internal critics of mainstream economics than John Cochrane did to Paul Krugman. Maybe that's because he is a European? :)

Ranking Economists by Blog Popularity

The Eastern Economic Journal is publishing a paper about ranking economists by blog popularity. That's not something I want to catch on too fast! :) Reasonably popular blogs like Environmental Economics, Core Economics, and John Quiggin rank between 400,000 and 900,000 in Alexa rank. I have a long way to go.

Response to Paul Krugman

Via John Quiggin, a response to Paul Krugman.

ANU's 21 Future Fellows

ANU won 21 ARC Future Fellowships, second only to the University of Melbourne which won 25. ANU has now published the list of the future fellows and their research topics. I am surprised that all but one of them (Thomas Huber) is already a member of the academic staff of ANU. I would have expected to see more people who wanted to use the fellowship to come to work at ANU from other institutions.

EERH Research Reports Join RePEc

Everything is now complete and debugged and the Environmental Economics Research Hub Reports are now included in the RePEc database. The papers will be included in the IDEAS and EconPapers search engines and other RePEc services.

This will provide much greater visibility for our working paper series in the worldwide economics community. RePEc has around 21,000 registered members and even more users. The RePEc database currently catalogs 3/4 million working papers and journal articles and has more than half a million items downloaded and more than 2 million abstracts viewed each month.

I strongly recommend all economists who are not yet members of RePEc to register. Registered members have searchable profiles online and receive monthly reports on downloads of their papers and other ranking statistics. In order for downloads to be included in your RePEc ranking, readers must download the paper through one of the RePEc services. I recommend always providing links to your papers (like this) through RePEc services when referring to them online.

Penn World Table vs. World Development Indicators

Today, we had a presentation from Prasada Rao of University of Queensland on the theory of constructing international comparisons of income. He also covered some more practical aspects concerning the recent new international price comparison benchmark - ICP 2005. As everyone knows, the prices of identical goods vary across countries as exemplified by the Big Mac Index. But actually constructing more serious indices using baskets of many goods is very hard. The most recent estimates for China reduced estimated GDP per capita in China by around 40% compared to previous projections based on earlier benchmark studies. The reason was that the benchmark study conducted price comparisons only in the regions of 11 major cities, which has been argued to result in an artificially high price level on the basis that the price of many goods may be cheaper in smaller cities and the countryside. Higher estimated prices mean that a given US Dollar value of GDP is actually really worth less than if prices had been estimated to be lower in China. An alternative explanation put forward by Peter Warr was that projections of the inflation in the prices of non-traded goods in China that had been used before the new study were wrong. It's likely that both arguments are correct to some degree.

So what data should applied researchers use at the moment? The latest World Development Indicators is based on the 2005 benchmark survey and with the exception of the issues with the Chinese data is probably superior to previous estimates. But the data (on PPP) only go back to 1980 and they just use the economic growth rate in local currency units to project back from the 2005 benchmark. The Penn World Table Version 6.3 does not yet use the 2005 survey results. They promise to bring out Version 7.0 incorporating those results by the end of 2009. PWT data go as far back as 1950 in some cases. Given this I'm going to be using PWT data where possible in my current work.

The Garnaut Review One Year On

Ross Garnaut gave a presentation to a totally full theatre at Manning Clark Centre at ANU yesterday evening, reviewing his Review and the responses to it in the last year. From what he said he pretty much anticipated what would happen especially regarding the lobbying by business for free permit allocations (after all he's chairman of a mining company himself). Still he said that the government's allocation of compensation followed no principle whatsoever. He didn't address the delays in implementation and oddly no-one asked about that either. He did say the legislation "could be passed in a joint sitting of Parliament". That was typical indirect Garnaut humour. Another good one was that "some of Frontier Economics' other work is very good".

I found myself agreeing on all points he raised except one - the idea that business as usual emissions will rise faster than the most emissions intensive IPCC scenarios in the long-run. I don't buy that intuitively but I haven't got hard evidence to back up my position yet. My current research is meant to address that issue.

