Norquay Densification

With population growth coupled with environmental issues, urban densification seems to be a hot issue around.

Densification carries with it both positives and negatives. On one hand it can help the environment because having locations closer together can lead to lower car use (in turn lower car usage means less carbon emissions). Increasing densification can also lead to lower housing costs. By definition having something that is denser indicates being more closely compacted together which means being able to put more housing units together. More housing units, like increased supply, should lead to lower prices. It can also lead to a more diverse and lively neighborhood.

However, there are also negatives to densification. In fact, an article in The Province highlights just that.

On April 7, 2013 The Province released an article showing concern over the densification of the Norquay area[1].

The Norquay neighborhood in Vancouver goes from East 41st Avenue to East 28th Avenue and from Gladstone to Killarney Street. The issue at hand is zoning changes that will allow increased housing units (and thus more people) in the area.

With more housing one would think that homeownership would become more affordable. Basic economics does dictate that more supply means lower prices. Metro Vancouver released a report on increasing housing density in single detached neighborhoods as a way lessen housing price increases[2]. Wealthier homeowners usually do not reside in that area of Vancouver but if they did, it would raise their wealth since lower housing costs means they get to save more from their disposable income. However, from various courses I have learned that when poorer, my marginal utility is higher and I am losing more when I am giving away money. Thus the distributional effect of this policy then benefits the less affluent residents. It should make homeownership or renting more affordable for these residents. Lower home-costs then should benefit all but more for the less wealthy.

The question is now how effective this rezoning of Norquay is going to be, and not only in terms of its effect on housing prices.

In my opinion the hardest thing about densification is what happens if something is already dense? What happens when a limited amount of space has already too many people?

(I will not consider the difficult political issues. A building that is rezoned for development requires the developer to pay the community some kind of cash payment that I will not go into detail on. There are issues of an inadequate amount going back to the community that goes beyond the scope of densification3).

“Despite all the promises made along the way, almost all that the ‘planning’ has done for Norquay so far is to dump additional density on top of existing density”[3].

If this is the case then higher densities will not be effective and will in fact produce the opposite effect. In fact, most of the positive effects of densification are never seen.

Densification is supposed to help reduce carbon emissions by having fewer cars around. Wendell Cox argues that taking a car is more efficient than taking public transport[4]. If that is the case then increasing housing units means adding more families that also means more cars. The positive gain of a lower carbon footprint is not met with densification in this case.

Further, a study should be conducted to verify if adding more units would lower housing prices. Results from a study on Vancouver Housing Density and Property Values suggested found that more densification did not lead to lower housing prices. They further found that it could be the case that those with more income could be the driver for higher housing prices[5]. If then the demand for these homes increases by young professionals with increasing buying power, the opposite effect might occur and the less affluent would greatly be affected by the policy and it will create a regressive effect.

Strictly speaking about densification issues could arise if pushed too far. If a finite space is already filled, negative effects will occur. If this were the case, (I’m not saying it is), then development of Norquay would be a bad idea (again, other political stuff aside).

I am not saying that the development on Norquay is necessarily a bad thing but it should be important to note that if the current density situation is not examined correctly, the negative effects are going to make things worse than they already are.

 

 



[1] Frank Luba http://www.theprovince.com/Norquay+development+proposal+raises+alarms+about+densification+east+Vancouver+neighbourhood/8208400/story.html

[2] Coriolis Consulting Corp. http://www.metrovancouver.org/planning/development/housingdiversity/AffordableHousingWorkshopDocs/IncreasingHousingDensityinSingleDetachedNeig.pdf

[3] Eye on Norquay

http://eyeonnorquay.wordpress.com/

[4] Wendell Cox

http://www.macdonaldlaurier.ca/files/pdf/Mobility-and-Prosperity-in-the-City-of-the-Future-Commentary-May-2012.pdf

[5] http://blogs.ubc.ca/vancouverhousingdensification/conclusion/

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A Quick Look At Sweden’s NOx Tax

A Quick Look At Sweden’s NOx Tax

What is NOx?

NOx is a generic term for nitrogen oxides. The reaction of nitrogen and oxygen in the air during combustion at high temperatures produce NOx. It is a dangerous pollutant and a component of acid rain, which can cause extensive destruction to vegetation and animal life. Sweden is more sensitive to acid rain than most other countries due to granite bedrock covering most of the country. Because of this, precursors to acid rain like nitrogen oxides have been a major political issue for the Swedes since the 1980s.

