Key Point¹

The Irish government has published the draft heads of a climate bill. Because we won’t know the essence of what is proposed until we see the national and sectoral roadmaps that will follow, it is not possible to draw definitive conclusions as to the sense and effectiveness of what is proposed. But we can surmise that it has some strengths, and some gaps. The strengths are:

• Commitment to sectoral roadmaps; each sector has particular characteristics that require separate design and implementation. Developments in the Common Agricultural Policy (Multiannual Financial Framework) and in the food industry (Glanbia) make agriculture especially interesting as a focus of attention, and improved efficiency in buildings can yield big economic, social and environmental gains.
• The primacy of policies that are cost effective (likely to achieve outcomes at least cost). [But the considerable achievements of the existing policy portfolio need more recognition and support]
• Avoidance of ‘ourselves alone’ targets disassociated from the wider European policy framework.
• Institutional integration, with the EPA, Sustainable Energy Authority of Ireland, Teagasc and the Economic and Social Research Institute anchoring the National Expert Advisory Body, and Ministers reporting to the Dail on the performance of their sectors.

Gaps include no overt treatment of:

•  Innovation and associated research and development as an essential instrument for progress, and for the development of business.
• Supporting European action as a means of helping China make the transition to a low carbon future.
• Climate justice, where we have an important contribution to make, and only passing reference to adaptation to the climate change that is already happening or in the pipeline.
• Engaging effectively with the generation that will be most impacted by climate change.

Introduction

The Irish government recently approved the draft heads of a ’Climate Action and Low Carbon Development Bill, 2013,’ – referred to in this paper as the ‘climate bill’ – which lays out a general scheme. This was complemented by the simultaneous publication of a detailed analysis of the context and choices by the National Economic and Social Council (2013)². The essence of the proposed approach is ‘to achieve transition to a low carbon, climate resilient and environmentally sustainable economy in the period up to and including the year 2050’. This is to be achieved by preparing and implementing national and sectoral road maps that are informed by scientific evidence, research findings, and the advice of an Expert Advisory body, and consistent with existing and future European Union and other obligations. The plans will specify the policy measures to be undertaken for both mitigation (reduction of greenhouse gas emissions) and adaptation (accommodating the climate change that is already upon us, or very likely to happen), and they are to be cost effective and economically efficient.

Until the national and sectoral road maps are available, it is impossible to draw conclusions about the likely quality and effectiveness of what is proposed, but we can identify the characteristics that would lead us in a useful direction.

1. Will the road maps and their implementation help us be positive and effective leaders for Europe on climate change?

The centre of gravity of the global economy is shifting to Asia, and this is reflected in greenhouse gas emissions, with China and India in 2011 accounting for over a third of CO2 emissions.

Table 1. CO2 emissions, by selected jurisdictions, 1990 and 2011, Billion tonnes.

Source: Olivier, Jos G.J., Greet Janssens-Maenhout, Jeroen A.H.W. Peters, 2012.. Long-Term Trend in Global CO2 Emissions, 2012 Report, Netherlands Environmental Assessment Agency and JRC European Commission 39 pp.

China alone now accounts for almost 30% of the global CO2 emissions, and its share is rising. It is instituting a number of very ambitious measures to address greenhouse gas emissions. Success or otherwise in addressing the global challenge will be decided there. And the difficulties in doing so are immense. China’s GDP per capita in 2012 in purchasing power parity was $12,302. Ireland’s was over three times that level ($41,739). There is intense political and popular pressure to keep growing so as to catch up with the richer countries. There is a chance that the transition to a low carbon and prosperous economy will be achieved, but it will take a comparable effort and support from the EU and the US if the climate progressives in China are to prevail.

Ireland’s greenhouse gas emissions are about 0.1% of the global total. On our own, whether we succeed or fail to cut emissions is immaterial, unless our performance has a multiplier effect on others. Action at European level can provide the multiplier. We have the advantage of being at the decision making table of the European Union, which has real leverage. Although the EU in 2011 only accounted for 11.2% of total global CO2 emissions – and this share is shrinking – it is still a major global player; it has some negotiating heft because it is doing rather than talking, and, as the largest importer of goods and services in the world, it has incomparable market power. Our own roadmap should first and foremost assist the EU in shaping and the advancing the European and global agendas, and this should be recognised as a priority in the Irish roadmap.

The Issue of Targets

The meat in any policy sandwich is the quality and credibility of the policies that are proposed and then implemented, and their prospects of achieving a productive change in direction. Do not judge any policy process by what it aspires to in the long term – such commitments are politically costless and so can be extremely ambitious, because they become due for delivery way beyond the current political cycle. Focus instead on what is proposed now to achieve a change of direction; this is where difficult choices, tradeoffs, priorities and allocation of scarce financial, political and administrative effort are to be found, and where political skill and courage (or its absence) can be judged.

Having Irish climate targets is not irrelevant, but they are relevant only in the context of contributing to the ambitions of Europe, and thereby as a means of helping China make progress, for reasons outlined above. There is no logic in establishing targets for ourselves alone, independent of the European context. But a sinn féin approach has its supporters.

In ‘Climate Report is a dismal technocratic document’ (I Times February 22, 2013) Frank McDonald bemoans the absence of ‘specific real targets’ in the recent NESC report on facing the climate change challenge in Ireland. This enthusiasm for targets is also shared by a number of non- governmental organisations (Friends of the Earth, Stop Climate Chaos, Environmental Pillar, Irish Corporate Leaders on Climate Change) who on February 20 issued ‘Six Tests for the Government’s Climate Change Bill’ the leading two of which are: ‘Is there a 2050 target?’ and ‘Are there interim targets?’

Making ‘real targets’ the top priority is misconceived for three reasons.

The first is that Irish (and other) governments consistently do not meet many environmental and other targets that are legally binding, especially those that come due outside the electoral cycle in which the target was set. And this is true even when non achievement results in large lump sum and daily financial fines being imposed on us by the European Court. In ‘Implementing EU Directives – an Opportunity to Lead’, I elaborate on the reasons for this lack of action. Irish governments do not embarrass easily. It is optimistic beyond reason to imagine that a target for 2050, which between now and then will see about 9 governments come and go, will have any real purchase on how these many governments will act.

The second reason why national targets covering the whole economy will be ineffective is that our emissions from the power sector and heavy industry (cement, refineries etc.) are already part of an EU-wide cap which is fixed at EU level; this is called the European Union Emissions Trading Scheme (EU ETS). Even if we reduce to zero our emissions from the traded sectors, there will be no commensurate reduction in total emissions.

A third reason is that under European Law we already have very demanding legally binding annual targets over the 2013 to 2020 period for emissions from sectors not in EU ETS, i.e. emissions from agriculture, transport (excluding aviation), buildings (heat), waste. The total reduction from a 2005 base for the EU is -10%. Ireland (with Luxembourg and Denmark) was given the most demanding minus 20% target. The huge task we face can be judged from the fact that our annual non traded emissions in 2011 (41.7 million tonnes) – after 3 successive years of decline in GDP – still exceeded our legally binding target for these sectors (40.56 million tonnes). We have a huge mountain to climb, and this challenge will intensify if this cap is further tightened at EU level.

2. Are we transforming agriculture to be climate efficient?

In 2011, agriculture in Ireland contributed over 44% of the total greenhouse gasses emitted from the non-traded sectors. There are ambitious plans to expand output once quotas are removed³. Without an effective strategy, emissions will grow and result in some combination of tax payer buying of allowances from other countries to cover the deficit, and compensating reductions from the transport and heat sectors which could be very difficult and expensive.

There are initiatives and instruments emerging to support farmers in making the transition: In the Conclusions of the European Council on the EU budget to apply from 2014 to 2020⁴, we find the following(p.27):

“The overall environmental performance of the CAP will be enhanced through the greening of direct payments by means of certain agricultural practices  to be defined in the Regulation of the European Parliament and of the Council establishing rules for direct payments to farmers under support schemes within the framework of the common agricultural policy, beneficial for the climate and environment, whilst avoiding unnecessary administrative burden, that all farmers will have to follow. In order to finance those practises, Member States will use 30% of the annual national ceiling, with a clearly defined flexibility for the Member States relating to the choice of equivalent greening measures.”And from the enterprise sector, we find a very interesting initiative with huge potential: Glanbia is a major Irish food company that has ambitious plans, which are summarised by the National Economic and Social Council (2013, p. 74) as follows

“Glanbia views the drive to reduce energy costs and environmental impact as key to future growth. To support this it has created a very sophisticated process by which it assists farmers to farm more efficiently and reduce emissions. Bord Bia and Teagasc were centrally involved in this project. They designed the data collection questionnaire, collected the information on farms, developed the methodology and model and achieved certification from The Carbon Trust.

There is now a Code of Practice that supports continuous improvement on farms. This includes things that famers must do and should do. Independent audits will be used to determine if standards are reached. There is also an education and awareness programme to introduce the code of practice, explain how it works and highlight its impact on farms, particularly the scope to reduce costs. It allows farmers to assess their performance relative to national benchmarks and with local peers. In addition, farmers receive a visit from in-house advisers working with the company who provide advice based on detailed analysis of the audit and ongoing performance data for the farm.
Having completed a pilot programme,  Glanbia is planning to roll out this initiative to all of its milk suppliers over 2013/14⁵.”

This initiative is potentially transformative: What doesn’t get measured doesn’t get done; this provides the measurement, Glanbia can see advantage in the global market place from adopting this approach, and the CAP provisions noted above can be designed and implemented so as to reward farmers who embrace the approach. It needs to be re-enforced by an innovation and research and development strategy (see below).

If Ireland becomes a global leader in the area of transforming farming and forestry to be resource and environmentally efficient, it can have spillovers and insights for China and other countries that are struggling to expand food production while protecting local and global life support systems. [The other ‘big win’ opportunity is improving the energy efficiency of buildings, but this can only be achieved if the transaction costs of retrofit can be dramatically reduced, and this involves scaling up to community and neighbourhood levels]

3. Is energy efficiency prioritised?⁶

Energy efficiency is about getting more output per unit of energy input. As efficiency improves, it can lower energy prices, reduce greenhouse gas emissions, improve comfort and health levels, especially for the most vulnerable, and generate employment. But it only delivers these outcomes for households if the barriers inhibiting action are successfully addressed; these include small individual scale which increases unit costs and makes investment of limited interest to banks, fear of strangers in the house, apprehensions about disruption, split incentives – where landlords don’t reap the benefits of their investment in energy efficiency. And this requires achieving substantial economies of scale and scope through community-wide schemes and making the choice ‘opt out’ rather than ‘opt in’.

4. Is climate efficient innovation embedded so as to influence how we think and act as producers, consumers and government?

Business, families, farmers, civic society, the universities, government all need to do research, experiment, find new ways of doing more with less. And some of these new ways need to be converted into enterprises. Teagasc and the universities have key roles here. There needs to be a substantial research, development and demonstration programme in place to support the innovation imperative. The main vehicle for research funding in Ireland is Science Foundation Ireland (SFI), and it plans by 2015⁷ to devote all of its funding to the 14 areas specified in the Report of the Research Prioritisation Steering Group⁸ . In the priorities report, ‘Climate Change and Related Environmental Research’ is listed in an Annex as an example of policy research but is not addressed at all in the funding portfolio. An appropriately funded climate research, development and demonstration programme needs to be front and centre if the climate strategy is to succeed.

5. Do our political and institutional arrangements foster and facilitate effective action?

The 5 key sectoral players at national level are the departments of agriculture, employment, energy, environment and transport. They all need to be mobilised, with political leadership from An Taoiseach, and executive leadership from environment, reporting regularly to the appropriate Oireachtas committee.

