Biochar is an effective negative emissions technology: so what are we waiting for?

The IPCC notes that even massive reductions in carbon emissions will be inadequate to achieve carbon neutrality by 2050.  It states that “there is additional need for large-scale atmospheric carbon dioxide removal (CDR) to prevent overshooting the 1.5°C temperature threshold”.  Given that soils contain more carbon than both terrestrial plants and the atmosphere combined, it is therefore surprising there is so little focus placed on biochar as a carbon sink.

The October 2018 IPCC special report highlighted Pyrolytic Carbon Capture and Storage (PyCCS), that is biochar, as a promising negative emission technology (NET).  Natural biological processes break down biomass and soil carbon releasing carbon dioxide into the atmosphere.  Biochar differs because it is a stable carbon form that is retained in the soil for the long term. PyCCS can therefore be a core NET to solve humanity’s great existential threat – climate change.

 

What is biochar?

Pyrolysis turns biomass into charcoal (biochar) and also produces biogas and bio-oil by-products.  The biochar is added to soil to improve productivity and store carbon for the long-term.

Charcoal is often found in soils, made by grassland and forest fires and retained over millennia.  This natural biochar is at high levels in some of the world’s most valuable agricultural soils: the Russian Chernozem and the US Mollisols. However, intensive agricultural practices and deforestation have effectively mined carbon from many of the world’s soils, and modern industrial agriculture has become heavily dependent on synthetic fertiliser inputs.

Using charcoal in soils is an ancient technology used to restore carbon and to lift agricultural productivity.  In tropical soils plant material rapidly breaks down and releases carbon into the atmosphere.  Amidst low fertility Amazonian oxisol soils, indigenous people created rich Terra Preta soils over centuries.  These soils began as dumps of food scraps, manure and sewerage waste, ashes and charcoal.  Over decades these dumps matured into highly productive soil oases within tropical soil deserts.

Asian countries have a long history of using biochar in soil.  Rice husk biochar has been used since the beginning of rice cultivation in Asia.  Biochar is used in Europe and Asia as a feed ingredient for animal health purposes and to lift animal productivity, with the biochar then returned to the soil through manure and other waste.

What is biochar used for?

Biochar’s surface area, porosity, conductivity and other characteristics make it a general purpose substance with multi-purpose functionality in diverse applications.  It can remove pollutants and yet retain water.  It can help recycle nutrients and upcycle waste.  It can immobilize at times and catalyze at other times.

Biochar production technologies can convert agricultural, horticultural, vineyard, municipal and other waste into something valuable.  Biochar can reduce nutrient loss, improve nutrient recycling, increase soil life and enhance soil productivity.   It can reduce nitrous oxide emissions and reduce nitrate pollution in water.  It can enhance compost’s effectiveness. It can be used to purify waste water.  It can remediate contaminated soils.  It can enhance the functionality and lifecycle environmental benefits of construction, food packaging and storage materials.  It can be used as an animal feed additive, colouring agent, and as a low cost and more sustainable material for activated carbon. It can also be used in carbon black, in paints, medicines and as a decontaminant in biogas production. Above all, biochar can sequester carbon over the very long term.

Why is biochar not promoted as a core negative emissions and sustainability technology?

Biochar is one of the most important technologies we have to counter anthropogenic global warming and contribute to sustainability.  Given this, how can we explain why biochar has not been developed and applied widely?

Governments respond to concentrated lobbies, not individuals working in isolation.  Technocrats seek centralised solutions to complex problems that in fact require a society-wide and decentralised response. Fund technology to refreeze the North Pole!  Ocean iron fertilisation!  Stratospheric sulfate aerosols!  Deflecting solar radiation with space-based sunshade mirrors!  Such technological interventions come from those who presumptuously assume they can act for the planet without an inclusive mandate to do so.  Such technological fixes are unlikely to be acceptable even if they were practical.  They would inevitably come with unexpected environmental downsides.

As with distributed electricity generation, biochar technology would decentralise economic power away from the cities and to the regions. Biochar can be a tool for hundreds of thousands of individuals, communities, cooperatives, farmers, horticulturalists and small holders and cannot be monopolised by a few large companies.

Vested industries defend their financial interests by “buying science”. The science peer review process entrenches specialised disciplinary silos.  Few scientists can work across disciplines. Soil scientists and agronomists have bravely driven biochar research, however this has not been well connected to other fields such as climate and atmosphere science, animal health research, material science, and above all to climate change policy making.  Although tens of thousands of pyrolysis and biochar papers have been published, few are linked to climate change science that is core to IPCC reports and they are therefore not integrated into climate change policy responses.

Politicians and officials focus on attempts to create enforceable international agreements based on market trade principles.  For emissions markets to function effectively, the units have to be measurable, the train of transactions visible, and the trading rules enforceable.  Climate change mitigation rules can favour what is measurable at the expense of what can be most effective.  Soil carbon can be measured, however is difficult to predict with precision how long a specific biochar product will store carbon in a particular soil.  Likewise, it is difficult to predict carbon’s likely storage life in solid wood products.

How does biochar compare with other Negative Emissions Technologies?

Direct Air Capture with Carbon Storage (DACCS) and Enhanced Weathering have yet to be proven scalable, will be costly, produce no spin-off benefits, and may come with environmental risks and other unintended consequences.  Planting trees sequesters carbon, but only while the trees are growing.  If retained as a permanent forest the amount of carbon trees sequester is eventually capped.  If trees are harvested, some carbon is sequestered in long-life wood products such as housing, however most is lost.  Non-biochar soil organic matter can be enhanced through different agronomic and other techniques, however these have limits beyond which soils are saturated, and some techniques can reduce productivity.

In contrast, biochar can be used for a wide range of economic purposes and then be stored in the soil as a long-term carbon store.  This effectively involves “cascading uses”.  For example, making biochar produces some process heat and bio-oil that can be used for example in industrial processes.  The biochar can then be used for many different purposes such as waste treatment.  The nutrient-enriched biochar resulting from its waste treatment use then cascades down to its next use in lifting soil productivity through fertilisation and enhanced nutrient recycling to reduce nutrient loss.  The final cascading use for this biochar is its long-term presence in the soil.

What we should do to make biochar happen in New Zealand?

