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Chinese tariffs on coal there & gone

An interesting feature of the proposed Australia China free trade agreement is that so little is at stake. Most of Australia’s exports to China and most of China’s exports to Australia are tariff free. The catch is the restriction on Chinese purchases of Australian housing and land and Chinese foreign investments generally which are subject to discriminatory restrictions.  But if Australia reduced these restrictions what could China offer in return? Well, not much.  So a few weeks ago China imposed tariffs on Australian coal and, as a major “concession” yesterday announced they would be removed as the negotiations over the FTA enters its final week.  One wonders what Australia has given away to achieve this remarkable concession.   Some dumb politics here. There just isn’t much in this FTA for Australia given that (as I have pointed out in the past) it is highly unlikely Australia will remove the restrictions on Chinese foreign investment.


Empathy & sound ethics

I have been thinking about empathy and reading the psychologist Paul Bloom on this. Empathy is a type of bias – it evokes compassion for those close to us and to a lessor extent to those we can see but who need not be at all close to us in terms of actual ties – e.g. asylum seekers. It leaves unconsidered those facing peril in other countries (or awaiting resettlement in refugee camps in other countries) even though these people may face greater peril than asylum seekers. Of course we need to add reason and principles to considerations of empathy if we are to be truly ethical. Empathy can be a negative in terms of ethics – if I assign a high market to a friend in an exam or give them undue preference in a job interview that is a negative.  If I have a serious illness and visit my doctor the last thing I want is empathy – I want the doctor to use his/her brains to help me not to sob in sympathy with my problem.

The negative side of empathy is the reason I cannot take the “Care Ethics” due to  Carol Gilligan and the feminists very seriously.  These thinkers do identify important determinants of individual ethics – close relationships –  but, by themselves they are insufficient as a basis for ethics because of the implied biases.

Continue reading Empathy & sound ethics


Moralities of everyday life

I am doing the Professor Paul Bloom course “Moralities of Everyday Life” for credit from Coursera. This is an approach to ethics based on psychology. Paul is a very talented lecturer (and author) based at Yale. Weekly assignments are online and students are identified from their typing style and using photographic imaging. A 70% average score across the assignments is required to get a certificate – the assignments themselves are challenging and test not only the lecture content but also knowledge of the set reading and the extra required videos. The general approach is based on a “gut instincts” theory of ethics that I am finding attractive.

Maybe this is one way university teaching can go. It costs $49US to attempt to gain credit for this subject and the teaching and materials are better than anything I have experienced in Australia. The first week consisted of 7 lectures ranging between 12-25 minutes each (that’s a good idea – not operating oppressively long lectures) and there are several readings, some excellent video clips, a text and a multiple choice assignment.  The lectures have quizzes in them that are not for credit but they do keep you on your toes. There are discussion groups although I have not participated mainly because the reading takes quite a lot of time.

The reading itself in the first week involved extended newspaper articles  by Steven Pinker and Peter Singer and video clips of quite different approaches to ethics by Sam Harris and Jonathon Haidt both of who  are experts in this area.  Fascinating.

Incidentally it was interesting for me to be a student after 35 years of teaching in a university.  Looking at course design and designing reasonable work loads as well as incentives to do the required work was much easier to see from a student’s perspective.  The idea of using newspaper surveys to introduce students to new materials makes more sense than plunging directly into academic journals.  And there is nothing “low level” about the approach at all –  real effort is required.


Australian Asylum Seeker Policy: An Economist View

I am speaking on “Australian Asylum Seeker Policy: An Economist View” at an Amnesty International meeting 8th October, 2014 at  John Scott Meeting House, La Trobe University 6-00pm. This is an earlier paper I drafted on this issue.  Comments welcome.

“Rational argument can be conducted with some prospect of success only so long as the emotionality of a given situation does not exceed a certain critical degree. If the effective temperature rises above this level, the possibility of reason’s having any effect ceases and its place is take by slogans and chimerical wish-fantasies. That is to say, a sort of collective possession results which rapidly develops into a psychic epidemic.” (C.G. Jung, 1957, pps. 4-5).