In the context of the conflict in Northern Ireland, Frank McGuinness observed that “The greatest mistake we have made is not that we didn’t love our neighbour, rather we don’t know them, and that is our continued mutual choice.” In regard to policy development and implementation, this idea has its analogue in that each department and agency has its own missions, personnel and professional skills, ethos, priorities and budgets, and finds it difficult to impossible to reach across and know what others are doing, and collaborate effectively to advance a shared objective. This silo mentality and practise is damaging in general, but it is disastrous when it comes to addressing climate change, which is quintessentially a multi sectoral challenge. The draft Climate Bill includes an important feature that would make the silos more porous; it proposes (Heads 6-9) a National Expert Advisory Body with 5-7 members, four of whom will comprise the directors of the Environmental Protection Agency (EPA), the Sustainable Energy Authority of Ireland (SEAI), Teagasc, and the Economic and Social Research Institute (ESRI), to which should be added the Director of the National Transport Authority. It also provides for regular reporting to the Dáil by each Minister on his or her sectoral performance. Presumably periodic reporting to the relevant committee(s) will also be part of the oversight functions.

6. Are the policies that are already working well being sustained and developed?

As noted above, the degree of substance in a strategy can be judged by the quality and coherence of policies being pursued. The emphasis on the ‘how’ in the NESC analysis is well justified.

We are amongst the leaders in the EU in introducing and increasing a carbon tax, and in the recalibration of the vehicle registration tax and the annual road tax applied to new cars to reflect their emissions performance. The income from the carbon tax is helping avoid the need to raise other taxes, and both taxes are helping re-shape our behaviour in the direction of reducing climate change pressures. [Emissions from transport fell by over 10% between 2009 and 2011]. We have also been very effective at introducing an energy efficiency labelling scheme, and in making new houses almost carbon neutral. We need to continue with these policies, and re-enforce them. The first requirement in an effective strategy is to make sure not to weaken or abandon the policies in place that are effective. The second is to keep scanning the horizon for new and better ways to move the agenda forward. The emphasis in the draft bill on policy measures is important and should be retained, as should the focus on sectoral road maps; the three sectors that make up the non-traded emissions – agriculture, buildings (heat) and transport – have very particular technological, business, consumer and policy features that require separate treatment.

7. Are we making sure that our children understand?

We are the first generation in human history to, by our own actions, begin to shape how our planet’s life support systems function. Most adults who interrogate the evidence⁹ are convinced intellectually that climate change is happening, but for most, it is not embedded in how we think and act, and how we value what we have.
The costs of climate irresponsibility are likely to be borne tomorrow by those who are in our schools today. Every student needs to understand the issues, the evidence, the risks, the choices, and the likely implications of not taking action. In Ireland we have done well, with our Green Schools and Eco UNESCO initiatives, to embed the value of protecting the local commons with a global consciousness. Continuing and developing these initiatives need to be an integral part of the strategy.

8. Are we effectively addressing adaptation and climate Justice?

Some climate change is already upon us. And the costs are being borne in the main by those with the least resources to adapt, namely, the 800 million who are already struggling to put enough food and clean water on the table to survive. The Mary Robinson Foundation is providing global leadership in giving an effective voice to the voiceless in this critical area. Irish Aid, Concern and others are making the link between climate change and nutrition, so we have a nucleus of advocacy, performance and expertise in adapting to climate change in ways that are effective and fair.

In the Climate road map, adaptation in general should be given more prominence, and global leadership in climate justice should feature.

If we can answer ‘yes’ to these 8 questions, we have a climate strategy we can be proud of.

To download a pdf version of this commentary, click here.

Notes:

¹Declaration of interests. I was a member of the Research Prioritisation Steering Group, served as chair of the Sustainable Energy Authority of Ireland, am on the board of the Mary Robinson Foundation, and have received research funding from the EPA.

²‘Ireland and the Climate Change Challenge: connecting ‘How Much’ with ‘How Do’. Final Report of the NESC Secretariat to the Department of Environment, Community and Local Government, Dublin, 2013.
³ See ‘Food Harvest 2020’
⁴ European Council (from General Secretariat of the Council to Delegations) ‘Conclusions: Multiannual Financial Framework’, EUCO 37/13, February 7/8 2013
⁵NESC, 2013. “Ireland and the Climate Change Challenge: Connecting ‘How Much’ with ‘How To’”, Final Report of the NESC Secretariat to the Department of Environment, Community and Local Government.
⁶A discussion of the issues involved can be found in: Convery, Frank. 2011. ‘Reflections–Energy Efficiency Literature for Those in the Policy Process’, Review of Environmental Economics and Policy, 5 (1): 172-191.
⁷ See SFI ‘Agenda 2020’, 2013, page 14.
⁸The areas are: A. Future Networks, B. Data Analytics, , C. Digital Platforms, D. Connected Health and Independent Living, E. Medical Devices, F. Diagnostics, G. Therapeutics, H. Food for Health, I. Sustainable Food, J. Marine Renewable Energy, K. Smart Grids and Cities, L. Manufacturing, M. Processing technologies, N. Services.
⁹A recent World Bank publication – Turn Down the Heat – why a 4C warmer world must be avoided – a report for the World Bank by the Potsdam Institute for Climate Impact Research and Climatic Analytics, Washington DC, 2012.

Key Point¹

The Irish policy system has been properly obsessed by the need to make progress in reducing the extent and impact of the bank related debt. Now that we have made some progress on this front, it is timely to focus on another dysfunctional aspect of Irish and European governance. By delays amounting to decades in the implementation of some directives, the member states of the European Union (EU) undermine the Union’s credibility, effectiveness and its competitiveness. Once they have finally been found guilty by the European Court and been fined, member states rush to comply. As a result, ‘Europe’ gets blamed by the citizenry for being forced to take actions the justification of which has been poorly explained, where a credible evidence base for action is often not available or not accessible, and the many benefits of action get lost in a maelstrom of recrimination and disputation. What is needed is to learn from the many cases of successful implementation in Ireland and elsewhere, including those member states – Nordic countries, Netherlands and the UK – that perform best. Each member state should design and implement a credible plan once a directive has been approved, and then monitor implementation as part of the European semester process. Ireland should implement these procedures itself so as to become one of the leaders in best practice. The European Affairs Committee of the Oireachtas (Parliament) should be given an explicit mandate to monitor and report on performance. Ireland should use its influence in Europe to put this issue on the EU agenda.

Introduction

There are many areas where the performance of the EU can be improved. Improving the governance of the banking system and addressing public debt have dominated recent efforts in Ireland and across the Union. Now that the promissory note aspect of our banking crisis has been addressed, there is an opportunity to focus on another area where the performance of the EU and Ireland is inadequate.

Ireland holds the Presidency of the European Union from January through June 2013. We have a well deserved reputation for being business-like and administratively effective in advancing those agendas which are at a point where they can be progressed. We rarely add our own strategic perspective. There is one area where there is significant policy failure, which does not involve banking and finance, and where we could make an important contribution at EU level. This is in the implementation of directives. It is too late in the EU policy cycle to effect any change during our Presidency, but we should work at getting the issue on the European agenda.

The general pattern is as follows: after a number of years of deliberation, a legislative proposal from the European Commission is approved by the member states (Council) and the European Parliament; Ireland has a voice in both fora. It is then transposed into domestic legislation in each of the member states. Typical legislation lays out what is to be achieved, by which dates, but leaves considerable discretion to the member states as to how it is to be achieved. A relatively long period for implementation – typically two years but sometimes 10 years or more – is allowed. In the event of non compliance – and after several warnings – the Commission takes a case to the European Court. Where the court finds against the member states, it imposes fines, typically a combination of lump sum and daily charges, the latter continuing until compliance is achieved.

Two recent Irish examples, announced by the Court of Justice of the European Union 19 December 2012 :

Septic Tanks

This ruling relates to Ireland’s failure to properly regulate the installation and use of septic tanks (individual waste water treatment systems). Discharges from septic tanks, of which there are close to 500,000 in Ireland, have contributed to micro-biological pollution of groundwater and nutrient pollution of surface waters. Human health is put at risk because pathogens can enter drinking water sources via septic tanks that are poorly designed, located or maintained.

Fine: A penalty payment of €12,000 for each day of delay in adopting measures necessary to comply with the 2009 judgment, from the date on which judgment is delivered in the present case to the date of full compliance with the 2009 judgment. Also a lump sum payment of €2,000,000.

This directive² was first approved 38 years ago (in 1975) when James Tully was the relevant Irish Minister (for Local Government).

Impact Assessment

The Court found that the thresholds for undertaking an environmental impact assessment for certain types of projects, including the restructuring of rural landholdings and water management projects for irrigation or land drainage, were too high.

Fine: a lump sum of €1,500,000.

This directive³ was first approved in 1985 (28 years ago) when Liam Kavanagh was the relevant Minister.

Why do we do this, does it matter, and what should we do about it?

Why do we delay?

There are a number of reasons:

Time Disconnect

There is a large time lag between when agreement is reached on the policy at EU level, and Court proceedings. The politicians and the governments in which they serve that are involved in the initial decision have moved on long before engagements with the European Court take place, and the associated costs are incurred. So the current political incumbent – Phil Hogan in the Irish case – is stuck dealing with a mess not of his making. The same applies to the public servants involved, although the file will be there, and it their job to process it.⁴

Planning Deficit

Secondly, effective implementation requires hard thinking and effective planning, and the Irish system is not well designed to deliver this. There are exceptions, but ours is a ‘put out the fires’ model, and seems to be only fully energised by crisis. This is especially true when effectiveness requires substantive involvement by a number of departments and/or agencies. Who is going to do what, when? What minimum knowledge will be needed to understand where we are starting from (the baseline), and to judge policy effectiveness over time? How and by whom will this be delivered? What skills in science, engineering, design, risk assessment, economics, law and project management etc. are needed and how can they best be mobilised? What are the financial implications, and how will costs be covered? Can we identify a financial model that is self sustaining, or will subsidy be required? Are there property or other rights involved that need to be understood? How can the economic social and environmental benefits of policy implementation be maximised? How and by whom will the interest and engagement of the Oireachtas, the key stakeholders and the general public be achieved? This level of planning requires someone with the mandate and the skills to be given sufficient time to sort through the issues, engage with key players, and put an implementation framework together. And then senior management need to agree an implementation plan.

Wrong Incentives

No Minister or civil servant suffers any career or other sanction for failing to act early on in the manners suggested, and similarly there are no career gains – from the electorate in the case of politicians, or in terms of promotion for civil servants – if they do act effectively early on. The incentive asymmetry is especially sharp where one department has the legal responsibility for compliance, but effort by other departments and agencies is needed to deliver effectively. The latter have little or no incentive to devote scarce staff time and budgetary effort to the task.

We’re not the worst

There is little peer pressure from other member states to improve our performance. Table 1 gives indicative evidence for EU15 over the 2005-2007 period. The ever virtuous Nordics are the best, Italy is the worst, and we are in the middle at number eight.

Table 1. Infringement Cases Opened against Member States, 2005-2007, ranked from least to most.

Source: Nicolaides, Phedon and Anne-Marie Suren, 2007. ‘The Rule of Law in the EU: What theNumbers Say’, EIPASCOPE 2007/2

Does it matter?

There are important costs incurred by delay. One is credibility of the EU mission. At EU level, it is striking that 5 of the 6 worst in terms of compliance (Italy, France, Germany, Belgium, Luxembourg) are also founding members of the EU. It weakens the credibility of the whole when so many key members are delinquent. And it is paradoxical that three of the top 5 performers (Denmark, Sweden, U.K.) are not members of the Euro. There is a gap between rhetoric and reality. David Cameron, Prime Minister of the UK, has initiated a discussion about the character of the EU, and has committed to hold an in-out referendum within the first half of the next parliament (if the Conservatives form the next government) . Many issues will arise in the course of the debates on the future of Europe over the next years, but one is likely to be the lethargy of the core countries – relative to the UK and the Nordic performance – in implementing EU legislation. It is likely to be tagged as another example of European sclerosis and complacency or worse. The delays also damage the image of the EU with its citizens. It gets blamed for ‘forcing’ us to do what our governments have consciously agreed should be done and what any self-respecting country should do anyway. The blame arises because the issues involved and the benefits accruing are not explained and discussed over a reasonable period. Furthermore, the evidence supporting the action is either not available, or is only available to experts, the choices for implementation are not articulated and support from the public is not generally secured for the preferred means of implementation. To take two recent examples of non-compliance, where many would support effective implementation if fully informed in time: the conservation of the last remnants of intact boglands as being of value for ourselves and posterity⁵ ; secondly, understanding if and to what extent septic tanks were deficient in protecting surface and ground water. But the engagement with the citizens seems to happen when action is immediately required, in an atmosphere where the costs are seen to loom large, the benefits are ignored, and there is low confidence in official pronouncements and promises. We need to find a path to do what needs to be done because we the citizens agree that it makes sense, rather than be dragged by the courts to do what ‘Europe’ wants.

