Ishrat Gadhok – Topics in Applied Economics and Global Health

London Congestion Charge Zone

Post author By Ishrat
Post date March 23, 2013
2 Comments on London Congestion Charge Zone

Political beginnings

The turn of the millennium ushered in a new administrative system in London – namely, the Greater London Authority Act – which devolved responsibilities like transportation, emergency services and economic development to an elected Mayor of London. Then independent candidate, Ken Livingstone championed the cause of congestion pricing as his electoral platform. Eventually, for two consecutive terms, he served as Mayor of London, and became the man responsible for establishing one of the largest congestion charge zones in the world.

That is not to say that he didn’t face widespread opposition from politicians, labour organizations and motorists (1). Although the opposition’s plans of completely scrapping the “Kengestion” charge have now been scrapped themselves, the incumbent Conservative mayor Boris Johnson is much less disposed to remedy existing inefficiencies in an economically sound way, than his Labour Party counterparts. Quite ironically, he cited Professor Edward Glaeser to advance such actions as halving the charging area and opposing price hikes, unaware that his ‘muse’ would infact support the free-market logic that Johnson inadvertently opposes (2).

Changing policy environment

The congestion charge policy in London has gone through substantial change within the 10 years that it has been around. Perhaps because it was one of the few cities that led the world in this kind of scheme, and perhaps because it has remained a contentious political issue, the policy seems to have undergone periodic revisions which, when summed up, appear rather contradictory and inconsistent.

Initially, the charge was intended to reduce congestion on the roads – an externality faced by all travellers to and from central London. A £5 daily charge was thus levied within a defined zone, and the market was allowed to take effect. Moreover, the revenue generated from this charge, it was said, would be used towards strengthening the public transport system (to absorb the travellers disincentivized by the charge). Official (Transport for London – TfL) reports estimated that in fact, there was a 20-30% drop in congestion (“defined as excess delays per kilometre ) following the charge (3). However, according to the same official sources, despite an increase in the daily charge to £8 in 2005, the decline in congestion was not sustained over time, and instead, it trended upwards (4). TfL cites reduced capacity of roads (due to higher road works for construction of bus and pedestrian lanes) as the cause of this trend. The data does in fact show that traffic levels had declined and then stayed constant. However, if the revenues were used to finance the construction of such bus and cyclist lanes, the goal of reducing congestion was evidently overridden.

Moreover, while questions were still being raised of the effectiveness of this congestion charge zone at reducing travel time, a month ago, Mayor Boris Johnson announced “his vision to see the world’s first ‘Ultra Low Emission Zone’” (5). A shift towards a more rigorous emissions reduction policy goal can be seen since 2011, when the daily charge was increased to £10, and perhaps more significantly, the exclusion criteria became more explicit in favouring low-emissions vehicles. Initially, those excluded by the charge in 2003 were residents of the zone (they received a 90% discount), emergency vehicles, public transport vehicles, motorcycles, bicycles, and certain vehicles using alternative fuels (“these included the cleanest LPG and natural gas cars, and all electric and battery-electric vehicles”; the car had to be listed on the “PowerShift Register”) (6). In 2011, the Alternative Fuel Discount was replaced by the “Greener Vehicle Discount”, which exempts “cars that emit 100g CO2/km or less and meet the Euro 5 standard for air quality” (6); all plug-in and electric hybrid vehicles are therefore exempt (6). Sure, this may help in emissions reductions, and sure, that is an international commitment of UK. However, the question remains whether the original policy goal is met? The current specifications are essentially incentivizing increased traffic – albeit cleaner – but road space nonetheless. Therefore, from the perspective of a polluting consumer of the road space, he is not receiving the benefits of reduced congestion despite paying a heavy price for it. For a clean, non-polluting consumer: well, we’re back to the problem of public goods, where some consumers pay for benefits (road space) that accrue to others.

Final comments on effectiveness

Hilton Holloway (blogger for AutoCar) considers the congestion charge policy as “outright farce”, given that it is the city’s “ageing taxi cab fleet” and its “lumbering, stop-start, buses and commercial vehicles” that are “responsible for 25 per cent of diesel pollutants” which are implicated for air pollution (7). Therefore, he believes that exempting a few thousand new cars will not infact induce emissions reductions, and neither he says, will it incentivize more traffic in the zone (because these cars form a small fraction of the total traffic currently entering the zone). While I cannot argue for or against the government’s perverse agendas to sustain revenues from the congestion scheme as he does, I do agree with his first point about the nominal effect of exempting low-emissions vehicles.

