How does one eliminate plastic shopping bags without inconveniencing consumers?

Peter Garrett, Midnight Oil frontman and current Minister for the Environment, Heritage and the Arts has the idea that shopping-bags are evil – entirely correct – but that, while they need to be removed, taxation and regulation are bad ideas:

Mr Garrett is working with state governments to formulate a strategy for weaning the country off plastic bags. It uses 4 billion a year, and Mr Garrett said they were having a serious impact on coastal and marine environments.

…

Banning the bags outright or imposing a levy on them were among proposals being considered, but Mr Garrett said he was conscious of passing costs on.

“We certainly don’t want to disadvantage the consumer, and I don’t believe in any way that any measure that will be brought forward will do that,” he said.

Mr Garrett said biodegradable plastic bags were not the answer, with some taking as long as 1000 years to completely break down.

Should be very interesting indeed. A levy would seem to be the optimal solution: plastic bags cause damage to the environment, damage that costs (a) money, to repair, and (b) not-money, as our environment disappears under the weight of our own waste. The solution? Add that cost to the price of a shopping bag (meaning charge money for them). Consumers cause the damage, consumers get to pay the compensation for that damage.

Thus, the Pigovian tax: add the social cost to the private cost of plastic bags. The market receives price signals based upon the negative externality and fewer bags being consumed. Yes, this causes inconvenience to consumers – why should they pay for the damage their behaviour causes?

The usual alternative is the likes of a ban: simple, efficient, either popular or not. Pass a law that forbids the things being in supermarkets. I actually rather favour this one. Like taking a band-aid ™ off, one may as well just rip it off. Have shopping bags one month and then nothing the next. People who forget to bring bags can purchase cloth ones – they really aren’t that expensive (and usually hold quite a bit).

But I’m hippie scum, utterly without sympathy for non-hippie scum like me (and, believe me, I use my share of plastic bags. Then end up garbage bags, and they end up in land-fill. I also use my fair share of cloth shopping bags – I just don’t always remember, or I shop while I’m out.

Anyway, this too would inconvenience consumers. In fact, given that consumers are getting these basically for free, anything that isn’t this way of doing things is likely to be inconvenient. This is what makes Garrett’s statement so interesting.

My guess is that they will come up with something geared towards voluntary conversion by stores, hopefully big-box retailers first. I would like to see them push the system that I saw Sainsbury’s use, when I was there. Several different types of bags for use/sale, and a rebate if you brought your own.

Unless the government intends to use the levy-money to repair environmental damage (making the levy a Coasian solution), the tax is not a good idea: it’d be unpopular, and the effect on the number of plastic bags used is more likely than not to be both small and short-lived. Customers will end up adding the cost in to their expected cost of a shopping trip.

Stores, however, should be encouraged to levy their own goods, on a weighted basis, and use that money to fund re-usable cloth bags. Those can be free for customers, and you receive a discount equal to the estimated cost-increase when you bring your own bag (either theirs or someone else’s). Yes, goods would be more expensive – but probably not by much. Think about how much a single, $1, $1.50 cloth bag will hold: add $1 to the cost of all the groceries inside, and it’s a fairly small change. At that level of the customer’s budget, their consumption will not be very responsive at all to the increase, meaning inefficiency (deadweight loss, excess burden) will also be acceptably low.

Does this inconvenience shoppers? A bit, sure – bear in mind, though, that, by bringing bags with them, they can erase that cost completely (on average). Given that we’re all, currently, choking off the environment with our toxic plastic bags, that hardly seems too inconvenient for mature economies to handle. The alternative is for the government to underwrite the cost of cloth bags – but that means taxing all of us. Moreover, it means the market can’t clear properly (e.g. by taking your own bags to the supermarket) because the price signals are all out of whack, moreso even than before.

In any event, if the government intends non-intervention to be their solution, they have few enough options thereafter. The market for plastic bags got to this point without intervention, so it stands to reason that non-intervention will leave it at this point, over the long-term.

Key Economic Developments and Prospects in the Asia-Pacific Region 2008

By now the report by the United Nations’ Economic and Social Commission for Asia and the Pacific (UNESCAP) has made the news, mostly through its pessimism regarding the US economy – but it has far more within! You can read the entire report here.

Specifically, and as per the IHT link above, it mentions the growth rates of Asian economies (the “AP” in ESCAP):

Eco 1 students! This returns us to the principle of Catch-Up:

Short version: emerging/developing economies, assuming that they have adequate policies in place, will exhibit higher rates of economic growth than developed countries, eventually “catching up”. Compare, in Table 1 of the UN ESCAP report above, the developing/developed economies numbers. That is catch-up. It is also why the bourses of emerging markets will usually out-perform those of developed exchanges.

Another section of interest in the report is Sovereign Wealth Funds, to wit:

Buoyant reserve accumulation by countries in the region is adding to the stock of capital for existing wealth funds. Reserves are increasingly being accumulated not for prudence in times of crisis but as a result of managing currency appreciation. Therefore, there is no limit to the level of reserve accumulation.

It has become increasingly important for Governments to consider setting up sovereign funds as a strategy to obtain a reasonable level of return on their burgeoning capital. In addition, such funds serve to reduce risk by diversifying the assets in which foreign reserves are invested. Existing sovereign funds are also allocating more of their capital to riskier assets. For instance, the Russian Federation uses its stabilization fund partly to meet emergency budget shortfalls and partly for investment purposes.

Sovereign wealth funds have a major potential impact on movements in international financial markets. The volume of capital under their management is at least twice as much as that of hedge funds. Estimates put the current size of the world’s 25 sovereign funds at about $2.5 trillion, with a rise of $450 billion in 2007. It has been forecast that the resources at the disposal of sovereign funds could rise to $12 trillion by 2015. The region’s major established funds are the Government Investment Corporation of Singapore, with holdings of $330 billion; the stabilization fund of the Russian Federation, with assets of about $100 billion; and the Investment Agency of Brunei Darussalam with $30 billion. The Republic of Korea also began its own fund, the Korea Investment Corporation, in 2006 with capital of $20 billion.

The desire to obtain healthy returns on their bulging reserves is also leading other countries in the region to consider setting up their own wealth funds. The year 2007 saw the formation by China of a sovereign wealth fund to invest $200 billion of its foreign reserves in other investments. Investments by the country’s new State Foreign Exchange Investment Corporation will be in financial and strategic assets around the world.

Sovereign wealth funds present a number of challenges for their owners. One is that they are prone to protectionist sentiment from investment-receiving countries because the funds are government entities. In this context, the extent to which investment in a company by a sovereign wealth fund results in voting rights or management control is important. A reasonable amount of information on the investment strategy and portfolio holdings of sovereign wealth funds would also help to reduce concerns from investment-receiving countries.

Currently, most funds are opaque about internal checks and balances, investment strategy and commercial goals.

Surprisingly (for me) was the extent to which the Russian Federation had expanded its holdings of foreign reserves, in 2007:

Although that could just mean I’ve been here too long (I’m forever trying to argue with colleagues here in the US about the latent strength of Russia. The mindset here is that they were soundly defeated and will never be a problem – very English thinking on the issue, frankly).

The report’s discussion of inflation (pinning no small amount of the same on the Money Supplies in Asian and Pacific economies) is very good also. The report is well worth the time of students of economics to read.