Research Lounge: Jennifer Ljungqvist, “UK Fuel Poverty: Is the liberalisation of energy markets to blame?”

Date: Monday 17 June, 2013
Location: PG Hub 7, Senate House
Topic: UK Fuel Poverty: Is the Liberalisation of Energy Markets to Blame?
Speaker: Jennifer Ljungqvist

About the Speaker: Jennifer Ljungqvist previously did an MA in Economics and International Relations at University of Aberdeen before commencing her MSc in Economics at Warwick. She has in the past done IT Risk, IT Assurance and Health Consultancy work with private and public bodies in the Utilities, Retail, and Aviation, Telecoms, Financial Services and Healthcare sectors. Jen has also long held an interest and done economics research work in Health Economics at e.g. the Health Economics Research Unit in Aberdeen and Environmental Economics. Her undergraduate dissertation was titled ‘The Lack of Corporate Environmental Responsibility Environmental Management in Context’ and her recent research on Energy Poverty for Dr. Monica Giulietti, Associate Professor of Global Energy at Warwick Business School, was the foundation for her 17 June presentation.

Presentation: Though a relatively recent topic in terms of academic literature, with Belinda Boardman leading the way in the 1980s, the subject of ‘Fuel Poverty’ [FP] or ‘Energy Poverty’ is not a recent phenomenon. Three of the main definitions of FP can be outlined as follows:

  • ‘Need to Spend’: Households who would spend >10% of their income on fuel to achieve recognised heating standards (rhs) – Used in the UK
  • ‘Actual Spend’/ ‘Expenditure Fuel Poor’: Households who actually spend > ‘specified % of their income’ on fuel (often 10% mark used) – Used in Ireland, Australia, New Zealand
  • ‘Feel Fuel Poor’: Households who report difficulties in affording sufficient energy for their needs

There is yet to be a commonly agreed definition of the concept, thus comparisons of FP statistics across countries and the value of FP targets is subject to the definition used. The ‘Need to Spend’ definition for instance, unlike ‘Actual Spend’, is promoted for taking into account both those who under-heat their homes and those with high fuel bills but is does not take into account consumer attitudes, perceptions or preferences the way that the ‘Feel Fuel Poor’ definition does.

So why should we care about FP?

First, looking at the UK as an example of a country with colder winters, if vulnerable energy consumers such as older adults, families with young children or the ill do not adequately heat their homes because they cannot afford it or because it costs too much due to rising energy prices and poor insulation then this could have direct adverse effects on their health. The World Health Organisation recommends minimum indoor temperatures of 18C or 20-21C for more fragile elderly adults, but if temperatures are below this there are risks of small adverse health effects (16-19C), increased probability of respiratory or cardiovascular conditions (<16C) or even hypothermia (<10C).

Second, if households do spend enough to heat their homes but this expenditure is a significant proportion of their income then this will affect those consumers ability to spend money elsewhere in the economy and their living standards in general. Research has shown that a large number of fuel poor are also often income poor.

Third, long term solutions to tackle FP such as improved insulation, more cost-efficient use of energy, more educated energy consumers and utilizing waste heat from renewables and other industries (e.g. Combined Heat and Power [CHP]) also tie into today’s climate change targets.

The problem in the UK is a prominent one, there was a rise in the number of fuel poor in England to 2.8 million (13.2%) in 2004-2007 of which 2.3 million were vulnerable households and 56% were in the lowest income percentile. The problem peaked in 2009 (see graph) at a total of 5.5 million households and has since decreased to 4.5 million in 2011, possible correlated to improved insulation and wider use of more cost-effective heating mechanisms such as district heating using combined heat and power (CHP); the efficient use of waste heat from renewable energy sources.

The title of the presentation was whether liberalized energy markets are to blame for FP in the UK. Some of the existing arguments for and against are as follows:

Since the 1990s de-regulation of UK gas and electricity markets the initial rise in prices among prepayment consumers (mostly low income households) as a form of cross-substitution for the decrease in prices for direct debit payments and the prevalence of market dominating energy suppliers (the ‘big six’ in the UK) and distributors (only 7 in the UK) the reform has been criticized for allowing natural monopolies and possible cartels to form and focusing energy companies’ attention on energy pricing rather than efficient supply and use of energy.