In any case, to achieve the kind of emissions reductions from hybrid cars that will be required for Greater London to become and Ultra Low Emissions Zone, there would have to be a sustained increase in the numbers of these vehicles, which, given the exemption from congestion charge, would treat the zone as a public good, and would contribute to increased congestion as before. Therefore, I find this scheme contradictory and unsustainable in the long run.

References:

http://www.vtpi.org/london.pdf
http://www.guardian.co.uk/politics/davehillblog/2012/nov/13/london-road-congestion-edward-glaeser
http://www.tfl.gov.uk/assets/downloads/Impacts-monitoring-report-2.pdf
http://www.tfl.gov.uk/assets/downloads/sixth-annual-impacts-monitoring-report-2008-07.pdf
http://www.bbc.co.uk/news/uk-england-london-21451245
http://www.nextgreencar.com/congestioncharge.php
http://www.autocar.co.uk/blogs/green-cars/londons-congestion-charge-descends-farce

Environment

Sweden Pesticide Tax

Background

Pesticide use can pose significant environmental externalities (3). Among other impacts is their effect on surface and groundwater contamination. Being a non-point source of such pollution, pesticide regulation is thus a complex policy issue.

In the 1980s, pesticides were a hotly debated topic in the Nordic countries. Although I am unable to find the precise trigger for such debate (I would appreciate if my readers would share any information on this), I found that Sweden was the first of these countries to formally address the environmental and health risks posed by pesticide overuse (4).

Introduced in 1984, the main goal of the pesticide tax was to reduce the usage of chemicals in the environment (1). Moreover, the tax revenues would be used to finance research and development of more environmentally benign practices, making pesticide reductions sustainable.

Specifically, Goal 1: By 1990, reduce consumption by 50% of the average of 1981-1985 levels; Goal 2: achieve further 50% reduction in consumption by 1996. In total, Sweden aimed for pesticide use reduction of 75% from before implementation of tax.

Implementation

The regulation was a Tax plus a Regulation Fee.

For the most part, the tax was administered as a fixed amount on every kilogram of active ingredient in the pesticide (1). Later, this was changed to a percentage of product price. The tax level changed many times since its introduction as summarized below (2).

1984: SEK 4/kg active substance
1988: SEK SEK 8/kg active substance
1994: SEK 20/kg active substance
1996: tax share is 8% of product price
1999: tax share is 5% of product price

Moreover, a regulation price was also initially charged to finance the administrative cost of implementing this regulation.

1991: SEK 46/ha dosage or 20% of the price of the pesticides
1993: converted into a tax
1995: abolished
1996: pesticide regulation fee

Sectors Covered and Exempted

The tax is applied at the retail level. It is imposed on manufacturers and importers of pesticides. Exempt from the tax are wood preservatives (1).

Appropriateness and Effectiveness

At first glance, it seems that consumption indeed decreased nearly 50% by 1991, as desired. Although the stated goal of 75% reduction was not achieved, the total consumption as of 1996 does seem to be 35% of average 1981-1985 level.

Figure taken from (1).

However, as we can see from the graph above, even when the tax rate more than doubled from 8 SEK to 20 SEK in 1994, there was no overall decrease in the volume of pesticides used. Instead, the Swedish Board of Agriculture and National Inspection found that farmers increased their purchases of low-dose pesticides (those that are biologically active at very low concentrations per hectare) (5). This was likely a result of the “soft effects” of the tax (4). That is, tax revenues were used to finance research that resulted in pesticides that were biologically active at low doses. Therefore, instead of looking at number of tonnes sold, if one were to examine the number of doses sold, there would be a definite increase since 1995 (4).

An obvious question that arises is whether a reduction in gross volume of pesticide use is equivalent to a reduction in risk to the environment or to health. A flat tax like the one implemented in Sweden treats all active ingredients the same, regardless of the level of environmental and health damage that they impose. It therefore merely encourages a shift from high to low volume products, which may in fact be more hazardous.

The more recent shift towards a tax as a percentage of pesticide prices may not be the particularly effective either, as prices may promptly decline as a result of technological change (that the tax revenue is funding!) (3), ultimately encouraging more pesticide use.

Therefore, rather than aiming for a reduction in tonnage of pesticide (active ingredient) used, a tax implemented on a hazard or estimated damage basis would be a more effective solution in my opinion. Even though I can see difficulties in estimating its value, such a tax would more explicitly address the social cost of the pesticide, rather than simply the quantity.

Moreover, the research and development which is being funded by the tax revenues would better achieve the stated goals if it was aimed at discovering pesticides which have lower damaging effects.

