Porsche Develops Hybrid Technology

I blogged about the development of hybrid cars by BMW and Mercedes when I was visiting Munich. My point was that fuel economy standards were forcing luxury car makes to adopt hybrid technology. I saw this as a route to wider adoption of hybrid technology in mass-market cars. Non-luxury hybrids seem so far to only appeal to "green consumers" willing to pay a premium for lower fuel consumption. Anyway, the New York Times has an article on new hybrid systems developed by Porsche.

One is a hybrid version of the Cayenne SUV with a 35kW electric motor and a 250 kW petrol engine. Urban fuel economy is improved from 16 mpg to 21 mpg. Highway fuel economy only improves by 10%. Then there is a racing car that uses a flywheel to store energy from braking which can then be used to power a generator. It has two 60 kW electric motors driving the front wheels in addition to the 360 kW petrol engine. The third system is a concept car that has a 375 kW petrol engine and front and rear electric motors that can produce a total of 164 kW. For comparison, the current standard V6 Ford Falcon has a 195 kW engine.

There is an increasing diversity of body plans out there, which is a positive sign in the development of a new technology.

Tests for Non-Linear Cointegration

It took more than 25 years since the discovery of cointegration for someone to come up with general tests of cointegration in nonlinear regression models. Choi and Saikkonen published a paper on the topic in the June issue of Econometric Theory. One place where this might be relevant is, of course the environmental Kuznets curve, where Martin Wagner argued that standard cointegration methods could not be applied to a model that included powers of the explanatory variables. Wagner has a paper with Seung Hyun Hong on just this topic. But a lot of standard models such as the translog consumer demand model involve non-linear functions. So this is a very useful advance.

Survey Paper on Estimating Consumer Demand Systems

If you are looking for a nice survey paper on estimating static consumer demand systems (I was) Apostolos Serletis and William Barnett put one out a couple of years ago in the Journal of Econometrics. It's a nicely organized paper that should be understandable to anyone who's done the basic graduate level micro-economics and econometrics courses. In other words, it is really approachable compared to most papers published in the Journal of Econometrics :)

The beginning of the article reviews the basic neoclassical consumer demand theory. Following that, parametric approaches to estimating demand systems such as the Rotterdam model, flexible functional forms such as translog and AIDS, and "semi-non-parametric" forms such as the Fourier approach are covered. Next on the agenda are sections on revealed preference and on Engle curves. The final sections cover estimation issues, theoretical regularity - to what degree estimated demand functions meet the restrictions of neoclassical theory - and econometric regularity - mainly a discussion of non-stationarity - i.e. data with stochastic trends.

The only additional issue I would want the paper to cover, of course, is the question of how to interpret the estimated elasticities - are they estimates of short-run or of long-run elasticities - and how reliable the estimates from any single study are. The former is affected largely by the type (time series, cross section etc.) and properties (stationary, non-stationary etc.) of the data and the latter by sample size as I discuss for industrial interfuel substitution elasticities in my forthcoming paper and in my recent paper on estimating the emissions-income elasticity.

Why You Should Have a Blog

(if you are an academic)

The vast majority of hits on my website that originate with Google are from people entering keywords closely related to my name. By contrast, Google Analytics shows that almost no-one looking for my name arrives at my blog. So the blog attracts an audience that would be unlikely to arrive at my website and check out my publications on all the topics that I write about on the blog. In the past I did have a bit more content on my website. But the blog now has more than 300 articles for search engines to hit on a wide range of topics. So I think it has been pretty successful in getting my opinions and expertise on that range of topics out to people who are interested and much more successful than I think the website would ever have been. There isn't as much crossover of visitors from one site to the other as I would have liked. But then most of the links about my research on both sites go to RePEc etc. rather than to the sister site.

Index Numbers and Consistency in Aggregation: Part II

This post gets even more technical than the last. I'm just blogging about what I'm reading in the course of my research. I read a whole bunch more papers on index numbers, which got more and more technical. The bottom line is that for most applications the chain Fisher index is an appropriate index to use.

