Guest Post by Willis Eschenbach
I’ve spent the last week in the Solomon Islands, which is northeast of Australia. It’s a wonderful place for me to come back to, even if only for a week, as I lived here for nine years. It’s a curious place, one of the UNs “LDCs”, the “Least Developed Countries.” It is the most rural country in the Pacific, with about 90% of the people still living in small scattered villages on hundreds of islands. Most people from outside the Solomon Islands have never heard about it until I say that the capital city, Honiara, is on the island of Guadalcanal.
I wrote my last post from here in the Solomon Islands, about how energy and GDP are different ways of measuring the same thing. I got to thinking about the Solomons GDP ($1,600 per year, tied for 187th out of 225 countries with countries like Chad and Tajikistan) and the energy use in the Solomons. Here’s the Solos’ energy consumption by type of fuel:
Figure 1. Energy Use by Fuel Type, Solomon Islands. Photo Source
As an aside, looking at that chart, you’d think that the Solomons should be the poster child for alternative energy. Three-quarters of the country’s energy comes from biomass, what’s not to like?
What’s not to like is trachoma and lung disease from cooking over open fires, plus lots of unburnt hydrocarbons and brown carbon from wood smoke, huge inefficiency losses, and other issues. But I digress. Looking at that graph, I was reminded that we mark the dawn of human civilization by a single act – the domestication of fire.
Fire was our first use of a concentrated energy source, our first step towards a GDP greater than what humans can do unaided. Unfortunately, for much of the Solomon Islands, it remains the only energy available in concentrated form. Three quarters of the energy used is plain old garden variety fire. In addition to household use, it provides the energy for two of the very few ways that the rural islanders can make money – copra (dried coconut meat) and cocoa. Both require heat for drying.
Now, given the general equivalency of energy consumption and GDP, what does that mean for the Solomons? It means that this lovely environmentally correct bio-fuelled country will never climb out of its poverty without more energy. Fire is not nearly enough to fuel an economy in the 20th century.
What about the petroleum fuels? What are they being used for in the Solomons? Here is the breakdown:
Figure 2. What the Fossil Fuels (diesel, petrol, natural gas, kerosene) are Used For in the Solomon Islands. Photo Source
The main thing that sticks out is that, in great contrast to the US situation, more than half of the Solomons fuel is used for transportation. This is a consequence of the way things are transported here … mostly by outboard canoe. There are perhaps a hundred miles of paved road in the entire country. Everything is moved by boats large and small. The big boats take things to the provincial centres (such as they are), and people go to buy them in their small canoes powered by outboards.
The good news in the graph is that electricity sector is 100% diesel-powered, so at least there is hope there. The islands are steep and rainfall is abundant, and there are some good hydropower sites. That means some substitution is possible.
Overall, once again we see that development in Solomon Islands is a function of energy, and that as long as they are relying on fire and a handful of petrol, they will never fire up the economy in any significant manner.
Now, I started this whole island travelogue with a very specific point in mind. It has to do with a pet peeve of mine. This is the pernicious idea that the way to solve the “energy problem” is to make fuel more expensive through taxes, so people will use less of it and become more efficient in its use. (As an aside, I don’t see the “energy problem” as being people using too much fuel, but as being people who don’t have affordable fuel. But hey, that’s just me.)
There’s two problems with that “tax our way to energy freedom” idea. First, in the Solomons, a trip from Gizo Island to Kolombagara Island in a particular boat might take, I don’t know, call it ten litres of fuel. If fuel prices go up and the operator can only afford eight litres, he’s stuck. He can’t economize and get more efficient like the theory says he’s supposed to, the outboard engine burns so much an hour. And he can’t just use the eight litres he can buy, it will leave him marooned in mid-ocean. He’s stuck in port, and out of the game.
There’s a worse problem, though. This is that taxing energy is taxing the wrong end of the production process. This slows the whole production process down before it can be started. I saw this in Honiara when fuel prices got high in 2008. For a while you couldn’t buy fish in the market of the capital city. Why? Because fuel cost too much, so it wasn’t worth it for the guys to go out fishing … and a significant chunk of the fuel price in the Solomons is taxes to the Government.
