Since the National party moved into the Beehive back in 2008, mining has been a contentious issue. The government, looking for ways to mirror Australia, as well as speed up economic growth, focused on upscaling the mining industry. We have plenty of coal in country and, possibly, major reserves of oil and gas offshore. What’s not to like about that?

Well quite a lot really. Gulf of Mexico ring any bells? Like Chernobyl and Bhopal before, major industrial accidents can have long-term, catastrophic consequences, as well as immediate costs measured in human and economic cost. Offshore drilling carries huge risk and major negative downstream effects if it goes wrong. Onshore mining, on the other hand, is supposed to be plain vanilla these days. Apparently it’s a little like rolling up a cricket wicket and re-laying it when you’ve dug out a bit of sub-soil.

It’s safe, clean and you end up with an environment, which is as good as, if not better, than before. I was told that by the Assistant Head of Global HSE at Rio Tinto back in 2000. Actually it made sense to me…if you contain all the possible polluting effects, run a safe operation and remediate to very high standards…that could work. Perhaps that culture hasn’t quite made to to NZ. Judging by the poor practices at Pike River, one would have to ask serious questions about the management of mining in NZ. This has been reinforced by the recent shutdown of the Solid Energy mine at Spring Creek.

So I’m waiting to be convinced about this new world of clean coal and safe extractive practices. However, whilst I’m waiting, I’d like to suggest another way forward. Given that we do need certain commodities to be extracted, we need to create a risk structure that allows for exploration but with a precautionary approach. In other words, extractors must pay their way and do so in a manner that reflects the worst case scenario, such as the BP Gulf of Mexico disaster. So far BP have set aside a $20b fund for settling claims, of which $7.8b has been currently allocated. It’s an extreme event but an example of how badly things can go wrong when operating in sub-optimal conditions.

It’s time to explore environmental contingency bonds, as a way of mitigating risk and ensuring that insurance is in place before the extracting activity takes place. Just as someone renting a house has to pay a bond up front, to ensure any potential damage is covered, so do extractors have to pay an upfront amount before they start work. This upfront risk adjusted payment would be used to purchase government bonds (supposedly risk free!) or similar risk free asset, for the duration of the extractive activity. If, at the end of the activity period, there are no adverse effects, over and above what may have already been applied for, then the money is returned (plus any interest) to the extractor.

There are several consequences to this approach:

- This may increase the cost of extraction (though, in reality, this is simply a financing cost, assuming no damage occurs).

- This may spur companies towards better risk management and remediation processes. If they get it wrong, they pay. The onus of responsibility falls on the extractor and not the taxpayer and/or local community.

- In some cases, the sum demanded by the rental agent (usually the government) will be too high for the extractor to bear and this may result in the proposed project not proceeding. This isn’t necessarily a bad thing, as the priced risk is considered to be too high. An example of this may be drilling for oil in the Arctic or the new trade of the day, fracking.

How will the bond be priced? Each industry will have a different risk factor, which will be based on previous data….for example, offshore oil drilling and onshore coal mining have very different risk profiles. It’s important to note that this is not an insurance payment but a full cash upfront payment. The extractor may, of course, wish to insure their own risk on having to forfeit the bond but the important point here is that the government holds the cash and can move into remediation action as soon as any damage occurs. As we have seen with numerous disasters, insurers and re-insurers are difficult to deal with and can lock up claims for many years.

Remediating and risk management plans are great but for business, paying cash up front against possible mishaps will certainly concentrate their focus on doing the job properly and without harm. The public will be happier knowing that extractors are having to pay upfront and that they will, therefore, do their utmost to ensure their activities are not polluting, harmful or dangerous. Governments will be happy knowing that they have the cash in the bank, just in case anything does happen. The extractors? Well they probably won’t be happy at the extra cost but according to them they will leave the place in a better condition than they found it. So really they have nothing to worry about at all.

This is a post from about 5 weeks ago, before the Occupy Wall Street protest started. It was lost on a server transfer so I’m reloading it now. It makes interesting reading when thinking about the Occupy movement and what its core concerns are. I think the post below encapsulates those concerns, namely: measurement, institutions and values. Our current system externalises as many costs as possible, has institutions cuorrupted by money, and has lost any sense of meaningful values, other than monetary gain. Not only has our economy become monetised, so has our society. In terms of how values have been set aside and how they may be recovered, this piece by Chris Hedges is revealing. On to the original post.

Economics is quite popular these days. It’s not so much the traditional discipline, itself, that is the focus, but a constant flagellation of its representation. Simply put, it’s not delivering the goods. Many trained economists would argue that economics is not the problem but the solution. To paraphrase “it’s the politicians, stupid!”.

The word “economics” also seem to be creeping into the title of every other book, blog or column. “The Economics of…….sex, drugs, football, hairdressing (i made that one up) and so on. The message is clear. People want to know how the world works and seek to understand it through the lens of economics, which is, as I’m repeatedly informed, only about the allocation of resources. We’ve also had Freakonomics followed up by SuperFreakonomics, just in case you didn’t get it the first time.