It also damages EU competitiveness. Most directives yield substantial net benefits, and these are foregone as long as non compliance prevails. And these wider considerations apply also locally. There is the diversion of scarce political and management capital, and the payment of legal fees involved in dealing with court cases. Instead of advancing our strategic economic, social and environmental agendas, we are sucked into case making, documentation and actions to meet our obligations. Finally, the fines are not trivial. A year’s delay in meeting our septic tank inspection obligations will cost €4.38 million.

What should we do about it?

Four elements are needed. We need to learn from best practise within and between countries. Not all Irish experience is poor. One example among many: The Energy Performance in Buildings Directive came into force at EU level in 2003. By 2006 the Irish legislation was transposed, and in 2007 began the process of rating buildings on a phased basis⁶ . We need to learn from our own good experiences as to why they succeeded⁷. We also need to learn from the Nordics, Dutch and the UK about why and how they succeed.

Secondly, we need to include leading successful implementation of directives as an important criterion for promotion in the public service, especially where this requires agreement across departments and agencies.

Thirdly, we need a commitment by every member state to prepare a realistic implementation plan whenever a directive is approved at EU level. Finally, we need reporting on the progress of the implementation plan. In Ireland, the European Affairs Committee of the Oireachtas (Parliament) should be given an explicit mandate to monitor and report on performance. At EU level, performance monitoring should be undertaken as a routine part of the European Semester; this is an EU level policy coordination tool which is part of a broader EU aim to strengthen economic governance. As it stands, this surveillance framework governs the:

• Implementation of fiscal policies under the Stability and Growth Pact to strengthen economic governance and ensure budgetary discipline.
• Implementation of structural reforms in the context of Integrated Guidelines outlined in National Reform Programmes to ensure progress towards the agreed goals of the EU Strategy for Growth and Jobs(“Europe 2020″).

If we could make progress on the implementation of directives, the coherence and credibility of the European mission would be improved, as would our own self- image and performance. We would all gain. And there is a framework to build on. In regard to environmental policy, there is a framework already in place which provides evidence and analyses. These include the European Environmental Law Network , and Milieu which comprises a team of lawyers, economists and policy analysts who address legal challenges. We should build on these.

For a pdf version of this blog, please click here.

Notes:
¹ I am very grateful for valuable input provided by Donal de Buitleir, Bride Rosney and Yvonne Scannell. The usual disclaimer applies.
² Council Directive 75/442/EEC of 15 July 1975 on waste (OJ 1975 L 194, p. 39), as amended by Council Directive 91/156/EEC of 18 March 1991 (OJ 1991 L 78, p. 32).
³ Council Directive 85/337/EEC of 27 June 1985 on the assessment of the effects of certain public and private projects on the environment (OJ 1985 L 175, p. 40), as amended by Council Directive 97/11/EC of 3 March 1997 (OJ 1997 L 73, p. 5).
⁴ One of the problems is that there are very few lawyers in the public service, and none with specialist skill in EU law. We hope to address this issue with a separate commentary.
⁵ See: Commentary ‘Bogs – when they’re gone, their gone’ June 2012,for why such conservation makes sense.
⁶ See: Implementation of the EPBD in Ireland pp.III175-III186
⁷ Declaration of interest. I was chairman of the Sustainable Energy Authority of Ireland at the time; it was designated as the ‘issuing authority’ for implementing the directive.

Fiscal policy is about getting our public income and expenditure in balance, in ways that are acceptable and foster the creation of employment. When expenditure dramatically exceeds income,  and crisis is upon us, extricating ourselves becomes all consuming. But it is important even in crisis to retain what is valuable about those aspects of life that are not readily valued in markets, and don’t enter easily into the fiscal calculus.

A society can be judged in part by the extent to which it protects those aspects of our lives we share in common – our air, water, wildlife, our culture and language. Where profits are to be made, it takes no particular skill to ensure that what is needed will be provided. In his characteristically apt and pithy fashion, Adam Smith captured the essence:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity but their self love, and never talk to them of our necessities but of their advantages.

But self love will not protect the commons – in belonging to everyone, it belongs to no one. And so, without intervention, the climate changes, water and air quality diminish, natural endowments – bogs, woodlands, wetlands – get exploited to extinction, and most undomesticated wildlife struggles to survive. And these features are all interrelated.

Our history has made protecting wildlife and its habitats in Ireland a particular challenge. For centuries, land and fishing rights belonged to the landlord class, who were typically Protestant, while the predominant religion of their tenants was Roman Catholic.  Landlords were relatively rich when their tenants were poor; they were educated where their tenants lacked formal education; they were English speaking, often with a posh accent – they pronounced their ‘ths’ – where their tenants spoke Irish.

At their best, this landlord class nurtured innovation, creativity, research and science, helped their tenants in time of crisis, notably in Famine times, promoted democracy, fostered an understanding of Irish and Celtic  culture, created and conserved beautiful buildings, and protected nature and woodlands. At their worst, they were rapacious mediocrities who used their status, legal and political power to protect their privileges and to maximise their own well being, often investing the proceeds outside Ireland, and treated their tenants not as fellow citizens, but as sources of income.

The transfer of land and associated buildings from landlords to tenants had many economic and social advantages, but one disadvantage was that most of the new owners did not have the scale or the income to protect woodlands, wetlands and wildlife. This tension between meeting economic necessities and protecting what does not yield income was often resolved in favour of the former. Advocates speaking up courageously for the conservation of our shared endowments often spoke with an Anglo-Irish accent.  There was an old joke that the definition of a member of An Taisce (National Trust for Ireland) was someone who didn’t know how to pronounce it!  The wisdom of their insights and their saliency as regards popular support and political effectiveness was hobbled by (an often unfair) association with the landlord class. They were perceived as not being in touch with the realities, an attitude nicely captured by Lionel De Rothschild in a talk to a city gardening club: “gentlemen, no garden, however small, should be without its two acres of rough woodland.”

And this perceived disconnect between many of the spokespersons for environment and those who could protect it, meant that our built and natural heritage was gradually but inexorably eroded.

Enter Eamon de Buitléar, the man who convinced the first generation of  Irish children that watched television that nature was ours, not only ‘theirs’.  That nature is to be understood and cherished, not only to be exploited and profited from.

Constable observed that ‘you can’t see what you don’t understand’. Eamon used his humour, attention to detail and considerable style to enrich our understanding. An oft heard argument against conservationists was they ‘they prefer birds over people’. He loved both people and birds, and was fearless in extending our ethical compass, showing that sometimes we the people must make sacrifices if our natural world was to flourish. He did this while working as an entrepreneur depending on the market for his keep, where every hour he devoted to the non commercial public interest was time not spent earning a living. His business instinct led him to seek and encourage enterprise that protects and enhances the environment; he devoted his last months to supporting Rory Harrington advance the installation of constructed wetlands which dispose of waste while sustaining wildlife and cleaning our water.

His talent at breaking down barriers was also manifest in other areas: he made the Irish language a natural means of communication; he helped Seán Ó Riada revolutionise the interpretation and presentation of traditional Irish music. His meticulous sartorial style stood out from that of his fellow environmentalists, where bearded unkemptness was the norm. There is some truth in the observation that behind every great man stands a very surprised woman. His wife Laillí grew up Irish speaking in Carraroe in a family suffused with artistic and literary tradition. She was the rock on which he stood, and which made his achievements possible. And, most of the time, she was not surprised.

Some have complained that the residential property tax (to be applied in Ireland from 2013), and to be based on the market value of the property, will be unfair to Dubliners, because property values are higher there than elsewhere in Ireland. The value of the 298 properties sold in Dundrum, County Dublin are compared with the value of the 25 properties sold in Dundrum, County Tipperary, over the 2010-2012 period, using the Residential Property Price Register (RPPR). The median value (and associated full-year property tax in brackets) for Dundrum, County Tipperary are €100,001-150,000 (€225); the equivalent for Dundrum, County Dublin are €350,001-400,000 (€675); the median property owners in County Dublin will pay €450 more in annual property than their counterparts in County Tipperary. But the former have manifold advantages over the latter, including easy access to tax-payer subsidised infrastructure and services in:

• Transport
• Culture
• Sports
• Education
• Health
• And the widest range of life style possibilities, job options and entrepreneurial potential on the island.

These benefits are reflected in property prices and therefore in property taxes; this is fair and appropriate. The timeliness and transparency of the property price evidence available on the RPPR is impressive, as is the quality and clarity of the background information and responses to ‘Frequently Asked Questions’ provided by the Revenue Commissioners. One weakness is that the price is not converted into price per M2. This gap should be corrected as a matter of urgency. The data, combined with the Revenue Commissioners’ ability to nudge us towards compliance with a variety of soft and hard measures, make it likely that most of us will comply.

Background

In Ireland, property taxes (or ‘rates’ as they were known) on domestic dwellings were abolished by central government in 1977, and this was followed by elimination of property taxes on agricultural land. In order to help make good the shortfall in revenues, local authorities imposed levies on new developments to cover the costs of infrastructure and services provision, and central government increased the tax on property at the time of acquisition (stamp duty). What is notable about both of these revenue streams is that their magnitude depended on the volume and value of new development and property transactions. With the collapse of the property market, in terms of both volume and value, these two revenue streams fell sharply.

It is clear that confining the tax base to transactions and new development made revenues very dependent on the level of economic activity in the property market.  This contributed to the sharp fall in government income and the rise in the deficit. This in turn played its part in Ireland’s exclusion from international money markets and the request to the European Union (EU) and International Monetary Fund (IMF) on November 21, 2010 for financial support. Agreement was reached in December 2010, the terms of which are included in the EU/IMF Programme of Support for Ireland.[2]

Not surprisingly, this agreement includes a requirement to re-introduce a property tax (p. 9):

On the tax side, we will build on the base-broadening measures outlined above and establish a sound basis for sub-national finances through a new residential-property based site value tax”.

In December 2012, the government announced its decision to introduce a tax, payable by the property owner, and administered by the Revenue Commissioners, based on the market value of property in early 2013, at the rate of 0.18% of market value up to €1 million, and 0.25% on all value above €1 million .[3]

This has engendered a reaction that this is unfair to property owners in Dublin where property values are much higher than elsewhere in the country. Also, it is argued that because of economies of scale and scope, the cost of providing some public services – parks, water, roads, waste collection etc. – per household are lower in Dublin than elsewhere, and so the revenue required per household will be lower.

This is the urban analogy to the case made by rural residents, some of whom objected to the requirement to assess the performance of septic tanks.[4]

The Property Value Difference – Two Dundrums Compared

The Property Services Regulatory Authority maintains a publicly available property price register covering all residential transactions since January 2010. It provides the date of each sale, its value, and its address but unfortunately nothing about the size or nature of the property. We can get a sense of the discrepancy between Dublin and the rest by comparing the records for two Dundrums – one in south county Dublin, the other in Tipperary.

Over the 2010-2012 period, there were 25 units sold in Dundrum County Tipperary, and 298 in Dundrum County Dublin. If we assume that the property tax rates agreed by government will be applied to these prices, the taxes payable will be as shown in Tables 1 and 2 .[5]

Table 1. Property Tax in Dundrum County Tipperary, based on sale prices 2010-2012.

Property Value Range Number of Properties Annual Property Tax Per Property €

Source: http://www.propertypriceregister.ie/ for property prices, and http://www.revenue.ie/en/tax/lpt/index.html for annual tax rates

The median property value is 100,001 to 150,000, with a tax liability of €225.

Table 2. Property Tax in Dundrum County Dublin, based on sale prices 2010-2012.

Source: http://www.propertypriceregister.ie/ for property prices, and http://www.revenue.ie/en/tax/lpt/index.html for annual tax rates

The median property price in Dundrum (Dublin) is €350,000-400,000, with a median tax liability of €675.  This compares with a median tax liability of €225 in Dundrum (Tipperary).