An index is superlative if it is exact for an aggregator function (e.g. a production function) that can provide a second order differential approximation to an arbitrary twice differentiable linear homogenous function. A second order differential approximation is one where the level, first derivative, and second derivatives of the two functions are equal at the point of approximation.

Diewert (1978) shows that the Vartia I index differentially approximates a superlative index as long as both prices and quantities are strictly non-zero and there is actually no price and quantity change between the periods. What this means is that for relatively small changes in prices and quantities the Vartia I index will give very similar results to superlative indices like the Törnquis index and the Fisher index.

The nature of superlative indices themselves means that “chained” indices are always preferable to non-chained indices. A chain index is one where the index is computed for each year (or whatever is the smallest available gap between datapoints) and the product of those annual indices is used as the time series of the index over time even if we only want the change over a much longer period.

Diewert (1978) goes on to show that chained superlative indices will yield close to consistent aggregation for relatively small changes in prices and quantities. Diewert (1978) also shows in an empirical appendix that chained Vartia, Törnquist, and Fisher indices produce almost identical results and that two stage aggregation produces almost the same results as one step aggregation for Törnquist and Fisher.

An additional advantage of the Fisher index over logarithmic indices such the discrete Divisia index also known as the Törnquist index is that it can easily handle the introduction of new goods, as zero values pose no problem for it. One way to deal with this for the Törnquist or Vartia I indices is to compute the price index, assuming that the price of a new input was the same before its introduction as in the year of its introduction and then find the quantity index as the ratio of total value to the price index.

References
Diewert, W. E. (1978) Superlative index numbers and consistency in aggregation, Econometrica 46(4): 883-900.

Index Numbers and Consistency in Aggregation: Part I

There are many formulae for the index numbers used to compute price and quantity indices, such as a consumer price index or a volume index of imports, in economics. The Laspeyres, Paasche, Divisia, and Fisher indices are the best known of these formulae. A body of theory examines the criteria that can be used to decide which formula to use in a particular application. One important property is consistent aggregation. Say that consumers purchase the following categories of goods and services: Education, health care, food, clothing. First compute price indices for goods using the data on quantities and prices of food and clothing and services using the data on quantities and prices of education and health care and then compute a consumer price index using the resulting goods and services price indices. If this index is the same as a consumer price index computed using the data on the four original commodities then the index formula is said to exhibit consistent aggregation.

Another important property is “Fisher’s factor reversal test”. Compute a price index for the ratio of the prices of a group of commodities relative to a base year as well as the corresponding quantity ratio index. Then if the product of these two indices equals the ratio of the total value or cost in the second period relative to the first the index formula is said to pass Fisher’s factor reversal test.

Vartia (1976) proposed a formula that passes both these tests dubbed the Vartia I index. The Vartia I index for a change in price between period 0 and period 1 is:



where superscripts refer to the two time periods, the pi are the prices and the xi are the quantities of each of the commodities indexed by i. p and x are the vectors of the prices and quantities. L() is a function defined by:



But Vartia’s index isn’t perfect. Another desirable property of index functions is that a quantity index for the ratio of aggregate quantities in the second period relative to the first should be equal to the ratio of production functions that use those quantities of inputs in the second period and the first.* Such an index is called an exact index.

Diewert (1978) shows that Vartia’s index is only exact for the Cobb-Douglas production function. This seems rather disappointing as the Cobb-Douglas function imposes an elasticity of substitution of one between each pair of inputs rather than letting the data speak. This seems rather restrictive. So maybe Vartia’s index isn’t as ideal as he thought?

References
Diewert, W. E. (1978) Superlative index numbers and consistency in aggregation, Econometrica 46(4): 883-900.
Vartia, Y. O. (1976) Ideal log-change index numbers, Scandinavian Journal of Statistics 3: 121-126.

* Similar relationships exist for the price index and the unit cost function and for utility functions etc.

