Crikey has another column from Guy Rundle expounding his theory that the recession in the West (dubbed by some libertarians “the Great Correction") is permanent unless the economic framework is changed (as there is no tool available to policymakers to revive growth in the west under the neoliberal model of globalisation other than letting wages fall to developing world levels, thus inciting some real class warfare - not the nonsense being peddled by demented Fox News pundits about Obama’s proposed tax increases for higher income earners in the US) - The Recovery of 2008 ? What Bloody Recovery ?.

That may well be a more astute judgment about the world than that of the pro forecasters, and more in accord with the notion of materialist economists such as Robert Brenner and David Harvey — that the West is tapped out, and cannot again grow in the neoliberal framework currently imposed on it. In its existing framework, the argument goes, neither free-market nor Keynesian approaches will work. Apply cuts to clear the balance sheet and restore confidence, and the collapse of demand will be so great that the economy will stall — and, something economists never consider, the social unrest from a new wave of poverty will destroy any nascent confidence anyway.

But they also turn on the Keynsians who believe that higher wages and public spending would refloat demand as it did in the postwar period. True, they say, but the aggregate effect, at national and regional levels, will be nothing like you hope. Local industry will not, of course, restart, the money will flow out of the economy to manufacturing sources in the East, and the endlessly promised growth in new sectors — services, etc — won’t eventuate.

Online shopping, automatic checkouts and myriad other automations (of service jobs — hamburger flippers — that it was once assumed would sop up those for whom manufacturing provided employment), narrow the employment base further, and push the poorly educated permanently out of the sphere of work. No public education or training program is in place to make them employable, and individual firms do not need to provide it.

Why is there such a critical assessment of the notion of boom and bust on the street? I suspect it has something to do with the centrepeiece of the “boom" from the ’90s onwards, discretionary consumer spending. In the postwar Keynesian boom, a sense of forward motion was around because people could see not merely consumption but production increasing. Factories reopened after the Depression and the war, cities grew based on rational lending and so on.

In this “boom", people saw not an increase in production, but its dismantling. This occurred as — via franchising, chains, increased advertising presence — consumption spread into every available area of life. Housing became not more affordable but less so, as property prices became dizzyingly unreal, beyond any notion of merely paying for permanent habitation.

In other words, the boom always looked like what it was, a bubble. Its fantastical character was hiding in plain sight. At some level people knew that they were living through an unreality, and that the best thing to do was grab as much sh-t as you can while you can (the English riots were really a repetition of that, done at high speed and in dell’arte style).

Yet even if people were willing to accept this stasis, it is not possible to do so. The Western economy is boxed in. Slash costs? You would need to drive down pay levels, abolish the legally mandated minimum wage and usher in ever greater levels of inequality — effectively restarting large-scale class conflict. Stimulate production? What would be stimulated? What remains of the economic sectors that could grow fresh roots — only low-employment “services", intellectual property rents and the like.

Stimulate consumption? You would deepen the debt reliance of Western economies whose savings levels are zero — and, culturally, simply extend a set of expectations of consumption that cannot be sustained on a mass basis. Indeed it is the near-total reliance on consumption that tells us how late in the day the ’90s/2000s boom-bubble was, how desperate its attempt to fill in the gap. Capitalism has always lived by holding something back — the fruits of people’s labour, and the promise of satisfaction chief among them. For two hundred years, the system has relied on two techniques — violence and ideology — to create compliance. After violence, the system was sold on the notion that a thrifty, modest life was a sign of virtue, that honest work was its own reward.

From the 1870s onward, Western capitalism had a demand crisis, and the modern science of demand creation — advertising, the shopping arcade/mall — dates from this time. Confined initially to a privileged class, such consumption was made general in the 1950s, and then — in the ’90s — was cut loose of any notion of rational accounting. That is surely, a very late, if not a final stage, of system maintenance by demand creation — and what makes the current era interesting is that we are now out the other side of it, and no one knows what to do about it. And everyone knows it.

The Climate Spectator has an article by Ian Dunlop on peak oil, global warming and the implications for the Australian economy and its dependency on resource extraction - Playing resource roulette. The column is based on a chapter from Dunlop's new book, More Than Luck.

Australia has had a dream run since the end of World War II, built on our natural wealth. Despite the occasional hiccup, our economy has expanded year after year, with increasing prosperity. Much of our success has been built around supplying agricultural products and raw materials to the expanding economies of the world, particularly in Asia – initially Japan, then Korea and south-east Asia, now China and India.

Understandably, we are proud of being world leaders in agriculture, mining and processing, but we have also created a strong and vibrant society in many other areas, all built around a capitalist, market economy model.

Our resource base is formidable and expanding. Not only do we have substantial energy resources of gas and coal, but we have the world’s largest uranium and thorium resources and enormous untapped renewable energy – solar, wind, ocean, geothermal and bioenergy. Beyond that, iron ore, other metalliferous minerals and agricultural assets abound.

However, that bounty may well become our Achilles heel unless carefully managed. Much of our exports are carbon-intensive – thermal and coking coal, alumina, natural gas, with coal being the largest export earner of around $36 billion in 2009-10. Our domestic energy system is highly carbon-intensive, largely a result of readily available and inexpensive coal. Our carbon emissions are correspondingly high, around 19 tonnes CO2 per capita in 2007 – among the highest in the world.

A weak point is oil, where Australia has a particular vulnerabilty. We are around 50 per cent self-sufficient in oil, a situation that is declining rapidly unless new discoveries save the day, which seems unlikely. We rely on long supply lines from Asian refineries for around 85 per cent of our daily product use, offset by high exports.

We do not comply with the requirements of IEA membership – to maintain a 90 day net-import strategic petroleum reserve – relying instead on operational stocks and just-in-time delivery. With a small, geographically dispersed population in a large land mass, we are heavily dependent on transport fuels.

The cost of our oil and gas imports is now close to twice our oil and gas exports, with high coal exports saving the day. This will represent an increasing burden on our current account deficit as our level of self-sufficiency declines.

Despite this vulnerability, peak oil is not on the federal government's agenda. While some state governments have taken it seriously, studies at the federal level have been dismissive, even though it may have far more impact in the short term than climate change.

If the world now moves rapidly to a low-carbon footing due to climate change, while facing increasing oil scarcity due to peak oil, many of our traditional advantages turn into major strategic risks – that is risks beyond our control which have the potential to fundamentally change our way of life, and undermine our economic strength.

Whilst our raw material exports will not cease overnight, given likely strong demand from the developing world, a worldwide shift toward low-carbon alternatives will seriously disadvantage Australia if carbon sequestration technologies fail. Similarly, we may not find it that easy to secure the oil imports we require. Domestic alternatives, based on our coal and gas resources, such as Coal-to-Liquids (CTL) and, to a lesser extent, Gas-to-Liquids (GTL) technologies are likely to be expensive and environmentally damaging.

In agriculture, Australia is already experiencing the impact of changing temperature and rainfall patterns, which may well be the result of human-induced climate change, with serious drought in many areas and an overabundance of rainfall in others fundamentally altering farming patterns and water supply.

As the Garnaut Review pointed out: "Australia has a larger interest in a strong mitigation outcome than other developed countries. We are already a hot dry country; small variations in climate are more damaging to us than to other developed countries."

On the positive side, we have enormous undeveloped renewable energy resources, and there is great potential for the biological, as opposed to geological, sequestration of carbon, which has substantial benefits for agriculture, and possibly for our coal industry.

A Janus nation

The scenario, of rapid climate change combined with the onset of peak oil, while becoming part of mainstream thinking overseas, is still regarded as extremism in Australia, and not as part of the "official future."

Ironically, we have some of the best scientific and analytical advice in the world on the implications of climate change and energy supply, in studies such as the Garnaut Climate Change Review and extensive work by the CSIRO and other bodies. They indicate the need for rapid change – advice which is blithely ignored.

On the other hand, the vested interests defending the status quo, particularly those linked to some sections of the resource industries, are among the strongest in the world – which is not surprising, given the importance of those industries, historically, to the development of Australia and the resulting power they have accrued. ...