The RPPR Property Price Register is an excellent resource, providing real data in real time but it does not provide data on the size [square metre (M2)] of the properties or any other characteristics. Such information would be very valuable in addressing valuation of two properties in the same area that are significantly different in size. Since most European countries provide valuation data per M2, it would also be useful as a help in identifying emerging price bubbles in the future; for example, if Dublin prices per M2 were rising well above those in Stuttgart or Lyon, this would be one indicator that there may be problems looming.

Why It Is Right That Dublin Households Should Pay More

Median households in Dundrum (Dublin) are likely to pay €450 more than their counterparts in Dundrum (Tipperary).  The gap widens at the upper end, where the annual tax payment on the most expensive property sold in Dundrum (Dublin), valued at €1,805,000, would be €3812, compared with a tax payment of €405 payable on the most expensive property sold over the same period in County Tipperary, valued at €247,000.

Houses in Dublin are worth more, because there are many benefits to living and working in the Dublin region; these advantages get capitalised into property values. Key Dublin advantages relate to transport, education, health, access to places of worship, religion and lifestyle, culture and sports, enterprise and jobs. Many of these benefits can be characterised as what economists call ‘option value’, i.e. the value that most of us attribute to the choice of being able to avail of a good or service, even if we never take up the opportunity; there is real benefit in having the choice available.

Transport

Internal: With its existing (and generally) improving bus services (more bus lanes, real time timetabling etc.) light rail (Luas lines being connected – which is relevant to Dundrum, Dublin), commuter rail (DART etc.), cycle lanes, footpaths and M50 motorway, Dublin is getting close to international standards in internal connectivity, a diversity and density unmatched anywhere in Ireland, including Belfast.

External: The hub (Dublin) and spokes (to everywhere else) transport system give Dublin residents easy access to other parts of the island. Regular train service – including hourly to Cork and Limerick, 2 hourly to Galway and Belfast – buses going everywhere with increasing frequency, a motorway system that brings almost everywhere within a 3 hour commute for business or recreation travel by Dubliners. Dublin airport (average of 457 commercial movements per day, compared with 64 for Cork, and 57 for Shannon in 2012) is the main artery for connection with the outside world, and Dublin Port and Dun Laoghaire also provide regular ferry services.

Education

The advantage is especially notable at 3rd level, with three universities and a range of institutes and specialist academies (music, design etc.) within cycling distance of most residents.

Health

Amongst physicians, Ireland has the lowest share of specialists in Europe. This means that access to such care is a key pinch point for patients. But a majority of specialists are Dublin based, as are the specialist hospitals and associated equipment.

Religion & Lifestyle

Agnostics, Anglicans, Atheists, Bahai’s, Baptists, Buddhists, Catholics, Charismatics, Doubters, Evangelicals, Falun Gong, Hindus, Jehovah Witnesses, Jews, Methodists, Muslims, Orthodox, Presbyterians, Secularists, Taoists, Unitarians and many others can find companionship and fellowship in Dublin. All lifestyle choices are available.

Culture & Sport

Access is free to much public cultural infrastructure and services including: three branches of the National Museum [Archaeology (Kildare Street) Natural History (Upper Merrion Street) Decorative Arts and History (Collins Barracks)]; the National Gallery (Clare Street); the Chester Beatty Library, Dublin Castle. In terms of what they offer, and how it is presented, these are of a very high standard, and welcome families and children. After considerable public investment, Dublin Zoo is now of international standard and one of the biggest tourist attractions in Ireland.

Specialist cinemas include the Lighthouse and the Irish Film Institute; the National Concert Hall provides a flow of classical music offerings; there are a number of venues provide international calibre theatre, and a variety of clubs and large entertainment centres.

All major international games are played in Dublin; Croke Park and Aviva Stadium dominate in terms of ability to host major international events; the RDS is the venue for the major horse show jumping event of the year. Noisy concerts galore – Croke Park, RDS, Marley Park, RDS ….

Enterprise & Employment

Cities agglomerate people, ideas, innovations and economic activity, because they have economies of scale and scope (diversity of skills and opportunities). They are about choice, from the profound to the trivial (a sign seen in New York City – ‘Tattoos available, with or without pain’ – exemplifying the latter). And the gap between the largest and the others tend to widen as these advantages re-enforce each other. The Irish American Willie Sutton famously explained that he robbed banks because “that’s where the money is.” In Ireland, Dublin is where most of the money is. Ready access to this market – and the diversity of consumers and their demands – is a huge advantage to a start-up business. And the connectivity to the rest of the world via Dublin airport makes it a good place to expand internationally. Even in a depressed economy, there is likely to be more job turnover and more enterprise and employment opportunities in Dublin than elsewhere.

Conclusions

All of the above options / amenities are available to the residents of Dundrum, County Dublin; most can only be accessed by residents of Dundrum County Tipperary if they come to Dublin. Of course the motorway and rail spokes go both ways, so that physical access is easier than before; and where it exists, high quality internet access can reduce the value of Dublin’s advantage. But geography still imposes iron constraints, and gives those in the capital manifold advantages that are reflected in the value of property. Urban dwellers have many legitimate causes for complaint, but the higher value of property in Dublin, and the associated higher property taxes property owners will pay, is not one of them.

The reason Dublin house prices are higher than Tipperary house prices is in part because of the greater benefits created there by society. It is not surprising then that Dubliners should be asked to contribute more via property taxes. The case made by rural lobbyists against the inspection of septic tanks was inappropriate and misconceived. The case against the property tax in Dublin is similarly misguided.The timeliness and transparency of the property price evidence available on the RPPR is impressive, as is the quality and clarity of the background information and responses to ‘Frequently Asked Questions’ provided by the Revenue Commissioners. This, combined with the latter’s ability to nudge us towards compliance with a variety of soft and hard measures, makes it likely that most of us will comply.

Notes:

[1] I am grateful to Donal de Buitleir, Sean Moriarty, Cormac O’Dea, Cormac O’Sullivan, Mary Walsh and Brendan Walsh who commented very usefully on an earlier draft. The usual disclaimer applies.

[2] The Troika programme provides up to €85 billion over a three-year period to assist public finance needs and facilitate banking assistance. The package is provided equally by the ESFM, the EFSF, the IMF, an Irish contribution through its treasury cash buffer and investments by Ireland’s National Pension Reserve Fund.

[3] Discussion of the policy available at: http://www.publicpolicy.ie/the-new-property-tax/

[4] See  ‘Invest in Cavan’ for details of the proposal, and why it deserved support.

[5] This assumption is likely to exaggerate the taxable value of properties sold in 2010 and 2011; the residential property price index (January 2005 = 100) declined from 90.5 in 2010  to 68.8 in November 2012 – see http://www.cso.ie/en/media/csoie/releasespublications/documents/prices/2012/rppi_nov2012.pdf. Property will be valued in early 2013, and this value will apply from 2013 to 2016

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Having been in hospital in Ireland in early 1979 for minor surgery, Elizabeth Shannon, the wife of the then US ambassador to Ireland, wrote in her diary as follows :

“Irish hospitals are wonderfully kind, warm places, very unlike my scanty experience with American hospitals. The nurses, many of them nuns, are patient, humane and understanding. Doctors have time to talk to patients in a reassuring and unhurried manner. I think I shall come back to Ireland if I ever need to be hospitalised. The medical care is excellent, the nursing care superb, and the rules….well, relaxed enough to make recovery fulfilled with laughter, surely a good medicine for everyone.”
I wonder what her reaction would be if Elizabeth Shannon came back today for a similar procedure, 33 years after her first idyllic experience? Few aspects of Irish life today are as much criticised as the health service. Can we ever again find the nirvana she evoked? For many readers of a certain age, “bring back the nuns” would be a preferred solution, but there are no nuns to bring back.
Future Health – A Strategic Framework for Reform of the Health Service 2012 – 2015 was issued by the Irish Department of Health and Children on November 15, 2012. It is hugely significant in that, if acted upon, it will affect our well-being and economic and social performance like no other initiative. If we get it wrong, it will cause huge damage. If we get it right, it could be transformative in a positive sense.

Outcomes and Cost Evidence

The key reference for this section is Health at a Glance Europe 2012, OECD Paris, 2012 the result of a collaboration between the European Commission and the OECD.
From a policy point of view, what is of particular interest are those areas where we are excelling in an EU context, and those where we are doing badly, defined as being in the top 5 (excelling) or bottom 5 (doing badly). Most rankings are out of a total of 27, with 1 being best, and 27 being worst in the EU. The data in Annex Table 1 summarise the situation, from which the observations below are drawn.
The Irish system has excelled at some things – notably the reduction in mortality – and performed poorly at others, notably incidence of cancer. A logical next step for a strategy would be to tease out what factors are most likely to explain excellence and the opposite – i.e. what mix of medical intervention, genetic endowment, social and cultural norms and wider policies explain performance. This would set the stage for an analysis of the combination of policies within and outside the health sector per se that could improve performance in manners that are cost effective and fair. The Report of the Expert Group on Resource Allocation chaired by Frances Ruane identified pathways whereby progress could be made, with a particular focus on aligning the incentives faced by the key players in the system with what is desired.
The costs of the Irish system are astonishing. An analysis by Paul Redmond adjusts for our very favourable demographic profile This adjustment is especially relevant in the case of Ireland, because we have a relatively small share of the population over 65 (11.1%) compared with the rest of Europe – e.g., Germany (20.5%), Italy (20.4%), France (16.7%). Gross National Product (GNP) is used for Ireland instead of Gross Domestic Product (GDP) .
He concludes that we have the most expensive health system in the European Union, and the third most expensive in the world. As such, it is a considerable drag on economic performance, since more resources are tied up unproductively. This is the bad news. The good news is that this allows considerable scope for reform, and for releasing resources that could be more productively used. The OECD ranks the Irish health system 28th out of 28 in terms of productivity.
“It has measured the potential impact of a range of structural reforms that can impact directly upon productivity and can directly improve national fiscal positions while maintaining current outcomes. This analysis suggests that Ireland could save up to 0.25% of GDP through educational reform (Education is ranked 3rd out of 24), and more significantly, 4.8% of GDP through reform of the health care system”.
In terms of human medical resources, we rank number 2 in the EU for number of physicians. The OECD data tells us however that we have the highest proportion of generalists (66%) in Europe. This implies that the specialist share (now totalling 34% – the lowest share in Europe) should be increased. Our top ranking in terms of number of nurses per capita deserves analysis, and specifically, to net out those in management and administration. It may also be the case that they are doing work which in other jurisdictions is done by other professions, such as social workers.

Key elements of ‘Future Health’

The case for change is made on the basis that the aging population is growing – expected to increase by 54% by 2025, and the numbers aged over 85 will double. Incidence of chronic disease – which accounts for around 70% of health resources – will increase by about 40% by 2020. This implicit increase in demand will have to be met while resources shrink. Reform is essential.

Some key elements in the strategy include:

• Universal Health Insurance to be introduced from 2016
• Free GP care for all to be introduced in 2015
• A new patient safety agency to be set up in 2013 next year and a health and wellbeing agency in 2015.
• A reorganisation of services by hospital groups, on a trial basis at first.
• Control of health spending to return from the HSE to the Department of Health in 2014
• The introduction of new financial management systems aimed at controlling costs.

Conclusions and Implications

Clearly, with limited resources and rising demand because of the aging population and emerging (expensive) treatments and technologies, reform of our systems of healthcare is essential if quality is to be maintained, and if the drag on the economy is to be reversed.

1. ‘Future Health’ Does Not Represent a Credible Reform Effort

Credibility is about convincing the public and the key actors that what is proposed makes sense, and that it can and will happen. Not everyone shares my enthusiasm for independent evidence, but neither am I alone; our experience at publicpolicy.ie is that there is a growing constituency for verifiable facts. ‘Future Health’ does not meet minimum standards in this regard – hardly any numbers, no references, no background notes explaining the strengths and limitations of the proposals, and a strange paucity of visual prompts –pictures, graphs, flow charts, tables etc. So its credibility is already impaired, in the context of a sector that already suffers a considerable credibility gap. If we don’t tackle the choices – especially the ‘how’, on a careful scrutiny of the evidence, in 2016 we are likely to be chanting Hardy’s catchphrase to Ollie: “Well, here’s another nice mess you’ve gotten us into!”