Launch of Centre for Climate Economics and Policy

The launch of the new Centre for Climate Economics and Policy at ANU will be on 27th October following the Asian Climate Change Policy Forum. The new centre will be directed by Frank Jotzo. There will be a working paper series, which will take over from the EERH Working Papers in the area of climate change.

Writing and Publishing Tips from Nature

Very good advice (almost all of which I follow myself) from Nature on writing and publishing.

My only caveat is that there is a real trade-off in economics between getting published in reasonable time and getting published in the top journals. The top journals have very slow review processes and very high rejection rates. Not all of them use the "desk reject" system used by top natural science journals like Nature and Science, though some do.* If top journals take a year to review a paper and accept fewer than 10% of submissions vs. 3 months at typical lower ranked journals and acceptance rates of 30-50% it is a real question as to which it makes sense to submit to. This is especially the case for people on the job market who want to quickly get some publications onto their CV but also for authors of policy-oriented articles who need to publish in a time-frame before the issues change significantly. If you just want to get your paper to the audience then it could make sense to send it to the second-tier journals (those ranked by the ARC as A journals). It will be cataloged in the Web of Science and Scopus and thought of as a reliable paper by most potential readers. But it won't help as much in getting a job or promotion as a paper in a top-ranked journal ** and some readers might think it a less reliable source and, therefore, be less likely to read it and cite it. If you have a paper that you think might be publishable in a top journal check whether that journal has a desk-reject policy.

* At Ecological Economics we do use the desk-rejection system (and we're a "second-tier" journal). Papers that are either very weak or not related to the topics we are interested in publishing on will likely be desk rejected. At the moment it is a minority of papers that are not sent for review by referees. Often an associate editor like me will decide whether to reject the paper.

** At the most elite departments in the US (maybe UK?) articles in a second-tier journal could be a negative, especially for new PhDs. If the only thing on your CV is a second-tier article, search committees are likely to downgrade their evaluation of you. It could be better to have no publications and a PhD from a top program. If you are coming from a low-ranked program you should get publications on your CV somewhat irrespective of quality.

Causes of the Demographic Transition

Oded Galor has made many contributions to growth theory and population economics and the connections between them. A new working paper examines various economic theories of the causes behind the demographic transition. In Galor's terminology the demographic transition refers specifically to the decline in fertility rates and population growth. This is the third phase in the conventional demographic transition model:



Galor gives the background of each theory, facts that they predict, and whether those facts match reality. It is a very useful survey. Hypotheses/theories that he rejects based on the evidence are that the fall in fertility was caused by:

1. Rising income in the early industrial revolution - a theory he associates with Gary Becker.

2. The decline in infant and child mortality.

3. Development of capital markets reduced the need to have children to support oneself in old age - The old age security hypothesis.

The ones for which he finds support are (not surprisingly given his previous work on these topics):

1. The rise in demand for human capital resulting in a trade-off between child quantity and child "quality".

2. The decline in the gender gap in human capital and wages.

Energy Efficiency Report Part II

Reading through the report they seem to come to similar conclusions to me on Australia's track record on energy efficiency. The main goal is a 30% reduction in Australia's energy intensity by 2020. This implies an annual reduction of 2.6% per annum. Since 1980 energy intensity has declined by 1.3% per annum so the target is fairly ambitious in seeking to double this historical rate.

The centrepiece policy recommendation is to broaden existing energy efficiency schemes that currently exist in NSW, Victoria, and South Australia to a national energy certificate scheme. Credits would be generated by energy efficiency increasing investments that could then be sold to energy suppliers who would be obligated to improve the energy efficiency of their customer base. An interesting feature of this proposal is that it reduces the "split incentives" faced by renters and landlords. Often, landlords are reluctant to improve energy efficiency because they won't gain the benefits of energy cost savings while renters are ill-informed about the energy cost parameters of alternative rental properties and so don't make choices of where to live and how much rent to pay on that basis. In very tight rental markets there is often little choice anyway on where you can live*. Under the certificate scheme the landlord could sell the credit and the renters gain from the cost savings. Under an energy tax the incentives remain as asymmetric as they are now.