TOD's Jérôme Guillet has an article on the superior economics of wind power in New Scientist - All power to the wind – it cuts your electricity bills.

ATTEMPTS to discredit wind power often claim that wind turbines need to be subsidised. A piece in British newspaper The Daily Telegraph last month asserted that each wind turbine in the UK receives, on average, £138,000 in subsidies a year, and that as a result wind-power investors are coining it hand over fist at the taxpayer's expense.

So are wind farms subsidised? In the sense of direct government support, very rarely. What they do enjoy in most countries, though, is a guaranteed right of access to the grid, and minimum prices for the electricity they produce.

These rights are imposed either directly - by so-called feed-in tariffs - or indirectly via an obligation on electricity producers to generate a certain proportion of their output from renewable sources.

The regime is designed to create an environment favourable to wind power, but it is not funded by the taxpayer. Feed-in tariffs are paid by the companies that transmit electricity, such as National Grid, while producers pay to meet their renewables obligation. In both cases the cost is eventually passed on to consumers. In other words, it is not your taxes that support wind power, but your electricity bill.

This may seem like cold comfort. However, it has an unexpected upside: you end up paying less for electricity when wind power is part of the mix.

This is because of the way the electricity markets in Europe and North America are set up. They are "marginally priced"; that is, the spot price of electricity is set by the highest price the transmission company must pay at any given time to meet demand.

As an analogy, imagine you need 100 apples. One grower has 60 apples on offer for $1 apiece, another has 30 on offer for $2, and a third has 20 on offer for $3. You buy the entire stock from the first and second growers, and 10 from the third - but must pay $3 for every apple you buy.

The very highest spot electricity prices are seen at moments of peak demand, when coal, nuclear and hydroelectric sources cannot meet the need. At these times extra "peaker" plants need to be turned on. Generally oil or gas-fired, peaker plants have high marginal production costs - generating each extra unit of electricity is relatively expensive because they have to buy oil or natural gas, which are more expensive than coal. Not surprisingly, peaker plants drive the electricity spot price up.

The addition of wind power, however, changes the dynamics of the market. Wind turbines don't burn fuel, so their marginal costs of production are very low - lower even than coal, nuclear and hydro. Being the cheapest, transmission companies buy from them first.

On windless days, wind power companies don't get paid, since they only receive money for the electricity they produce. But on windy days, their output ensures that peak demand is satisfied without the need to turn on the most expensive peaker plants.

In other words, when there is little or no wind, prices on the market are normal; when a lot of wind power is available, it has a moderating effect on prices. The result is that, over time, bills are lower than if wind power were not present, even taking into account the cost of the support regime.

This price-lowering effect is called the merit order effect (MOE), and the resulting savings can be significant. Its impact on prices in European countries with a fair amount of wind generation has been estimated at between €3 and €23 per megawatt-hour. One study by researchers at the Fraunhofer Institute for Systems and Innovation Research in Karlsruhe, Germany, found that it saved German consumers €5 billion a year.

So the MOE is good for consumers - but what about the big picture? We believe that, paradoxically, it spurs opposition to renewables among energy companies, and discourages investment in them.

Imagine you run a utility company with coal-fired or nuclear plants. From your perspective, wind power is causing you to lose out on the windfall cash previously provided by high spot prices at times of peak demand. Will you be inclined to look favourably on plans to increase the share of wind power in total electricity generation?

Insofar as there is a problem, it lies in handing control of industrial policy to marginally priced markets. Market-based decisions are not technology-neutral. They favour short-term profits, and that encourages the building of power stations with low capital costs and high marginal costs. That means gas-fired plants, which are tailored to make a profit whether the spot price is high or low.

In fact, hardly any nuclear or coal-fired plants have been built in the past 15 years, only gas-fired plants, along with renewables installed thanks to support mechanisms such as feed-in tariffs.

If those mechanisms had been ruled to be market-distorting subsidies and removed, leaving the market to make all the calls, we would see nothing but new gas plants built. This would leave us vulnerable, wondering where tomorrow's natural gas, on which we would be utterly dependent, would come from - a scenario that has only been prevented because wind turbines receive support.

It may be that the electricity market will evolve into one that offers long-term fixed prices to producers, as power distributors take into account the long-term stability of the cost of wind power. In that case, wind will need no special favours, since it will be cost-competitive with nuclear and coal. Until that happens, the framework in which wind operates - permitting investment while lowering prices for consumers - is not an abusive subsidy but simply intelligent market regulation.

Stuart at Early Warning has a post on a study of the impact of rising fuel prices on different geographical regions in the US (which looks similar to a comparable study done in Australia a few years ago - The Impact Of Rising Oil Prices On Sydney Suburbs) - Peak Oil Stress Map.

The map [below] is a first rough cut at where the stress of peak oil (or any oil shock) is likely to be greatest. It comes from taking county level data from the Census Quick Facts and extracting two variables: the average travel time to work (from the 2000 census), and the median household income (from 2008 data). The idea is that if average travel time is long, that probably indicates that people in that county need a lot of oil to run their cars. On the other hand, if income is low, they are probably going to have more trouble paying for that oil. So I divided the travel time by median income, and then rescaled that index by its own average and standard deviation to produce a map of where the problems are likely to be greatest.

This is a fairly rough methodology. In particular:

* It's average, county-level, data, so this may miss a lot of neighborhood level details
* It ignores other calls on people's income (like housing costs)
* It assumes that work travel time is a decent indicator of overall household oil need (in particular, it misses north-eastern dependence on heating oil).

Still, the broad geographical results are fairly interesting, I think. It seems likely to be a robust result that the south-east of the country is the worst affected region, and since this is the main geographical base of the modern Republican party, that probably has interesting political implications. Drill, baby, drill.

Jerome a Paris has an interesting post at the European Tribune about the economics of wind power - Wind's latest problem: it ... makes power too cheap.

Bloomberg has a somewhat confusing article about the newest complaint about wind power, but the gist of it is that wind power is an issue for the industry because it brings their revenues down:

operators in Europe may have become their own worst enemy, reducing the total price paid for electricity in Germany, Europe’s biggest power market, by as much as 5 billion euros some years

Implicit in the article, and the headline (which focuses on lower revenues for RWE) is the worry that wind power will bring down the stock market value of the big utilities - which is what the readers of Bloomberg et al. care about.

But despite the generally negative tone of the article, it's actually a useful one, because it brings out in the open a key bit of information: wind power actually brings electricity prices down!

windmills (...) operators in Europe may have become their own worst enemy, reducing the total price paid for electricity in Germany, Europe’s biggest power market, by as much as 5 billion euros some years ...

The wind-energy boom in Europe and parts of Texas has begun to reduce bills for consumers. ...

Spanish power prices fell an annual 26 percent in the first quarter because of the surge in supplies from wind and hydroelectric production

This tidbit of information, which will hopefully begin to contradict the usual lies about the need for hefty subsidies for the wind sector, has been publicised by EWEA, the European Wind Energy Association in a report on the merit order effect (PDF). This is the name for what happens when you inject a lot of capital-intensive, low-marginal-cost supply into a marginalist price-setting market mechanism with low short term demand elasticity - or, in simpler words: when you have more wind, there is less need to pay to burn more gas to provide the requisite additional power at a given moment.

I've long argued that this was one of the strongest arguments for wind (see my article on The cost of wind, the price of wind, the value of wind from last year), and I've pushed the EWEA people to use it more - so this study (which I was not involved in) is most welcome.

The key thing here is that we are beginning to unveil what I've labelled the dirty secret of wind: utilities don't like wind not because it's not competitive, but because it brings prices down for their existing assets, thus lowering their revenues and their profits. Thus the permanent propaganda campaign against wind. But now that this "secret" is out in the open, it's hopefully going to make one of the traditional arguments against wind (the one about its supposed need subsidies) much more difficult to use... The argument remains true for solar, and to a lesser extent for offshore wind, but the utilities are going to complain much less about offshore wind given that they are investing so much capital in that sector right now. The reality is that wind power brings prices down for consumers, even taking into account the cost of feed-in tariffs or other regulatory support mechanisms, which means that these regulatory schemes are not subsidies, but rather smart corrections of market inefficiencies for the public good.