Biochar could become the world’s single most important negative carbon emissions technology.  New Zealand is well placed to lead in biochar because we are a biologically-based economy and biochar can target our key environmental challenges.  These include biochar reducing nitrous oxide emissions from pastoral farming, reducing nutrient loss, and building up soil carbon stores to offset emissions.  Pyrolysis can turn forestry, horticulture and intensive animal industry waste streams into valuable products.

To make biochar happen in New Zealand we need to recognise it in our international climate change commitments as a NET.  We need a Certification scheme to ensure the right biomass is turned into biochar and matched to the right uses and that it is sequestered in the right soils.  This could be based on the European Biochar Certificate that ensures safe, sustainable and fit for purpose biochar production and use through the lifecycle.

We need New Zealand-specific research to match biochar from specific biomass products to particular soil environments for specific productive purposes. This research must translate into technology that is applied in productive systems.

In future posts I will address these research and technological opportunities in the context of specific New Zealand industries.

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Second best policy in an MMP world can be first best in the real world

When the electorate will not support capital gains, wealth, inheritance or land taxes, how can we enhance equity?

The top priority is to lift productivity to make everyone on average better off.  How can this be done equably, within constrained policy space?

An ideal “first best” policy mix might be compulsory savings, a capital gains tax, and more optimal human capital policy settings impinging on NZS eligibility age as well as on education and immigration.

Compulsory saving can lift domestic savings rates to lift labour productivity, reduce the real exchange rate and improve export competitiveness.  Deeper and more patient capital markets would foster the growth of knowledge-intensive firms owned and anchored in New Zealand.

Capital gains taxes can reallocate capital from inflating property prices into wealth-creating tradeable sector investment.  Lifting the NZS entitlement age would free up money to invest more in educating those too young to vote.

Though such policies would be politically self-immolating, the outcomes sought could be achieved through “second best” policies, through focusing on multiple objectives with single policy instruments, through rethinking capital and labour dichotomies, and through enhancing active knowledge flows:

Second-best policies

Lipsey and Lancaster’s 1956 paper The General Theory of the Second Best addresses the challenges faced when one market failure cannot be solved to achieve optimality.  In such cases, it may not be wise to seek optimality in solving other market failures.  The best policy might therefore be second-best interventions.

For example, ideally a binding global agreement should place a cost on greenhouse gases and allow markets to drive emissions reductions to achieve an optimal mitigation response.  However, if this first-best policy is unachievable we must look to second-best policy such as forest planting, and interventions to encourage electric vehicles, distributed generation, bioenergy, biochar, and building in wood.

A capital gains tax might be first-best policy, however equity can be progressed through augmenting owner-occupied housing with new state, social and private rental housing models that can deliver affordable and secure housing.

To overcome capital misallocations, the state can invest in a targeted way in knowledge-intensive firms to ensure they are capitalized for long-term growth and anchored in New Zealand.  Such a policy would be second-best in California or Texas, however it might be first best in capital-light New Zealand.

The 1972-75 government introduced a first-best, retirement-focused compulsory savings scheme.  Were it not abandoned when the government changed in 1975 New Zealand would have avoided premature industrialization and be a much richer country today.

While the New Zealand Superannuation Fund and Kiwisaver are both “second best”, collectively they form a strong foundation to build from.  They could be augmented by savings and investment interventions that are geared towards human capital development and to tradeable sector capital formation.

Multiple objectives with one policy instrument

The Tinbergen Rule argues that for each policy objective at least one policy instrument is needed.  Many policy interventions can be used, however one will always be better than the others.  This rule has been dogmatically interpreted to mean “one policy instrument for one policy objective” – Tinbergen had a finer mind.

Mixed objectives can dissipate effort, and make performance management more difficult.  This thinking influenced the 1980s and beyond state sector reforms; often for the better.  The Reserve Bank was given an inflation band target as its major objective, and the OCR mechanism as its main lever.

Government trading activities with economic, employment and regional development objectives were corporatized and given a single commercial objective.  This led to significant productivity gains.  However, it also led to ideological overreach as privatization and offshore asset sales meant New Zealand sold its banking and insurance sectors at a time when the service sector was growing and becoming more knowledge-intensive.  We blundered down the deskilled low road when we could have chosen the knowledge-intensive high road.

Multi-functional land management was replaced with single-purpose conservation, forestry and farm land use models. This contrasts for example with multi-functional forestry in Germany and Scandinavia which has supported economic, environmental and amenity value services for centuries.

Some interventions can have a dominant objective, while allowing flexibility around individual circumstances, or allowing other objectives to be progressed.  An example is the ability to draw down KiwiSaver for home ownership.

It is also possible to use one instrument to promote multiple objectives that deliver optimal societal benefits even where some objectives will be delivered sub-optimally.  For example, Singapore-style individual development accounts can support education, life-long learning, health, home ownership and retirement savings, while also lifting overall domestic savings rates.  Draw-down from these accounts depends on an individual’s needs and life-stage.

Rethinking capital and labour dichotomies

Thomas Piketty uses capital and labour shares as equity indicators – when the returns to capital exceed economic growth rates equity falls.

However, capital and labour overlap.  Education creates human capital, and returns from it can exceed those from land, rental property and other capital investments.  Wage and salary earners also receive income from capital investments they make through Kiwisaver or shares. The value of knowledge-intensive firms can largely be intangible capital (skilled workers and intellectual property) rather than physical capital (plant and equipment).

Given advances in digital technology, computing and artificial intelligence, on-line learning, and economically tractable big data the lines between human and physical capital are likely to blur even further.

Investment in human capital is the best way to lift productivity and enhance equity. Critical investments include literacy, numeracy and digital skills capabilities that provide the foundation for deeper learning and for multi-disciplinary connections.  Effective learning will increasingly require distilling useful knowledge from otherwise overwhelming information overload, and ensuring that learning directions support individual life-narratives.

Enhancing productive knowledge flows

Economics is about individuals with their evolved human psychology and computational powers, self-interest, and the information flows and decision making that harmonize individual and social benefits.

That information is imperfect, distorted in transmission and asymmetrical is core to economics.  This shapes our institutions, laws and regulations, consumer behaviour, student choices, market structures, and how we deliver services.  Information failings have catastrophic consequences.  The 2008 Global Financial Crisis came partly from the loss of publicly visible transaction records that linked derivatives to the real property underlying their value.