This is taxing the wrong end of the production process. Countries should tax the outputs of production (in this case the fish) and not the inputs (fuel, fishing gear, and boats). You want to encourage people to fish by making the entry cost for production inputs as low as possible.
There’s also a more subtle problem with taxing the wrong end of the production chain. Output prices are typically some multiple of the price of production. This means that adding a dollar on the input side often leads to a two dollar jump in the final price … not good.
Then, when the boats can go out and fish because the cost of inputs is low, the country should tax their output. Tax the fish in the markets. It will perhaps make the fish slightly more expensive for the customer … but at least there may be fish in the markets, instead of empty boats tied up by the markets. When the fuel prices were so high in 2008 and fish were either wildly expensive or unobtainable, the health of the kids suffered because fish is a main source of protein in the islands. That’s not a direction that I want to go.
In summary:
1. Taxing energy to force people to economize and become more efficient can be very counterproductive at the poor end of the economic spectrum. People are already using as little energy as they can possibly get away with, because from their point of view energy is already very expensive. In addition, they may not be physically able to economize or increase their efficiency.
2. If a country decides to use taxes as a (very blunt) instrument of energy policy, it should tax the outputs of production, rather than the inputs to production. This allows production to increase, instead of crippling it.
3. In the absence of often unavailable changes in efficiencies (see outboard motors above), forcing people to use less fuel through taxes means lowering the GDP. For places like the Solomon Islands, that’s the last thing we want to do, lots of folks there are way out on the economic edge already.
Finally, in the very best Solomons fashion, this is being written while I’m waiting for the departure at the airport, because the plane is two hours late. Or as they call that here in the Solos, “right on time” … wish me luck, when and if the plane arrives I’m bound back to Nowherica.
w.
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You could argue that taxing inputs to industry keeps out inefficient producers, which reduces overall consumption. OTOH, that reduces competition and stifles invention… unless you compensate for that fact with tax credits for invention.
I don’t really have a position on this issue, I’m just saying that someone could argue against you by arguing that the overall good would increase by taxing inputs.
There’s also a flaw in the logic of saying “Output prices are typically some multiple of the price of production”. this statement can’t be falsified, unless you mean there is a fixed multiplier, which is usually untrue. Output prices are driven by different markets than input prices, although the two markets communicate. A classic example would be the cost of crude oil and the cost of gasoline, which sometimes bear a resemblance to one another. However, gas prices vary by seasonal demand, refining capacity, etc.
Were fuel prices in the Solomons so high in 2008 because of taxes or because of the market? I’m not sure this story illustrates your point.
JDN says:
November 17, 2010 at 8:03 pm
As a commercial fisherman myself, I can assure you that every dollar invested in a fishing trip is “risk money”. If the trip goes bad, you don’t get it back.
As a result, the final price of the fish perforce includes a return on that money. Yes, it might not be double what the fisherman put into the trip, but it will definitely be larger than what the fisherman put in. If he can’t make extra money to pay for empty trips, he’ll go out of business.
And this, of course, means that a dollar added to the cost of the trip will need to be replaced by more than a dollar … which is the problem I am pointing to.
It was a combination of both. However, it doesn’t matter which one it was, because my point was that increasing prices on the input end of a production cycle for whatever reason will have a ripple effect that often leads to problems with production and cost down the line.
– copra (dried coconut meat) and copra. Both require heat for drying.
Both?
Nice article, cogent. Minor typo “- copra (dried coconut meat) and copra. Both require heat for drying.” Should that be copra and cocoa?
Phil’s Dad says:
November 17, 2010 at 8:29 pm
Fixed, my bad.
I agree fully with the underlying premise of this piece; that some people are already barely surviving on their current energy use. They are at absolute rock bottom for energy survival. Cutting it further will kill. As you indicate 40 entire countries have even lower GDP than the Solomon Islands and already many are dying for too little energy. Putting up the price is a death sentence for many more.
(Are you on the plane yet?)
This idea has been around for a while, I remember a retired ANU academic floating the idea of coconut oil as a diesel substitute about a decade ago now. Any sign of this being used in the Solomon’s ?