Ironically, wind provides "utility-like" returns to investors, ie low, stable single-digit returns, as befits a regulated strategic infrastructure activity required for the common good. Utilities and investors should love the sector; but they have been spoiled by market deregulation, which has allowed companies to seek higher returns by under-investing, building merchant gas-fired plants, going for M&A games, and playing on market price volatility and trading - in other words, by behaving as perfect clients for investment banks...

As I've noted many times, the energy sector is one of the best examples of how the financialisation of the economy has brought results that are bad for everybody except the investment bankers and top management; it's also, thankfully, one where reality can most objectively re-assert itself.

And the reality is that you get cheaper electricity with wind - and oh by the way, wind requires no imports of fast-depleting fuels from unstable countries, spews no carbon and provides lots more domestic jobs. And it's a perfect investment for our pension needs - safe, low risk, stable, decent long term returns...

Paul Krugman has a (long) article in the New York Times on the transition to a clean energy economy - Building a Green Economy.

If you listen to climate scientists — and despite the relentless campaign to discredit their work, you should — it is long past time to do something about emissions of carbon dioxide and other greenhouse gases. If we continue with business as usual, they say, we are facing a rise in global temperatures that will be little short of apocalyptic. And to avoid that apocalypse, we have to wean our economy from the use of fossil fuels, coal above all.

But is it possible to make drastic cuts in greenhouse-gas emissions without destroying our economy?

Like the debate over climate change itself, the debate over climate economics looks very different from the inside than it often does in popular media. The casual reader might have the impression that there are real doubts about whether emissions can be reduced without inflicting severe damage on the economy. In fact, once you filter out the noise generated by special-interest groups, you discover that there is widespread agreement among environmental economists that a market-based program to deal with the threat of climate change — one that limits carbon emissions by putting a price on them — can achieve large results at modest, though not trivial, cost. There is, however, much less agreement on how fast we should move, whether major conservation efforts should start almost immediately or be gradually increased over the course of many decades.

In what follows, I will offer a brief survey of the economics of climate change or, more precisely, the economics of lessening climate change. I’ll try to lay out the areas of broad agreement as well as those that remain in major dispute. First, though, a primer in the basic economics of environmental protection.

Environmental Econ 101

If there’s a single central insight in economics, it’s this: There are mutual gains from transactions between consenting adults. If the going price of widgets is $10 and I buy a widget, it must be because that widget is worth more than $10 to me. If you sell a widget at that price, it must be because it costs you less than $10 to make it. So buying and selling in the widget market works to the benefit of both buyers and sellers. More than that, some careful analysis shows that if there is effective competition in the widget market, so that the price ends up matching the number of widgets people want to buy to the number of widgets other people want to sell, the outcome is to maximize the total gains to producers and consumers. Free markets are “efficient” — which, in economics-speak as opposed to plain English, means that nobody can be made better off without making someone else worse off.

Now, efficiency isn’t everything. In particular, there is no reason to assume that free markets will deliver an outcome that we consider fair or just. So the case for market efficiency says nothing about whether we should have, say, some form of guaranteed health insurance, aid to the poor and so forth. But the logic of basic economics says that we should try to achieve social goals through “aftermarket” interventions. That is, we should let markets do their job, making efficient use of the nation’s resources, then utilize taxes and transfers to help those whom the market passes by.

But what if a deal between consenting adults imposes costs on people who are not part of the exchange? What if you manufacture a widget and I buy it, to our mutual benefit, but the process of producing that widget involves dumping toxic sludge into other people’s drinking water? When there are “negative externalities” — costs that economic actors impose on others without paying a price for their actions — any presumption that the market economy, left to its own devices, will do the right thing goes out the window. So what should we do? Environmental economics is all about answering that question.

One way to deal with negative externalities is to make rules that prohibit or at least limit behavior that imposes especially high costs on others. That’s what we did in the first major wave of environmental legislation in the early 1970s: cars were required to meet emission standards for the chemicals that cause smog, factories were required to limit the volume of effluent they dumped into waterways and so on. And this approach yielded results; America’s air and water became a lot cleaner in the decades that followed. ...

Dave Roberts has a few comments about the article at Grist, in what he dubs "A plea for hippie economics" - Hey Paul Krugman: How about less econ theory and more econ mechanics?.

Many people, including me and, um, Al Gore, have recommended Paul Krugman's primer on climate economics. It's a top-notch introduction and a welcome antidote to the ignorance and hysteria that characterize most media coverage of climate policy. Read it!

In describing environmental economics, however, Krugman simply passes along many of its flaws. Economist James Barrett identified a few of them. I want to echo and reinforce one of the points he made.

"Not that bad" ain't good

The great sin of conventional economics is the assumption of rationality. According to rational choice theory, individuals act to maximize their self-interest; ergo, markets based on free exchange of goods and services will yield maximally efficient distribution of resources. A free market is, in German philosopher Gottfried Leibniz's terms, the best of all possible worlds. Most of what economists miss about energy can be traced to to the lingering effect of this assumption.

Now, every time I bring this up, people come out of the woodwork to tell me I'm constructing a caricature, and everybody knows about market failures. Which is ironic, since the people who bitch about rational choice theory more than anyone I know are economists. (Again: see James Barrett. Or anything Dean Baker's ever written. Or the entire field of behavioral economics.) What they tell me is that the most common macroeconomic models still rest on the assumption of rational choice; that the most influential names in the field still work with the assumption; that new approaches are still marginal and viewed with skepticism by modelers; and that laypeople's understanding of economics is heavily colored by it.

Anyway, the assumptions of rational choice theory are the only way to explain something like this -- and that's one of a dozen articles I could cite. They are the only way to explain the results of the economic models used by the CBO to score climate legislation. They're the only way to explain the conventional wisdom in D.C. that climate legislation is all about costs. After all, as Barrett says, "with everyone constantly and correctly optimizing their behavior, there is nothing the government can do to make us any better off."

Lamentably, Krugman's article reenforces that conventional wisdom. He concludes that pricing carbon is the Ultimate Climate Policy (maaaybe we can tack on a few performance standards for coal plants). According to mainstream economic modeling, a carbon price will inhibit GDP growth. Krugman's cri de couer is as follows: "Restricting emissions would slow economic growth -- but not by much." Freeeeeedooooom!

"Not as bad as you might have worried" may be a convincing argument to pointy-headed intellectuals, but it hasn't exactly gotten the public fired up. To boot, it's almost certainly incorrect. Krugman simply ignores the panoply of policies proven to boost economic productivity and reduce emissions.

They exist! Long ago, in the Dark Ages (1997), over 2,500 economists, including nine Nobel Laureates, endorsed "The Economists' Statement on Climate Change." The second of three propositions in that statement was:

2. Economic studies have found that there are many potential policies to reduce greenhouse-gas emissions for which the total benefits outweigh the total costs. For the United States in particular, sound economic analysis shows that there are policy options that would slow climate change without harming American living standards, and these measures may in fact improve U.S. productivity in the longer run. ...

But my objection to Krugman's take on climate economics is even more basic. To see what I mean, consider this passage:

If there's a single central insight in economics, it's this: There are mutual gains from transactions between consenting adults. ... Free markets are “efficient” -- which, in economics-speak as opposed to plain English, means that nobody can be made better off without making someone else worse off.

...

But what if a deal between consenting adults imposes costs on people who are not part of the exchange? What if you manufacture a widget and I buy it, to our mutual benefit, but the process of producing that widget involves dumping toxic sludge into other people's drinking water? When there are “negative externalities” -- costs that economic actors impose on others without paying a price for their actions -- any presumption that the market economy, left to its own devices, will do the right thing goes out the window. So what should we do? Environmental economics is all about answering that question.