ARC Future Fellowships

The results were announced of the first round of the ARC (Australian Research Council) Future Fellowships. These are fellowships tenable for 4 years at an Australian institution for "mid-career" researchers. 200 fellowships were awarded out of 975 proposals submitted. ANU got 21 of the fellowships, though its success rate of 26% was not a lot higher than average. Universities such as Deakin and Edith Cowan had a 0% success rate but Charles Sturt got 25%. Clearly it's riskier to apply to work outside a Go8 university, a major medical institute, or CSIRO (14% success rate). There were higher success rates for younger people asking for lower salaries, which is not surprising. 14% of applicants were foreign nationals and 8% returning Australians. The former had a slightly lower success rate and the latter a slightly higher success rate. There were slightly lower than average success rates in the humanities and social sciences and in environmental priorities...

Though, it is still not 100% certain that the scheme will run again (but this morning ANU Deputy-VC and former ARC staffer Mandy Thomas seemed confident it would and the ARC website says that it will) I am planning to apply in the coming round if it does and if I am eligible (I'm borderline for being "mid-career" but might be someone that Australia would like to retain here, having only recently come back from overseas and currently being on soft money). I have a draft proposal, which I've received plenty of feedback on. I will now work up some of the additional material on track record etc. required. If I don't use it for the Future Fellowship competition I'l turn it into an ARC Discovery Project proposal.

Krugman in the NYT Magazine

In case you haven't seen it yet, here is Paul Krugman's article on the state of macroeconomics from the New York Times Magazine.

Progress on "Hub" Project

My research project funded by the Environmental Economics Research Hub is about the international diffusion of energy efficiency technology at the macro-economic level.

The project has two main stages. In the first stage I estimate a function that explains energy intensity (=the amount of energy used in the economy/GDP) in terms of the level of inputs like capital, labor, and the various types of energy, the structure of the economy, and the state of technology. This part is very similar to my previous work on this topic published in Ecological Economics, Journal of Environment and Development, and Policy Studies Journal. Energy intensity is not a direct measure of energy efficiency technology because of the factors mentioned above. This approach controls for the confounding factors and produces a purer measure of technology. I have decided to adopt the "between estimator" to estimate this model after testing it on the environmental Kuznets curve model (that paper is now available as a Hub Research Report).

In the second stage of the project I am developing a dynamic growth model that should explain why technology varies across countries. I can now feed in data on energy efficiency and investment and the model tells me what the energy efficiency of current investment is (rather than of the installed capacity) and what the price of those current investment goods is:



Z is the energy efficiency of the installed capacity and z that of the new investment. The lower the number the less energy used and, therefore, the more efficient the capital goods are. The model produced z (and B) when I fed in Z. The price of capital goods is assumed to be q=B/z. The more efficient the capital goods the higher their price. This formulation has similar cost implications to the carbon emissions reduction function in Nordhaus' DICE model. I want to eventually get estimates of how the parameter B varies across countries. I am assuming that differences will largely reflect inefficiencies - similar to what Parente and Prescott call "Barriers to Riches". In their model barriers to trade and investment result in GDP being lower than it otherwise would be in poor countries. In my model, inefficiencies result in countries being more dirty than they would otherwise be.

I also computed the "shadow prices" of capital and energy efficiency that would mean that the choice of z was optimal contingent on B:



Lambda is the shadow price of the capital stock and mu that of energy efficiency. Yes, these results surprised me, and there may still be mistakes in the model. But then I realised: "Of course, the shadow price of energy efficiency is negative! The lower Z is the more efficient the economy is!" Increasing Z means reducing energy efficiency. That is bad, so its shadow price is negative.

This is a good check on the internal consistency of my model.

British Wages in the Early Modern Period

An interesting article about the welfare gains from the introduction of commodities like coffee and sugar in early modern Britain. The authors also argue that these gains lead to underestimation of the increase in wages in early modern Britain. I think they are right about the rising wages in Britain but a bit surprised that they think that that finding is new as Robert Allen makes the high wages in early modern, pre-industrial revolution Britain one of the key facts of his theory of the industrial revolution. Allen also discusses the role of new consumer goods in this period.

Archives Awaiting Activation

Hopefully, we'll be off this list very soon :) Just been ironing out some Mac/Unix file format glitches.

EERH Research Reports Joining RePEc

As you may know, my position is funded by the Environmental Economics Research Hub based at the Crawford School at ANU. We have a working paper series reporting on research carried out in the Hub. We've now completed indexing the series so that it can be catalogued by RePEc, which is the biggest and best system of indexing working papers in economics. I've been working on this with Meredith Bacon who is the coordinator of the Hub. I'll make another post when things are complete at the RePEc end.