Abstract:  Economic reasoning is applied to Australia’s asylum seeker policy problem.  Australia has a managed migration program based on quotas but has ratified the UN Convention on Refugees that is not quota-based. To control asylum seeker numbers successive governments have sought to increase the generalized price that asylum seekers must pay to gain Australian citizenship.  This has led to policies that involve Australia in high enforcement costs while imposing significant hardship on asylum seekers.  A policy reform of abandoning the Convention and enforcing greater selectivity with the processing of asylum seekers onshore improves both Australian and asylum seeker welfare without increasing overall levels of asylum seeker intake. Continue reading Australian Asylum Seeker Policy: An Economist View


Road pricing yet again, & again & again….

The Harper Competition Review has again raised the case for road pricing.  It is frustrating to me that after 20 years of working in this area many economists don’t get the economic basis for road pricing right.  The article in The Australian today is a case in point.  Roads are not priced for user pays equity reasons but because congestion externalities arise on them.  A road is a fixed asset with substantial fixed and low marginal costs. If a road is not congested (and undamaged by heavy vehicle use) there is no sensible efficiency reason for pricing it. Why would you price in this situation since adding an extra vehicle using the road leaves social costs unchanged?  Ignoring heavy vehicle charging the case for road pricing stems from possible congestion externalities.  Now adding an extra vehicle increases the travel costs of other users and this is unpriced.

Again too I am weary of arguments for congestion pricing given the lack of political will in this area.  Even the much easier issue of pricing heavy vehicle road usage seems to have been put on the back-burner despite support for it in COAG.  The last thing our free enterprise Coalition parties want are some efficiency-promoting reforms in the transport sector. They will duck the road pricing issue and avoid too real reforms in the taxi sector which the Harper review also discusses, yet again and again……


Taxing foreign buyers of Australian housing

This measure – discussed in today’s AFR – is (apart from its cost-recovery role*) is effectively an export tax on housing.  As such it will diminish the gains from international trade in Australian property markets. It will however (in accord with the standard theory of export taxes) reduce the price of property to Australian consumers.   Currently the economic effects here will be small since the size of the charge – at maximum it seems to be $1500 – is small but a much larger charge could be considered.  There are at least two reasons for this. While export taxes penalise property owners by reducing the size of the market they can sell into they also distributionally advantage local purchases on property at the expense of relatively limited deadweight losses.  Second, a large enough charge would take some of the heat out of a overheated local housing market and limit the likelihood of adverse macroeconomic externalities associated with possible banking and other corporate failures.   I’d consider this move as a reasonable (very partial) policy response toy the problem of ridiculously expensive Australian real estate that to some degree owes its origins to the limited possibilities for buying decent land and housing in China.

* Partly these charges are intended to reflect costs of Foreign Investment Review Board applications by foreigners and partly to cost a crackdown on illegal purchases.


Near irrelevance of university lectures

Lectures at my university almost by obligation need to be presented in Powerpoint format* and almost all are aurally recorded.  In a few cases a video is taken and that distinction seems to be the fairly arbitrary dividing line used by administrators in classifying courses as being presented in “face-to-face” format or “online”.   In fact student attendance at almost all lectures is so low these days that all subjects taught are, in terms of student numbers, effectively almost all online.  Students simply do not attend lectures.  A few years ago attendance rates were around 30-35% but my guess is that these levels have now about halved.  Only about 1/6th of students enrolled in most courses actually attend lectures and attendance at tutorials is about on a par with this.  If continuous assessment is conducted in tutorials many students do not attend these forms of assessment and either claim “Special Consideration” status at the end of the course or just sacrifice the marks.  Administrative pressure is now being applied by university administrations to allow student choice over assessment procedure that will presumably facilitate such strategies. Continue reading Near irrelevance of university lectures


Real estate agents providing financial advice

A snippet that interests me.  The Ray White Group (one of Australia’s largest real estate brokers) is to move into the financial planning industry.  They earn commissions on real estate transactions and I assume they will earn commissions on the advice they give.  They seek ASIC approval and expect to get it.  My devious, perverted, economist mind asks some obvious questions which I am too modest to articulate.


An economist views asylum seeker policies

Deriving sound asylum seeker policies is partly a moral issue. It is also a concern that analytical disciplines like economics can throw light on.  I have been asked to provide views on asylum seeker policies as an economist.  The views below are preliminary and I welcome polite comment. What I want to do is to think about are what most people would agree are reasonable objectives for policy and then use economics to think about how these objectives might be met. Continue reading An economist views asylum seeker policies


Retirement finances

I have been reading my favourite work on investment – the most recent edition (2011) of Burton Malkiel’s “A Random Walk Down Wall Street” – for some advice on managing wealth in retirement.  I first read Malkiel in the mid-1970s and find him to be a perceptive and balanced advisor on investment strategies.  These issues become important to me now as I am very likely to leave full-time employment over the next few months.  The trick with investment planning for retirement is to try to “live as well as you can without running out of funds if you live longer than expected” – this is the “drawdown dilemma” or “longevity insurance” .  If you have a bequest motive for your progeny this needs to be restated to be “living as well as you can without leaving a grossly depleted inheritance”.