Perhaps inadvertently, Krugman reveals how environmental economists seem to think of their work. Assume a free market filled with exchanges among "consenting adults." Then introduce a negative externality -- say, CO2 emissions. What's the proper response? Viewed in that light, obviously the right response is to put a price on the externality. Done! That's why the environmental economist's approach to climate policy always seems to be: price carbon and get out of the way.

But ... and this is a gargantuan but (quit snickering) ... why would you assume a free market? Are there free markets in energy anywhere in the world? If so I'm not familiar with them. Everyone involved in energy markets is always and already operating within a skein of existing market distortions. We live in a fallen world.

The ABC has an article on the increasing weight of the LNG export industry (including coal seam gas) in Australia's economy - RBA says welcome to quarry Australia.

The Australian economy no longer rides on the sheep's back, but on the deck of a bulk carrier taking iron ore, coal or LNG to Asia.

The Reserve Bank's latest quarterly Statement on Monetary Policy has singled out the resources sector, in particular the Liquefied Natural Gas industry, as the main driver of Australia's future prosperity.

The bank says Australia's LNG production is set to increase three or fourfold within the next four or five years, as the Gorgon, Pluto and planned Queensland coal seam gas projects come online.

The bank's figures show that such growth could lead to 2.5 per cent of Australia's total economic output coming from LNG, up from only 0.5 per cent currently.

"Production increases of this magnitude would likely see the value of LNG exports increase towards a similar share of total exports as for coal and iron ore," the bank noted in its report.

The investment, construction and exports generated by these massive resources projects are forecast to take Australia's growth back to 2.25 per cent over the year to June, and up to 3.25 per cent over the 2011 financial year.

The SMH has an article by Ross Gittins on the overlap between the economy and the environment and the correct direction for the latest review of the Australian taxation system - Tax plan mustn't ignore nature's coming backlash.

As Ken Henry, the Secretary to the Treasury, beavers away on his blueprint for the reform of taxation over the next 25 years, he needs to keep in mind something that's not at the centre of the tax debate - ''environmental tax shifting''.

The trouble with economics is that its horizons are too narrow. Economists live in their own economic world, divorced from the natural environment and from the non-economic needs of the humans who inhabit the economy.

Though they're supposed to be in the business of predicting human behaviour, they haven't bothered - at least until recently - to keep up with the findings of psychology and sociology (partly because they can't get those findings into their equations).

And though the economy exists within the ecosystem, and is dependent on it, they haven't thought it necessary to keep up with ecology or study the ways the economy and ecosystem impinge on each other.

The economists' insularity wouldn't matter so much if they weren't so imperialistic, seeking to dominate the advice going to governments and leaving the public with the impression that the narrow concerns of economists should be given primacy over all else. ...

But the Henry report needs to go much wider. First, it should get rid of explicit subsidies to fossil fuel and other natural resource use (such as fuel tax breaks for farmers, concessional taxing of company cars, undercharging for logging crown forests and undercharging of trucks) and then move in on implicit subsidies to those environmentally damaging activities whose private costs don't reflect the social costs they impose on the community and its life-supporting ecosystem.

Now that would be a tax blueprint that could stay relevant for 25 years.

Alex at WorldChanging has a post pondering how cities can be transformed to sustainable models during a credit drought - How Can Bright Green Cities Thrive Without Capital ?.

What do you do when things are booming but your credit's dried up? Perhaps you begin to invent new ways of doing business.

U.N. Habitat recently released a report showing that the pace of urbanization is increasing, with "200,000 new dwellers flooding into the world cities and towns each day." That's like a new city the size of Seattle, Washington D.C. or Copenhagen springing up every three days. And while it is true that in the Global North, some industrial areas have become home to shrinking cities and others are in line for massive climate troubles, the trends suggest that most cities that are growing today are going to see long sustained booms in population.

But our cities are not only growing quickly, they're getting younger. We live on a young planet, with two billion people under the age of 15 and a median age of only about 27, worldwide. Already there is a massive unmet demand for jobs, housing and services. Youth unemployment is at its highest level ever in many countries, but that doesn't mean young people stop living. Indeed, while some of their energy is channeled into destructive outlets, from gangs to terrorism, evidence suggests that there's been a much larger explosion of activity in the so-called "informal economy" -- everything from "gray market" trading to casual labor to microbusinesses and community efforts. A faltering economy doesn't mean an end to enterprise.

Bright green innovations are generating all sorts of new business frontiers as well. Green building and design innovations spur new possibilities for development and renovation. Smart technologies drive new ways of looking at shared goods and spaces. Attention to foodsheds and footprints enable new models of feeding and clothing ourselves. The list goes on.

So on the one hand, we have the material for a remarkable boom: rapidly growing cities full of energetic, young people with unmet needs but access to a wave of bright green innovations.

On the other hand, we have a worsening credit drought. An increasing number of stories warn that we should not expect much available credit at all in the short term:

Most banks expect their lending standards to remain tighter than the levels of the last decade until at least the middle of 2010, according to a survey of senior loan officers conducted by the Federal Reserve Board.

The disturbing possibility presents itself that credit may not begin to flow again for years. A growing number of pretty credible observers already warn that, Wall Street talking heads aside, several big problems may dry up credit for some time to come. The biggest immediate problem seems to be that commercial real estate loans (for building apartments, offices, stores and warehouses -- $1.7 trillion in just U.S. loans) may be following residential lending off the cliff. In addition, while it's true that "green-technology firms attracted the largest share of venture capital in the third quarter," what hasn't generally been mentioned in green business stories on that news is that venture capital funds have shrunk to a 15-year low. Then there's the planet: other factors may cause investors to be even more skittish -- from the anticipated losses caused by climate change and ecosystem service degradation to the rising costs associated with constricting supplies of fossil fuels and virgin materials.

So, what does it mean to have an expansion, in a time when capital is extremely difficult to get? What does a "dry" boom look like?

The New York Times has an article on a recent biophysical economics conference in the US, featuring Charlie Hall and Nate Hagens, amongst others - New School of Thought Brings Energy to 'the Dismal Science'.

The sharpest difference between biophysical economics and the more widely held "Chicago School" approach is that biophysical economists readily accept the peak oil hypothesis: that society is fast approaching the point where global oil production will peak and then steadily decline.

The United States is held as the prime example. Though the United States is still the world's third-largest producer of oil, its oil production stopped growing more than a decade ago and has flatlined or steadily fallen ever since. Other once-robust oil-producing countries have experienced similar production curves.

But the more important indicator, biophysical economists say, is the fact that the U.S. oil industry's energy return on investment has been steadily sliding since the beginning of the century.

Through analyzing historical production data, experts say the petroleum sector's EROI in this country was about 100-to-1 in 1930, meaning one had to burn approximately 1 barrel of oil's worth of energy to get 100 barrels out of the ground. By the 1990s, it is thought, that number slid to less than 36-to-1, and further down to 19-to-1 by 2006.

"If you go from using a 20-to-1 energy return fuel down to a 3-to-1 fuel, economic collapse is guaranteed," as nothing is left for other economic activity, said Nate Hagens, editor of the popular peak oil blog "The Oil Drum."

I suspect the answer is might be richer (just) for Australians but poorer for our friends in the northern hemisphere (unless they work for Goldman Sachs, aka the Vampire Squid of course). The New York Times has a review of Richard Wolff's book "Capitalism Hits the Fan" which looks at Americans' changing economic fortunes (a trend which will continue as China and India continue to industrialise and resource limits become more apparent) - The State of Families, Class and Culture.

Over the last 40 years, we have witnessed a profound shift in the American family, one that bears the deep footprints of a disappearing economic sector and a transformed culture. The shift has hit blue-collar families especially hard. These days, the best gauge of social class is years in school. In 1970, a female high school dropout had a 17 percent chance of becoming a single mother (versus 2 percent for a woman with a bachelor’s degree). By 2007, her chances had jumped to a whopping 49 percent (versus 7 percent for the B.A. holder). Nearly all new mothers with graduate training, but only half of high school dropout mothers, are married.