References

Environment

British Columbia’s Carbon Policy: a curious case of leadership loneliness

Post author By Ishrat
Post date February 8, 2013
3 Comments on British Columbia’s Carbon Policy: a curious case of leadership loneliness

Political Origin

In May of 2009, against daunting odds and a historically low voter turnout, the incumbent Premier of BC – Gordon Campbell – led the Liberal Party into a third term. In an article on the politics of that election in Macleans (1), Andrew Coyne argues that although it was widely unpopular at first, the NDP’s strident opposition to the tax during the election campaign may have overwhelmed their own commitment to environmental sustainability (2). In this setting, carbon tax being a bold, risky conviction may have actually led to the Liberal victory.

On July 1, 2008 when it was implemented, BC became the first North American jurisdiction to have committed to such a carbon tax regime. Originally slated at $10/tonne greenhouse gas emissions (GHGs), the tax was designed to rise incrementally each year, until it hit $30/tonne in July 2012. Phasing it in was intended not only to allow British Columbians to adapt to a low carbon footprint, but also for other jurisdictions to follow their lead (3). The situation today is that the tax has reached $30/tonne as expected, 57% of British Columbians support it, but BC is still the only jurisdiction in North America to have it in place. A discussion of the distributional and economic effects of this policy follows in this article.

How it works

Traditionally, there are two instruments of reducing emissions. The first is a quantity-based Cap and Trade system, whereby a total abatement level is fixed (or emissions are capped) at a certain level by the government, and emissions permits are auctioned (or given away) among the highest emitters in the market, who can then buy or sell them based on their individual needs. The guarantee of emissions reduction, and the economic efficiency generated from the trade of emissions credits are some of the positives of such a scheme. Additionally, government revenue can be increased by a competitive auctioning process, which can then be put towards minimizing the adverse distributional impacts of the policy. However, it is argued that by penalizing industrial polluters, not only will local industries become disadvantaged, but also there may be little incentive for individuals or households to switch to energy-efficient solutions.

The second mechanism is a carbon tax, which puts a price on each tonne of GHG emissions, raising the price of the fuel to reflect the true social cost of emissions (i.e. accounting for the externality of pollution). This is done to elicit a market response in order to reduce emissions. The advantage of this system over cap and trade is that it covers all polluters and fuels equally. However, it is argued that such a policy disproportionately hurts the poor whose demand for fossil fuels is inelastic, and who do have not enough income to adapt to newer technologies.

In this context, British Columbia has adopted a “revenue-neutral carbon tax” which is championed as reaping “double dividends”: emissions reductions as well as the removal of distortions. The policy stands on the following five pillars (4):

All carbon tax revenue is recycled through tax reductions (that is, all carbon tax revenue will be returned to tax payers through tax reductions, rather than being used to fund government programs)
The tax rate started low and increases gradually (to allow time for adaptation)
Low-income individuals and families are protected (through tax credits)
The tax has the broadest possible base (covering nearly all fuel combustion as captured in Environment Canada’s National Inventory Report)
The tax will be integrated with other measures (such as cap and trade)

Tax rate for individual fuels is determined by the amount of GHG released from burning it. Moreover, practically, this scheme is relatively simple to administer, as the tax is collected in much the same way as motor fuel tax (with the exception of natural gas, which is collected at the retail level).

My two cents: Cost-effectiveness and Distributional Effects

The effectiveness of the tax at reducing emissions has been observed since its implementation in 2008, whereby the average emissions for BC are lower than that of Canada as of 2013. It is projected that in the absence of all other GHG reduction strategies, the carbon tax alone could cause a reduction in British Columbia’s emissions in 2020 by up to three million tonnes CO2 equivalent annually (5).

However, the sustainability of this scheme can be questioned, because of its potential to slow economic growth. For instance, as the government itself reports, the tax returns that the revenue-neutral scheme promised have actually been $192 million in excess of what was collected by the policy in 2011/2012 (6). It is therefore no surprise that there is wide buy-in for the policy. However, this only means that lower government revenues are available for other government services, which is a cost that needs to be accounted.

Moreover, as long as other jurisdictions in Canada and the U.S. do not subscribe to some form of emissions reductions scheme, British Columbia’s relatively higher-cost industries (thanks to the tax) will continue to face an unfair disadvantage in the national or world market (particularly against industries in Alberta) (7). This may lead to individuals and businesses migrating to other provinces to resume their operations and stay competitive.