A problem with such schemes is that they seem to ignore the rebound effect. However, rebound effects are usually much less than 100%.

* See search markets

Report of the Prime Minister's Task Force on Energy Efficiency

The report of this group commissioned during Kevin Rudd's period as prime minister was released about a week ago. I gave a presentation to some members of the team earlier this year on my work comparing Australian energy efficiency to that of other countries. So I was particularly interested to see what they came up with. One interesting point for academic economists is that the extensive reference list in the report includes hardly any references to the academic energy economics literature. There are no references to journals like Energy Policy or Energy Economics. There are several to a special issue of the journal Energy Efficiency which dealt with the energy efficiency certificates that the Task Force came out in favor of. I wonder whether this is because what is published in these journals is too esoteric, too useless or irrelevant, or the group just didn't have the time to do look through that stuff. It's got to be a bit depressing for people who publish stuff on energy policy to see a review which doesn't really look at all at most of what has been published academically on the topic. Also, the advisory group to the task force included representatives of industry and NGOs but no academic researchers.

I'll have more on the report soon. Henry Ergas doesn't like it.

John Ionnanides

For those of you interested in meta-analysis, the Atlantic has an interesting article on John Ioannidis (needs subscription I think?). I've written about him previously and his paper "Why Most Published Research Results are False". This article gives more color about him and his research group.

On a related note, you can now get my article on meta-analysis of interfuel substitution for free at Journal of Economic Surveys. This seems an odd publication model to me. Why give away the paper for free before assigning it a journal issue and page numbers and then put it behind the paywall? The New York Times used to follow a similar online model where archived material cost money but the current issue was free online. But in that case people looking for old articles wanted very specific information and were probably more willing to pay for it than someone looking for current news who could just go to another website.

Tips for Choosing a Title for a Paper

I'm having a harder time than usual in deciding on a title for our latest paper. For some reason none of the alternatives I have seem good. So I looked on the web for some ideas and the following seem to be the key useful ones:

1. Make sure there are the main keywords in your title. You may think that your abstract will handle that. Google Scholar thinks otherwise.

2. Shorter is better than longer, subject to condition 1.

3. Active language is better than passive. One site I encountered favored the opposite resulting in really boring titles.

4. Get the most important idea first in the title - this was not something I had really thought of. That means I have to choose the most important idea :)

Now I have even more potential titles than before!

The Story of Climate Change Legislation in the Obama Administration

Peter Wood pointed out this story in the New Yorker, which chronicles the history of the so far failed attempts by the Obama Administration and various senators to legislate on climate change policy.

Is the Drought Over?

As you can see from the above graph, after a long period of standing at about 50% capacity, Canberra's dams are now at around 80% capacity. All the dams in the Western catchment in the Brindabella-Namadgi mountains are near capacity. Googong to the east which is half the total capacity is only at 60%. But that too is an improvement. As we flew into Canberra on Thursday we could see that the Eastern half of Lake George in now full of water. That's the most I've ever seen. I suppose that that is about a 1m depth. The historic shoreline is at 2m depth. The prehistoric shoreline, within the last 1000 years is at 17m! So far things seem to be following the prediction in one of my first blogposts.


Image of Lake George in August from Wikipedia

Back Home

I'm finally back from my trip to Europe (mainly work) and Asia (mainly family visit/vacation). As an Australian the only country we visited that seemed expensive overall was Denmark. Sweden no longer seems to be a terribly expensive country as it once seemed to be. The Big Mac index doesn't agree though. Thailand, our last stop, is of course way cheap but I noticed that drinks in Starbucks don't cost much less than in the US. In general restaurant meals ranged from 1/6 (foodcourt in cheap mall) to 1/3 (waiter service restaurant but some are also more like 1/5-1/4 the price) of Australian prices for the same quality of service. Blogging might continue to be sparse until I am fully up to speed here again. The downside of going on vacation in careers like academia is that the work doesn't go away, it just piles up for you for when you get back.