2. There should be a rule at cabinet that no proposals from any government department will be admitted for consideration unless it meets minimum standards in this regard

The imperative of good policy analysis is evident at European level, where for any significant policy proposal, the European Commission must undertake an impact assessment, which is based on an integrated approach which analyses both benefits and costs, and addresses all significant economic, social and environmental impacts of possible new initiatives. It would demonstrate a certain maturity and respect for the citizenry and tax payers if we were to adopt and apply this precedent. It will necessitate having in place a policy analysis team that has up to date knowledge of the data and the literature, that understands policy instruments, the role of incentives and behavioural science, and the importance of interaction and engagement, both intellectual and practical.

3. Focus Attention on the ‘how’

The arguments contained within ‘Future Health’ for more integration, achievement of scale economies by grouping, money following the patient, the aligning of incentives to achieve the outcomes desired, the separation of purchasers and providers, etc. all make sense. But how they are going to be achieved is not explicitly addressed, beyond organisational changes, led by the Programme Management Office which will have ‘central, overarching coordination function for health reform.’

4. In addition to the usual suspects, engage with those who have an interest in cost containment

A worrying element of ‘Future Health’ is that ‘active support will be sought of patients and clients, advocacy groups, health and social care professionals, health system managers, other workers, professional bodies and staff associations, the Oireachtas the wider political system, government departments, relevant statutory bodies, colleges and institutes, EU and other international bodies.’ Most of these will be pushing vigorously to increase expenditure and expand services. There also needs to be some grit in the system that vigorously questions such propositions, that demands credible evidence, and that in effect represents the wider tax payers who will have to pay for same.

5. Involve the OECD

‘Future Health’ does not flag the OECD insights, including the reform measures they envisage. This is an important gap, in terms of both identifying measures that should be included in the strategy, but also in terms of benchmarking the reform process. The OECD should be invited to review and evaluate the Irish proposals, and to monitor and report on progress as it evolves. We need serious and periodic international peer review if the reform process is to have credibility and to stay on track.
The OECD data show that the Irish system does excel in some areas. There is no attempt in ‘Future Strategy’ to learn from these, or from the areas where performance is very poor. It is important to recognise world class achievements where they are to be found, to understand what brought them about, and what lessons can be learned for the rest of the system.

6. Adopt Graduated Access to Primary Care

A core proposal of the strategy is to provide free access for all to GPs. This is justified on the basis that there is a “body of evidence that user fees are a barrier to accessing care at the primary care level and thereby cause late detection of illness, poorer health outcomes and greater pressures on the acute hospital and long term care systems.” But there is also a body of evidence that when prices fall – and especially when they fall to zero – demand rises; with this policy change, we can expect far more pressure on the GP services, with waiting lists and queuing as a likely outcome.
I prefer the illustrative proposal to create a graduated set of Medical Card entitlements that came from the Ruane Resource Allocation group , namely:

• The Standard Card: capped GP and prescription drug fees for all who register with a GP
• Standard Plus Card: reduced capped fees and cheaper prescription drug fees for those with chronic illness and incomes between 40-50% of the average
• Enhanced Primary Card: further reductions in fees and the cost of prescription drugs for those with chronic illness and incomes between 30-40% of the average
• Comprehensive Card: No fees or prescription costs for those with incomes under 30% of the average. This is identical to the current medical card.

This hews to the spirit of access to all and is consistent with the commitment in the Programme for Government, but does embody elements of cost containment, fairness and incentives not to overload the system. The graduated system also reduces the dangers of a poverty trap, whereby if you ‘lose’ the card, you lose all other entitlements.

7. Hire More Specialists

Considerable damage to the provision of health services in Ireland seems to be attributable to the Common Contract agreed in 1997 for specialists; because of its ambiguities and generosity , it has been a vehicle whereby some specialists have captured rents on a grand scale, comparable to those generated when the mobile phone licence was allocated (rather than auctioned) in 1995. This in turn has engendered a reluctance to hire sufficient specialists to meet needs, with consequent stresses and inadequacies. The supply needs to be expanded to international norms, at pay and conditions that also reflect international norms.

8. Incorporate Housing with care as an option for older people

As we get older, and more dependent, international experience shows that, for most, the hierarchy of preferences is first to stay at home, then move to what is variously characterised as assisted living, housing with care, or supported care, and then finally to nursing home where more or less complete dependence is characteristic. The key is to maintain independence and as much autonomy as is feasible for as long as possible. Although the second stage – housing with care – is characteristic of most economically developed societies, it is largely absent in Ireland. Including this strand should be an explicit element in the review of the Fair Deal scheme [the fact that this is titled ‘The Nursing Home Support Scheme’ tells its own story]. Dying with dignity, tranquillity and no pain should be available to all, and the Hospice movement in Ireland has an excellent record in this regard. The commitment in regard to palliative care is welcome.

9. Clarify Nurse Numbers

It is important to verify (or not) if we are indeed the most nurse-intensive health system in Europe. The outcome will have considerable implications for resource allocation.

And let’s bring back Elizabeth Shannon in 2014 – 35 years after her happy experience in an Irish hospital – and get her judgement as to whether we continue to deserve her endorsement…

Annex Table 1 Some Comparative Health-Related Outcomes and Activities in an EU Context, Ireland, 2010

To download a PDF version, please click here.

Key Point

Suggestions to merge Trinity College Dublin (TCD) and University College Dublin (UCD) have been rejected. But they should emulate the US precedent and provide the facility for students, both undergraduate and graduate, to take courses for credit in each other’s programmes. This should be done across the board, with a minimum of bureaucracy and no fees transfer; the only requirements would be that students meet the necessary pre-requisites to take the course(s) in question, and that there is classroom or other relevant capacity in the receiving institution. It would help make the programmes of both universities more internationally competitive, and will encourage specialisation and scale in research; the whole will be more than the sum of the parts. The TCD-UCD Innovation Alliance and a few Higher Education Authority (HEA) bottom-up collaborative initiatives show promise, but to achieve serious economies of scale and scope, access should be universal. What is good enough for Harvard and MIT should be good enough for UCD and TCD

Introduction

Budget policy is in part about getting more and better outcomes from the same or a shrinking level of resources. Are there opportunities to do this in Ireland with our universities? A recent report has recommended that one way of doing so in the Republic of Ireland would be to merge the two largest and internationally highest ranked universities, namely the University of Dublin (Trinity College) and University College Dublin. This proposal did not find favour with any of the key decision-makers, including the Minister for Education. But there is another opportunity – allow all undergraduate and post graduate students access to the courses that each university offers, regardless of their home institution.

The Teaching Dividend

In the seventies, I co-directed a new 2 year course work Master’s degree in Environmental Management at Duke University, North Carolina. It was competing with other programmes, notably a similar offering at Yale University. Fees were very high, and it was important to be able to offer an outstanding programme. There was an arrangement between the three major universities in the area – Duke, the University of North Carolina (UNC) in Chapel Hill (known as ‘Communist Hill’ by some locals because of its liberal traditions) and North Carolina State University in Raleigh – that their courses at both undergraduate and post graduate levels would be accessible to all. In our case, it allowed us to include environmental law, offered by UNC, and environmental design, offered by NC State, which were very popular with students, and a source of competitive advantage in their careers and in our programme. Duke has a law school, but at that time it did not offer a course in environmental law suitable for non-law students. In time, there was a backward flow, as students came to Duke to take courses in environmental economics and applied ecology.

Irish universities are looking to develop their taught master’s offerings as a source of revenue. It will improve their attraction to both local but especially international students if they can widen their coursework menu. The only way to do this as resources and staff numbers shrink is to draw on what adjacent universities have to offer.

The influx of students from the neighbouring institutions had a subtle but real effect on performance. It was flattering that they were taking the time and trouble to come and take your course, and you did not want them going back to their home institution saying ‘That course by Convery was a real waste of time and effort – avoid it.’ You upped your game to ensure that reports on your content and performance were good. And the wider the pool of teaching available, the greater the chance of competition, and productive and transferrable innovation. See ‘Notes’ for some interesting innovations.

There is an incentive for students to seek out enjoyable career-enhancing courses in other universities and bring them to the attention of their supervisors ‘at home’. They find new and (to the academics) unexpected gems that add to their intellectual development.
This principle of mutual access is widespread in the US, and includes Harvard, MIT and other colleges in the Boston area, and the University of California Berkeley Stanford University and others in Northern California.

There is local precedent. For a few collaborative programmes in Ireland, most of which have been supported by the Higher Education Authority – for example the PhDs in Simulation Science and Earth and Natural Sciences – we are already doing this. But each case has to be built from the bottom up – the ability to automatically and quickly take advantage of a particular offering is lost. And the gap applies with particular force in regard to course work masters degrees.

How to make it work

It has to be a top down decision. The university managements agree on the principle and how it will work. The operating assumption is that everyone opts in.

The transaction costs are minimised. The only administration is registration for the course, and transfer of the grade back to the home institution, both of which can be done electronically. No fees are transferred. The only rules governing access are that the ‘sending’ supervisor/department/school agrees that the courses in question are appropriate, the students meet whatever pre-requisites are needed in order to succeed in the course, and there is capacity in the class room or lab. This will limit the collaborative potential in the case of lab based courses.

Research Dividend

To create an internationally competitive research cluster in your department or school, you need to be able to hire more than one person in the same specialist area. For many of us, research is a conversation, in which we invent questions and jointly examine our intuitive answers. But for this to work, we need someone nearby to talk to. An important inhibitor of research performance in the Irish system is the need to ‘cover’ all of the teaching needs. This means that whenever a new appointment is to be made, the first call is to ensure that the candidate fills any teaching gaps. But this makes it difficult to impossible to build up a team of expertise in a specialist research area. If it were possible to say: ‘the minimum teaching requirement in this area can be met at a sister institution’, this very limiting constraint on hiring can be relaxed. Over time, universities would tend, more or less automatically, to specialise in what they are best at, and draw on their neighbours for the rest.

Final Thoughts

There will of course be opposition, especially from the insecure. Daniel Kahneman observed that people can maintain an unshakable faith in any proposition, however absurd, when they are sustained by a community of like-minded believers. But most will enjoy the challenge and embrace the opportunity. What’s good enough for Harvard and MIT should be good enough for UCD and TCD.
The US experience implies that the amount of movement from one campus to another is modest – perhaps on the order of 2-5 per cent, so there is little likelihood of mass take up. (Of course, if this were to happen, it would tell its own, very useful story). But students like having the choice, even if they never exercise it – what economists call ‘option value.’ And it can be very important in terms of enhanced intellectual experience and professional development for the small number who do take up courses at another university; they are likely to be the leaders of tomorrow.

Notes

Examples of Existing Collaboration

The TCD-UCD Innovation Academy is a collaboration to “transform our brightest scholars into vibrant entrepreneurs.” It involves 200 PhD students.

And a number of PhD programmes. Examples include:

• Economics and Political Science
• Simulation Science
• The Earth and Natural Sciences (also includes University of Limerick, National University of Ireland Galway, and Queens University Belfast).

Teaching Innovation

Five TED presentations worth seeing (first brought to my attention in Financial Times ‘Life and Arts’ February 25, 26, 2012, p. 2) – see here.

1. Kevin Slavin Algoworld (2011) – writing code we can’t understand, with implications we can’t control
2. Jane McGonigal Game on (2010) – harness gaming power to solve real world problem
3. Misha Glenny Hire the Hackers (2011). Hacking is more ‘nurture’ than ‘nature’ – recruit their talents.
4. Salman Khan (2011) Flip Teaching
5. Chimamanda Adichie -the single story (2009). The single story creates stereotypes – one story becomes the only story.

Also click here for more information.

Kahneman observation
Daniel Kahneman, Thinking, Fast and Slow, Penguin Books, London, 2012, p. 214

For a PDF Version of this blog, please click here.