Also in an informal economy like that, adding a tax at the market end would be difficult, cash registers are few and far between in ‘wet’ markets, it is a lot easier to tax the fuel in an unsophisticated economy.
So when you said;
– copra (dried coconut meat) and copra. Both require heat for drying.
did you mean – copra (dried coconut meat) and cocoa?.
Time delay – ingnore my last.
“it is a lot easier to tax the fuel in an unsophisticated economy.”
Easier doesn’t make it right Mr Minto.
Keith Minto says:
November 17, 2010 at 8:47 pm
Thanks, Keith. I’ve run the numbers on it seven ways from Sunday to see if using coconut oil for fuel would work here. In the village the economics of it could work, because you are avoiding two shipping costs – shipping diesel from the capital to the village, and shipping copra the other way.
But setting up that kind of action in the village is a hard trick, there’s not a lot of productive uses for the fuel (no roads so no diesel trucks, and outboards burn petrol), and margins are very thin. I could never find enough in it to justify the investment.
And in the capital, where there is a market, the economics don’t work. Palm oil is cheaper here than coconut oil, but the local palm oil plantation still buys diesel to burn in their processing plant. They looked at burning some of the palm oil … too expensive.
You are right, it’s much easier to tax the fuel … and much more damaging.
JDN/Willis, typical in most service businesses, i.e. plumbing, electrical, etc. with employees, you base your hourly charge among other things, that most of the time your employee is only providing 5 hours of billable time for every 8 hour shift. kinda like your fishing without success willis. All costs have to go into your final price.
One of your better essays. I immediately wondered about hydro, and I see you say there are possibilities there.
Very limited, I would guess. The terrain is so rugged that it would cost a fortune to move electricity out of one valley to another, so efficiencies of scale are going to be hard to come by.
Some very small generators are called for, what a friend of mine who works with poor farmers in Africa calls ‘Joe-tech,’ the kind of stuff Joe can make in his garage.
On the subject of coconut oil for fuel…just some numbers
it takes about 10,000 nuts to produce 1MT (metric ton) of oil. There are about 1082 liters in a MT. market value is about $1450/MT or $1.34/liter
You can burn pure coconut oil in a diesel engine, but maintenance costs are going to be higher. You can make bio-diesel but really is it worth it? In most cases you loose money by burning the oil for fuel.
The islanders are selling copra and my guess would be they get about 1 cent per nut equivalent.
Willis–
Interesting post, thanks.
I must admit, from what I know of the history of the 19th century (and I’m a recognized expert on a wee small bit of it), I’m not entirely convinced that global dimming didn’t play a major role in hiding/slowing global recovery from the Little Ice Age.
If you look at major urban centers like London, Pittsburgh, St. Louis, etc in that period, what you see is a dark brown haze from unfiltered wood/coal burning constantly present. An awful lot of diagnosed “tuberculosis”, sent to Arizona or the mountains or other “clean air” locales for “the cure” was actually likely to be particulate-based rather than true tuberculosis.
Of course, world population wasn’t nearly as great at the time, and one has to take that into account as well. But then the filtering was pretty well non-existant. . . .
A fish (or any commodity) is only worth what the customer will pay for it. Primary producers everywhere rarely have any control over selling price. Therefore the old cost/price squeeze- increased costs/taxes can’t always be passed on to the consumer, local producer goes out of business, commodity must be bought from somewhere else or done without, everybody loses. And people will die earlier.
I’m sometimes accused of being indirect. So, if it wasn’t clear from my above. . . if recovery from the Little Ice Age was delayed by 19th century fuel practices, then that has implications for the trend line, and attribution to causation thereof, above and beyond that commonly attributed to “clean air” legislation of the 1970s. . .
How many acres of sugar cane do they have to grow to produce ethanol for all their outboards. This produces work for farmers, work for process people and work for fuel sellers. Cuts the imports of fuel and utilises a resource that they have.
Hi Willis,
Back in the early 90’s, roughly, I was at an American Nuclear Society annual meeting. A senator was one of the keynote speakers, and it’s driving me crazy because his name is on the tip of my tongue but I cannot quite seem to get it out… started with an “M” I’m pretty sure – would know it in a heartbeat if I heard/saw it.