Enhancing information flows in ways translating into productive knowledge has massive wellbeing potential. It requires moving as close as possible to complete and symmetrical information that is construable and acted on in social value-creating ways.

Enhancing productive knowledge flows needs filtering devices and choice architecture to focus human construal and computational power on what creates value.  For this to work for society as a whole it needs to create mutual benefits.

We face new challenges – and opportunities.  The Internet has turned an information-constrained world into one overwhelmed by information that is difficult to navigate and draw meaning from.  People who managed bounded rationality through rule of thumb heuristics and satisficing now face boundless distractions that obscure what matters.

Interventions to enhance productive knowledge flows need underpinning principles; religious or secular.  When selling houses and used cars the Golden Rule tells the saint-like among us to show buyers the borer in the roof beams and the parts held together with duct tape.

The Islamic gharar principle constrains trade with high uncertainty, for example when the buyer does not know what she bought, or the seller what is sold.  An Islamic scholar defined gharar as something that has “a pleasant appearance and a hated essence”.

For secular good citizens information flows must strive for mutual and equitable benefits, be based on respect for others, and integrity in every transaction.  At a minimum it means “do no harm” whether in our free expression or through what we keep private.

Therefore, those who despair of improving New Zealand’s productivity and well-being through tax policy changes can take heart from other policy options still available to us.  These options require new thinking, new ways of leveraging information’s non-rival properties, of creating human capital, and of harmonizing short and long term and private and social benefits.

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Shakespeare defending refugees

Around 147 lines in the collaborative play The Book of Sir Thomas More are the only authenticated remnants of Shakespeare’s work in his own handwriting.

The play was initially drafted by Anthony Munday and Henry Chettle.  However it was not performed because of political sensitivities.  Sometime after Queen Elizabeth’s death in 1603 a team of playwrights, including Shakespeare, revised the play.

Sir Thomas More includes coverage of the 1517 May Day riots when Londoners threatened Lombard refugees who they saw as competitors for jobs, culturally alien, and who they wished to expel.

When the play was written Londoners were becoming hostile to Huguenot refugees from France. The Huguenots were Calvinistic Protestants whose persecution in France culminated in the 1572 St Bartholomew’s day massacre in Paris.  This event saw an influx of refugees from France, which triggered xenophobic hostility towards them. However, the Huguenots had a powerful sympathizer – William Shakespeare.

In around 1604 Shakespeare lodged with the Huguenot Christopher Mountjoy in Cripplegate in London.  In 1612 he gave testimony in a legal dispute in which Mountjoy was involved.

In the speeches in Sir Thomas More written by Shakespeare, More defends the Lombards (and therefore tacitly the Huguenot refugees).  Shakespeare’s lines signal his empathy for refugees, and his belief that how a country treats them will signal how a society will treat its own members:

Grant them removed, and grant that this your noise
Hath chid down all the majesty of England;
Imagine that you see the wretched strangers,
Their babies at their backs and their poor luggage,
Plodding to the ports and coasts for transportation,
And that you sit as kings in your desires,
Authority quite silent by your brawl,
And you in ruff of your opinions clothed;
What had you got? I’ll tell you: you had taught
How insolence and strong hand should prevail,
How order should be quelled; and by this pattern
Not one of you should live an aged man,
For other ruffians, as their fancies wrought,
With self same hand, self reasons, and self right,
Would shark on you, and men like ravenous fishes
Would feed on one another….

…Say now the king…
Should so much come too short of your great trespass
As but to banish you, whither would you go?
What country, by the nature of your error,
Should give you harbour? go you to France or Flanders,
To any German province, to Spain or Portugal,
Nay, any where that not adheres to England,
Why, you must needs be strangers: would you be pleased

To find a nation of such barbarous temper,
That, breaking out in hideous violence,
Would not afford you an abode on earth,
Whet their detested knives against your throats,
Spurn you like dogs, and like as if that God
Owed not nor made not you, nor that the claimants
Were not all appropriate to your comforts,
But chartered unto them, what would you think
To be thus used? this is the strangers case;
And this your mountainish inhumanity

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Children’s development accounts and our equity and productivity challenges

Underdeveloped human capital and low domestic savings rates explain much of New Zealand’s child poverty and its stagnating economy-wide productivity.

Lifting New Zealand’s productivity is the major determinant of future per capita incomes. Productivity growth depends on higher savings rates and capital formation, combining with more advanced human capital.

Children’s Development Accounts (CDAs) can lift human capital at the individual level.  If a CDA system achieves sufficient scale it can help lift economy-wide savings rates in productivity-enhancing ways.

What are CDAs?

CDAs are individualised savings accounts that support such purposes as education, and investment in business and other assets.  They are accounts that can start at birth and grow in value over time.  They are drawn on later in life, typically from around age 18.

Governments typically kick-start CDAs with an initial deposit, and may continue with ongoing contributions.  Children and family members also make deposits, as can iwi, churches and other NGOs.

CDAs have affinities with asset-based welfare (see Sherraden, 1991; Bynner & Paxton, 2001; Zhan &  Sherraden, 2011).  However, asset-based welfare approaches have often focused on redistributing assets such as housing.  CDAs go further and shift social expenditure that is currently for consumption into active wealth-creating capabilities.

For example, CDAs formed part of Singapore’s strategy to gear social policy to support economic development.  Singapore avoided welfare dependency through investing in individual and family education, financial assets and in home ownership rather than subsidising consumption.

Singapore used asset-based policies within a wider cradle to the grave framework.  This included baby bonuses, child savings accounts supporting school age education and health, post-secondary savings schemes, with funds later in life being transferred to adults’ Central Provident Fund accounts.

Singapore’s policies were supported by a culture of high savings, strong families and individual aspiration.

This meant people avoided poverty through their own efforts being supported by government, and without developing a culture of passive dependency.  Government therefore aligned its social policy to its economic development strategy.

Some US states have used CDAs to encourage a savings culture among deprived children, with a special focus on saving for education.  The UK, Canada, South Korea, Hong Kong and other jurisdictions have also used CDA-type mechanisms for similar purposes.

What problems do CDAs address?

CDAs address several inter-related problems:

CDAs enhance social mobility

Many New Zealand children reach adulthood with little or no savings.  They often have limited aspirations relating to future tertiary education, business opportunities or home ownership.