Key Point

Ireland is a pioneer in the implementation of a carbon tax. This has allowed us to avoid (more) increases in income tax which would have further reduced disposable income, increased labour costs and destroyed jobs. It is also facilitating us in meeting our very demanding legally binding obligations to reduce greenhouse gas emissions, and provides support for the creation of new jobs in improving energy efficiency and growing the low carbon economy. We will continue to benefit economically and environmentally if we keep it in place, and increase the rate per tonne of from €20 to €25, as envisaged in the programme for government.

Context

Ireland was the first of the fiscally stressed countries in Europe to implement a carbon tax, which is now an important source of income for government, generated in a way that does not destroy jobs, and which at the same time helps us protect the environment and meet our legally binding greenhouse gas emission reduction obligations.

This achievement has become a focus of attention internationally, as an increasing number of countries struggle to find a path that increases government income and does good at the same time.

Many countries talk about introducing a carbon tax, but few do it. We did it, and it is important to keep it in place. In this commentary, I summarise the economic context, what we’ve done, and to what effect as regards government income and greenhouse gas emissions, and why we need to increase it. Notes that give more detail, including sources etc., are provided at the end.

Economic Crisis

The economy was in free-fall between 2008 and 2009 – GDP (real terms) fell from €166.80 billion in 2008 to €157.69 billion in 2009, a drop of over 5%. Since then GDP has stabilised – expected to be €159.7 billion in 2012.

Tax revenues went over an even deeper cliff, dropping from €40.78 billion in 2008 to €33.0 billion in 2009, a fall of over 23%. Since then tax take has increased; it is expected to rise to €36.4 billion in 2012 (but still well below 2008 levels). Most of the increase has been in income taxes, which rose from €13.2 billion in 2008 to €15.3 billion in 2012.

The Irish Carbon Tax

The carbon tax was first introduced in December 2009, to apply in 2010. In its design, it followed the recommendations of the Commission on Taxation which reported in 2009, of which I was a member. The key to progress was what we were not asked. We were not asked “Is a carbon tax a good idea?” We were told that the government had decided to implement a carbon tax – a key plank of the Green Party – and we were asked to advise as to how to do it. Most of our advice was taken.

The tax has the following features:

Coverage: In all European countries, climate change policy distinguishes between emissions that are in the European Union Emissions Trading Scheme (EU ETS) which sets a (declining) cap on greenhouse gas emissions from the power and heavy industry sectors, and the non-traded sectors, which comprise the rest of the economy (heat in households and business, transport, agriculture, waste). The Irish tax is on CO₂ emissions from the non-traded sectors (mainly transport and heat in buildings). The logic of applying the tax only to emissions from the non-trading sectors is that emitters in the trading sectors – who can buy and sell allowances – already confront a price for carbon.

Rate: €15 per tonne of CO₂, applied in 2010 and 2011, increased to €20 for 2012. The idea was that there would be a rough symmetry between the tax and the allowance price in the trading sectors – everyone would face roughly the same price and therefore the same incentive to reduce emissions.

Table 1. European Union Allowance (EUA) Price (trading sectors) and Carbon Tax (Non Trading Sectors), Ireland, 2008-2012

The price symmetry held in 2010 and 2011, but a wide gap emerged in 2012.

Revenue Yield: Roughly €100 million per €5 per tonne tax. Tax-take has risen from €246 million in 2010 to about €400 million in 2012. It will approach €500 million if the rate is raised to €25 per tonne.

Price Effects

Table 2. Impact of a €5 increment in tax, Ireland

Has it had any effect on greenhouse gas emissions from the non-trading sectors?

We have good data on transport, and in particular consumption of petrol and auto diesel.

Table 3. Transport Fuel Consumption, Ireland, 2008-2011

Consumption of petrol fell from 2310 million litres in 2008 to 1829 million litres in 2011 (fall of 21%)

Consumption of auto diesel fell from 2,960 million litres in 2008 to 2,563 million litres in 2011 (fall of 13%)

Considering that GDP over the same period ‘only’ fell by 5%, this reduction in motor fuel consumption is very striking. However, note that the drop was already underway from 2008 to 2009, before the tax came into effect. And there are complementary policies which have played a role. Ireland imposes a substantial tax on car purchase, called Vehicle Registration Tax (VRT) and an annual motor tax. In the past they were based on engine size. From July 2008 both of these were re-calibrated, based on open market selling price and CO₂ rating.

These had major effects on the composition of the new car fleet, shifting it dramatically towards low emitting vehicles. Ninety per cent of 90,000 new car sales in 2011 (down from 187,000 in 2007) were in the lowest carbon bands (A and B)

Issues and Analyses

Limitations of Data and Analysis

Correlation is not causation – beware the ‘Leacock’ effect…..With a very short time horizon, and very turbulent economic conditions and other policies (tax on new cars), it is difficult to draw definitive conclusions.

Stephen Leacock (early 20^th century writer and political scientist): When I state that my lectures were followed almost immediately by the Union of South Africa, the banana riots in Trinidad and the Turco-Italian war, I think the reader can form some opinion of their importance.

But we cannot reject the hypothesis that the carbon tax has had some effect in reducing emissions

We would expect the biggest environmental effect to be on the heat in buildings sector – because the price increase is 8-12 per cent, and there is a presumption that there are some low cost responses available. But the data are not yet readily available to track such effects

Limitations of Coverage

In terms of addressing total emissions from the non-traded sectors, its effects will be limited by the fact that it only applies to CO₂ emissions, while methane and nitrous oxide emissions from agriculture contribute about 50% of total emissions from the non-traded sectors, and are not taxed. Double income tax relief was provided to farmers in respect of their additional carbon tax liabilities for farm diesel from May 1, 2012.

For a combination of technical, leakage (with Northern Ireland) and political reasons, the carbon tax has yet to be applied to coal and peat, the most carbon intensive of all fossil fuels. This omission reduces the incentive to switch from peat and coal to woody biomass.

Limited Double Dividend Effect

The double dividend is garnered where tax is raised by charging for emissions (‘environmental bads’), and some or all of the revenue generated is used to reduce taxes on something good we want to foster, like jobs and employment, thereby stimulating the economy. “Taxer moins le travail, plus les pollutions ou les atteintes à la nature” (Tax work less, pollution or harm to nature more) so spoke François Hollande, President of France, on Sept 14, 2012.  The tax on CO₂ in 2012 will raise about €400 million, increasing to about €500 million in 2013 if the rate is increased to €25 per tonne.  This amounts to 3-3.5% of money raised from income tax. As such, it is by no means trivial, but it does not allow a major reduction in taxes on labour. But it does, (in the Irish case) help prevent increases.

Distributional Concerns

When the tax was introduced in December 2009, the Minister provided funding for complementary measures to support retrofitting of homes to improve energy efficiency, and there is also a subsidy for the fuel poor. However, the number of weeks for which the latter applies has been reduced from 32 to 26.

A group that would not be ‘picked up’ by these policies are the long distance commuters, especially to Dublin, who lack good access to effective and efficient public transport. These were identified in a report by an ESRI team as the most significant ‘losers’ of a carbon tax.

EU Policy

There is a revision to the Energy Tax Directive under consideration, which is likely to be finalised under the aegis of the Irish Presidency of the EU (January – June 2013). If this results in the setting minimum rates, they are likely to be well below the rates already applying in Ireland, but could bring peat and coal into the net.

A wide gap now exists between the carbon tax rate (€20) and the European Union Allowance price (EUA) of about €7 per tonne. This creates an incentive for consumers to ‘favour’ electricity over other sources, and as such will be economically inefficient.  The likely solution is that action will be taken at EU level to increase the allowance price by either shrinking the supply of allowances, or increasing  demand – e.g. by including transport in the EU ETS.

Why stick with the carbon tax, and indeed increase it to €25?

There are several reasons:

• The government desperately needs the money. Raising the extra €100 million or so that another €5 tax on CO₂ would raise will do far less damage to the economy that raising the same amount by an increase in income tax.
• Why is it better to increase charges for using the environment, instead of raising taxes on income? Increasing the tax on labour reduces the amount each worker has to spend on goods and services, and increases the cost of labour, so that employers are incentivised to move jobs offshore, or replace workers with machines. With a rise in your income tax, your income shrinks and you have no choice but to pay it. But with the carbon tax, you are faced with a rise in cost but you do have some choice as to how to adjust.
• It helps us all transition to a more sustainable and affordable world. Anyone who can possibly afford it now has very strong incentives to invest in insulating their house and (if they need a car) buying one that is super fuel efficient. If they can store wood (which is exempt from the carbon tax), they have an incentive to switch from oil or natural gas, which are taxed. As energy costs rise, such investments will pay off in more affordable mobility and more comfortable housing.
• And the tax encourages innovation. Sean O’Sullivan showed how crowd sourcing could help solve the problems of the long distance commuter
• A charge on environmental ‘bads’ improves the quality of our environment, which improves the quality of our lives.
• It means that we more easily and less expensively meet legally binding environmental obligations and avoid the costs (including fines) and reputational loss of being in the European Court.
• To the extent that we play a part in making the transition to a world less threatened by climate change, we also support our grand-children in limiting their exposure to the turbulence of climate change.
• It makes us less dependent on imports, and less vulnerable to potential interruption in the event of war or other supply-interrupting turbulence.
• It creates jobs as we invest in making our buildings, heating systems and boilers more energy efficient, and as we switch to locally grown wood as a source of heat.

Taxes are never popular. Edmund Burke’s familiar “To tax and to please, no more than to love and be wise, is not given to men” still rings true. But some taxes are less bad than others.

‘Dying must  be very hard,’ a friend said to Flaubert, ‘It is’ he responded, ‘but not half so hard as writing a novel.’ Taxing is always hard, but we can reduce the pain by taxing smartly.

Notes

1. I am grateful to Cormac O’Sullivan of publicpolicy.ie for accessing data on GDP, income tax etc. from sources below:

GDP and income tax data comes from the National Accounts (current price) and constant price -the forecast for 2012 was taken from the ESRI’s QEC (Quarterly Economic Commentary)
Tax data comes from the exchequer returns  and the 2012 figures are based on Finances’ tax profile for 2012 (2012 revised tax profile)

2. Report of the Commission on Taxation 2009 is available here:

 The details of the analysis and recommendations on the carbon tax are in Section 9.

3. Emissions from the traded sectors

I am grateful to Eimear Cotter (EPA) and Luke Redmond (UCD) for assistance here.

Pricing Carbon, Cambridge University Press 2010 (Ellerman, Convery and De Perthuis) is a good source on EU ETS and its performance in the pilot phase

4. Greenhouse gas emissions from non-traded sectors

Some data sourced from Ireland’s GHG Emissions Projections 2011-2020, EPA, April 2012 (Table A and B, pp. 22, 23) Available here

I am grateful to Eimear Cotter (EPA) and Luke Redmond (UCD) for assistance in accessing data

The consumption of petrol and auto diesel is taken from a very useful paper by Eric Gargan, Fiscal Policy Division, Department of Finance. See especially Slide 16 (‘Revenue Yields and consumption trends’) in ‘Reflections on the Implementation of the carbon tax in Ireland, presented at UCD/NESC Climate Change workshop, 16 May 2012. All the papers presented at this conference are available here.

5. President Hollande and the Double Dividend

I am grateful to Aldo Ravazzi for drawing my attention to this.

The link to the French president’s thinking is: “L’écologie n’est pas une punition, c’est ce qui doit nous permettre d’être plus forts ensemble. Dès lors, il nous faudra changer des modes de prélèvement et surtout peser sur les choix, taxer moins le travail, plus les pollutions ou les atteintes à la nature; dissuader les mauvais comportements ; encourager les innovations ; stimuler les recherches ; accélérer les mutations.”

François Hollande, ouverture de la conférence environnementale, 14 septembre 2012, page 5 line 5

6. Distributional effects of an Irish carbon tax

These are mapped by Callan, T., Lyons, S., Scott, S. and Tol, R. 2009. The distributional impacts of a carbon tax in Ireland. Energy Policy, 37, 2, 407-412.

7. Innovation

Sean O’Sullivan  “Revolutionary Mobility: Collaborative Consumption and Connected Computing – Crowdsourcing the Public transit Network” presented at the UCD-NESC workshop 16 May, 2012. Available here.