Diane Coyle is a serial offender is this area with 2 recent books called “Sex, Drugs and Economics” and “The Economics of Enough” (I would recommend both and happy to lend them to anyone local). These books do help us to make more sense of the way our economy works and, therefore, how our society is structured. Economics describes how people transact with each other and for what reasons. Getting into the nitty gritty of personal life seems an odd place for economics to be but research continues to show that how we make decisions is very much dependent on variables which can, to some extent, be measured and quantified. Put bluntly, incentives and pay offs do matter (unless you have no impulse control at all – read male teenagers – but this can be controlled and measured as well).

“The Economics of Enough” is a well written account of  the economic challenges facing us and how we can move forward to create more even prosperity and happiness. Diane outlines what is importance to people: happiness, nature, posterity, fairness and trust. She then looks at where the problems are: our measurement system, our values and our institutions. She then finishes off with a “Manifesto of Enough”, a ten point programme for shifting to a world of “Enough”. It’s all very useful and accurate in its conception. What I like about the book is the realisation that our values have become warped (seen readily in the fiasco of the Global Financial Crisis and its response) and our institutions have become corrupted by those same values. Changing that will require some serious reform and will face major resistance by the vested interests happy with the current situation.

Slipping nicely alongside this book is a new film called “The Economics of Happiness“, which I screened last night in Christchurch to an audience of 115 people, including 2 local MPs. This film, by Helena Norberg-Hodge, Steven Gorelick and John Page, visits themes raised by Diane in her book, but it does so in a more poetic fashion. Drawing on many years research and living in Ladakh, Helena pulls together a picture of a severely fractured global population struggling to maintain its humanity in the face of the onslaught of globalisation. The film dismantles many myths around the benefits of globalisation, describing it is ultimately a process designed for major transnational corporations to increase profits at the expense of people and planet. It’s naturally tends towards the polemical but it’s hard to dispute the evidence. Median incomes do not tell us the whole story. The constant externalisation of environmental and social costs produce a massive hidden subsidy to the global business network. The global institutions (IMF, WTO and World Bank) support and embed this process and remove sovereignty wherever possible so that business faces no impediment. We don’t pay the true costs but some one else picks up the tab.

This links back to Diane’s discussion around measurement. Economics can only be of use if the variables, that are plugged into the models, have integrity. As both Diane and Helena note, the value of integrity is missing. The pressure of profit takes few prisoners and if a cost can be ignored, it will be. Whilst Diane is still in favour of economic growth, she recognises it must come within a properly constructed framework. Helena goes further in promoting a more localized world, where we are in touch with, and close to, our processes and means of production. This approach brings the connection back into our lives and this, ultimately, is the root of the happiness we are looking for.

The clear message from these works (and others like it) is clear. There is a desire for a new approach to our economy and there is evidence to support it. The various manifestos, blueprints and proposals for reform are starting to merge in content and structure. Slowly but surely a solid platform for re-envisaging our society is coming together and a renaissance in economics may not be far away.

I was asked recently to give a talk to a small but distinguished group on “how to survive the global financial and ecological crises”. Easy uh! Well you have to start somewhere and have a rough idea of where you’re headed. For me, the more difficult the situation gets, the simpler the solution becomes. Essentially, changes that once would have been rejected flat out as unworkable, implausible and idealistic, are suddenly deemed more acceptable.

We are all conditioned to think and live within a certain paradigm or system. For many of us (especially readers of this blog), it’s considered to be democratic, liberal capitalism. More realistically it’s a neo-liberal system where free markets dominate at the expense of any concept of the public good. Markets will solve any problem. Actually that’s a truism. It’s the outcome that is often of dubious merit.

When I look at the Occupy Movement, I see a protest against this system, a system where people are secondary to profit, and the public is considered to be a wasteful and unnecessary construct. As John Key noted of the Christchurch post-EQNZ insurance problem, eventually the markets will sort it out. Again they will but there may not be any insurance for anyone for a while. This mirrors the government’s approach to managing our prisons: simply contract it out to private operators, who will manage it more “efficiently”. The belief in the idea of the “public” is slowly being eaten away by this neo-liberal fantasy that for profit organisations will always achieve the best outcome.

It will be interesting to see how this protest develops but it feels like it has legs. The outrage is fair and justified: the corruption at the heart of the political-financial system; the gaping inequalities; the disenfranchisement and the feeling that the whole system is built on sand. Over time the picture will be clearer and the protests may coalesce around a series of concrete demand but the consultative and participatory process is a fascinating starting point. Participatory, as opposed to representative, democracy is messy, frustrating, turgid, slow, tedious and annoying but that’s the whole point. It is built on allowing all people a voice and on allowing a process to develop. It is a far cry from the many bills rammed through under “urgency” in the NZ Parliament, with little debate or scrutiny for even our partially elected representatives.