On the other hand, more recent data does not support the fear that prices for prepayment users is rising faster. Also, many of the large energy suppliers and distributors argue that the consistent transparency of price changes maintained by watchdogs Consumer Focus, Ofgem and Energy UK as well as the UK Government’s 2000 and 2004 Fuel Poverty targets are providing unofficial pressure on prices, keeping them from increasing significantly.

Final considerations…
Whatever conclusion you reach on the advantages and disadvantage of a de-regulated market Waddams Price (2005) cautions that re-imposing price caps would bring new costs and disturbances in the market. Furthermore, it should be noted that British history of cheap access to coal for heat starting during the industrial revolution, which required large and open air vented buildings and resulted in poorly constructed and insulated buildings, the country’s cultural trend to admire and maintain old buildings and the bas past experiences with energy efficient solutions such as district heating have also played their part in today’s fuel poverty numbers. Whereas the much earlier and wider use of energy efficient solutions in continental Europe in large part grew out of necessity.

The problem of fuel poverty, though prominent, does not only apply to the UK or cold climate countries. The recent summer heat wave of 2013 where a number of fragile energy consumers have died shows that too hot temperatures and the lack of access to or inability to afford cooling facilities such as air conditioning can be equally detrimental to one’s health.

Thus, lessons learned in tackling fuel poverty alongside climate change through more energy- and cost-efficient means such as renewable energy, district heating and/or CHP can be applied to developing as well as developed countries. This will become more and more important as energy use and costs look to continue to increase; see below graphs.

 

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Research Lounge: Grace Chang, “What is wrong with immigration? Immigration economics as a way of thought”

Date: Monday 17 June, 2013
Location: PG Hub 7, Senate House
Topic: What is wrong with immigration? Immigration economics as a way of thought
Speaker: Grace Chang

About the Speaker: Grace Chang previously attained her BSc (Hons) Economics from the University of Warwick and has continued on in the University to pursue Masters in Economics this academic year. She previously was interested in microeconomic behaviour and her previous work focused largely on Life Satisfaction where she wrote her dissertation on the “Happiness of Working Women”. Later on, she delved heavily into labour economics and settled on immigration as her topic of interest. She is currently writing her dissertation on “The impact of skilled migrants on skilled natives: a study in the US” where she hopes to investigate any displacement effects, if any, and the mobility of natives from the influx of migrants.

The main aim of the talk was to encourage the way of thinking about a typical academic subject in Economics. In this particular case, Grace decided to focus on immigration, a large topic in labour economics that is still under scrutiny by academics and in public debates.

Firstly, it is important to assess the importance of focusing on the issue. Why is it important to still discuss issues on immigration? Besides the various results in academic literature, there are still on-going differences in public policies in countries worldwide today. The issue at hand is why do we see the policies enacted today, why do they vary and how are we to judge it ourselves?

Thus, we see a transformation in perspective over time. Using a rough guideline, she finds that the literature first had the investigation of the pressing issues during that time. The first “headlining” literatures in the 90s are focused largely on mass emigrations onto the respective countries such as seen in Card (1990) and Friedberg (2001). Here, there was a large interest in the substitutability of natives and migrants – that is, if natives and migrants are perfect substitutes, the migrants would displace natives of their jobs, or saturate the labour market to then put downward pressure on native wages and employment.

However, more recent studies then had a transformation in their perspective. Recent work by Hunter and Gauthier-Loiselle (2010) find that educated migrants have positive effects on native workers and on the native economy through increased patenting. So in her perspective, the accumulation if literature today has led to the exhaustion of the popular question of “Is immigration bad?” The bias of each “native” country will always exist and the question will always be asked. However, at least academically, the argument of substitutes and complements may be a weak one. As labour becomes more mobile, it is perhaps more interesting to question: 1) Do migrants add productive value to the native economy? Who are they and how can we encourage their contribution? 2) Do restrictive policies help native workers to better contribute to the economy? 3) How well do migrants (first and second-generation) assimilate into the native country and how can we encourage this?