Malkiel favours an overall investment strategy for individuals that reflects the stage they have arrived at in their life cycle – young worker, middle aged, about to retire, retired.  Obviously as one ages there is less time to work through a sustained equity market collapse so that risk-aversion suggests a higher proportion of wealth being placed in bonds and in stocks that pay high dividends but have less prospects for capital appreciation.  For those aged in their late thirties -early forties Malkiel recommends 5% of one’s portfolio in cash (money market funds) , 20% in various bonds , 65% in equities and 10% in real estate investment funds (REITs).  For ages from the late 60s and beyond he suggests 10% in cash, 35% in bonds, 40% in stocks and 15% in real estate investment funds. In the sort of superannuation scheme I am a member of these allocations can be easily made online at low or zero cost while with other private asset holdings some selling and buying is necessary.

Malkiel does support the partial use of annuities for retirement. Annuities guarantee that you will not outlive your income although such a service is expensive unless you can find them provided without sales commissions.  This seems a moot discussion in Australia given the negligible size of the local annuities market although for some an effective annuity arrangement is via the “defined benefit” option of their superannuation scheme. Unless this is backed by a government guarantee  (as it is for the case of civil servant superannuation) it is unclear how secure such “defined benefit” provisions are – employers such as universities no longer agree to finance gaps in funding needs*. But beyond the use of such annuity arrangements anyway Malkiel recognises retirees will want to manage at least a portion of the assets themselves when the allocation rules above apply.  How much should you spend from the optimised portfolio each year?

Malkiel suggests using a “4% solution”.  In simple terms spend no more than 4% of the value of your asset nest egg annually.  Thus you would need a nest egg of about $2.5m to yield $100,000 annually.  4% sounds low since the total return on an equity portfolio should exceed this (more plausibly in Australia long-run returns will be 8-11%) but inflation reduces the real value of  holdings (by about 2% I suppose) and there will inevitably be “bear” markets that could endure for quite a while.  Spending at 6% of value during a bear market could markedly cut into financial staying power. A slump like 2008 would impose real difficulties.

Following Malkiel literally a person of my vintage should keep about 8% of  wealth in the money market, about 30% in bonds, 13% in REITs and about 50% in equities. That is a couch more conservative portfolio than I currently hold which has always been (apart from the family home) heavily geared towards equity.  I’ll think about it.  A shift to bonds and money market holdings might make sense given uncertainties about current equity and residential real estate markets – the latter are part of my wealth through my fully-owned family home. That isn’t the motivation for the Malkiel prescription but it adds weight to my adopting his prescription.

I need to state that I have no qualifications as a financial advisor and am thinking aloud about my own fate rather than suggesting advice to others.  Of course I am (as always) grateful for views from others on the reasoning.

* I didn’t join such a scheme myself as my guess is it will under-perform simple accumulation schemes.  A residual must be retained from savings simply to help assure that the scheme will remain viable.


Good monetary policy

There are competing claims about the current stance of Australian monetary policy and attempts by the Reserve Bank to balance the desire for a lower Australian dollar  by lowering interest rates against the problems that would be created by creating an asset price bubble.  Ross Garnaut suggests lowering interest rates still further and dealing with consequent effects on housing markets in other ways – presumably by “talking up” the risks as the RBA has been doing and perhaps even evoking quantitative restrictions on the private banks.  These last suppositions are guesses since Ross doesn’t point out what precisely he wants to do. Garnaut assumes the economy faces real dangers because of the collapse in mineral (specifically iron ore) prices but I think this is an exaggeration.

Warwick McKibben in this morning’s AFR rejects Garnaut’s view arguing that the risks of a housing bubble are too great and that competitive devaluations elsewhere in the world will make it difficult to devalue the Australian dollar using monetary policy anyway.  He suggests not lowering interest rates but improving the real terms of trade (roughly the ratio of export pricers to import prices) in Australia not by devaluing the exchange rate but by lowering domestic prices by cutting costs. This would be achieved by encouraging productivity improvements not by picking winners but through smart innovative ideas.    The latter sounds like the sort of economic advice you would never want to reject – we are wealthier if we can engineer the types of productivity changes Warwick suggests irrespective of the state of the economy.  I am skeptical of the ability of policymakers to make significant inroads into improving productivity – as opposed to simply getting people to work harder – even in the medium term.