Therefore, must leadership in carbon policy be by example? Perhaps it would be more effective to push for a regional or national reductions plan than treading solo. Although the government has accounted for distributional inefficiencies by making the tax revenue-neutral, long term data on economic growth will reveal whether this is a truly effective and sustainable reductions regime.

References
1. http://www2.macleans.ca/2009/05/26/a-new-coalition-a-different-politics/
2. http://www.carbontax.org/progress/where-carbon-is-taxed/
3. http://www.bcchamber.org/advocacy/policy/provincial_gov/finance/bcs_costly_carbon_tax.html
4. http://www.fin.gov.bc.ca/tbs/tp/climate/A1.htm
5. http://www.fin.gov.bc.ca/tbs/tp/climate/A4.htm
6. http://www.fin.gov.bc.ca/tbs/tp/climate/A2.htm
7. http://taxpayer.com/blog/03-10-2012/bc-carbon-tax-unfairness-continues-hamper-economy

Environment

Add to the Marginal External Costs of Fracking: Livestock Health

Post author By Ishrat
Post date January 29, 2013
2 Comments on Add to the Marginal External Costs of Fracking: Livestock Health

Hydraulic fracturing – “fracking” – of shale rock formations is taking place across the landscape of the ‘true north’. While supporters see in it a promising future for meeting the world’s energy needs, critics see an environmental disaster. Economists, as usual, see unaccounted negative externalities (1).The fracking technique imposes both global and local negative externalities, such as greenhouse gas emissions and groundwater contamination, respectively. An exhaustive list can be found on Ed Dolan’s blog (1); although admittedly, not all of those have been quantified.

Recently, the first and only peer-reviewed study on the link between fracking and livestock health was published in New Solutions: A Journal of Environmental and Occupational Health Policy. Although the death toll of livestock in shale-gas states was not very high, they were reported to have experienced neurological, reproductive and acute gastrointestinal problems (2). The costs to dairy farmers from the death of their capital, and to consumers from potential health risks has now been quantified and can, and must be added atop the other costs already traced to the engineering marvel.
References:

1.http://www.economonitor.com/dolanecon/2012/05/04/fracking-and-the-environment-an-economic-perspective/
2.http://www.theecologist.org/News/news_analysis/1784382/livestock_falling_ill_in_fracking_regions_raising_concerns_about_food.html

Commodity Trading

Week 7: Cool Sources of Information

Post author By Ishrat
Post date November 25, 2012
No Comments on Week 7: Cool Sources of Information

This week, I relied on past sources for technical trading information, namely the Wall Street Journal, Barchart.com and Tradingcharts.com. Andrew had also mentioned Trading Charts in his presentation so I was assured that a combination of these could be relied upon for technical analysis. As before, the market data centre in the wall street journal allowed me to see soybean price changes in context of other commodity price trends such as corn and wheat, as well as other important commodities like crude oil; it allows you to see price trends of both on the same chart.

After my trade, when I tried to reflect on the theory of the ups and downs in prices this week, I looked up one new source called Farms.com (http://www.farms.com/), Yield Data Centre. As the name suggests, it basically provides information on commodity yields throughout the world. It is informative because it informs the reader about yields and harvests in all the major countries, as opposed to just the U.S. It also places these figures in context of world news stories, like the lowering dollar due to easing concerns of the fiscal cliff which has been an important factor with traders this week. I found their section on Government and Policy interesting, because the stories it carried gave me some new insight into farm policies in the U.S. that have an impact on prices.

Commodity Trading

Week 7: The Road Ahead

I looked up why the prices actually rose over the week and found the following causes: earlier in the week, due to “technical and commercial buying” (1) and due to a lower dollar which in turn was because of the “easing concerns about the fiscal cliff” (1), there was the net effect of lowering soybeans prices. At the same time, traders are watching the South American for news of delayed plantation given the heavy rainfall it received this season. It turns out that fewer soybeans have been planted at this time as compared to last year, which may have also driven prices up. Later in the week, soy oil exports rose which helped to keep soybean futures prices afloat (2).

Although technical analysis seemingly worked for me, I think it’s a bit of an odd way to go about making big trading decisions. One often hears technical traders say that theory should not be mingled with analysis of price charts, so that is what I did: I refrained from reading into the demand and supply forces at play and focussed just on ups and downs in prices (which certainly made my life a lot easier this week). For future trading decisions though, my choice of doing technical analysis vs. reading into the theory of demand and supply would simply be a result of whether I am plugged into the market or not. It is assuring to know that even if one is oblivious to what is going on in the market, they can likely make a technical trade as good as any other “expert” who has been completely plugged in at the time.