The idea is to think ahead of the current literature, and to question the old. Perhaps substitutability in labour is not as strong as we assumed it to be such as its comparison to substitutability in goods. Maybe the migration policies enacted today are in such a variety because we have been holding on to such old assumptions that lead us to contrasting results. Thus, the talk concluded as a food for thought about the way we think about an argument, especially when there is always a natural bias to one side.

 

© The content is provided by the speaker Grace Chang to present the opinions and findings completely and accurately. Reference and data source may not be fully displayed but can be requested from the author. The Full content is considered as intellectual or academic work and strictly protected by copyright law. All rights reserved.

Distinguished Lecture: Professor George Akerlof, “Phishing for Phools”

For the audio recording of this Distinguished Lecture, please visit: Warwick Economics Media Library.

George Arthur Akerlof is one of the giant figures in the economics profession, and we are delighted that he is going to be one of our Distinguished Lecturers on Tuesday 11th June 2013, 4.15-5.15pm in room M1 of the Radcliffe Teaching Centre. The lecture will be followed by a drinks reception outside room M1, where you will have the chance to talk informally with the speaker.

He is Koshland Professor of Economics at the University of California, Berkeley. He won the 2001 Nobel Prize in Economics (shared with Michael Spence and Joseph E. Stiglitz). He is perhaps best known for his article, “The Market for Lemons: Quality Uncertainty and the Market Mechanism”, published in Quarterly Journal of Economics in 1970, in which he identified certain severe problems that afflict markets characterized by asymmetrical information, the paper for which he was awarded the Nobel Prize. The title of his talk will be “Phishing for Phools”. Not to be missed!

You are most welcome to come along to his talk at 4.15pm. There is no need to register – just turn up.

Research Lounge: Katharina Allinger, “Happiness Economics: Key findings from several decades of happiness research and their implication for economics”

Date: Monday 10 June, 2013
Location: PG Hub 7, Senate House
Topic: Happiness Economics: Key findings from several decades of happiness research and their implication for economics
Speaker: Katharina Allinger

In my research lounge talk I attempted to discuss a variety of interesting findings from the research on “happiness economics” *. I chose an interactive format where we tried to use common sense and economic intuition to approach questions and answers from the field of happiness economics. For this reason I want to thank all of my amazing colleagues for their participation and, as usual, very insightful comments. This article cannot possibly reflect all the issues we touched upon which is why I focus on two topics instead: the relationship between income and happiness and happiness equations.

Income and Happiness
What economists ultimately care about is welfare and not GDP, but GDP and welfare maximization have often been equated in the public debate. Whether GDP and well-being are indeed necessarily positively related has been questioned on various accounts and happiness research has made important contributions to the discussion. One of the earliest academic contributions in the field was a book chapter written by Richard Easterlin in 1974.

What Easterlin discovered was that when you looked at time series data for the United States, GDP per capita in the period of analysis had increased rapidly, but there had been no increase in life-satisfaction over the same time period. If you believed that GDP growth was sufficient for increasing life satisfaction, then the logical conclusion was to name the finding “Easterlin paradox”. As usual, when conventional wisdom gets challenged, people reacted strongly to the findings and tried to prove them wrong. Almost 30 years later, the consensus among economists is that Easterlin’s results are robust and indeed, do not only apply to the United States, but to some other developed countries as well. His findings have been confirmed and extended in numerous studies. On the other hand, there are also some stylized facts on the impact of income on happiness: Individual-based cross-country studies, experimental evidence and macro studies largely show a positive correlation between measures of happiness and income.