It is true the value of the Australian dollar is determined by both Australian actions and the monetary policies of our major trading partners.  The US dollar will almost certainly rise and my view is that responsible monetary policy in bubble-prone China makes appreciating the RMB a good policy also – and consistent with the Chinese Government’s policy of switching expenditures away from exports and investment towards imports and consumption.  Longer term the Australian dollar will depreciate for these reasons.  The housing market in Australia – and asset markets generally – look prone to make a significant downward adjustment.  It is important to limit the size of this adjustment by doing what the RBA is now doing – by “talking up” risks in the housing market.

On balance I don’t think the RBA is doing a bad job.  I don’t favour the moves suggested by Garnaut as I don’t want a massive asset market bubble bursting.   I am supportive of McKibbin’s policies because who could not support moves to increase productivity.  But I doubt these policies will have a significant enough effect to matter much even in the medium term.  Like McKibbin (and John Bell in his recent book) I question whether Australia’s future is as Garnaut suggests.   The benefits of the mining boom were exaggerated and, even with greatly reduced commodity prices, our miners will do well by exporting larger volumes post the boom.

These are some rough notes. Revisions very likely as I try to think through these issues.


Where is the economics?

I attended some economics honours student presentations on Friday and what was noticeable in most of the studies was a lack of any economic theory.  Yes there was usually a data base and, yes, statistical techniques were applied to that data base (along with (occasionally) some quasi-theoretical reasoning about what might or might not be “exogenous”) but in most cases no economics model or even qualitative economics reasoning was used. Later in the day I heard a faculty member present a seminar talk on “peer group” effects on learning outcomes in schools. Apart from describing such effects as “externalities” there was, again, no economics.  Nor, for that matter, was there any appeal to learning theory or educational psychology.  Whatever happened to economics? Whatever happened to economic (or any other) theory?   I select a couple of instances on particular occasions but it seems to me a trend in much, modern so-called economics “research”.

In principal there is nothing wrong in “letting the data talk” without reference to a priori model but in my experience the insights gained from this approach are meagre – invariably the results are conditional on the quality of the data and fairly inconclusive statistical tests. Often there are no strong insights at all.  The core difficulty, as usual, is that the world is complex and letting selected facts speak for themselves won’t work – interpretative a priori insight is a crucial ingredient of understanding and explanation. I doubt any policy maker would be prepared to devise policies on the basis of purely data-driven insights.  Of course the immediate question to defenders of this approach is: If the approach is valid why are we devoting years of effort teaching undergraduate students macroeconomics, microeconomics, public economics, international economics etc etc if this is not to be used?

The sneaking suspicion I have is that the data+econometrics direction that is increasingly becoming fashionable has its own economics explanation – it economises on the need to think, to read and to reflect. The less costly option is to just assemble pre-collected data and apply a technique from a statistical package.  This also provides an immediate pseudo-novelty: data bases can be exploited in innumerable ways using nearly as many statistical techniques*.  This is important when “low hanging fruit” insights have been pretty well picked over.  On the last point I recently acquired a complete set ((back to the 1930s) of an Australian economics publication – the Economic Record.  Articles in the 1930s through to the 1960s tackled the big economic issues of the day whereas the modern version of the same journal gets bogged down in minutae with, again, an emphasis on the atheoretical data base + statistical technique methodology.  Much more prestigious journal’s such as the American Economic Review are much better in insisting on basing work on a model and some reasonable a priori hypotheses but the drift in even these more prestigious journals is similar.

Don’t get me wrong I am not an opponent of econometrics. I just think that as an approach it has come to dominate economics in ways that are harmful both with respect to providing policy-relevant insights and towards getting students (and economics faculty!) to exercise their brains.  Econometrics should serve economics and not be its master.

* Using data and econometrics-intensive technology is also a risk-averse strategy for students seeking a degree (or faculty seeking promotion). It simply becomes more difficult to reject inadequate thinking and a lack of understanding of fundamentals.