Why is this happening? As the economist Richard Wolff tells the story in his book “Capitalism Hits the Fan,” for a century before 1970 most American companies paid wages that slowly rose decade by decade, so that a male worker could feel better off than his dad and trust that his son would be better off than he was. But by the 1970s, the deal was off; corporate profits continued to rise while workers’ real wages stagnated. Scrambling to make up for this fact, fathers worked longer hours. Mothers got jobs — and this in a society without paid child care or parental leave. Families went into debt. The blue-collar family became the shock absorber of the broken deal. On top of this, Americans of every class found themselves less and less secure about their jobs, pensions and health insurance. For as Jacob S. Hacker, the Yale political scientist and Democratic adviser, argues in “The Great Risk Shift,” over the last 30 years, companies and government have offloaded risk onto the shoulders of individuals.

Ross Gittens has an article in the Age on the relationship between the economy and the environment (taking a few swipes at PM Rudd's pretend climate policy along the way), and noting glumly recent reports on our large projected population increase - It's the ecosystem, stupid.

Everyone (rightly) condemns economists for their failure to foresee and warn us about the global financial crisis, but here's a climate crisis we've seen coming for years and we can't take it seriously. Even the economists who brought us the emissions trading scheme don't adequately appreciate the problem we've got. They think all we've got to do is switch to low-carbon energy sources (ideally by finding a way to capture all the carbon emitted by burning coal) and the economy can go on growing as if nothing had happened. Being economists, they see us as all living in an economy, with this thing at the side called the environment that occasionally causes problems we need to deal with. As usual, wrong model.

In reality, the economy exists within the ecosystem, taking natural resources from that system, using them and then ejecting wastes, including sewage, garbage and all forms of pollution and greenhouse gases.

The global economy grows as the world's population grows and as people's material living standards rise. The problem is that the human population and material affluence have grown so much in the past 200 years that our economic activity is putting increasing pressure on the ecosystem that ensures our survival. On the one hand we're chewing through non-renewable resources at a rapid rate and using renewable resources faster than their ability to renew themselves. On the other, we're spewing out wastes faster than the ecosystem can absorb them.

Global warming is, of course, an example of the latter. But it's just the most acute respect in which global economic activity is undermining the healthy functioning of our ecosystem. Think of the way we're destroying the world's fish stocks, the way farming practices are causing acidification, desertification and erosion of land, the way dams and irrigation are destroying our rivers and the way human ''progress'' is destroying species.

All this is happening with only about 15 per cent of the world's population enjoying high material living standards similar to ours. Now consider what happens to the global economy's use of natural resources and generation of wastes when China and India - accounting for almost 40 per cent of the world's population - get on a path of rapid economic development to raise their citizens' standard of living to something approaching ours. Since the rich countries are reluctant to countenance a decline in living standards, to put it mildly, and the poor countries most assuredly won't abandon their quest for affluence, there's one obvious variable that could be used to limit global economic activity's deleterious impact on the ecosystem: population growth.

Limiting population growth in the developing world and allowing population to continue on its established path of decline in the developed world wouldn't be easy, but it would be easier than trying to prevent rising living standards among those already living.

Hence my dismay when Treasurer Wayne Swan's announcement last week that Australia's population in 40 years time is now expected to be 6.5 million greater than was expected just three years ago was received without the blinking of an eyelid. Ho hum, tell me something interesting.

Tom Konrad has a post on the cost of various forms of clean energy - What Does Clean Energy Cost?.

The seemingly simple question, "How much does wind/solar/geothermal/etc. cost per kWh?" can be surprisingly difficult to answer. Advocates often cite particularly low figures, but they are often based on particularly favorable conditions, or analyses that don't include all the costs (for instance, costs of permitting.) Opponents do the opposite, often assuming particularly unfavorable conditions, or adding in costs which they would never consider adding in for their favored technology. Adding to the confusion, levelized cost of generation calculations are very sensitive to the interest rate used to discount capital cost and the lifetime of the investment.

A couple years ago, I put together some slides meant to give a visual comparison of transportation fuels, and another set for electricity generation technologies. These slides were intended to be more qualitative than quantitative, and were based on my personal synthesis of a large number of reports, rather than using a single methodology for each. More recently, I brought you an economic comparison of energy storage technologies (and alternatives to storage) based on a quantitative review of the literature.

Costs of Electricity Generation

Recently, a friend who invests in cleantech startups asked me for an update of comparisons of electricity generation technologies. I have not done an update, but I have found more studies that take fairly impartial looks at the available technologies. The most comprehensive one I've found is the one Black and Veatch (B&V) did for the California Renewable Energy Transmission Initiative (RETI.) B&V looked at the costs of generation of various renewable energy resources in the California region, as a first step in planning new electricity transmission to the best resources.

The Phase 1A report is available on the RETI website (large PDF), and is excellent reading for anyone interested in a relatively unbiased view of the real costs of renewable energy. It is a regional report (similar to, if much more comprehensive than, the Arizona Resource Assessment I wrote about in late 2007,) so people living in other regions should adjust the numbers to reflect resource availability. California and the surrounding area have good wind, hydro, and biomass resources, as well as world-class solar and geothermal resources. In the Southeast US, biomass based power would probably be cheaper, but wind, geothermal, and solar more expensive, while in the Great Plains, wind would be cheaper, but solar, hydro and geothermal would be more expensive. You get the idea.

It's interesting to note that the five least expensive renewable energy resources in the list are either baseload resources (Geothermal and Biomass cofiring) or have some potential to be dispatchable (hydropower, and landfill gas, if used in conjunction with storage for the methane.) Although wind is a variable resource, there are inexpensive potential sources or renewable electricity that are easy to integrate into the grid.

Jamais Cascio at Open The Future has sketched out a scenario describing a post-capitalist economic order - One Model for a New World Economy.

The trigger was a phrase we'd all become sick of: "Too Big to Fail." The phrase had moved quickly from sarcasm to cliché, but ended up as the pole star for what to avoid. Any economy that enabled the creation of institutions that were too big to fail -- that is, whose failure would threaten to collapse the system -- could never be thought of as resilient. And, as the early 21st century rolled along, resilience is what mattered, in our environment, in our societies, and increasingly in our economics.

Traditional capitalism was, arguably, driven by the desire to increase wealth, even at the expense of other values. Traditional socialism, conversely, theoretically wanted to increase equality, even if that meant less wealth. But both 19th/20th century economic models had insufficient focus on increasing resilience, and would often actively undermine it. The economic rules we started to assemble in the early 2010s seek to change that.

Resilience economics continues to uphold the elements of previous economic models that offer continued value: freedom and openness from capitalism at its best; equality and a safety net from socialism's intent. But it's not just another form of "mixed economy" or "social democracy." The focus is on something entirely new: decentralized diversity as a way of managing the unexpected.

Decentralized diversity (what we sometimes call the "polyculture" model) means setting the rules so that no one institution or approach to solving a problem/meeting a need ever becomes overwhelmingly dominant. This comes at a cost to efficiency, but efficiency only works when there are no bumps in the road. Redundancy works out better in times of chaos and uncertainty -- backups and alternatives and slack in the system able to counter momentary failures.

It generates less wealth than traditional capitalism would, at least when it was working well, but is far less prone to wild swings, and has an inherent safety net (what designers call "graceful failure") to cushion downturns.

Completely transactional transparency also helps, giving us a better chance to avoid surprises and to spot problems before they get too big. The open-source folks called this the "many eyes" effect, and they were definitely on to something. It's much harder to game the system when everyone can see what you're doing.

Flexibility and collaboration have long been recognized as fundamental to resilient systems, and that's certainly true here. One headline on a news site referred to it as the "LEGO economy," and that was pretty spot-on. Lots of little pieces able to combine and recombine; not everything fits together perfectly, but surprising combinations often have the most creative result.

Lastly, the resilience economy has adopted a much more active approach to looking ahead. Not predicting, not even planning -- no "five year plans" here. It's usually referred to as "scanning," and the focus is less on visions of the future than on early identification of emerging uncertainties. Resilience economists are today's foresight specialists.