Evolutionary psychology argues that early life experiences shape psychology and different life strategies.  These range from risk-taking “fast life” through to “slow life” strategies (Del Giudice, 2018).

CDAs support a future-oriented slow life strategy.  The implicit assumptions are to stay at school, avoid trouble, get a good degree, become a home or business owner, and don’t have children until you can afford them.

Child poverty and how to address it is a divisive issue.  Some advocate higher family benefits, while others resent paying taxes to subsidise parents they see as irresponsible.  However, almost everyone agrees that children should get a good start in life and have equitable opportunities.

Child poverty is cultural as well as financial.  Its mindsets are mediated through families and transmitted through the generations.  These mindsets persist through both cuts in family benefits and generous increases in them.  Improving child and family wellbeing requires changed mindsets, starting with children themselves.

CDAs transfer resources to children, not to their parents. That is, they do not subsidise today’s family support.  Instead, they build financial assets for children to draw on when they are young adults.   This shapes children’s thinking towards the future. Their own future children are then born into more stable, secure and better educated households.

CDAs can complement benefits that address today’s household poverty.  They can also substitute for them.  For example, Working for Families (WFF) transfers could be invested in children’s future capabilities, equity ownership and net worth without parental intermediation.

Some NGOs such as churches and iwi have substantial resources and need a mechanism to support contributions to those they care about.  Lobby groups that advocate increased taxpayer-funded benefits for low income families are sometimes criticized for cost-free virtue-signalling.  Such groups can be challenged to make tangible financial contributions to CDAs.

 

There is strong international evidence on CDAs’ effectiveness (Elliott & Sherraden, 2013; Butrica, 2015).  Sherraden et al (2016) show that CDAs positively affect ownership of university savings accounts and assets.  They build educational expectations and other well-being indicators (Kim et al, 2015).  Disadvantaged children especially benefit from CDAs.

Children with savings accounts have better attitudes to school and higher educational achievement.  This includes better reading and maths scores (Elliott et al, 2010).  CDAs can influence educational plans for the future from as early as primary school. Even small savings tagged for education dramatically lift university enrolments and completions (Elliott et al, 2013).

CDAs have positive effects on children’s socio-emotional development, with the effects greatest for children from low income families and with less educated mothers (Huang et al, 2014a).  CDAs mean fewer behavioural problems, better academic understanding, higher motivation to study, lower school dropout rates, and better social functioning (Ko Ling Chan et al, 2018).

CDAs help build net worth that gives people more autonomy and choices in life.  Benefits from net worth include imputed rents, bargaining leverage over service providers, and collateral for business investment.  Net worth can be transferred to the next generation.

 

CDAs target a child’s psychology, however this radiates out more widely.  Children’s savings accounts lift parental expectations that children will go to university (Kim et al, 2017; Rauscher et al, 2017).  In Singapore, CDAs have enhanced parental views on the importance of children’s education, and fostered more positive attitudes toward saving (Chang-Keun & Chia, 2012). Huang et al (2014b) found that CDAs can also improve parental mental health.

 

CDAs can lift economy-wide productivity

New Zealand’s low domestic savings rates mean a high real interest rate, and a real exchange rate that weakens our tradeable sector.  Too little capital is applied to labour, and labour productivity languishes.  The tradeable sector is weakened, yet it is tradeable sector productivity that drives per capita income.

Higher savings rates can lift economy-wide productivity.  This depends on the scale and composition of capital formation, the industry structure it can be applied to, and other factors such as migration and tax policy.

Together with other schemes such as Kiwisaver and the NZSF, CDAs can lift domestic savings and economy-wide productivity if they achieve sufficient coverage, scale and funds accumulation.

Arguably, Working for Families (WFF) subsidizes low wage work and a low skill, high employment labour market model.  A thought experiment is to envisage channelling some or all of WFF into CDAs.  This would gear social policy to economic development objectives. It would divert consumption subsidies into human, physical and financial capital formation.

The effects on short-term net parental incomes would initially be negative.  However, upwards pressure on wage rates would encourage businesses to invest more in labour-augmenting technology, lifting labour productivity.  This would in time translate into higher working incomes.  The longer-term outcomes both for children from low income backgrounds and for economy-wide productivity could be transformative.

CDAs can contribute to macro-economic stability and international competitiveness

In 2014 David Parker advocated a Variable Savings Rate (VSR) mechanism through which macroeconomic stability and a more competitive exchange rate could be achieved through differential Kiwisaver contributions.

When the economy overheats the Reserve Bank lifts the OCR to increase interest rates and reduce inflationary pressures.   The OCR is then reduced to counter recessions.  The proposal was to use the VSR mechanism to lift or reduce Kiwisaver contributions rather than use OCR mechanisms.

The VSR proposal was visionary, but hard to implement.  Kiwisaver is not universal.  It was initiated as a retirement savings scheme, with options added allowing funds to be drawn on for home ownership and hardship reasons.  Using Kiwisaver for yet another purpose risked further policy drift from its core retirement savings intent.

A universal CDA system could offer an alternative to the OCR mechanism through a variant of the VSR proposal.  When inflationary pressures are rising the government could sequester surplus revenues into CDAs.  This would help avoid higher real interest rates from a higher OCR.  It would also help reduce short-term political pressures to spend surpluses in low value ways.

How should CDAs be designed?

Key CDA design features are:

Universality and progressivity

CDA policies should be universal and progressive (see Cramer & Newville, 2009).  Universality means CDAs would be automatically created for every child from birth.  Voluntary CDAs that require “opting in” result in lower uptake among disadvantaged families, defeating the policy purpose.

All children should have a CDA.  This includes children from wealthy backgrounds. These children deserve respect, rather than being dismissed as “privileged”.  Universality will bolster long-term support for CDAs.

Government contributions could be weighted to children from deprived backgrounds.   Over the lifecycle, this counters Kiwisaver accumulations favouring the higher paid and the regressive effects of NZS (see Jeram, 2018).

Wide funnel for contributions, and a narrow funnel for draw downs

CDAs should have a wide funnel through which contributions can be made, and a narrow funnel through which funds can be drawn on.

It should be easy to put money into CDAs.  Contributions from all sources must be made in the confidence that they will be invested in children’s interests and not be diverted to “other purposes”.

The accounts must only be drawn on after around the age of 18 and for specified purposes. These would be tertiary education, equity investment, business start-ups and any other such investments that expand productive capability and enhance net worth.