Yesterday I made an application to depart my university of employment and to accept a redundancy.  It was an emotional moment for me as I had never contemplated exiting employment in this way. I always thought I would work until I dropped.   My decision partly reflects what I want to do with my life in the future (more leisure, greater freedom from obligation) but it mainly reflects my pessimistic assessment of where the Australian universities are going.  I enjoy teaching and doing my research but side issues, related to the way universities are being currently administered, provide an overwhelming rationale for my decision.  Irrational managerialism and scant regard for academic merit are the order of the day. What is unfolding is a national educational tragedy.

My application for departure may not be accepted but I suspect it will.

Having worked pretty hard all my life the thought of not being obliged to work is daunting.  The loss of a regular income is, of course, also an issue.  Provided the redundancy goes through I’ll give being retired a trial for a few months and probably then begin to look around for, at least, part-time work. This will not happen until after  the sought redundancy decision is confirmed.


Distortions in the patent market

Distortions in the patient market for new drugs mean that drugs are overwhelmingly being developed for people who will die anyway from conditions the drugs are designed to address. There are few incentives to provide preventative medicines and this distortion costs lives.

As the Economist states:

“The data paint a bleak picture. The economists find that pharmaceutical companies conduct 30 times more clinical trials for recurrent cancer drugs than for preventive drugs (the effect persists even after adjusting for market size). The authors also show that firms divert their R&D expenditures away from more curable, localised cancers and focus on incurable metastatic and recurrent cancers instead. The patent system encourages pharmaceuticals to pump out drugs aimed at those who have almost no chance of surviving the cancer anyway. This patent distortion costs the U.S. economy around $89 billion a year in lost lives.

A one-size-fits-all patent system does not cater to the specifics of innovation in the pharmaceutical industry. But tailoring patent law may encourage lobbying and corruption. A careful reform of the patent system is necessary: outright abolition of patents will not be enough to save cancer patients’ lives”.

The paper that provides the basis for these views is available gratis from the Journal of Economic Perspectives. As its authors Michele Bodrin and David Levine conclude:

The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity. Both theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent, the general equilibrium effect on innovation can be negative. A properly designed patent system might serve to increase innovation at a certain time and place. Unfortunately, the political economy of government-operated patent systems indicates that such systems are susceptible to pressures that cause the ill effects of patents to grow over time. Our preferred policy solution is to abolish patents entirely and to find other legislative instruments, less open to lobbying and rent seeking, to foster innovation when there is clear evidence that laissez-faire undersupplies it. However, if that policy change seems too large to swallow, we discuss in the conclusion a set of partial reforms that could be implemented.


Around the Block

This is a preposterous, improbable Australian movie. A young American women gets a group of young aboriginals to do a performance of Shakespeare’s Hamlet.  Based in Redfern, Sydney. The movie is not even going to be released in conventional cinema.  But I loved it and scenes moved me to tears.  A great Australian film that trounces Hollywood and the garbage we are delivered via the mainstream cinema.  Entranced and moved by this gorgeous Australian-motivated and Australian-made movie.


What will happen to Australian asset prices?

Low interest rates that are unlikely to increase any time soon and property as well as equity markets that are growing strongly, both in Australia and overseas, create the basis for gearing up and taking high levels of risk. People ask me – as an economist – how it will all end. I confidently predict it will end in tears with many people losing everything and margin calls driving asset prices to levels where those few smarties with plenty of cash will make a killing. This matters a lot for older people who are either retired or about to retire and for whom a 20-year wait for market values to be restored would be a disastrous possible outcome.

What I don’t know is when the disaster will impact. Selling out now might leave investors missing good gains. My best advice however is to cut back gearing and not to overextend. Indeed holding a fair bit in cash or short-term bonds makes sense – even if, as Christopher Joye points out, after-tax returns on these assets are negative at present.  The fear is that if another crash occurs soon it will be a doozy.  Of course I may be wrong or suggesting precaution too early in which case investors will forego gain. There are no guarantees despite what the spivs currently flogging red hot property deals all over town are suggesting – indeed their raucous noises make me less confident about the future rather than more.  But this strategy does provide insurance against a real possible asset market meltdown short-term.

Please don’t take any of this as financial advice but don’t consult your paid financial advisor either.  I don’t know but they don’t know either and, like Socrates, I am superior at least to the extent that I know I don’t know.