So how can we reconcile the Easterlin Paradox that shows no increase in happiness combined with large increases in GDP over time with these stylized facts that suggest that GDP does lead to higher happiness? Many researchers have attempted to answer this question and found two main explanations: social comparison and adaptation. The former refers to the fact that for individuals it does not only matter what they have, it also matters what others - our reference groups - have. An impressive amount of studies has focused on different reference groups and in many studies the effects on happiness of a personal income increase are exactly neutralized if the income of the reference group also increases by the same amount. In addition, there is a certain adaptation effect, meaning that a one-off increase in income may only increase happiness temporarily. Studies have shown that income’s long-run effect is only 40% of it’s short-run effect. **

If we wanted to translate these findings into economic intuition we could say that increasing income for an individual has two effects: a consumption effect and a status effect. When we assume that happiness rises with income we normally invoke the idea of a positive but decreasing marginal utility of consumption. Therefore in developed countries the additional benefit from more income and consumption may become relatively small. On the other hand, if the income of the reference group is held constant, the individual gets a happiness boost because its relative income rises: we can call this a status effect. If we assume that status is not a zero-sum game, then we can, for example, hypothesize that increasing income inequality might have negative effects on happiness even though it might raise average income. There are certainly many different combinations of consumption and status effects that can lead on aggregate to very different effects of an increase in average income on average happiness.

Happiness Equations
Most of the second half of our discussion was then devoted to another interesting question. Obviously, income is not the only factor that causes people to be happy (or in this case maybe better: content with their lives). After some brain storming we were able to use common sense to figure out the main determinants of happiness and stumbled upon one important distinction: the difference between “being happy in the moment”, which could be triggered by eating chocolate, and “being generally happy with one’s life”. This distinction is mainly one between “affective” and “evaluative” measures which have yielded different results in empirical studies. While every study follows a slightly different approach and focuses on different measures we could generally say that the factors that are most important for evaluative happiness are: income, employment (unemployed, employed, housewife, job satisfaction, …), family (marital status, children, …), community and friends, subjective health, freedom and religion (which has yielded ambiguous results in empirical studies).

In addition to these “happiness equations” that try to explain the variation in happiness through different individual variables, a number of authors, e.g. Helliwell, have argued that we need to include societal variables as well in our happiness equations and that including purely individual determinants without societal controls leads to confounding results. For this reason many studies in recent years have attempted to distinguish between individual and national determinants of well-being.

Footnotes:
* To avoid confusion I subsequently use the term happiness even though it is generally assumed that happiness is a more „affective“, short-run measure while subjective well-being is a more „evaluative“ and long-run measure and that both are strongly linked but not identical.
** If one cares to dig a little deeper into the literature on happiness, we can find that what happiness economists have proven with the means of elaborate econometrics, Bernard Mandeville already discussed as early as 1705 in his book „Fable of the Bees“.

 

© The content is provided by the speaker Katharina Allinger to present the opinions and findings completely and accurately. Reference and data source may not be fully displayed but can be requested from the author. The Full content is considered as intellectual or academic work and strictly protected by copyright law. All rights reserved.

Distinguished Lecture: Professor Andrew Oswald, “Does High Home-Ownership Impair the Labour Market?”

For the audio recording of this Distinguished Lecture, please visit: Warwick Economics Media Library.

The next Distinguished Lecture will be given by Professor Andrew Oswald on Tuesday 4th June 2012, 4.15-5.15pm in room M1 of the Radcliffe Teaching Centre. The lecture will be followed by a drinks reception outside room M1, where you will have the chance to talk informally with the speaker.

Professor Andrew Oswald’s work lies mainly at the border between economics and behavioural science. He serves on the board of editors of Science. Previously at Oxford and the London School of Economics, with spells as Lecturer, Princeton University (1983-4); De Walt Ankeney Professor of Economics, Dartmouth College (1989-91); Jacob Wertheim Fellow, Harvard University (2005); Visiting Fellow, Cornell University (2008). He is an ISI Highly-Cited Researcher. He will be talking about Home Ownership as a Driving Force Behind High Unemployment in our Nations. Those who would like to read a new formal paper on the material of the lecture can find it on his website http://www.andrewoswald.com under the title “Does High Home-Ownership Impair the Labour Market?”

You are most welcome to come along to his talk at 4.15pm. There is no need to register – just turn up.