OECD Advocates Investment in Infrastructure

It’s a point we’ve been peddling for years now, but it looks like the OECD have at long last come to the conclusion that investment in infrastructure is in fact an excellent idea. By way of some proof that we haven’t been in a minority of one up to now, here’s The Economist from October 2014, underneath a picture of a parrot pushing up the daisies:

Germany’s chancellor, Angela Merkel, should allow France and Italy to slow the pace of their fiscal cuts; in return, those countries should accelerate structural reforms. Germany, which can borrow money at negative real interest rates, could spend more building infrastructure at home.

That would help, but not be enough. It is a bit like the early years of the euro debacle, before Mr Draghi’s whatever-it-takes pledge, when half-solutions only fed the crisis. Something radical is needed. The hitch is that European law bans many textbook solutions, such as ECB purchases of newly issued government bonds. The best legal option is to couple a dramatic increase in infrastructure spending with bond-buying by the ECB. Thus the European Investment Bank could launch a big (say €300 billion, or $383 billion) expansion in investments such as faster cross-border rail links or more integrated electricity grids — and raise the money by issuing bonds, which the ECB could buy in the secondary market.

Obviously here at V2G UK we were particularly keen on the bit about “more integrated electricity grids”. More recently the United Kingdom’s House of Commons Energy & Climate Change Select Committee put much the same message this way:

This promising new demand-side response technology has been disadvantaged in the auctions under the Government’s Capacity Market – meaning costs and emissions could be higher than necessary. Only a fraction of the £1 billion pounds that will be spent keeping the lights on through the Capacity Market will actually provide new capacity and just 0.4% will go on demand-side response – with most of the rest going to existing fossil fuel power stations, paying some of them to stand idle for much of the year.

Today the OECD announced its latest “Interim Economic Outlook” in a blaze of publicity under the headline “Stronger growth remains elusive: Urgent policy response is needed”:

Global GDP growth in 2016 is projected to be no higher than in 2015, itself the slowest pace in the past five years. Forecasts have again been revised down in light of disappointing recent data. Growth is slowing in many emerging economies with a very modest recovery in advanced economies and low prices depressing commodity exporters. Trade and investment remain weak. Sluggish demand is leading to low inflation and inadequate wage and employment growth.

Financial instability risks are substantial. Financial markets globally have been reassessing growth prospects, leading to falls in equity prices and higher market volatility. Some emerging markets are particularly vulnerable to sharp exchange rate movements and the effects of high domestic debt.

A stronger collective policy response is needed to strengthen demand. Monetary policy cannot work alone. Fiscal policy is now contractionary in many major economies. Structural reform momentum has slowed. All three levers of policy must be deployed more actively to create stronger and sustained growth. The recipe varies by country, especially with regard to needed structural reforms.

Diving into the depths of the OECD report itself, the bit that caught my attention runs as follows:

A stronger collective fiscal policy response is needed to support growth and provide a more favourable environment for productivity-enhancing structural policies. Governments in many countries are currently able to borrow for long periods at very low interest rates, which in effect increases fiscal space. Many countries have room for fiscal expansion to strengthen demand. This should focus on policies with strong short-run benefits and that also contribute to long-term growth.

A commitment to raising public investment collectively would boost demand while remaining on a fiscally sustainable path. Investment spending has a high-multiplier, while quality infrastructure projects would help to support future growth, making up for the shortfall in investment following the cuts imposed across advanced countries in recent years. These effects would be enhanced by, indeed need to be undertaken in conjunction with, structural reforms that would allow the private sector to benefit from the additional infrastructure; notably in the Europe Union, cross-border regulatory barriers are a significant obstacle.

Here’s a video of the proceedings in Paris earlier today:

The presentation was given by Catherine Mann, the OECD’s chief Economist, and the bit where she mentions the OECD’s concerns about the need for fiscal stimulus and investment in infrastructure is is around half an hour into the video:

Implementation of the “Juncker” investment plan has yet to deliver the targeted boost to investment. The further harmonisation in regulation needed to make the plan work also lags.

Note also Ms. Mann’s remark during the Q&A session, at around 48 minutes:

Fiscal spending on just any old thing, to the same white elephants, that is not the type of collective action that is going to generate the improvement in growth and the improvement in debt to GDP fiscal sustainability that we can see as possible. So our recipe is very much one that we started talking about more than a year ago. The recipe is we deploy the full set of tools that we have at our disposal as policymakers. Fiscal and monetary policy under the demand side, and a range of structural reforms that are unique to each country, depending on what it is they need to do.