Contributions to CDAs might be specifically identified to make visible what government, family members and NGOs contribute.  However, contributions should not be tagged rigidly for specific purposes such as study at a particular university.

One question is whether CDAs could be drawn on from age 18 to contribute to home ownership.   Doing so might see CDAs duplicate rather than complement Kiwisaver.  Home ownership builds net worth, however it does not expand New Zealand’s productive capabilities.  CDAs might be best to focus tightly on an individual’s wealth-generating capacity, for example through tertiary education or business investment, including start-up businesses.

Decisions and impacts arising from the Tax Working Party, Kiwibuild, migration policy, and whether Kiwisaver should be compulsory will all have a bearing on whether CDAs should also be used to encourage home ownership.

Simplicity

A CDA system needs to be tightly focused and as simple as possible, with minimal administrative costs and fees.

Some CDA-type accounts have underperformed because of poorly conceived objectives.  For example, they may be designed as anti-poverty measures for adults, not for children’s development.  CDAs have also been used to foster financial literacy.  However this and other mixed objectives can clutter their purpose and create a self-perpetuating administrative bureaucracy.

CDAs can encourage children’s savings through matching mechanisms and savings targets.  However, matching savings and reward-based targets make CDAs vulnerable during financial downturns.  For example, after the 2008 financial crisis the UK’s Child Trust Fund was abolished in 2010 as an austerity measure.

CDAs should not be given privileged tax advantages.  Doing so could misallocate resources, and could lead to rich families using CDAs as tax havens.

CDAs overseas have been administered through multiple providers offering diverse options.  This fragments funds and lifts administrative costs.  It does give choice, however young children from poorly educated households can hardly be expected to make well-informed decisions on fund managers.

New Zealand’s small size as an economy and experience with Kiwisaver suggests that CDAs in New Zealand should be administered by one fund manager.  As with the NZSF, one fund manager can achieve scope and scale economies. The fund manager needs to have access to administrative data, for example to ensure differential contributions go to children from more deprived backgrounds.

CDA fund management must be integrated into the New Zealand economy

The CDA fund manager must be deeply integrated into the New Zealand economy so that savings aggregate into capital accumulations that improve macro-economic performance and lift productivity.

New Zealand has a long history of giving birth to world class businesses, only to have them go offshore or be bought out and turned into branch offices of overseas companies.  Deeper and more patient capital markets would allow knowledge-intensive businesses to grow and internationalize while retaining deep roots and capturing benefit streams in New Zealand.  Over time New Zealanders would own more of New Zealand.

The CDA manager would therefore need to be a New Zealand-owned bank or fund manager, or a dedicated entity could be established akin to the NZSF.

There might appear to be conflicts between maximizing returns to children from CDAs funds being invested in international financial markets and the aim of deepening New Zealand’s capital markets.

However, domestic savings and investment schemes such as the NZSF, Kiwisaver and ACC have a home bias. This means they disproportionately invest in the New Zealand economy, while still delivering good investment returns.

CDAs should not crowd out existing public services

CDAs should not be drawn on for compulsory age education, health or other such services.  To do so would be to risk weakening the government’s existing obligations for such services.

Resilience and adaptiveness

A CDA system will be resilient over the long-term if they are adaptive to fiscal and other shocks.  Beyond an initial deposit, the government should not be locked into obligatory annual financial commitments that future administrations have a right to change.

Concentrated assets such as state-owned enterprises and the NZSF create risks that politicians liquidate them, as they are constitutionally entitled to do.  Alternatively, they can use them for misguided pet projects.

Of course, investment banks in the lead up to the 2008 crisis did far more damage than politicians could conceivable do through, for example, investing in infrastructure or regional development projects.

However, CDAs only work in the long-term and so they need to be protected from political short-termism if they are to have a chance to work.  Like Kiwisaver and unlike the NZSF, CDAs individualise assets and make them invulnerable to capricious government “takings”.

The core CDA system design must be resilient over time, however details of what fund contributions can be invested in must adapt over time. For example, if e-learning in future slashes tertiary education costs then a higher proportion of CDA accumulations might be spent on other purposes such as business equity investment.

CDAs should therefore not be fragmented rigidly into sub-funds tagged for specific purposes.

How could we make CDAs happen in New Zealand?

Few New Zealand politicians and senior officials come from deprived backgrounds.  CDAs can only succeed over the longer-term, yet politicians and officials focus on the short-term.

CDAs are a long-term investment benefiting people who may not vote for 18 years.  They have no strong voting constituency, and they will face opposition.

Beneficiary advocates will lobby for increased benefit transfers to parents, which may or may not benefit children.

Businesses employing low wage workers may sense the threat that CDAs are part of a wider strategy to wind down subsidies to low wage businesses and encourage upwards wage pressure.

Overseas-owned banks operating in New Zealand will oppose CDAs because they know there is a subtext of New Zealanders taking more control over their savings and financial industry.

However, the real barrier to CDAs will be myopic inertia and policy short-termism.  This has seen New Zealand for decades sink inexorably in relative economic terms compared to other countries.

Visionary leadership for a CDA system is needed from those concerned with New Zealand’s long-term future.  This needs to start with a focus on productivity, and be supported by a narrative for children.  A CDA system works at the macro level of economy-wide capital formation and at the micro level of individual psychology, resources and human capital formation.

A CDA will welcome every child born in New Zealand as a mark of citizenship.  CDAs will deliver resources for children and change their psychology to focus on their future potential.  More highly skilled young people then enter the workforce and lift productivity at the micro-level.

A CDA system could make a profound and enduring contribution to our socio-economic wellbeing.  Perhaps New Zealand has a few passionate, well-placed individuals that might champion and deliver such a system?

References

Butrica, B. (2015) A Review of Children’s Savings Accounts. Urban Institute.

Bynner, J. Paxton, W. (2001) The Asset Effect.  London, Institute for Public Policy Research.

Chang-Keun, H. Chia, A. (2012) A preliminary student of parents saving in the Child Development Account in Singapore.  Children and Youth Services Review 34(9):1583–1589.

Cramer, R., & Newville, D. (2009) Children’s savings accounts: The case for creating a lifelong savings platform at birth as a foundation for a “save-and-invest” economy. Washington, DC: New America Foundation.