8. Edmund Burke on Taxation

From a speech by Edmund Burke on American taxation in 1774. The full speech is available here.

To download the pdf version of this blog -click here.

Key Point

We weigh losses far more heavily than equivalent gains, and we infer the general from the particular, rather than induce the particular from the general. These and many other features of our behaviour are elegantly documented in Thinking, Fast and Slow, authored by Nobel Prize winning Daniel Kahneman. In addition to loss aversion, he identifies the halo effect, anchoring, luck, the planning fallacy, optimism bias, the endowment effect and many other features characterising how we behave. They have considerable value as explanations as to how we got into such economic disarray, and provide some pointers as to how to frame the process of making progress. In this commentary, I summarise a few of the key insights, and their relevance to our situation in Ireland.

Context

Daniel Kahneman is a psychologist who in 2002 won the Nobel Memorial Prize in Economic Sciences for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty. He is regarded as the father of behavioural economics. He has recently written a best-selling book – Thinking, Fast and Slow – which operates at two levels; it is a beautiful thank you, tribute and farewell to his late friend and long-time collaborator Amos Tversky, who died in 1996, and a very elegant and accessible pulling together of insights from a lifetime’s work, both his own and that of other leading contributors to the field. He points us towards how to avoid the sin of intellectual sloth – drawing the ‘obvious’ but wrong conclusion based in intuition and whatever information is available. He argues that we draw conclusions about the general from the specific, when we should instead derive conclusions about individual cases from categories and ensembles. Ignorance is bliss; knowing little makes it easier to fit everything you know into a coherent pattern. “The emotional tail wags the rational dog.” (quoting Jonathan Jaidt), and makes the point that those who avoid the sin of intellectual sloth could be called ‘engaged.’ “They are more alert, more intellectually active, less willing to be satisfied with superficially attractive answers, more sceptical about their intuitions. The psychologist Keith Stanovich would call them more rational.” (p. 46).

Many governments, including Ireland’s, are facing the unwelcome challenge of increasing taxes and reducing expenditure. Kahneman’s work addressing how most of us react to challenges and make decisions provides useful pointers that both explain the nature of the challenge, and how to make progress. Below, I summarise some of his key insights, and conclude with some implications. For the points made below, Kahneman provides evidence linked to peer-reviewed literature. The page numbers used for direct quotations refer to the Penguin 2012 edition of his book.

Key Insights and Evidence

Loss Aversion, Endowment Effect and Anchoring

We put far more weight on the prospect of a loss than an equal probability of a gain. Most of us will not accept a coin toss with an equal chance of winning or losing $100. We become more open to the offer when heads will give us €200, tails a loss of €100. Golfers – even Tiger Woods –try harder to avoid a bogey (loss aversion) that when putting for a birdie. Related to this is the endowment effect, whereby the reference point is what we now hold. He notes that it is well known in wage negotiations that the current wage is the reference point, from which negotiations are expected to proceed; preventing decline is far more important than achieving a rise. The concession you make to me are my gains, but they are your losses; they cause you more pain than they give me pleasure. Anchoring is a where the number on the table becomes the basis for the negotiation, hence the importance of ‘guide prices’ in house sales. [He argues that if awards for injury were capped at €1 million, the size of all awards will over time drift up to this reference amount]

We can see all of these phenomena at work in Ireland’s fiscal adjustment. One example: Incumbent teachers and other permanent civil servants (who are well represented by unions in negotiations) have lost much less in terms of salary and conditions than new entrants (whose interests are not well represented and who did not have a reference income). Aversion to loss can be mitigated by inflation; the money illusion allows us to be more accepting of de facto losses in real (net of inflation) income; this was an important feature of Ireland’s last fiscal adjustment in the 1980s. On May 31st 2012, the Irish public voted in a referendum to support ratification of the EU “Fiscal Stability Treaty”. In terms of engendering support, the campaign advocating ratification did not get traction until it began to emphasise what would or could be lost if we did not ratify. Pointing out the benefits of ratification generated little engagement; but once the perception of potential losses of not ratifying began to lodge in the public consciousness, the momentum in favour of approval began to grow.

Optimism Bias, the Planning Fallacy and the Sunk Cost Fallacy

He makes the case that most of us think we are smarter and more likely to succeed that we are. Psychologists have confirmed that most people genuinely believe that they are superior to most others on most desirable traits. At a personal level it is a blessing. Optimists are normally cheerful and happy, and therefore popular; they are resilient in adapting to failures and hardships, their chances of clinical depression are reduced, their immune system is stronger, they take better care of their health, they feel healthier that others and are in fact likely to live longer. He notes (pp. 253, 255, 256):

“The main benefit of optimism is resilience in the face of setbacks….the optimistic style involves taking credit for successes but little blame for failures…… Optimistic individuals play a disproportionate role in shaping our lives. Their decisions make a difference; they are the inventors, the entrepreneurs, the political and military leaders – not average people…..the optimistic bias plays a role – sometimes the dominant role-whenever individuals or institutions voluntarily take on significant risks; it probably contributes to an explanation of why people litigate, why they start wars, and why they open small businesses” And as such of course they can be very destructive. Politicians and generals promise the troops that they will be “home before Christmas” as they start wars they always imagine will be easily won, and bankers deride the naysayers: “It is time to shout stop. The tide of regulation has gone far enough. We should be proud of our success, not suspicious of it” (Sean Fitzpatrick, CEO, Anglo Irish Bank, 21 June 2007)

Related to this optimism bias is the planning fallacy and wishful thinking

The planning fallacy describes plans and forecasts that are unrealistically close to best case scenarios. This happens for many reasons: Statistics from the reference class – the population of similar projects nationally and internationally that could be interrogated to inform estimates – are not systematically collected, insufficient effort goes into detailed estimation of costs and plans, expensive changes are then made mid -stream, costs are deliberately under estimated to secure approval, the role of luck is ignored, there is an illusion of control, and plans of competitors, and what we do not know, are neglected. Kahneman cites the new Parliament building in Edinburgh – where costs went from the estimate in 1997 of £40 million to an out-turn in 2004 of £431 million – as an interesting example of the planning fallacy in action. The sunk cost fallacy is where additional resources are allocated to an existing activity or project, when better choices are available. It is often driven by ego, embarrassment and unwillingness to admit defeat.

Ireland is an interesting case study of the optimism bias in action across all leadership classes. The planning fallacy applied to major one-off projects (e.g. light rail, Dublin Port tunnel) but not where there was a high volume of projects referenced to international norms (national schools, motorways) where there was also ‘learning by doing.’ There were many examples of the sunk cost fallacy, including electronic voting machines which were not popular, but were persisted with beyond what was rational.

Adjusting for the optimism bias and planning fallacy involves: collecting credible data on the reference class, creating realistic scenarios that include encountering seriously bad luck, and conducting what Kahneman calls a ‘premortem’ – a thorough review before decisions are made that legitimizes doubts.

The Halo Effect, Luck, Hindsight and Outcome Bias

The halo effect describes the tendency to like or dislike everything about someone, without having evidence to support our judgement. Where our view is positive, we give those in leadership positions – enterprise, politics, religion etc. – the benefit of the doubt for all their decisions, and vice versa. Hindsight bias captures the situation where we “blame decision-makers for good decisions that worked out badly, and give them too little credit for successful moves that appear obvious only after the fact. Leaders who have been lucky are never punished for having taken too much risk. ..A few lucky gambles can crown a reckless leader with a halo of prescience and boldness (p. 204)…Because luck plays a large role, the quality of leadership and management practises cannot be inferred reliably from observations of success.” (p. 207)

He argues that most of us vastly underrate the role of luck in shaping outcomes. His favourite equations are:

Success = talent + luck
Great Success = a little more talent + a lot of luck

Ireland suffered from the global halo effect, in that all major independent assessors (IMF, OECD, European Central Bank) of our economic management before the crash were effusive in their praise.

The Importance of Framing

‘Framing’ is about the context and language used to present choices. Kahneman gives many examples, including: human organ donation – the rate is 100% in Austria and 86% in Sweden, compared with 12% in Germany and 4% in Denmark. The difference derives from how the choices are framed: in Austria and Sweden, you have to opt out of organ donation, while in Germany and Denmark, you have to opt in. Similarly, information saying (about food) ‘90% fat free’ will be perceived differently by most if it says ‘10% fat’, as will information on car performance that says ‘kilometres per litre’ vs. ‘litres per kilometre’. And, the wider the frame, the more informed the choices are likely to be.

Implications

I hope that his book will encourage other eminent economists to emulate Kahneman’s idea of pulling together key insights from their field in a manner that is accessible to the public. There was a time when the luminaries of our profession did this, but it has fallen out of fashion.

For governments who have to cut expenditure and raise taxes, a first reaction to the Kahneman opus is that the news is all bad. Our intense aversion to losses and our anchoring (as contrasted with our much less strong feelings about equivalent improvements) to the status quo ordains that such change will be universally unpopular. But nevertheless there are insights that that can help both governments and ourselves make the transition to a better future. It is a sad particularity of politics that incumbent governments tend to increase expenditures and reduce taxes as an election looms; this does give the electorate a good feeling. But if they are re-elected, and have then to increase taxes and/or reduce expenditure, the odium and negativity they will experience will far exceed the feelings of bonhomie they generated before the election. The ideal political and economic strategy would be to generate large surpluses in the good times, and then use these to maintain expenditure and tax rates in recession. This is the essence of the Keynesian proposition. Unfortunately, the optimism bias ensures that most politicians don’t expect recessions, and the immediate pressure to be popular and meet ‘needs’ – spend it while you have it – makes it difficult to be prudent and avoid the blow back.

For governments, setting the right frame, and focussing on losses reduced, rather than benefits accruing, will help mitigate the negativity. Thus, in the Irish context, when property taxes are being introduced, the focus should be on the losses that will be incurred if this is not done; these losses include take-home income (if increase in income tax is the alternative) and follow on losses in jobs as labour becomes more expensive; or (if increase in VAT is the alternative) increases in prices and losses in competitiveness and jobs. In the case of domestic water charges, similar to the above, but also note the loss in reliability of water supply and its quality if a sustainable funding system is not in place that encourages conservation. It is important to be as focussed and precise as possible, and not exaggerate the losses – just present the facts as best they can be discerned and the evidence that underpins them.
When we want people to act in ways that are in their own and (especially) in the public interest, we should frame the choices they face such that it is as easy and painless as possible to act appropriately (the organ donor case)

It is important that the new Irish Government Economic and Evaluation Service and those in the public service generally with responsibility for the design of policy absorb and apply the insights from behavioural economics.

To counter the planning fallacy and optimism bias, a key is to improve prediction, recognising that intuitive predictions tend to be overconfident and overly extreme.

Kahneman recommends the following:

• Identify the reference class – e.g. emergency health services, and then obtain statistics on reference class (e.g. costs per patient)
• Develop a large data base that provides information on plans and outcomes for hundreds of projects all over the world
• Generate baseline prediction
• Use specific information about the case to adjust the baseline prediction
• In the default case of no useful evidence, you stay with the baseline

For we the public, it is important that we resist the halo fallacy, recognising that “because luck plays a large role, the quality of leadership and management practises cannot be inferred reliably from observations of success (or failure)” (p. 207). Kahneman proposes that we should reward decision-makers on how the decision was made, not by how it turned out. Unfortunately, in Ireland, it is very difficult to act on this admonition. The most we get about decisions in the nature of how they were arrived at, predictions, processes, values, analyses, priorities and rationales are to be found in press releases, which vary in content and analytical quality. You cannot reward what you do not know. This omission is a discourtesy to the taxpayer who pays the bills, and a loss to us all. The new Irish Government Economic and Evaluation Service may begin to fill this gap, but it should be the task of all departments to do their bit.

And, as the autumnal gloom descends, do read Thinking, Fast and Slow.

Notes

Daniel Kahneman, Thinking, Fast and Slow, Penguin Books, London, 2012. All the pages numbers cited refer to this edition

Kahneman shared the prize in 2002 with Vernon L. Smith, who pioneered the use of laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms.