Anyhow, he had an awesome presentation – cogent, thought provoking, unexpected, concise yet tons of hard well referenced facts, etc – that really highlighted just what impact cheap, plentiful energy has world wide. I can’t tell you how many times in the years since I’ve wished I had a copy of that presentation, or how many times I’ve referred to various aspects of it. It had several different charts, all showing how various key human parameters changed as a function of either the amount of energy available or the cost of energy available to a nation. The more cheap energy available, the higher the GDP, the lower the birth rate, the higher the standard of living, the lower infant mortality, the longer average lifespan (I think that was one), the better the air quality, the lower pollution levels were in general, the better the water quality, the higher the standards of sanitation, and on and on. Shoot, if you think about it, what nations are able to really do a LOT of all sorts of environmental protection “green” types of activities? Those that have a lot of cheap abundant energy available to them so they actually have leisure time and disposable funds available to devote to it. Who doesn’t pursue “green” issues? Those who don’t have or can’t afford the energy to power tools, build things, drill wells or otherwise provide good clean water…. in other words, those who are forced to scrambling like mad all the time just to try to scratch out bare survival.
It has always seemed to me that very very few people think of these things in terms of energy cost and availability – and yet with abundant affordable energy available, you can do almost anything, make almost anything happen. Most of us in the ‘developed’ nations really badly take energy for granted and don’t begin to realize the massively beneficial domino effect it has throughout societies and for all mankind.
I really would dearly love to have a copy of that presentation!
“This is taxing the wrong end of the production process. Countries should tax the outputs of production ”
Denmark is taxing the hell out of El – input about 250% + 25% (VAT) – output 25% (VAT)
..and the taxes is on the rise of cause , gotta finance them windmills
http://www.energifyn.dk/energifyn/elnettet/energi-fyn-net/el-priser-og-regninger/Nye-satser-for-afgifter-på-el-2010-2015.aspx
øre/kwt = 0,18 cent/kwt – ad 25% VAT
This is that taxing energy is taxing the wrong end of the production process. This slows the whole production process down before it can be started.
This is 100% correct… this is how small government suppress developing economies… and how big government slowly strangle developed economies.
The black art of Keynesian Economics practiced by big government is really very sadistic… it is about torturing and strangling the economy to the point of subjugation.
Personally, I do not endorse (via the ballot box) any politician who supports big government… and you really know how bad it has got when big government replace ballot boxes with voting machines.
I’m not an expert on the Solomons but given that they are islands I would be asking just how much scope there is for increasing GDP? If there are few resources and few people there probably is not. If there us no money to buy fuel, irrespective of taxes, there is no prospect.
I’ll also make a wild guess that the economy is heavily foreign aid dependent, in other words other people’s taxes.
When climate naysayers talk about enthusiatically about adaptation maybe the condition of the Solomons is what is meant.
The simplest explanation i’ve ever read, and perfectly sensible. Keep it simple.
Why then do we allow governments to (over) tax fuel? When we know they’re reaping the $1 fuel tax AND the GST/VAT on the end product?
They’re ripping us off … very clearly, but as you show, it’s against everyone’s best interests.
I enjoy reading your posts Willis, because I always come away THINKING.
I agree with most of your premise concerning taxing the wrong end of the supply chain, but would like to drive the point home a little harder. First let me take a stand and disagree on one point. The taxation you seem to be arguing for is aimed squarely at “improving” society by direct financial intervention – taxing a commodity to discourage it’s use. I believe that taxes ought to be used by government only to protect and provide for the civil well-being of a society. Intervention (ie. providing financial incentive, wealth redistribution, or any other social engineering/entitlement program) rarely ever achieves “the greater good” that it’s proponents first intended.
That being said, lets think your premise through a little further. Your premise is that taxing the use of fuel squeezes the balloon on the wrong end and leads to an unintended consequence. To wit, the Solomons goverment taxation of fuel doesn’t “improve” the islanders lot in life because it creates a disincentive where there ought to be an incentive. To this engineer, improve = optimize = achieve highest yield or highest efficiency/greatest good for the most citizens. In order to promote the highest efficiency while simultaneously improving the environment and the health of its citizens, each source of energy needs to be rated as to both its efficiency for achieving productivity as well as its costs (production, environmental impact, health impact).