What does this all look like for everyday people? For most of us, it's actually not far off from how we lived a generation ago. We still shop for goods, although the brands are more numerous and there are far fewer "big players" -- and those that emerge tend not to last long. People still go to work, although more and more of us engage in micro-production of goods and intellectual content. And people still lose their jobs and suffer personal economic problems... but, again, there's far less risk of economic catastrophe, and some societies are even starting to experiment with a "guaranteed basic income" system.

Is it perfect? By no means. We're still finding ways in which resilience economics isn't working out as well as past approaches, and situations where a polyculture model doesn't provide the kinds of results that the old oligarchic/monopoly capitalist model could. But those of us who remember the dark days of the econopalypse know where non-resilient models can lead, and would rather fix what we've made than go back to the past.

Grist has a column noting that "small solar needs long-distance transmission as much as big wind" - Big is beautiful when it comes to wind turbines.

Average cost for new wind capacity in 2007 was per $1,710 per KW, according to the Annual Report on Wind Power 2007 [PDF]. Some of the largest new wind farms had costs as low as $1,240 per KW, while the smallest ones tallied costs as high as $2,600 per KW.

Further, large new wind farms got more use from each KW than small ones -- as much 40 percent capacity utilization for big farms on the best sites vs. a 33 percent to 35 percent average. Since capital costs and capacity utilization overwhelmingly determine wind costs, big wind is simply less expensive than small wind.

One argument against big wind farms is that they need long-distance transmission. Gentle solar cells and fan-sized wind generators on roofs don't need those nasty old long-distance lines, it is sometimes claimed. But regardless of where you generate solar or wind electricity, generation with long-distance transmission is less expensive than generation without.

If we limit ourselves to local generation and transmission, we either need to generate only a fraction of power from renewables or put in a lot of storage. If we want to get most of our power from renewable sources and still limit how much we invest in storage and how many emissions we generate from fossil-fuel backups, the least expensive alternative is to connect to other renewables across a long distance.

Take the example of solar electricity from desert farms or roof tops. The bulk of solar energy received at a site occurs during daily peak sunlight, which lasts about five hours. For local solar to provide most of electricity demand with little use of backup requires at least 20 hours storage. To compensate for at least some cloudy days that grows to more like 48 hours storage. Further, the difference between summer and winter sun can easily be 1.5 to 1 or worse.

On the other hand, wind tends to blow hardest outside of peak solar energy hours. Strong wind seasons tend not to overlap with strong sun seasons. Unfortunately, good solar energy locations and good wind energy locations mostly don't overlap. Hence we need long-distance transmission even when energy is generated from rooftops and parking lots. And once we have long-distance transmission in place, large-scale wind farms are a lot less expensive per kWh than small-scale rooftop wind.

Bloomberg has an interesting take on the credit crisis, quoting one academic who sees a bit of game theory being put into practice - Hundreds of Economists Urge Congress Not to Rush on Rescue Plan . While inter-bank lending does indeed seem to have almost ceased now, the idea that this could be (at least partially) a high stakes game of poker being played in order to extract as much taxpayer money as possible with the least possible oversight does have a lot of appeal given my eye for tinfoil.

More than 150 prominent U.S. economists, including three Nobel Prize winners, urged Congress to hold off on passing a $700 billion financial market rescue plan until it can be studied more closely.

In a letter yesterday to congressional leaders, 166 academic economists said they oppose Treasury Secretary Henry Paulson's plan because it's a ``subsidy'' for business, it's ambiguous and it may have adverse market consequences in the long term. They also expressed alarm at the haste of lawmakers and the Bush administration to pass legislation.

``It doesn't seem to me that a lot decisions that we're going to have to live with for a long time have to be made by Friday,'' said Robert Lucas, a University of Chicago economist and 1995 Nobel Prize winner who signed the letter. ``The situation may get urgent, but it's not urgent right now. Right now it's a financial sector problem.'' ...

Erik Brynjolfsson, of the Massachusetts Institute of Technology's Sloan School, said his main objection ``is the breathtaking amount of unchecked discretion it gives to the Secretary of the Treasury. It is unprecedented in a modern democracy.''

Advocates for a rescue plan this week point to a seizing up of credit markets, reflected in elevated inter-bank lending rates, as reason for action. Some economists are unconvinced.

``I suspect that part of what we're seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who stand to benefit from the bailout,'' said David K. Levine, an economist at Washington University in St. Louis, who studies liquidity constraints and game theory.

The IHT has an article from Garrison Keilor asking "Where were the cops?".

Where were the cops?

It's just human nature that some calamities register in the brain and others don't. The train engineer texting at the throttle ("HOW R U? C U L8R") and missing the red light and 25 people die in the crash - oh God, that is way too real - everyone has had a moment of supreme stupidity that came close to killing somebody. Even atheists say a little prayer now and then: Dear God, I am an idiot, thank you for protecting my children.

On the other hand, the America's federal bailout of the financial market (yawn) is a calamity that people accept as if it were just one more hurricane. An air of crisis, the secretary of the Treasury striding down a hall at the Capitol with minions in his wake, solemn-faced congressmen at the microphones. Something must be done, harrumph harrumph.

The Current Occupant pops out of the cuckoo clock and reads a few lines off a piece of paper, pronouncing all the words correctly. And the newscaster looks into the camera and says, "Etaoin shrdlu qwertyuiop."

Where is the outrage?

Poor Senator Larry Craig got a truckload of moral condemnation for tapping his wingtips in the men's john, but his party proposes to spend 5 percent of the GDP to buy up bad loans made by men who walk away with their fortunes intact while retirees see their 401(k) go pffffffff like a defunct air mattress, and it's business as usual.

John McCain is a lifelong deregulator and believer in letting brokers and bankers do as they please - remember Lincoln Savings and Loan and his intervention with federal regulators in behalf of his friend Charles Keating, who then went to prison? Remember Neil Bush, the brother of the C.O., who, as a director of Silverado S&L, bestowed enormous loans on his friends without telling fellow directors that the friends were friends and who, when the loans failed, paid a small fine and went skipping off to other things?

McCain now decries greed on Wall Street and suggests a commission be formed to look into the problem. This is like Casanova coming out for chastity.

Confident men took leave of common sense and bet on the idea of perpetual profit in the real estate market and crashed. But it wasn't their money. It was your money they were messing with. And that's why we need government regulators. Gimlet-eyed men with steel-rim glasses and crepe-soled shoes who check the numbers and have the power to say, "This is a scam and a hustle and either you cease and desist or you spend a few years in a minimum-security federal facility playing backgammon."

The Republican Party used to specialize in gimlet-eyed, steel-rim, crepe-soled common sense and then it was taken over by crooked preachers who demand Americans trust them because they're packing a Bible and God sent them on a mission to enact lower taxes, less government. Except when things crash, and then government has to pick up the pieces.

Some say the tab might come to a trillion dollars. Nobody knows. And McCain has not one moment of doubt or regret. He switches from First Deregulation Church to Our Lady of Strict Vigilance like you might go from decaf to latte. Where is the straight talk? Does the man have no conscience?

It wasn't their money they were playing with. It was yours. Where were the cops?

What we are seeing is the stuff of a novel, the public corruption of an American war hero. It is painful.

The FT has an interesting article on the politics of commodity price movements - The usual suspects: Are financial investors driving up the cost of commodities?.

Prices were outrageously volatile. While traders attributed the sharp market movements to supply and demand, most politicians in Washington were sure that speculation was the culprit. The US public became incensed.

The year was 1958, the commodity in question onions. Congress held long and sometimes tumultuous hearings in which Everette Harris, then president of the Chicago Mercantile Exchange, tried to convince lawmakers that the futures market for onions was not the cause of the volatility. “We merely furnish the hall for trading . . . we are like a thermometer, which registers temperatures,” Mr Harris told a hearing. “You would not want to pass a law against thermometers just because we had a short spell of zero weather.” But such arguments were ignored and in August of that year the Onion Futures Act was passed, banning futures trading in the commodity.