In 1985, the Swedish Parliament set a goal to reduce the level of 1980s NOx emissions by 30%. In 1988, stationary combustion plants were subjected to individual, non-tradable, emission permits. However, this was not enough to meet their objective and the existing regulatory policy was deemed to be insufficient to meet the target. Thus, in 1991, the NOx tax was introduced. The policy was aimed to increase investment in better abatement technologies and reduce emissions. The management of the tax was assigned to the Swedish Environmental Protection Agency.

Only large combustion plants are required to pay the tax. Initially, a large firm was defined as producing at least 50 GWh of useful energy per year. However, as the policy developed and was successful, these costs have decreased and thus the criteria of being a large firm fell twice. In 1996 plants generating at least 40 GWh of energy per year were included and in 1997 this was lowered further to include firms producing 25 GWh. At present, all stationary combustion plants producing above the energy output limit and are part of the sectors power and heat production, chemical industry, waste incineration, metal manufacturing, pulp and paper, food and wood industry, are subjected to the NOx tax.

Smaller firms are not included because of high metering and abatement costs that were viewed as unreasonable for these smaller plants. Industries that are exempt from the tax are: cement and lime industry, coke production, much of the mining industry, refineries, blast-furnaces, glass and isolation material industry, wood board production, and processing of biofuels. Mobile sources are not included as well.

The charge rate was originally set at SEK 40 per kg NOx. This was based on an estimate of the marginal abatement costs that were predicted to reduce emissions. In 2008, this increased to SEK 50 or EUR 5.5 per kg NOx to re-establish the real value of the tax as to effectively sustain motivation for abatement. The duty is assessed directly on emissions or presumptive emissions. Normally, direct emissions are chosen because it typically brings about lower charges.

The question with taxing pollutants is often, is the policy revenue neutral? For example, every dollar generated from the carbon tax in BC is neutral through reductions in other taxes. Is Sweden’s NOx charge revenue neutral?

By definition, revenue neutral is when the payments received by the government remain virtually unchanged. In other words, the government does not retain most (or any) of the revenues from the tax. If we follow this definition, it can be said that the Swedish NOx charge is revenue neutral.

Why?

Incomes are redistributed to the different plants. Only about 0.3% of revenues collected are administration costs and 3% are metering costs. The rest are allocated back to the polluting companies. Refunds are given depending on the amount of useful energy produced. Firms emitting low emissions compared to their energy output are net recipients while high emitting firms are relative to energy output are net payers. This discourages wasting energy by plants and avoids changes in competition.

This implies that the Swedish government earns relatively nothing from the revenues of the NOx tax. It then seems that this charge-refund policy for nitrogen oxides emissions is in fact neutral.

Is the tax rate appropriate though?

The appropriate tax is set where aggregate firms’ marginal abatement costs are equal to the marginal damage caused by emitting NOx. This only works if the Swedish Environmental Protection Agency knew each firm’s abatement costs. Firms have an incentive to understate their abatement costs to lower their expenses under a tax. Sweden has had the tax in place since the early 1990s. If firms are lying they should have gotten caught by now because failing to meet the desired reduction in NOx emissions could easily be fixed by increasing the tax. They have reduced NOx emissions and their history shows that they did raise the tax in 2008 to establish the real value of the tax. Even if it is assumed their estimates for abatement costs are correct, the tax rate still does not seem to be appropriate.

Is it due to the refund system?

One would think that the refund would produce the opposite effect though: it gives firms the incentive to overstate their abatement costs. Assume that the tax successfully pushed a firm to adopt new cost saving abatement technology. Instead of reducing emissions because of this new tech, the refund reduces the incentive of the firm to lower emissions because they can save on reduction costs and get refunded at the same time. However, this is not the case. Their payback scheme rewards firms that can produce high output while emitting low emissions. This then discourages the different plants that adopt new technologies to lie and emit more.

My thoughts:

In my opinion, the tax is not set appropriately because the marginal damage being used to set the charge is understated. Remember that many different sectors are exempt from the NOx charge. The tax appears to be set on the damages caused by large stationary firms that can bear the cost. Smaller firms and mobile sources are not subjected to the tax. If the damage caused by their emissions was not taken into consideration when setting the tax, clearly there will be an understated marginal demand curve and the tax is going to be at a lower rate than it should be. To get the appropriate tax they must include all sectors and set the charge according to the marginal abatement and damage of all the groups emitting nitric oxides.