Del Giudice, Marco (2018) Evolutionary Psychopathology: A unified approach.  Oxford.

Elliott, W., & Sherraden, M. (2013) Assets and educational achievement: Theory and evidence. Economics of Education Review, 33,1-190.

Elliott W, Constance-Huggins M, Song, H. (2013) Improving college progress among low- to moderate-income (LMI) young adults: The role of assets. Journal of Family and Economic Issues. 34(4):382-399.

Elliott, W., Jung, H., Friedline, T. (2010) Math achievement and children’s savings: Implications for child development accounts. Journal of Family and Economic Issues, 31(2), 171-184

Huang, J,, Sherraden, M., Kim, Y. Clancy, M. (2014a) Effects of Child Development Accounts on early social-emotional development: An experimental test. JAMA Pediatrics. 2014;168(3):265-271.

Huang J, Sherraden M, Purnell J. (2014b) Impacts of Child Development Accounts on maternal depressive symptoms: Evidence from a randomized statewide policy experiment Soc Sci Med. 112:30-8.

Jeram, Jenesa (2018) Embracing a Super model: The Superannuation sky is not falling.  Wellington, the NZ Initiative.

Kim, Y; Huang, J; Sherraden, M.; Clancy, M. (2017) Child Development Accounts, parental savings, and parental educational expectations: A path model. Children and Youth Services Review, Elsevier, vol. 79(C), pages 20-28.

Kim, Y., Sherraden, M., Huang, J., & Clancy, M. (2015) Child Development Accounts and parental educational expectations for young children: Early evidence from a statewide social experiment. Social Service Review, 89 (1), 99-137

Ko Ling Chan et al (2018) The longer-term psycho-social development of adolescents: child development accounts and the role of adolescents. Front. Pediatr.https://doi.org/10.3389/fped.2018.00147.

Rauscher E, Elliott W, O’Brien M, Callahan J, Steensma J. (2017) Examining the relationship between parental educational expectations and a community-based children’s savings account program. Children and Youth Services Review. 74:96-107.

Sherraden M. et al. (2016) Universal and progressive Child Development Accounts: A policy innovation to reduce educational disparity. Urban Education. 2016:1-28. 

Sherraden, M. (1991) Assets and the poor.  A new American welfare policy.  M.E. Sharpe.

Zhan, M. &  Sherraden, M. (2011) Assets and liabilities, educational expectations, and children’s college degree attainment. Children and Youth Services Review, 33(6), 846–854.

 

 

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What should we do about climate change?

 

We adapt differently to sudden shocks and to incremental change, even where the latter is catastrophic.  The former are visibly and quickly disruptive and put pressure on politicians to act now.  The latter are slow moving, with uncertain impacts far beyond political timeframes.

Mount Tambora in the (then) Dutch East Indies exploded in 1815.  This triggered global cooling and led to the “year without a summer” in 1816.  It killed thousands of people directly.  It caused global famines, civil breakdown, and mass migrations of people escaping from starvation.  It led to a cholera outbreak in Bengal that spread internationally and killed millions.  Governments responded with authoritarianism and trade protectionism.

However, the eruption also triggered art and innovation.  Mary Shelley conceived Frankenstein while trapped by bad weather in Switzerland.  Lord Byron’s apocalyptic poem Darkness was written in 1816 in direct response to Tambora’s effects.  It begins:

“I had a dream, which was not all a dream. The bright sun was extinguished…”

At age 13 Justus von Liebeg in Darmstadt lived through the 1816 “dark summer” and the hardship it gave rise to.  This helped trigger his interest in science.  He later developed nitrogenous fertilizers and understanding of trace plant nutrients that revolutionized agriculture and helped make possible food security for most of the world.

Climate change is both natural and human-induced.  A sophist might argue that humans are part of nature – so human-induced climate change is “natural”.  A beaver’s phenotypical expression of its genotype is the dam it builds, altering the natural environment in so doing.  The World Trade Centre was a human phenotypical expression, as were the aircraft that destroyed it.  The psychology that led to “9/11” was a natural product of Darwinian evolution.

Humans may be akin to a highly invasive, weedy species.  However, we are also a sentient species and some of us can reason scientifically, project into the future, and create technologies for good or ill.

The scientific evidence for human-induced climate change is irrefutable.  We concur with Titania’s view in Shakespeare’s Midsummer Night’s Dream that climate change results from human action rather than from nature:

These are the forgeries of jealousy:
And never, since the middle summer’s spring,
Met we on hill, in dale, forest or mead,
By paved fountain or by rushy brook,
Or in the beached margent of the sea,
To dance our ringlets to the whistling wind,
But with thy brawls thou hast disturb’d our sport.
Therefore the winds, piping to us in vain,
As in revenge, have suck’d up from the sea
Contagious fogs; which falling in the land
Have every pelting river made so proud
That they have overborne their continents:
The ox hath therefore stretch’d his yoke in vain,
The ploughman lost his sweat, and the green corn
Hath rotted ere his youth attain’d a beard;
The fold stands empty in the drowned field,
And crows are fatted with the murrion flock;
The nine men’s morris is fill’d up with mud,
And the quaint mazes in the wanton green
For lack of tread are undistinguishable:
The human mortals want their winter here;
No night is now with hymn or carol blest:
Therefore the moon, the governess of floods,
Pale in her anger, washes all the air,
That rheumatic diseases do abound:
And thorough this distemperature we see
The seasons alter: hoary-headed frosts
Far in the fresh lap of the crimson rose,
And on old Hiems’ thin and icy crown
An odorous chaplet of sweet summer buds
Is, as in mockery, set: the spring, the summer,
The childing autumn, angry winter, change
Their wonted liveries, and the mazed world,
By their increase, now knows not which is which:
And this same progeny of evils comes
From our debate, from our dissension;
We are their parents and original.

Unfortunately, the most powerful elected politician in the world has neither poetry in his soul nor science in his reasoning.   His shortcomings are not unique – international agreements tend to be unstable over time because many political leaders are themselves unstable.

These problems are magnified given that climate change is the ultimate tragedy of the commons.  It is the supreme exemplar of market failure.  The costs and benefits of climate change mitigation are difficult to apportion equitably among countries and through generations.  Therefore, how realistic is it to expect that global climate change rules can be agreed to and implemented fairly and effectively?