Fast-forward 50 years and it seems that little has changed. The recent surge in commodity prices has sparked an intense and politically charged debate on whether financial investments – to some, plain speculation – are affecting the markets. Pension funds and other big institutions today hold about $250bn in commodities, mostly invested through indices such as the S&P GSCI, a widely accepted industry benchmark. This compares with just $10bn in 2000, although part of the increase represents the rise in prices rather than fresh flows of money. ...

The US regulator says there is little evidence to link price rises to institutional investors. It has maintained its stance that fundamental supply-and-demand factors combined with a depreciating US dollar – which is used to price and trade commodities – are mainly behind the recent market movements.

There is, moreover, a significant difference between speculation and manipulation or illegal activity. In response to a question at one of the hearings last month, Mr Lukken of the CFTC, said: “Speculators . . . provide a healthy mix of participants in the market to ensure there is a buyer for every seller and a seller for every buyer. That has been the case for the 150 years that these markets have been around.”

He added: “We are taking steps to ensure that markets are not being overrun by speculative interests. But, to date, we have not seen evidence of that . . . [Speculators] are not all on the long side of the market, betting it will go up. So it is difficult to say there is a smoking gun there but we continue to look.” ...

The Onion Futures Act is a perfect case study. When economists studied the market, they discovered that volatility and prices were higher in the period after the ban than they were before. Frédéric Lasserre, head of commodities research at Société Générale in Paris – who has studied the onion example – says today’s context is very similar. “The politicians are leading the debate pressured by the people,” Mr Lasserre says.

The onions market is not the only example. India last year banned financial trading in most agricultural commodities but prices continued to rise. “[Banning financial trading] is irrelevant,” says a senior Indian official. “When a commodity is scarce, its price rises, whether it is traded on an exchange or not.”

That is exactly the argument of those who say that high prices merely reflect robust demand growth – boosted by the industrialisation of populous emerging economies such as China, India and Brazil or new policies such as biofuels – against sluggish supply increases following years of underinvestment.

Moreover, record commodity prices are being seen across the board, not just in raw materials with developed futures markets but also in those without significant speculative investments such as iron ore and rice, up 96.5 per cent and 120 per cent respectively this year. Research by Lehman Brothers shows that prices for metals that are not traded in exchanges, such as chromium, molybdenum or steel, have risen faster than prices for metals traded in exchanges, such as copper or aluminium. In addition, some of the commodities markets in which pension funds hold the largest share of outstanding contracts, such as hogs, have seen price drops.

Equally important is that price rises across the commodity spectrum are not in line. This shows that different markets are responding to their own supply-and-demand fundamentals rather than to financial investors’ money flows, analysts say. The base metals market is a good example: while aluminium and copper prices have risen by about 30 per cent since January, nickel, zinc and lead have fallen between 20 and 40 per cent. Tin, the only metal in which pension funds had little exposure, has jumped almost 40 per cent.

In another sign that supply and demand is the main driver, inventories for most commodities – including crude oil – have fallen since January. Many analysts echo Mr Lukken in pointing out that financial investors in commodities are no longer betting only that prices would rise, as at the beginning of the boom in 2000-2001. Today, many funds are betting on lower prices. ...

Today, the Onion Futures Act remains in effect. But that has not stopped the price of onions from shooting up an eye-watering 420 per cent since 2000. ...

Bart Stupak, a Michigan Democrat who has introduced legislation, said in May that “excessive speculation” had “inflated oil prices to the point that they are no longer tied to underlying supply and demand” – a claim most economists would struggle to agree with.

Some of the stakeholders in the debate are not helping. A coalition of airline and travel industry associations wrote to Harry Reid, the Senate majority leader, and Nancy Pelosi, the House Speaker, last month claiming that speculators traded 22 barrels of “paper oil” – futures contracts – for every physical barrel of oil consumed. However, Francisco Blanch, commodity strategist at Merrill Lynch, says: “Speculators do not add physical demand or take away physical supply from the market. They do not take away any barrel of oil or bushel of corn from the economy and the only way they can affect spot prices is if they reduce the quantity available for final consumers.”

Of course, while this little fable is a reassuring tale about the reliability of the markets, it ignores the fact that the price of onions is driven by the price of oil (fuel, fertiliser and pesticides), so it is quite possible that all of the onion price increase seen has been oil related.

The real question here (to me) is how much weight speculators have vs "genuine" market participants (buyers or sellers of physical oil) and what direction their trades have moved the market. I don't believe that the spot price for oil is set entirely independently of the futures market, regardless of what some commodity strategists may say.

I suspect this story will trundle on for some time to come...

The latest McKinsey Quarterly has an interesting look at the economics and growth rates of solar PV production - The economics of solar power. Note the excellent graphic showing when PV will reach grid parity in different regions.

A new era for solar power is approaching. Long derided as uneconomic, it is gaining ground as technologies improve and the cost of traditional energy sources rises. Within three to seven years, unsubsidized solar power could cost no more to end customers in many markets, such as California and Italy, than electricity generated by fossil fuels or by renewable alternatives to solar. By 2020, global installed solar capacity could be 20 to 40 times its level today.

But make no mistake, the sector is still in its infancy. Even if all of the forecast growth occurs, solar energy will represent only about 3 to 6 percent of installed electricity generation capacity, or 1.5 to 3 percent of output in 2020. While solar power can certainly help to satisfy the desire for more electricity and lower carbon emissions, it is just one piece of the puzzle. ...

Even in the most favorable regions, solar power is still a few years away from true “grid parity”—the point when the price of solar electricity is on par with that of conventional sources of electricity on the power grid. The time frame is considerably longer in countries such as China and India, whose electricity needs will require large amounts of new generating capacity in the years ahead and whose cheap power from coal makes grid parity a more elusive goal. ...

Government subsidies have played a prominent role in the growth of solar power. Producers of renewable energy in the United States receive tax credits, for example, and Germany requires electricity distributors to pay above-market rates for electricity generated from renewable sources. Without such policies, the high cost of generating solar power would prevent it from competing with electricity from traditional fossil-fuel sources in most regions.

But the sector’s economics are changing. Over the last two decades, the cost of manufacturing and installing a photovoltaic solar-power system has decreased by about 20 percent with every doubling of installed capacity. The cost of generating electricity from conventional sources, by contrast, has been rising along with the price of natural gas, which heavily influences electricity prices in regions that have large numbers of gas-fired power plants. These regions include California, the Northeast, and Texas (in the United States), as well as Italy, Japan, and Spain.

As a result, solar power has been creeping toward cost competitiveness in some areas. California, for example, combines abundant sunshine with retail electricity prices that, partly as a result of the state’s policies, are among the highest in the United States—up to 36 cents per kilowatt-hour for residential users. Unsubsidized solar power costs 36 cents per kilowatt-hour. Support from the California Solar Initiative2 cuts the price customers pay to 27 cents. Rising natural-gas prices, state regulations aiming to limit greenhouse gas emissions, and the need to build more power plants to keep up with growing demand could push the cost of conventional electricity higher.

During the next three to seven years, solar energy’s unsubsidized cost to end customers should equal the cost of conventional electricity in parts of the United States (California and the Southwest) and in Italy, Japan, and Spain. These markets have in common relatively strong solar radiation (or insolation), high electricity prices, and supportive regulatory regimes that stimulate the solar-capacity growth needed to drive further cost reductions. These conditions set in motion a virtuous cycle: growing demand for solar power creates more opportunities for companies to reduce production costs by improving solar-cell designs and manufacturing processes, to introduce new solar technologies, and to enjoy lower prices from raw-material and component suppliers competing for market share.

Bloomberg has an article on the rush to build solar thermal power plants in California, with Google being joined by Chevron and Goldman Sachs in investing in Brightsource - Google, Chevron Build Mirrors in Desert to Beat Coal With Solar.

Along a dusty two-lane highway in California's Mojave Desert, 550,000 mirrors point skyward to make steam for electricity. Google Inc., Chevron Corp. and Goldman Sachs Group Inc. are betting this energy will become cheaper than coal.