Sweden has been dealing with NOx emissions since the 1980s and has had a NOx charge since the early 90s. The fact that they have reduced emissions suggests that they may have gotten the right system working for them. However, they might want to reevaluate the appropriate level of their tax to include all sectors that emit NOx, especially mobile sources.

 

 

 

Sources:

http://www.impireland.ie/downloads/Nox%20Tax%20Brief.pdf

http://search.oecd.org/officialdocuments/displaydocumentpdf/?cote=ENV/EPOC/WPIEEP(2011)20/FINAL&doclanguage=en

http://www.oecd.org/greengrowth/consumption-innovation/43211635.pdf

 

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A Quick Look At Sweden’s Carbon Tax

A Quick Look At Sweden’s Carbon Tax

In this exercise I was asked to do the following regarding a particular carbon policy:

**
1) The coverage of the carbon policy. Discuss the sectors/fuels covered. Discuss, what sectors/ carbon equivalent emissions are exempted. How does the policy implement over time? Use the information about the policy’s coverage to inform an evaluation of the cost-effectiveness of the policy.
2) Discuss distributional effects of the policy. One of the primary concerns around a carbon policy is that by raising the price of energy it disproportionately impacts the poor. How do these policies address such distributional concerns?
**

A Quick Look At Sweden’s Carbon Tax

Origin and goals:

  • The carbon tax was introduced when the Swedish energy tax system was reformed in 1991
  • The 1980s had a focus on oil substitution and thus the tax system was designed to discourage oil use
  • The goal: to reduce COemissions and to spur innovation of industry
  • How: The tax is levied as a specific tax on oil, coal, natural gas, bottled gas, and petrol

Climate change is such a big issue today. One can hear phrases like reducing carbon footprint multiple times on any given day. Truly environmental problems are abounding. A solution suggested and tried by some countries like Sweden (where 80 per cent of their contribution to greenhouse gases, came from carbon dioxide emissions) is implementing a carbon tax.

What is a carbon tax?

A carbon tax is a form of pollution tax used to cut greenhouse emissions and promote cleaner energy. It is meant to target carbon dioxide emissions from burning fossil fuels. Many prefer the CO2 tax for its simplicity and impartiality.[1]

The problem with a carbon tax though is the distributional effects it has. Raising the price of energy inexplicably affects the poor. Does a carbon tax work? It appears so in the case of Sweden. Not only have they reduced their carbon emissions, their economy has grown by more than 44 per cent and in 2011 they were second in the world on economic competitiveness.[2]

Sweden has been taxing carbon since 1991. The tax is believed to have encouraged innovation and the use of green heating technologies that have significantly phased out burning oil for heating. The CO2 tax has thus played a role for the country to be on target to achieve its commitment under the Kyoto Protocol.[3]

What is the coverage of their carbon policy?

In 1991, Sweden introduced a carbon tax as a complement to the existing system of energy taxes (which were simultaneously reduced by 50%). The country focused on oil substitution in the 1980s and the tax system was designed to discourage oil use.

The tax was initially set at a general level of US$133 per ton of carbon.[4] In 1993 however, competitive concerns changed the tax burden on the different sectors. The CO2 tax increased for consumers while in industry, taxes fell. This remains the same today. Industry, agriculture, forestry, and fisheries pay only about 21 per cent of the tax. Moreover, these sectors can receive additional reductions (and refunds) depending on the company’s value of sales versus their tax payment.[5] In 2009, the country’s standard tax rate was the equivalent of US$105 per metric ton CO2 but for industry it was only at US$23 per metric ton CO2.6

The major taxed sectors in Sweden’s carbon tax system are natural gas, gasoline, coal, light and heavy fuel oil, liquefied petroleum gas (LPG), and home heating oil.[6] The tax addresses the energy and transport sectors. Biofuels (including peat) are not taxed.

Is it cost-effective?

Being cost effective means achieving a specified goal at the lowest possible cost. To evaluate whether Sweden’s carbon tax is cost-effective or not begs the question what was the desired goal and how much should it cost.

The goal is obvious, reduce carbon emissions and the tax is effective in doing so. COemissions have been falling in Sweden since the tax’s implementation in 1991. By 2008 Sweden’s emissions decreased by more than 40% since the 1980s.5

BUT are they reducing carbon emissions at low cost?