For example cow dung is not a very efficient source of energy for transportation, heating ones home, or cooking with. Furthermore, while it is quite cheap, it has low energy content/unit mass and a highly negative health impact when handled improperly, inefficiently burned or left out on the streets. Diesel fuel on the other hand can be quite efficient as a source of productivity improvement for transportation, heating and with the proper catalyst even when used to cook with. It may not be as inexpensive as cow dung to manufacture out in a remote rural village, but it has much higher energy/unit mass (ie. lower transportation cost), and when burned properly, has less of a negative health or environmental impact.
To drive your point home further then, if government is going to use taxation to engage in social engineering, (again, I disdain this role of government) I would suggest that we take the premise that wise government ought to use taxation as both a disincentive for energy use that is inefficient and unhealthy, and as an incentive to improve efficiency, as well as environmental and health impact. In the Solomons, would it not make sense then to give each form of energy being used a “tax rating”; each energy consuming ‘engine’ a “tax rating”. To disencentivize (is that a word?) the use of cow dung, wood and copra to make products, heat homes and cook with, products made using these sources of energy, homes heated with them, and citizens using them to cook with ought to be taxed at a higher rate. As an example of using taxation to incentivize the improvement of efficient use of energy, fishermen who invest in the latest generation of high efficiency outboard motors, ought to receive tax refunds and be allowed to charge lower taxes on the fish they sell. The tax man who comes through a village and collects huge taxes from those villagers who are cooking on open wood fires, will have a terrible go of it, unless he can simultaneously teach those same villagers that they will pay much less if they purchase kerosene stoves or collectively petition the rural government to assist them in electrifying their village.
My points: Taxation shouldn’t be used at all to “engineer” a society’s energy choices. But if you insist, then yes tax the end products, but do so by taxing to encourage the improvement of efficiency and health for all using both taxes (disincentive) and incentives.
re post by: Grey Lensman says: November 17, 2010 at 10:29 pm
“How many acres of sugar cane do they have to grow to produce ethanol for all their outboards. This produces work for farmers, work for process people and work for fuel sellers. Cuts the imports of fuel and utilises a resource that they have.”
Ah, Grey Lensman, your logic has a wiff of the broken window fallacy to it. To borrow from Wikipedia:
So, as to your comment about growing sugar cane, a most labor intensive job I gather, to convert to ethanol…. assuming they even have the ability/capital for the facilities to convert to ethanol… So how about if we compare that to the ‘evils’ of importing a fuel source, and applying the broken window fallacy to the entire concept.
First, let’s consider just a few facets of the ‘grow sugar cane/produce ethanol’ side of things. Just having work for work’s sake isn’t a very good idea, as shown in the broken window fallacy parable. Not unless the only other alternative is sitting around doing nothing. Consider also the increased engine damage the hydrophillic ethanol will cause to the outboards, thus requiring them to be need costly repairs more often or even be replaced more frequently? Not to mention that the engines will get less gas mileage also.
If, on the other hand, one could import fuel for the motors instead, at, say, a quarter of the cost of locally produced sugar cane ethanol, and maybe a tenth the labor, then there would be vastly more ability of all involved to pursue more productive tasks, resulting in a far better long term outcome. Consider also what better uses the land that would have been required for sugar cane could be put to. Perhaps other agricultural uses that provide the islander’s with a more healthy and varied diet. Maybe those freed from the sugar cane/ethanol project could then build a much needed hospital instead, or build sturdier homes that wind up saving lives during storms. Or with the extra funds now available, send someone off to learn to be a doctor or dentist for the islands, or some could start up an ecotourism business while others branched out into any number of different useful occupations, open new businesses, service industries, manufacturing – the possibilities are endless.
Results all the way around, assuming that fuel sources can be imported cheaper than being made from local resources such as sugar cane ethanol? Higher GDP, higher standards of living, more growth for the community, and so on. Just because one can perhaps do something with local resources doesn’t in many cases mean it’s actually a beneficial thing to do.