LEGS

I attended a meeting of the LEGS Platform who are funding my visit to Lund. LEGS stands for Long-term Energy Growth and Sustainability.

As the website says: "It a new platform for inter-faculty and interdisciplinary knowledge creation and exchange at LUSEM (Lund University School of Economics and Management). It was founded March 2009 on the basis of a strategic decision by the vice chancellor of Lund University. The focus is on economic aspects of energy systems, which face the challenge of accomplishing large technological shifts in order to mitigate harmful climate change. To encourage shifts towards sustainability it is necessary not only to promote technical innovations, but also to learn more about firms under competitive pressure and new institutional settings."

The program is funded at a rate of SEK 1 million per year but also is a basis for seeking further grants. They are interested in bringing more visitors to Lund. We discussed various ways of raising visibility including conferences and workshops and I suggested starting a working paper series.

Generosity

Peter Martin reports on a generosity index. It combines data on charitable giving (which is highest in the US) with volunteering of time, and willingness to help strangers. In combination, Australia comes out top. It's worth also checking out some of the countries that come in with very low scores. One of these is China. We often here about a lack of trust in China and these numbers bear that out.

Another Push Towards a Directly Elected Executive President?

Back in June when Rudd was ousted I suggested that in the long-term that move could help push Australia towards adopting an executive presidency once the Republic was back on the agenda. Yesterday's emergence of a Gillard-Labor government with a one seat majority backed by the two relatively conservative independent MPs is another nudge in that direction I think. People commenting in the media over this period have tended to go on about the Australian people electing the prime minister and government when of course the system does no such thing. But when there will be a choice to completely reform the system, direct election of the prime minister or president maybe exactly what does happen.

Endogenous Price of Lighting Services

Another potential issue with the Tsao and Waide and Tsao et al. work on demand for lighting is that the price of lighting services is to some degree endogenous. If this is the case then estimates of a model of the sort suggested in my previous post will be subject to simultaneity bias. So why might the price be endogenous?

First, there are the usual reasons that we are not separating the effects of moves in the supply and demand curves here at all. Demand for lighting might affect the prices of the energy sources used to supply it and the prices of lamps. Lighting accounts for only a few percent of energy use so the effects on energy prices might not be that important. What seems to be a more fundamental problem here is that at many periods in time more than one lighting technology has been available. For example, at the moment there are incandescent bulbs, fluorescent lights, emerging solid state lighting etc. The efficiency with which energy is converted to light depends on the mix of these energy sources. Therefore, the cost of "lighting services" as defined by Tsao et al. depends on that mix of technologies. But the mix of technologies is chosen by consumers. That seems to be a problem I think?

Tsao & Waide: "The World’s Appetite for Light"

Following up yesterday's post I looked at the study that provided the background for the paper studied there:

Jeffrey Y. Tsao and Paul Waide:
"The World’s Appetite for Light: Empirical Data and Trends Spanning Three Centuries and Six Continents"
LEUKOS VOL 6 NO 4 APRIL 2010 PAGES 259 – 281

This paper gives a figure of per capita light consumption and GDP/cost of light:



I drew the thick black line on the chart which represents an alternative curve fit. I know it is very crude but I couldn't draw a nice smooth curve with my software. I'm not saying that this is a best fit curve, just that it is a vaguely plausible alternative. If something like this model was fitted then the rebound effect is less than 100%. Tsao and Waide do not test alternatives to their linear model that assumes an income elasticity of one and a price elasticity of minus one of lighting demand. I think more research in this area is definitely warranted though I praise Tsao and Waide's pioneering attempt to bring together different sources of data and begin the empirical analysis.

Whatever the truth, the Economist's proposal to just stick with incandescent lighting is wrong. Even if there were no energy savings from introducing solid state lighting, as Tsao et al. state people would have more lighting services for a given energy input. There are environmental impacts to having too much outdoor light. These should be addressed separately, not by halting technological progress. If regulation limited the amount of outdoor light then these innovations would result in saving of energy...