One way to tell if costs are being minimized is if the equimarginal principle is satisfied. The equimarginal principle can be simplified in this case as having the marginal abatement costs for all sources the same. Aggregating marginal abatement cost for each individual should then bring us to the appropriate tax. If this were the case, then the carbon tax would be uniform throughout Sweden. The amount of the tax, however, varies for different sectors. This indicates that they are most likely not reducing carbon at lowest possible cost.

If they did not do it that way, then more damaging fuels should be taxed more. However, the Swedish carbon tax fails reflect the actual level of carbon being emitted by fuels. Low fuel oil and heavy fuel oil for example were taxed at the same rate even though they cause different levels of environmental damage.[7] If taxing sectors separately, the tax should obviously be higher for the fuel that causes more destruction. The tax may then be costly to a particular industry that may be paying higher than it should and the reverse is worse. If not taxed appropriately, a higher carbon emitting sector will be paying less than it should be and is most likely causing more damage because the tax is too low than it should be if it were cost effective.

Are there distribution effects?

As mentioned in the beginning, a major concern of a carbon tax is its distributional effects. The tax is used specifically to raise government revenue6.  How does the country use the revenue? Does Sweden’s COtax impact the poor positively or negatively?

Consumers pay the full effect of the tax and there does not appear to be any additional policy to address the concern. Even without running any type of analysis it is obvious that the COtax must have negative effects on poorer households.

Where does the tax revenue go?

The Swedish carbon tax goes straight to government revenue.

I have not found anything that indicates the Swedish Government is still using the tax revenue to subsidize alternative energy sources but the regressive results can be lessened if consumers are able to convert to biomass fuels. Using biofuels for heating is deemed lower than the carbon tax.[8] It would make sense then if they gave or are continuing to give incentives to consumers to make the switch to alternative energy by subsidizing their costs to do so.

With regards to the industry sector, remember they pay a much smaller tax compared to consumers. Could they be the recipients of the subsidy to change to energy sources for production? From the little literature that I have been able to read, it seems part of the revenue from the tax goes to research and development for biofuel and alternative energy.

Sweden has had a carbon tax since 1991. They were one of the first countries to implement such a policy. Even if the tax has negative distributional effects and has not been cost effective, it has been successful in reducing Sweden’s carbon emissions. It has also spurred the country to be in the forefront in using biomass and biofuels. Will they achieve their goal of being the world’s first oil-free economy by 2020?[9] Only time will tell.

 


[1] http://science.howstuffworks.com/environmental/green-science/carbon-tax.htm

[2] http://science.howstuffworks.com/environmental/green-science/carbon-tax.htm

[3] http://www.davidsuzuki.org/issues/climate-change/science/climate-solutions/carbon-tax-or-cap-and-trade/

[4] http://www.sciencedirect.com/science/article/pii/S0961953498000361

[5] http://www.economicinstruments.com/index.php/component/zine/article/78

[6] http://www.nrel.gov/docs/fy10osti/47312.pdf

[7] http://www.colby.edu/personal/t/thtieten/eco-taxation.htm

[8] http://unfccc.int/resource/docs/natc/swenc4.pdf

[9] http://www.erec.org/fileadmin/erec_docs/Projcet_Documents/RES2020/SWEDEN_RES_Policy_Review_Final.pdf

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Trading Game Closing Notes

With the FRE 501 trading game coming to a close I thought it would be fitting to end my blogging with a recap of what I’ve learned since the game started.

Since this assignment started I traded wheat. To be more specific, I traded December wheat contracts. What I soon realized is that anyone with fundamental knowledge of economic theory could attempt trading in the futures market. For the most part, basic understanding of factors for supply is all I had to look for. From my experience with this exercise all I had to do was look at weather in the major producing regions of wheat. Arguably the biggest factor in production, weather allowed me to gauge if prices were going to rise or fall. Obviously good weather conditions means good production which in turn means good supply leading to lower prices (and of course the opposite for poor weather conditions).

The challenge was more on the timing. I had to get used to figuring out when to go long and when to go short on the different contracts. It is one thing to understand and predict how prices are going to move but it’s another to make profits from them. Once I understood how speculators would react to news that’s when I was able to do the optimal thing and buy low and sell high.

A wise man told me at the beginning that trading is like gambling. Sure enough, similar to poker, my strategy was trying to react to what others are going to do based on information given (or the cards dealt). Considering I am ending the game with a profit, I think it’s fair to say my strategy worked.