Unemployment & immigration

The Australian unemployment rate has hit a 12-year high at 6.4% – the highest since 2002 and higher than the US unemployment rate for the first time since 2007. Good market for equities markets this means the RBA will almost certainly not increase interest rates any time soon and may cut them further.  Of course disastrous for people such as myself who will probably soon be on the job market.   While the Treasurer has argued that these figures provide motivation to pass the budget – they do no such thing – the obvious candidate for policy is our immigration intake.

Currently Australia is taking in net 240,000 immigrants annually – it adds nearly a million people to our population every 4 years.  709,000 immigrants have arrived since the beginning of 2011 and 380,000 of these have got jobs. During that period 400,000 jobs were created net.

There are Ripley Believe-it-or-not economic theories  (often propounded by ANU economists) that these immigrants create jobs by adding more to aggregate demand than supply but this clearly is not the case at present.  What can be expected is that as unemployment increases the demand for immigration will weaken a little.

As much as I am concerned about the current unemployed I am even more concerned by forecasts that, at this rate, Australia’s population will be 40 million by 2060 and 50 million by 2100.  Sydney’s population will grow 80% and Melbourne’s population will double by 2060. Do Australians really want to live in mega-cities

It is almost politically incorrect among the latte left to criticize anything relating to unrestrained high immigration but I do.  The implications of high rates of immigration for the economy are modestly positive at best.  With high international capital mobility most of the labour market benefits from a liberal migration program accrue to the migrants not to resident Australians.  Economies of scale arguments are irrelevant in an economy that trades with the world. At the same time we must put up with more crowded cities and less people-free, biodiversity-rich landscapes.

I’d prefer a migration policy that stabilises the Australian population at something less than 30 million.   I am selfish enough to prefer living in open, low density landscapes where nature is not extinguished.


Proposed Australia-China Free Trade Agreement

I have been working on this FTA over the past week or so and trying to get up to speed on ideas in this area.  Some provisional notes – comments very welcome.

Continue reading Proposed Australia-China Free Trade Agreement


William Blake done by Allen Ginsberg

My interest in William Blake’s poetry dates back about 40 years to performances of his “Songs of Innocence and Experience” by Allen Ginsberg.  They were on an 1969 LP I had that got nicked while I was living in Surrey Hills Sydney.  Searching  I found YouTubes of several performances from this album. I particularly liked the mantra like version of “The Sick Rose” recorded here:

The Sick Rose/The Nurse’s Song

All of the Ginsberg Blake performance are now available at this University of Pennsylvania website:



Inefficient though fairly effective carbon pricing

IT is now widely understood (i) that current carbon pricing has fairly marginal impacts on electricity prices and that (ii) current electricity prices are high because of excessive investment in network costs which stems from the way electricity prices are regulated: Ross Gittins provides a simple explanation of this second issue.  Australian  electricity prices are very high and this electricity is largely generated in coal-fired power stations.  Thus the inefficiency in transmission creates the high prices which reduces the quantity demanded of electricity. Indeed this quantity – along with associated carbon emissions – have fallen over recent years.  Are we getting an effective carbon price as a consequence of the distribution network inefficiency?  Not really since there is real inefficiency here because there is a waste of resources, particularly capital, in the electricity sector. In terms of resource allocation it would be preferable to provide households and firms with much cheaper electricity and then to tax the carbon emissions severely enough so that demand was significantly curtailed.  In addition, high electricity costs in themselves do not provide the correct market signal to switch away from coal to less polluting sources of electricity such as gas although this switch has been occurring since 2008 well before carbon pricing came in operation.  They do however provide incentives to switch towards solar energy by households and firms trying to insulate themselves from higher electricity prices.  The interesting feature of the latter switch is that it increases the excess capacity of the electricity sector and makes more electricity price increases likely. This virtuous “downward spiral” accentuates the decline in demand for carbon-based electricity supplies and does have positive although imperfect effects in addressing climate change.

For these reasons I strongly favour retaining incentives for solar and wind energy because of the effects this will have on the conventional power sector.  On the other hand, as Ross Garnaut has pointed out to us, the effects of growing excess capacity in the electricity sector are likely to undermine the effects of the Emissions Reduction Scheme subsidies proposed by the Coalition Government.  Power stations with excess capacity are likely to draw on carbon reduction subsidies by closing down plants with uneconomic excess capacity and then by operating remaining plants at closer to full capacity. This might mean that the carbon reduction subsidies might have very limited effect in reducing emissions – they will simply provide subsidies to the uneconomic (and often privately foreign-owned)  power firms.