The 2018 Intergovernmental Panel on Climate Change proposes a target to limit global warming to 1.5 degrees. This requires a 45% drop in net carbon emissions by 2080 compared to the 2010 basepoint.  This means “net zero” is achieved by 2050.  This is possible within known scientific laws and technological possibilities.  However it requires far reaching changes in production and transport systems, consumption modes and the energy systems that support them.

Climate change mitigation rules reflect political compromises.  They focus on what can be measured and complied with rather than what works best.  For example, soil carbon is a bigger terrestrial carbon store than forests but the international rules reward carbon sequestered in trees alone, not in soils.  Long-life wood products are treated as emissions, even if wood in buildings lasts centuries.

It is unlikely that humanity can organize itself effectively enough to stop human-induced climate change from having dramatic impacts.  Most of these impacts will be negative; some may be positive.

Climate change is not a morality play, and there is no cosmic justice.  Low-lying and poor Bangladesh will suffer more than mountainous and rich Switzerland.  What therefore should New Zealand do, given that we are a middle income country with stagnating productivity and in inexorable economic decline?

New Zealand can lead in niche areas where mitigation technologies we help develop can also be adopted by others.  We must focus on the opportunities to cut net emissions and to make (or save) money at the same time, rather than focusing on slavish compliance with imperfect and sometimes counterproductive rules, or trying to game or work around them.

However, is New Zealand’s polity up to the challenge?  The failure to address climate change effectively is a sin of omission rather than of commission.  It is not a deliberate damaging act, but a failure to act.

Some argue that today’s public service has too many marketing, communications and relationship management types in senior positions.  Their incentives are to make deals and keep politicians happy in the short-term, not to think through what matters long-term.  Further down the ranks the more technically able people bite their lips and say nothing (publicly).

However, long-term outcomes are the end result of many actions we take in the short-term.  Our polity moved fast and effectively to deal with such immediate crises as the Christchurch earthquakes.  It needs to act now for the long term with the skills it can apply to today’s sudden shocks, while sustaining support from the communities it is accountable to.  For our polity this is a new art form.

Our climate change strategy must focus on what makes good sense both economically and in climate change mitigation. Specifically, opportunities include:

Mass adoption of sustainable electricity

New Zealand has among the world’s highest per capita endowments of sustainable electricity.  This includes hydroelectricity, wind, geothermal, solar and bioenergy.  It underutilizes these resources, and squanders them through poor building energy efficiency and transmission losses.

Electric vehicles powered with sustainable electricity would save New Zealand billions of dollars a year in imported oil.

More supportive rules for wind power, photovoltaics and solar thermal are needed. So too for distributed generation, and energy storage systems to smooth out generation intermittency.  The technology is already available.  The failure to exploit its full potential is due to lack of leadership and regulatory barriers.

Unlike capital-intensive, unproven and unsafe adventures with hydrogen a sustainable distributed generation system would help decentralize economic power and create opportunities for New Zealand’s regions.

Give the food and fibres industries centre stage

New Zealand’s food and fibres industries have a profound existential mission.  It is to help feed, house, furnish and dress the world within environmental constraints.

New Zealand should aim for world leadership in nitrogen management.  Fertilizers account for around 10% of the input costs for pastoral farming.  More efficient use will reduce nitrous oxide emissions and water pollution, while saving money.

Many New Zealand pastoral soils already have high carbon levels.  However there is potential to sequester more carbon, and to use biochar as a long-lived carbon store with spin-off benefits such as bioenergy and specialized product opportunities (see Winsley, 2007).

When carbon in tree roots and forest soils is included mature kauri forests have the world’s second highest per hectare carbon storage in the world – second only to Eucalyptus regnans with acacia under-storey.  Kauri is one of the world’s greatest timbers. There are classic boats where the kauri has outlived metal fastings that corrode and have to be replaced while the wood is still in good shape.

Anything you can do with oil you can do with plants.  Rubber can be made from guayule, Russian dandelion and other plants as well as from Hevea and oil.  Wood can make liquid and gas biofuels, chemicals and pharmaceuticals.

Redwood grows well in New Zealand and is a valuable timber internationally.  It is well suited to growing on slopes where its root structure locks soil into place.  This reduces flood events, erosion and soil carbon loss.

Douglas fir is a valuable lumber and is well suited to CLT and other highly engineered applications.  It thrives at higher altitude and in colder environments where farming is marginal.  Radiata pine is a fast-growing and profitable timber suited to very poor soils, and with versatile applications.  These include as an engineering building material.

Multi-storey buildings can be made from engineered wood products rather than steel and concrete.  They can deliver superior earthquake resilience and fire resistance while sequestering carbon.  Mass adoption of wood engineering technology can transform radiata and other fast-growing softwood species into higher value products.

What next?

Climate change will rewrite the world’s history.  It will have dark moments, lots of farce, however it does not need to turn into tragedy.

The above actions may make a substantive contribution to climate change mitigation, especially through technologies they create having wider international applications.  Even if they fail to do so the above actions will create some “no regrets” economic opportunities for us, and avoid us being cursed by our descendants.

Reference

Winsley, P. Biochar and bioenergy production for climate change mitigation.  NZ Science Review Vol 64 (1), 2007. https://pdfs.semanticscholar.org/83cc/ad73f3f0f29cc11734b23f08437282be1663.pdf

 

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What the NZ Initiative might learn from Keynes

 

Ideas, knowledge, science…these are the things which should of their nature be international. But… above all, let finance be primarily national.

J M Keynes, 1933[i]

The New Zealand Initiative (NZI’s) Embracing a Super Model report notes that NZS is one of the world’s best pension schemes.  It is simple and universal.  It does not discourage people working beyond retirement age. It delivers good outcomes for elderly people.

The report advocates lifting NZS eligibility age in line with rising life expectancy, and retaining the CPI link. It suggests delinking the NZS from wages so that wealthy elderly people do not capture disproportionately the benefits from productivity gains that might otherwise be more fairly shared.  However, delinking would over time create relative poverty for the elderly.

The NZI report does not address the potential for retirement and other savings policies to lift domestic savings in ways that flow through to capital formation and economy-wide productivity gains.

The New Zealand Superannuation Act 1974 established a compulsory scheme to lift savings and investment, while supplementing the pension.  However, the 1975 election result saw this replaced with a universal non-contributory scheme with age 60 eligibility.  This may be New Zealand’s worst ever economic decision.