Apropos the fact that we (unconsciously) strive harder to avoid loss than to achieve gain, Kahneman observes that “If in his best years, Tiger Woods had managed to putt as well for birdies as he did for par, his average tournament score would have improved by one stroke, and his earnings by almost $1 million per season.” (p304)

The key evidence on the power of having to opt out in the case of organ donation comes from: J. Johnson and Daniel Goldstein, 2003. “Do defaults save lives?” Science, 302, pp. 1338-39

For The Sean Fitzpatrick quote click here

For the announcement of the Irish Economic Research Services March 6, 2012 by Brendan Howlin, TD, Minister for Public Expenditure and Reform; click here.

The evidence that we suffered from a global halo effect before the crash is the following:

On September 2007 (by which stage Irish bank shares had lost one-third of their peak value) the IMF commended Ireland’s “prudent fiscal policy”, mentioning “Ireland’s continued impressive economic performance”: [See Section IV of IMF Article IV Consultation on Ireland (IMF Country Report No. 07/325).]

On 20 November 2007 Lorenzo Bini Smaghi, one of the more vocal members of the Executive Board of the ECB, stated that

“The Irish example shows that it is possible to prosper in the monetary union while having a higher potential growth rate than the rest of the union. This does not need to be ‘paid’ in terms of divergent or explosive inflationary outcomes and / or in unsustainable competitiveness for the country.”

[ ‘The value of central bank communication’, Speech by Lorenzo Bini Smaghi, Member of the Executive Board of the ECB, Financial market speech series, Landesbank Hessen-Thüringen permanent representation of Hessen in Brussels, Brussels, 20 November 2007]

In April 2008 the OECD noted that “Financial Sector Risks have been Contained” and that “The Irish banks are well-capitalized and profitable, which provides a cushion to weather the more difficult times ahead.” [OECD Economic Survey of Ireland, April 2008, Chapter 3: Financial Stability: Banking on Prudence]

From October 2001 to March 2009 Ireland enjoyed AAA credit rating from S&P.

To download a PDF version, please click here.

Budget 2013 – The case for periodic instead of lump sum payments for damages arising out of alleged medical negligence.

Key Point

We should move right away from lump sum to periodic payments in the case of medical negligence cases in Ireland. And this should happen before Budget 2013 is presented to the Oireachtas (Parliament) in December 2012. An excellent report explaining why this should happen, and how it should be done, was presented to the then Minister for Justice almost 2 years ago. Inaction will have many costs, not least that the Minister for Finance will have to find up to about €50 million right away that he (and we) can all ill afford.

Introduction

At present, when damages are awarded in Ireland to a person who suffers serious impairment of health as a result of alleged medical negligence, it is in the form of a once off lump sum, to enable him/her to pay for a lifetime of care. At the time of the award, a decision must be made based on assumptions which include: life expectancy of the plaintiff, prospects of further deterioration, costs over time of medical care and treatment, loss of earnings, rates of inflation and of return when lump sum is invested. The Working Group on Medical Negligence and Periodic Payments was established in February 2010 under the leadership of then Justice of the High Court John Quirke (and currently President of the Law Reform Commission) to:

• Examine the present system within the courts for the management of claims for damages arising out of alleged medical negligence and to identify any shortcomings within that system.
•  Make such recommendations to the President as may be necessary in order to improve the system and eliminate the shortcomings.
• Consider whether certain categories of damages for catastrophic injuries can or should be awarded by way of Periodic Payments Orders.

Analysis and Conclusions of the Group

The Group concluded that the current system of awarding damages for future pecuniary losses – the lump sum award – is inadequate and inappropriate, and that it should be replaced by periodic payments.  The report was presented to the then Minister for Justice Dermot Ahern on November 15, 2010, and is available here 

Most of what follows is drawn from this report.

The disadvantages of the lump sum approach are many, and include:

• No recourse for the injured victim who exhausts the fund by exceeding his/her life expectancy. In practice, the State de facto ends up   – with varying degrees of success – providing or funding the gap in care arising in such circumstances.
• Catastrophically injured persons who are intellectually capacitated are entitled to manage their own resources after a lump sum award of damages. Some may be youthful or inexperienced or both. Many invest unsuccessfully notwithstanding professional advice. Recent economic events illustrate the difficulties facing investors who need specific long term return on investments.
• A defendant has no recourse if a large lump sum is paid to a plaintiff who succumbs to his injuries earlier than expected. The next of kin of some deceased plaintiffs have received unintended multi-million euro windfalls. Ironically, some have been those whose negligence originally caused or contributed to the catastrophic injury.

The only advantage is finality for both parties –one knows how much must be paid, the other knows how much he or she will receive.

The current system is in a sense designed to fail. It fails the State, because it becomes in any event the residuary legatee of support in cases where the lump sum is poorly invested, and/or the individual lives longer than anticipated. It fails the individual, because he or she and their family must deal with risks of investment, mortality and inflation, and general stress in situations where what is needed is inadequate, or family tensions and frictions where a windfall gain is a possibility.

The Working Group examined alternatives to lump sum payments as implemented in Germany, Belgium, Italy, Sweden, Australia, the US, Canada, and the UK. It concluded that (p. 25)

“The English system of compensation by periodic payments orders represents the most modern and effective model for payment of ongoing care and associated costs in personal injuries actions”.

Specifically (pp. 7-9), the Group’s principal recommendations are as follows:

(i) Legislation should be enacted to empower the courts, as an alternative to lump sum awards of damages, to make consensual and non-consensual periodic payments orders (PPOs) to compensate injured victims in cases of catastrophic injury where long term permanent care will be required, for the costs of (a) future treatment (b) future care and (c) the future provision of medical and assistive aids and Appliances.  The revolutionary aspect of PPOs will be the fact that the Orders may be made by the Court in the absence of consent between the parties.

 (ii) Periodic payments orders may only be made in circumstances where the court is satisfied that continuity of payment under the periodic payments order is reasonably secure;

(iii) The State, through the agency of the NTMA, should be empowered to provide injured victims with the necessary security for periodic payments

 (iv) The  Group recommends the introduction of earnings and costs-related indices which will allow periodic payments to be index-linked to the levels of earnings of treatment and care personnel and to changes in costs of medical and assistive aids and appliances, prepared under the aegis of the  Central Statistics Office. This will ensure that plaintiffs will be able to afford the cost of treatment and care into the future.

(v) Variation of periodic payments orders should be permitted where it has been determined that the plaintiff’s condition will seriously deteriorate or significantly improve.

(vi) A person entitled to receive periodic payments under a court order should not be entitled to assign or charge that right without the approval of the court which made the order.

(vii) Periodic payments orders made to compensate for the costs of a plaintiff’s care, treatment and medical and assistive aids and appliances should not extend to dependents of a plaintiff after the plaintiff’s death.

(viii) Exemption from income tax for such payments

Budget Implications

It is now close to 2 years since the Group issued its recommendations. Delay in acting on its proposals has potentially extremely negative budgetary implications, for the following reason. There is now a substantial backlog of cases (11) awaiting action. If lump sum settlements are made rather than being spread out over the lifetimes of those injured, the amount required now will be of the order of €50 million, and could be much more.  The relevant care costs must be paid from public resources in the long term either directly, by the State or indirectly, via insurance premiums.

The main immediate financial advantage for the State  is  that the care costs will be paid over a lengthy period and not immediately during a time when the State is “cash strapped”. Also, when the Court orders insurers to purchase the annuities (i.e. the PPOs), from the NTMA by lump sum payments, the State is again receiving significant cash payments (albeit from premium payers). And the State will be entitled to keep the cash in the event of the death of the injured person; if the injured person exceeds life expectancy the State will have to bear the additional costs anyway.

Under the terms of Ireland’s Stability Programme (the Troika agreement), we must cut the government’s expenditure by €2.25 billion (1.70 billion current, 0.55 billion capital) in 2013, and by a further €2 billion in 2014. It will be an extraordinary missed opportunity if we allow ourselves to drift into gratuitously deepening the fiscal chasm that we must bridge by sticking with the lump sum payments model. And of course it will also continue to sustain  all of the uncertainties, inefficiencies, unfairness and costs that the current scheme engenders.

On Wednesday, 16 May 2012 Minister for State Dinny McGinley, TD, responding in the Senate on behalf of the Minister for Justice and Equality  to a question from Senator Colm Burke, pointed out that:

“The National Treasury Management Agency (NTMA) is conducting an actuarial review to examine the feasibility and cost-effectiveness of periodic payment orders as an alternative to lump sum payments or other options. The review will examine in particular the feasibility of the State acting as an annuity provider to insurers and indemnity providers in personal injury actions to enable compliance with the security of payments principle. The outcome of the review will inform the development of proposals under way in the Department of Justice and Equality to meet the Government’s commitment to legislate in this area. The review is expected to be completed in June 2012”.

The time for action is now. 

Professor Frank J. Convery

For a full PDF version click here.

The Benefits And Costs Of The Olympics

The most acerbically enjoyable view of the London 2012 Olympics has come from the Robin Lane Fox, gardening correspondent for the Financial Times (‘The real team GB’, Financial Times, House and Home section, August 4 and 5, 2012, p. 10). He dedicated his piece to the allotment holders whose cherished allotments have been destroyed by the Olympic park, and to the thousands of friends of Greenwich Park who have seen it ruined in order to create an equestrian obstacle course. He addresses what has been foregone as follows:

“The total Olympian cost of £9.3 billion could build at least 30 new hospitals or nearly 500 schools or fund three universities in perpetuity with endowments as big as Oxford.”

He also took aim at the opening ceremony:

“Why was there not a hint of Charles Darwin, the British mastermind who changed the world?”

And missing also were: the British geniuses who have changed many trillions of lives – Marie Stopes and her birth control, Fleming and penicillin, Crick and Watson and their DNA and Cicely Watson and her vision of proper pain control and a dignified hospice in which to die.

If economists had been asked to advise on the benefits and costs of the bid before proceeding (and they were not..), they would probably have estimated the willingness to pay by the British public for the Olympic experience; if these substantially exceeded the costs, then they would have approved. But the outcome would depend very much on how the choice was posed. Context is crucial: If what is foregone – the opportunity costs as outlined by Lane Fox – were presented as part of the question, they outcome would be much less favourable than if the choice was presented in isolation. But there are other considerations. The games give us insight into the evolution of national characteristics and culture.

A true but incomplete image of Englishness comes from George Orwell:

“The English have a horror of abstract thought, they feel no need for any philosophy or systematic world view. What endures is the addiction to hobbies and spare time occupations, the privateness of English life. We are a nation of flower lovers, but also a nation of stamp collectors, pigeon fanciers, amateur carpenters, coupon snipers, darts players, crossword puzzle fans.”

The Olympics widens the view to include a ferocious competitiveness and professionalism, especially in cycling and sailing, but it also engenders a sense of sharing and community. A character in one of Ibsen’s plays observes

“A community is like a ship; everyone ought to be prepared to take the helm”

– for these two weeks, the riots of yesteryear are forgotten – London is like Ibsen’s ship.

And of course China’s talents continue to surprise and impress. Chinese journalist and personality Hung Huang observed:

“We want people to really acknowledge our accomplishments. But by nature, the Chinese are conspiratorial. They don’t like to show their cards. They want to keep something hidden.”

The Olympics are the perfect antidote to this combination of need for acknowledgement and what in Ireland we call cute hoorism – Chinese talents in diving and many other fields that were hidden are given full acknowledgement on a world stage.

Acting and Olympic sports are two platforms where women are given (almost) full parity of esteem with men. Annalise Murphy (sailing) and Katie Taylor (boxing) are Irish Olympic stars in a country where women’s accomplishments in Gaelic games, rugby and otherwise are hardly acknowledged.
Finally, the Olympics creates a sort of inclusiveness, a place where the extraordinary achievements of countries and people that are often ignored – Kazakhstani wrestlers and the fastest man in the world from Jamaica (Usain Bolt) – are at the centre of the world’s stage.

So do the benefits exceed the costs?

Not for Robin Lane Fox, or the (former) allotment holders in what is now Olympic park, and not for all of those who seek refuge in Lyric Radio and other sports free zones for the duration. But for the rest of us, the calculus works, especially since the UK bears most of the costs, and the rest of us garner the benefits.

Professor Frank J. Convery
UCD Earth  Institute