Revise and Resubmit

I got a "revise and resubmit" for the paper I submitted to Journal of Productivity Analysis. There are of course no guarantees in these situations that you will be published and "major revisions" have been requested but that is still good news.

Allen: The British Industrial Revolution in Global Perspective

Robert C. Allen tries to explain why the Industrial Revolution took place in Britain in his new book The British Industrial Revolution in Global Perspective.

Allen (2009) places energy innovation centre-stage in his theory. Like Tony Wrigley, he compares Britain to the Netherlands and Belgium. These were the most developed economies in the world in the early modern age with much higher wages than elsewhere due to their dominant position in world commerce. In both countries the price of fuelwood was rising in the early modern period relative to the price of coal. But the price ratio of traditional fuel to coal was higher in London than in the Low Countries and even higher in the coalfield areas of northeastern England and western Britain. Compared to France, India, or China, Britain had both cheap sources of fuel and high wages.

Coal was lower quality than wood as a heating and cooking fuel but became a “backstop technology” once the relative price of wood to coal rose sufficiently, while in the Netherlands peat replaced coal. But innovations were required in order to use coal effectively in new applications from home heating and cooking – new specially designed chimneys had to replace older chmneys and open hearths - to iron smelting and then steam engines. These induced innovations sparked the industrial revolution. Initially though the new innovations were only profitable in Britain where wages relative to energy prices were the highest in the world. Continued innovation eventually made coal using technologies profitable in other countries too.

He concludes: "The British were not more rational or prescient than the French in developing coal-based technologies. The British were simply luckier in their geology... In other words, there was only one route to the twentieth century - and it traversed northern Britain." (p275)

Comments on Scientific Papers

Once upon a time, many comments were published on scientific papers, including in economics. Nowadays, relatively few are. Rick Trebino has written an article that suggests some of the reasons why not. The article is rather amusing/cathartic for anyone who has been frustrated with the academic publication process. In economics, comments have been replaced by increasingly lengthy refereeing processes at the top journals. I saw a paper somewhere on this but can't remember where. One of my colleagues/coauthors, Robert Kaufmann, simply published his comment on a paper in the American Economic Review in Ecological Economics when the AER refused to on the grounds that it added too little to the original paper. They'll only publish a comment that makes a substantial new contribution rather than merely correcting a mistake.

Time Allocation to Reading Journal Articles

A recent article in Science discusses the future of scientific publication and scholarship strategies. The chart above showing trends to less time spent reading more papers also shows that scientists spend about 5% of their time on reading articles.

Estimating a Two-Equation Model of the Swedish Economy

My coauthor sent me some Swedish capital stock estimates for 1850-2000 which allows me to estimate the production function equation that explains economic output in terms of labor, capital and energy in addition to the energy cost ratio equation I estimated on its own before. Having two equations which share many of the same parameters makes estimating those parameters accurately a lot easier. I got some moderately sensible results pretty much straight away. But this is a pretty tricky econometric problem for the following reasons:

1. The production function we are using (CES function) is non-linear and non-linear econometrics is always harder than linear econometrics.

2. Variables like capital, GDP, and energy are "stochastically trending" i.e. they are random walks (now you know why this blog has the title it does :)). Econometrics with trending or random walk variables is tougher than with more classically behaved variables that just fluctuate around an average value.

3. The variables on the right hand side of our equations are almost certainly endogenous in the economic system. The capital stock is affected by the level of GDP and not just vice versa. Econometrics with endogenous variables is trickier too.

4. The rate of technological change has not necessarily been constant over the last 200 years. In fact it almost certainly hasn't. We need to deal with that too.

From the preliminary econometric results and simulations I've done in Excel it seems that the elasticity of substitution between capital and energy is between 0.3 and 0.7. This is roughly the range that Koetse et al. found in their meta-analysis of the elasticity of substitution between capital and energy. The traditional Cobb-Douglas model used very extensively in empirical and theoretical applications assumes that it is 1.0 instead, which would mean that energy availability isn't much of a constraint on economic output and growth. But, instead, it seems that it is.