Will the Adoption of Solid State Lighting Lead to an Increase in Energy Use?

The Economist discusses an article in Journal of Physics D: Applied Physics by Tsao et al. on the effects on energy use of the adoption of solid state (i.e. LED) lighting (SSL) on global energy use. The Economist argues that it would be better to keep incandescent bulbs as a result. This seems a bit crazy. The literature on the rebound effect suggests that for energy saving innovations for consumers in developing countries the rebound effect is typically of the order of 30%. In other words, the net energy savings are around 70% of the amount of energy nominally saved by the innovation. Joshua Gans comments on this article taking a direction inspired by the Schumpetarian endogeneous growth literature where new innovations are sold by monopolist innovators.

To understand why the authors posit such a large rebound effect I took a look at the original article. The first key leg of their model is the following relationship between historical data on lighting use and a very simple model:



Most of the early data relies on the work of Fouquet and Pearson. The model treats light consumption as a function of two variables: GDP and cost of lighting. The elasticity of demand with respect to the cost of lighting is minus one and the income elasticity is plus one. Based on this data the model looks pretty plausible. It would be nice though to see this data in per capita terms or to see lighting intensity of GDP plotted against cost of lighting to get a better idea of how robust it is. The way in which the cost of lighting is computed will be very critical too. I'll look at that in a subsequent blogpost.

If the demand elasticity is minus one then any reductions in the cost of lighting will be exactly offset by increases in consumption of lighting services. Both these elasticities seem high in absolute value for developed economies. So it would be nice to at least test a model which allows the elasticities to vary with income level vs. a model which does not if you are going to make big predictions about the future.

Solid state lighting will certainly reduce energy costs of lighting but this is achieved partly by substituting capital for energy. At the moment, LED lights are expensive. This means that the cost of lighting is reduced by less than the energy use is reduced by the innovation currently. Therefore, even if the price elasticity of demand was minus one, adoption of solid state lighting would reduce energy use (ignoring indirect energy costs of capital). The authors argue of course that these costs will reduce rapidly. Historically, they argue that capital costs are typically 1/3 of energy costs of lighting. They assume that by 2030 the capital costs of SSL will be the same so that there is no capital-energy substitution in the adoption of SSL.

EERH Research Reports: August 2010

Peter Wood's paper on game theory and climate change continues to be popular this month. Follow this link for all the other stats.

Powerpoint Slide for Crawford School Research Retreat

Role of Fuel Economy Standards in Effecting Technological Change

I was fascinated to learn yesterday that Mercedes has paid the US government $300 million in fines due to violating the CAFE standards. As fuel economy standards continue to rise manufacturers will need to find innovative ways to reduce the fuel consumption of their luxury and sports models in order to end up with acceptable cross-fleet mean fuel consumption figures. The interesting thing is that luxury cars is exactly where it is easiest to absorb the costs of new technologies. Most automotive innovations have been introduced first on luxury models and then trickled down to mass-market vehicles. Why should fuel economy technologies be any different? But up till recently, manufacturers have tried to sell fuel efficient mass-market cars. Some of the more innovative such as the Prius have only been competitive beyond a green signalling niche market with government subsidies. But experimenting first with up-market models makes more sense to me. There are already Lexus hybrids but now BMW and Mercedes seem to be following suit.

Today, I went to the BMW Welt museum/exhibition here in München where I happen to be visiting:



A major theme of the exhibition was new technologies to reduce fuel consumption while maintaining performance. The suite of technologies is termed BMW Efficient Dynamics. Several BMW models already incorporate the technologies, which include regenerative braking, engines which shut off when the car isn't moving, more efficient fuel injection etc. Hybrid vehicles will be available soon.

BMW is still pushing hydrogen cars, which seem to be a mistake to me. Especially, using hydrogen to fuel an internal combustion engine makes no sense at all I think.