I wish them well in their endeavour. In the meantime, I have three simple proposals to offer, as a starting point:

1) Monetary Dialysis - No more public debt; new public money; raise limits on bank credit.

2) Trucost pricing - Start pricing ecosystem goods and services.

3) Participatory Universal Income - Basic Income for all those participating in society; rebalanced tax system; provision of key public goods.

I focused on the first 2 ideas in my presentation, the outline of which is below. By repricing our economic system, both in the cost of goods and services, as well as the creation and volume of money, we will immediately realign it towards a path of lower volume but higher quality consumption. We will reduce the burden of compound interest, this alleviating the constant pressure to produce and consume. The UPI will restore the public good in reflecting all contributions to society and laying the foundations for a more stable, harmonious and prosperous world. Far fetched? Not really, when you think about it for a bit. My turn is over for now. Who is next in the stack?

It’s good that the water debate is starting to take more shape. In the main we have struggled with the idea that we should pay for it and how to construct proper markets around it. Some places meter water and some don’t but as we know it’s hard to manage a resource if you can’t measure it use.

So it’s refreshing to see a piece in The Press  on the need for a water market to be constructed to provide an efficient allocation of this precious resource. As I’ve discussed many times, a resource with no price will be treated as if it is free. For many people water is free and always has been but now there are competing claims on water. In New Zealand this is primarily from agriculture with huge demands for irrigation from the dairy industry, which converts water into milk on an enormous scale.

Initial objections are alway around the issue that water is a necessity for life and should therefore be free.  Well so is food and shelter and they aren’t. We have lived with the false notion that water will always be plentiful and is a constant renewable resource. Tell that to Australian farmers who have suffered a 5 year drought in many areas. Water availability is subject to climatic variation and to overuse. Just look at the state of NZ rivers and lakes which are well known to have experienced a serious decline in quality over the last 20 years of intensive farming.

It’s fairly simple to make sure people are allocated a fair supply of free water to assuage those who believe they shouldn’t pay for it but anything above a basic amount should be paid for just like our energy.

It’s only through the pain of payment that we really focus our efforts on conservation, efficiency and alternatives.

It’s time we got on with this whilst we still have water to charge for.

Finally some research has been done on the effects of bio-fuel crops on the ecosystem. As widely expected the research has shown that bio-fuels can be highly destructive on the environment as well as actually adding carbon into the atmosphere.

So much for being the replacement to fossil fuels.

This a prime example of doing something because it looks like the right or a good thing to be doing. Those people with prescriptive views on how we should live our lives rarely take the trouble to do the sums and that’s where the problem arises.

Until we start to price up environmental externalities and let them flow through the price mechanism we will not get to see the true cost. So we will keep doing things because they feel good to us or they remove some embedded guilt about the way we use the environment.

The market is working in an inefficient manner and the environment continues to suffer because of it. Many environmentalists have a big grudge against the market perceiving it to be a monstrous creation of the capitalist machine. They are sadly mistaken. The market is how we show the real value of the environment to everyone not just those who think humans are a stain upon it.

Now I don’t want to tar all bio-fuels with the same brush. Bio-diesel from algae for example is using a waste stream and an easily grown input. Large swathes of forest don’t need to be cut down for this process.

But until we see the costs flow through the system we just don’t know.

Barely a week passes without a new campaign in the UK around the issue of food miles and NZ produce. Though this has been thoroughly debunked by the report from Lincoln University the story continues to rumble along.

This is just the beginning of a more serious debate on the issue of environmental costs otherwise known as externalities. Food miles is just a simple way of engaging the public and media just as the phrase “think global, buy local” has always done.

We all like to support our local farmers whether in NZ, UK, France, Japan or the US. However we all like to sell as much as our produce into markets where we can achieve a better price (even after taking account of transport costs). NZ is heavily geared towards exporting and with a large productive base and small local market it is more exposed than many other larger countries.

Stepping away from the hype and hysteria we can see that the Food Miles debate is both important and necessary. Consumers should be paying the full price for the goods they buy and that includes the basic inputs of energy and matter as well as ecosystem goods and services.

Whilst food miles comes across as a marketing ploy and is somewhat simplistic in its formulation, it can be seen as the start of a serious attempt to bring Trucost pricing into the mainstream economic system. Of course it makes sense to buy your veggies from the farmer down the road but the supermarket system is all pervasive and has driven costs down so far that they have been able to get away with an international supply chain as well as shipping domestic produce many miles further than necessary.

Pricing ecosystem services in at the primary level would see a vastly different pricing mechanism: one which included the price of nutrient and effluent run off, mining run off, soil depletion, air quality processing, clean water provision and the numerous other services which have enormous economic value.

If this happens then maybe we can relax a bit as the produce in our supermarkets and farmers markets will be priced on the same basis.

Only then will we really know which is really cheaper.