Commodity Trading

Week 7: What Went Right

As I had mentioned in my last post, I had wanted to try staying in my trade for a longer period. Based on Andrew’s presentation on technical analysis, I tried to devise a long term strategy and got into 2 long soybean contracts on Monday and stayed in until Friday. Although the prices fluctuated all week, I realized a net gain of $1850 on each contract as soybean prices rose $0.37 this week.

This week my trade was all about technical analysis. To do that, I honed in on the price charts for this past year and the last 6 months to try to find identifiable shapes like the head and shoulders, ascending and descending triangles and so forth. I noticed somewhat of a ‘head-shoulders’ shape which started in July this year, reached the peak of the left shoulder in mid-July, then reached the peak of the head in September, and finally, reached the peak of the right shoulder in November. By mid-November, prices had already dipped to July levels. So, at the start of the week, I had to make the decision of whether to go long or short. I figured that since traders will like to seize this low price, they will go long to lock in some profits. Also, since the ‘left shoulder’ isn’t too well defined, perhaps what we are seeing is instead an inverted head and shoulders, where the left side of the inverted shoulder happened in mid-October, and the current November prices are the lowest point of the inverted head. In this case as well, one would expect prices to go up before the ‘right shoulder’ appears. For this reason, I went long and realized some gains as a result.

Chart from: http://online.wsj.com/mdc/public/page/mdc_commodities.html?refresh=on

Commodity Trading

Week 6: Cool Source of Information

Post author By Ishrat
Post date November 4, 2012
2 Comments on Week 6: Cool Source of Information

This week, I found a website called barchart.com. Although I have the first half of the term (and some very valuable trading experience) behind me, I still need lots of explanations for how the markets work in order to verify my line of thought. Barchart was therefore a great discovery, because not only did it provide brief explanations for the daily changes in prices, but one article in particular helped clear the air on how weather reports should be analyzed. It is called “Watch Out! It is Raining in South America” by Chris Lehner of Archer Financial Services. He tells his readers to be more realistic about interpreting weather information by going back to a basic understanding of harvest seasons in the northern and southern hemispheres. Instead, he expects that there will be more “bouncing of grain markets due to changes and rumors about weather than a basketball during an NBA playoff game.” http://www.barchart.com/headlines/story.php?id=7178068

I think the article could make for a good read for anyone looking for a summary or refresher of Jim’s notes on futures trading so far because the article helps to tie the theory of daily price volatility and spread positions into the current state of the market.

Another link called “Futures 101” might also be useful for anyone needing to brush up on the theory. http://acs.barchart.com/sample/support/fut101.htm#buying

Commodity Trading

Week 6: The Road Ahead

For the last two weeks, I have noticed significant currency effects at play. I’d like to read into this a little more for future trading decisions. For the coming weeks, as I check for analysis of other grain prices for substitution effects on my chosen commodity, I’ll also be looking into trends and expectations of the dollar because it seems to exert a great deal of influence over commodity markets.

Moreover, I’d also like to understand better why and when commodity pullouts take place. I’d like to explore whether I am right in thinking that a rise in prices can soon after be followed by a decline as traders lock in their profits. So far, I have been assuming that the timing of this cannot be predicted, but one can research the price levels at which the price trend has been seen to reverse, and perhaps draw some conclusions from that.

I am also considering holding long term positions in the future – positions held over weeks or even the remaining month. The reason is that I find myself quite confident about my trading decisions (although much less so about Tradesim!), given my analysis of the news reports I read. I may do this starting next week, or the one after that.

Commodity Trading

Week 6: What Went Right

I went short two contracts of soybeans this week, and realized gains of $450 on each contract. All grains ended lower this week pressured by the appreciating US dollar. November soybeans ended 31 cents lower on Friday, which is the day in which I made my trade.

Soybeans were tricky to trade in this week, because there were in effect, two opposing forces at play. Firstly, Argentina has had three times the normal rain than usual this month, which means that 45% of their soybeans fields are excessively wet (1). On the other hand, about 30% of Brazil has been too dry for planting (1). This expectation of tightening supplies had an aggregate effect of pushing up soy prices early in the week.

That said though, after continued price rise, “speculative-profit taking” (2) or pulling out of the commodities can somewhat be expected as long traders lock in their profits from the rises in price. When lots of traders pull out in this way, prices can drop quite sharply. I did not predict that this will happen on Friday, but I had gone short on soybeans for another reason: the expectation of an appreciating US dollar ahead of the US elections. Ultimately, I think it was both of these factors that played a role in pulling down the price of soybeans, and I made some profits as a result.