The 1,000-acre plant uses concentrated sunlight to generate power for as many as 112,500 homes in Southern California. Rising natural gas prices and emissions limits may make solar thermal the fastest-growing energy source in the next decade, say backers including Vinod Khosla, the founder of computer maker Sun Microsystems Inc.

Costs for the technology will fall below coal as soon as 2020, the U.S. government estimates. JPMorgan Chase & Co. and Wells Fargo & Co. invested last year in the biggest solar plant built in a generation; Chevron and Google are funding research; and Goldman Sachs is seeking land to lease as demand outpaces wind turbines and geothermal. ...

Costs for solar thermal may fall as low as 3.5 cents a kilowatt hour by 2020, according to a report commissioned by the U.S. Energy Department. Meanwhile, coal expenses may rise. Congress is considering limits on carbon dioxide and other greenhouse gas emissions. The purchase of pollution permits may be required under a measure the Senate will begin debating next month.

`To Beat Coal'

Ausra's plants will produce electricity at 10 cents a kilowatt-hour starting in 2010, and the price will fall to 8 cents a few years later as it adopts systems with fewer parts that will be less costly when widely deployed, the company says. ``We are going to beat coal,'' says Bob Fishman, Ausra's chief executive officer. His company has a contract with PG&E Corp.'s Pacific Gas & Electric for a site in central California.

Chevron, Goldman Sachs, FPL, PG&E and other companies have filed more than 50 applications with the Bureau of Land Management to lease government-owned desert property for solar power systems. Chevron, which has invested in the solar thermal builder BrightSource Energy Inc. in Oakland, California, and Goldman, the biggest U.S. securities firm, declined to comment.

Google's philanthropic division put $10 million into eSolar, a start-up in Pasadena, California. Dan Reicher, a former Energy Department official who manages the unit's climate and energy initiatives, said there will be more such investments.

The Bloomberg article points to this report from the NREL last year to congress on the Potential impact of CSP for electricity generation (pdf), quoting a likely cost of CSP power of 5 cents per kilowatt by 2020.

Between 2000 and 2003, four reports were released on the potential for CSP. An assessment of the main issues raised by these reports leads to the following conclusions:

1. Further technology development and deployment could reduce the cost of CSP: The S&L study quantified the significant cost reductions that are possible with continued technology development and deployment. It concluded that there were three elements that could reduce the cost of CSP from approximately 12 cents/kWh today to about 5 cents/kWh by 2020: technology development (42 percent), building larger plants (37 percent), and volume production (21 percent). All four studies mentioned in this report are in agreement that the costs of CSP would fall with greater levels of deployment.

2. CSP requires policy incentives for initial deployment: All the reports emphasized that in the near-term, deployment of CSP depends on the establishment of policy incentives that offset the current higher cost of solar energy. The CSP industry provided a list of incentives it stated were necessary to initiate deployment. These were included in DOE’s 2002 report. Six southwestern States have now established renewable portfolio standards, and the Federal Government has created an investment tax credit that encourages the deployment of CSP. These policies have resulted in the establishment of CSP projects in California, Arizona, and Nevada that could result in 2,000 MW by 2010.

Development of CSP could provide energy, economic, environmental, and security benefits. The following factors could make CSP an attractive option for the Southwestern States if policymakers determine that these benefits outweigh the costs.

1. Energy: CSP could provide hundreds of gigawatts of clean power.

2. Economic: Analyses for California, Nevada, and New Mexico estimate that there could be significant benefits in job creation and additions to gross state product accruing from building and operating CSP plants. It is expensive to build a CSP plant and it requires a relatively large number of people to operate and maintain it. Counter balancing this, however, is the absence of a fuel cost. Much of the money that would otherwise be spent on monthly fuel costs, instead is spent on salaries. States and the Federal government have indicated their concern over the rising and volatile price of fossil fuels and their impact on the economy.

3. Environmental: CSP plants do not emit criteria pollutants or greenhouse gases, an issue of growing concern throughout the Federal and State governments. Thus, CSP could be an element of potential future policies related to climate change.

Bruce Sterling has a few comments on the Bloomberg report - as usual his interjections are marked ((())).

Along a dusty two-lane highway in California's Mojave Desert, 550,000 mirrors point skyward to make steam for electricity. Google Inc., (((dot-greens))) Chevron Corp. (((reforming petrocrats))) and Goldman Sachs Group Inc. (((East Coast finance establishment))) are betting this energy will become cheaper than coal.

(((Once people realize that coal plants are drowning major cities, coal plants are gonna get really, really expensive. Like, probably dangerous even to stand around. There must be any number of rich and evil people who own seaside mansions and could hire a global-guerrilla gang to blow up coal plants with truck bombs. You could probably leverage that activity in the markets and make a whole lot of money. Very "Shadow OPEC," except that the general population would cheer you on.)))

The 1,000-acre plant uses concentrated sunlight to generate power for as many as 112,500 homes in Southern California. Rising natural gas prices and emissions limits may make solar thermal the fastest-growing energy source in the next decade, say backers including Vinod Khosla, the founder of computer maker Sun Microsystems Inc. (((Rupert Murdoch's Wall Street Journal is afraid of Vinod Khosla. Proof the guy is onto something useful.)))

Costs for the technology will fall below coal as soon as 2020, the U.S. government estimates. JPMorgan Chase & Co. and Wells Fargo & Co. invested last year in the biggest solar plant built in a generation; Chevron and Google are funding research; and Goldman Sachs is seeking land to lease as demand outpaces wind turbines and geothermal.

``Solar thermal can provide a substantial amount of our power, more than 50 percent,'' says Khosla, who along with the Menlo Park, California, venture capital firm Kleiner Perkins Caufield & Byers led a $40 million investment in solar power producer Ausra Inc. ``This is an industrial-strength solution.''

The Australian reports that some people (with Bernie Fraser leading the way) are finally starting to question the wisdom of raising interest rates as a response to rising inflation when the factors causing the aforesaid rising inflation (rising energy prices feeding into rising prices of everything else) will not be affected in any meaningful way by Australian interest rate levels - "Reserve 'must lift inflation target'".

This is something I've been muttering about to anyone who will listen for some months, so I'm glad to see it reaching mainstream conversation now - all interest rate rises are doing is killing highly leveraged homeowners in outer-ring suburbs and making life even more difficult for exporters who are exposed to the exchange rate - and wiping out either or both of these groups won't bring inflation that is being imported via global market prices down at all (though the rising currency does mitigate this to a certain extent).

THE Reserve Bank should tolerate inflation running above its 2-3 per cent comfort zone for the time being to support economic growth and jobs, according to former RBA governor Bernie Fraser.

He also said the Rudd Government would "probably get away" with the tax cuts due to pour into voters' pockets on July1 without damage to the economy because demand was slowing. "We are very much back into the trade-off game and central bankers are going to have to start working hard again for their money," Mr Fraser said yesterday.

His warning was backed by respected economist and former Reserve Bank board member Bob Gregory, who said Australia risked a severe downturn if the 2-3 per cent inflation target were strictly adhered to when the China-led resources boom was forcing up food and fuel prices. "We ought to be talking about how long it is acceptable to be outside the range when most of the inflation is imported," Professor Gregory said.

The two monetary policy heavyweights were responding to a call from former senior Reserve Bank officer Peter Jonson to suspend the 2-3 per cent inflation target to avoid a recession.

Mr Jonson, a former monetary policy hardman and editor of the Henry Thornton website, now believes that soaring international food and oil prices have changed the ground rules.

The comments, in a series of interviews with The Weekend Australian, confirm a debate is under way about whether monetary policy needs to be rethought to cope with the two-speed world economy in which the US and Europe face recession while China and India are feeding inflation.

Mr Fraser and Professor Gregory emphasised that inflation targeting remained the best approach for an independent Reserve Bank, and did not support a shift to another mechanism. But they believe there should be flexibility in how the regime is applied to ensure the Reserve Bank does not over-cook the response to inflation.

Interest rates have already been lifted to their highest level since 1996, yet there is no sign that inflation is under control. The latest consumer price index showed inflation at 4.2 per cent in the year to the March quarter, with prices jumping across the board.