Brian Gaynor estimated that had it been retained the 1974 scheme would now be worth around $500 billion. We would have deeper and more patient capital markets, and lower real interest rates. New Zealand would be among the top OECD economies.  More of our high productivity businesses would be global players, owned and anchored in New Zealand.  New Zealanders would have higher incomes, and our retirees would be better off.

New Zealand’s low domestic savings rates explain much of its stagnating productivity, and therefore its modest per capita incomes.  Low domestic savings rates mean a high real interest rate, and a real exchange rate that weakens our tradeable sector.

Higher savings rates can lift the capital to labour ratio, which boosts labour productivity.  This depends on the scale and composition of capital formation, the industry structure it can be applied to, and other factors such as migration and tax policy impacts on capital allocation, including between the tradeable and non-tradeable sectors.

Even when they invest globally, domestic savings and investment schemes have a home bias and contribute disproportionately to our economic development. When terminated after just 37 weeks, all of the 1974 scheme’s investments were in New Zealand.  Over 40% of Kiwisaver funds are invested here.  The NZSF has around 15% of its funds invested in New Zealand, including in tradeable sector and technology-based businesses.  ACC invests significantly in New Zealand equities and in infrastructure.

The NZSF was established in 2001 to partially pre-fund superannuation liabilities.  The NZI argues that contributions to the NZSF should not be at the expense of paying down debt. However, government can borrow cheaply.  The NZSF provides a mechanism for governments to sequester surpluses, preventing pressures to spend today.  It helps capital formation within New Zealand.

Politicians might try to use the NZSF for ill-conceived pet projects.  However, it can be used for wealth-creating investment in for example enabling infrastructure and in knowledge-intensive businesses that become internationally competitive, while retaining benefit streams in New Zealand.

In 2007 Kiwisaver was launched.  Were it made compulsory with higher employer and employee contributions our retirement provisions would come close to those enacted in 1974.

Looking forward, the NZS eligibility age can be gradually increased to reflect life expectancy gains.  Compulsory Kiwisaver would lift capital formation and give people a lump sum at 65.

However, higher income people will save more through Kiwisaver and through other savings instruments than the lower income. This can compound relative inequality among the elderly.

A comprehensive and equitable savings and investment package could be completed through universal Children’s Development Accounts (CDAs).  Community groups and families as well as government could contribute.  Higher contribution rates to CDAs for more deprived children would counter the regressive effects of NZS and of Kiwisaver accumulations that favour the higher paid.

CDAs would support savings for tertiary education, equity investment, business start-ups, and other means of expanding young people’s wealth-creating capabilities and enhancing their net worth.  They would lift aspirations leading into tertiary education and equity investment.  More highly educated young people would enter the workforce and lift productivity.

Progressively diverting Working for Families into CDAs would gear social policy to economic development objectives.  It would convert consumption subsidies to wealth-creating investment.  This would also remove subsidies to businesses that pay low wages, and create upwards pressure on wage rates.  Businesses would then invest more in labour-augmenting technology, lifting labour productivity.

The capital formation that the CDAs and Kiwisaver would drive would underpin the productivity growth that would give all New Zealanders higher incomes.

CDAs could also contribute to the macro-economic stability purposes David Parker envisaged in his proposed Variable Savings Rate (VSR) mechanism.  When the economy is over-heating surplus government revenue could be sequestered in CDAs.

CDAs would lift wealth-creating capability, productivity and net worth at the individual and the economy-wide level.  NZS would continue to be linked to CPI and wages.  Workers and retirees would over their lifetimes benefit from the greater wealth-generating and net worth benefits from both CDAs and Kiwisaver.

The full benefits of the above savings, investment and retirement package would only accrue later this century. In the long run we are all dead, however we will feel more alive in our working, saving and investing lives when we know future generations will be wealthier, more secure and more equal.

[i] John Maynard Keynes, “National Self-Sufficiency,” The Yale Review, Vol. 22, no. 4 (June 1933), pp. 755-76.

 

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Two poems from Simonov and Bornholdt

Konstantin Simonov’s poem Wait for Me inspired Russia during the Great Patriotic War. Most soldiers knew it off by heart.  Many carried with them a locket with the poem and a picture of their wife or girlfriend inside.

Wait for Me by Konstantin Simonov.

Wait for me and I’ll return, only wait very hard.
Wait when you are filled with sorrow as you watch the yellow rain.
Wait when the wind sweeps the snowdrifts.
Wait in the sweltering heat.
Wait when others have stopped waiting, forgetting their yesterdays.
Wait even when from afar no letters come for you.
Wait even when others are tired of waiting.

Wait for me and I’ll return, but wait patiently.
Wait even when you are told that you should forget.
Wait even when my mother and son think I am no more.
And when friends sit around the fire drinking to my memory
Wait and do not hurry to drink to my memory too.

Wait for me and I’ll return, defying every death.
And let those who do not wait say that I was lucky.
They will never understand that in the midst of death
You with your waiting saved me.
Only you and I will know how I survived:
It was because you waited as no one else did.

Wait for Me is read below by Laurence Olivier:

https://www.youtube.com/watch?v=LQ2gMcFx3No

New Zealand has never faced an existential crisis such as the Great Patriotic War.  However, on our more humble individual level many of us take risks tramping, and Jenny Bornholdt’s 1989 prose poem Make Sure speaks to us:

 

Make sure by Jenny Bornholdt

Make sure you fall in love with a man who you know will survive in the bush.

This way, when he is three nights overdue from his trip and the search and rescue team is out looking for him and the helicopter has been called back because the weather is closing in and they’re interviewing you on television in a close-up camera shot, asking you what you think his chances are — hoping you will cry and your lip will tremble — you can look them straight in the eye and say you know he will be all right, he has had plenty of experience and he knows what to do, he was carrying plenty of food and warm clothing and he is strong.

Even if he is hurt, you know he will be all right.

He’s a fighter, you’ll say. He won’t give in.

But the weather is closing in, you must be worried, they’ll ask. You keep your resolve. He will be all right, you say. I know he will.

Jenny’s poem is read below:

https://www.youtube.com/watch?v=rHzuvf-q-3s

…and sung by a choir:

https://www.youtube.com/watch?v=cVxENfYelsc

 

 

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