**I would’ve made more money if I wasn’t so risk adverse trading only 1-2 contracts at a time. The most was 3.

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Week 8- Cool Sources

This week Andrew P. spoke to us about the use of technical analysis. Truth be told he’s been discussing technical analysis with me throughout the term and I’ve been learning lots from him. For that reason he is week 8’s cool source.

http://blogs.ubc.ca/ajpangil/

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Week 8 – Um Now What?

Well, nothing changes. Even with the report saying the USDA increased US global wheat-supply estimates (http://online.wsj.com/article/DN-CO-20121109-011476.html), weather has to be taken into consideration to check if it’ll cooperate to prove the USDA estimates to be correct.

Other things to look into would be the situation in Europe. Not only the weather conditions there but also the economic crisis they are currently going through. If everything is now better, how is that going to affect prices? That’s another thing to look into.

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Week 8 – Was It Luck Or Logic? Luck. Definitely.

Wheat prices kept rising last week. A good reason for that was poor weather conditions in different producing counties (http://online.wsj.com/article/DN-CO-20121107-016197.html).

I figured that eventually prices will come down as many speculators offset their long positions from these rising prices. I read somewhere though (I can’t remember where) that the crop report released Friday was going to indicate better than expected harvest results. When I read that, it was Wednesday afternoon and I already went short on Dec wheat that same morning. My worry was that I went short a day early. Speculators may try to raise prices to increase gains upon release of the report on Friday (shades of Trading Places?). I was also worried that if no one believed this rumor that the report will say better yields, people would continue to take long positions. Obviously with production constraints in different countries prices would continue to rise until a report comes out of better harvest yields.

I woke up Thursday with the price of Dec wheat lower than my price in from the previous day. Not willing to take a chance, I offset my position immediately. I had 3 contracts going and got in at 891.50 and got out at 891.00 (although when I put my trade in it was 888.75, just saying). Sure my gains were meagre (only $24 per contract). Lucky I did because later in the day prices shot up above 900.00. Still above $40000 at $41146.72

Luckily this isn’t real money because if it was, I’d be pretty annoyed. On Friday, the USDA announced that their forecast for US wheat supplies were up 7.6% from its estimate last month (http://online.wsj.com/article/DN-CO-20121109-011476.html). With a report like that, price came down, proving that I went short a day too early.

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Week 7 – Cool Sources

As humans we are all meant to be social beings and as such information can come from my fellow classmates.

Throughout the week I was in discussion with Gabi (http://blogs.ubc.ca/gabrielle/) about trading wheat. She was the one who brought to my attention that there was a strike going on at the different ports (http://newsandletters.org/issues/2012/Sep-Oct/essaySepOct_12.asp).

Discussion amongst peers can be a good thing.

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Week 7 – Now What?

Now what? What position should I take? How do I increase my make believe money?

I’ve been trading wheat so most my research has been for wheat. Most news I’ve been reading is that prices are going to be determined by exports. Increased exports would mean that production in other wheat producing countries has decreased. Therefore, again, Australia’s weather conditions and now seemingly Argentina will play a role. If conditions continue to be bad, then I would expect prices to increase as demand for exports increase as well. Once news hits of increased exports, expect prices to rise (http://online.wsj.com/article/DN-CO-20121102-009515.html).

Going long would be a good idea then.

Once more it seems as if weather will play a significant role. If exports is the issue, exchange rates will also play a role. By how much I am not certain but it would be a good idea to take a look at how economies are doing world wide.

 

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Week 7 – Sort of Went Right?

This was the first week that I did a small panic trade. As usual I did traded a contract in December wheat.

On October 30th I woke up to prices rising. With news from the week before about Ukraine cutting exports and with the anticipation of hurricane sandy, I thought that prices would now rise. Makes sense right? Less exports, less supply higher prices. Impending natural calamity, prices will rise. My logic then was to go short figuring that prices will come back down eventually once speculation on the price rise stops and when people start buying short contracts to offset their long contracts.

However, as the day went along I noticed that prices were already dropping. With my prediction technically correct, I also realized that it would be risky to keep this position, especially with the inconsistencies of Trade Sim. If prices rose, I’d lose. So I figured, close it now and make whatever I can.

Got in at 854.50. Closed at 854.25. Made $11.50. Better than nothing. Equity rose to $41074.25.

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