Has the Door Opened to a Very Different Car Industry?

On September 18th 2015 the United States Environmental Protection Agency issued a press release in which they stated that:

Today, EPA is issuing a notice of violation (NOV) of the Clean Air Act (CAA) to Volkswagen AG, Audi AG, and Volkswagen Group of America, Inc. (collectively referred to as Volkswagen). The NOV alleges that four-cylinder Volkswagen and Audi diesel cars from model years 2009-2015 include software that circumvents EPA emissions standards for certain air pollutants. California is separately issuing an In-Use Compliance letter to Volkswagen, and EPA and the California Air Resources Board (CARB) have both initiated investigations based on Volkswagen’s alleged actions.

“Using a defeat device in cars to evade clean air standards is illegal and a threat to public health,” said Cynthia Giles, Assistant Administrator for the Office of Enforcement and Compliance Assurance. “Working closely with the California Air Resources Board, EPA is committed to making sure that all automakers play by the same rules. EPA will continue to investigate these very serious matters.”

“Working with US EPA we are taking this important step to protect public health thanks to the dogged investigations by our laboratory scientists and staff,” said Air Resources Board Executive Officer Richard Corey. “Our goal now is to ensure that the affected cars are brought into compliance, to dig more deeply into the extent and implications of Volkswagen’s efforts to cheat on clean air rules, and to take appropriate further action.”

Here’s a video from The Financial Times which explains some more of the background to the story:

Four days previously Transport & Environment, who say they are “Europe’s leading NGO campaigning for cleaner transport” had issued a press release and an associated report in which they stated that:

Urban air in much of Europe is not fit to breathe, and vehicles, especially diesel cars, are the principal cause. High levels of particles, nitrogen oxides and unburned fuel create a cocktail of harmful pollution that is breathed by almost every urban European citizen. The effects are half a million premature deaths each year; a quarter of a million hospital admissions; and 100 million lost working days cumulatively costing over €900 billion. The crisis is taking place despite extensive EU laws that limit ambient air-pollution levels, total national emissions, and emissions from major sources including vehicles. The Commission has acted against 18 EU member states for breaching pollution levels but progress to tackle the problem is glacial. EU limits for air pollution are projected to be breached for at least another 15 years and levels will remain above World Health Organisation no-effect guidelines.

Following worldwide media coverage of the “VWGate” scandal, and in partial answer to the question posed in our title, The Economist certainly seems to think so. In an article in this weekend’s edition they say that:

The German carmaker’s… use of hidden software to deceive American regulators measuring emissions from diesel-engined cars has plunged VW into crisis. And as the scandal provokes further investigations it seems likely to throw into question a wider range of claims about emissions and fuel efficiency. It could thus be a blow to much of the industry—one that might be large enough to reshape it.

As well as being a threat to Germany’s export earnings, the scandal also menaces the brainchild of one of its most eminent engineers, Rudolf Diesel—at least as far as its future in cars is concerned. Diesel engines use fuel more efficiently than engines with spark plugs, and better efficiency reduces both drivers’ expenses and carbon-dioxide emissions. Those advantages have endeared diesel engines to thrifty Europeans with green governments; none too popular elsewhere in the world, they power half of Europe’s cars.

Unfortunately, the benefits come with costs. Diesel cars’ efficiency comes from burning their fuel at a higher temperature, and that means they turn more of the nitrogen in the air they use for burning into various oxides of nitrogen, collectively known as NOx. This does not have global climate effects on the same scale as those of carbon dioxide, which is the most important long-lived greenhouse gas. But it has far worse local effects, generating smogs and damaging plants and lungs. To make matters worse, the catalytic technologies used to deal with the NOx emitted by petrol engines are not well suited for use with diesels, requiring engine makers to deploy more complex and expensive alternatives. That is not a big problem for large engines like those of trucks and ships. But it is for small engines like those of cars.

In an associated editorial The Economist goes on to point out that:

The German carmaker has admitted that it installed software on 11m of its diesel cars worldwide, which allowed them to pass America’s stringent NOx-emissions tests. But once the cars were out of the laboratory the software deactivated their emission controls, and they began to spew out fumes at up to 40 times the permitted level. The damage to VW itself is immense. But the events of this week will affect other carmakers, other countries and the future of diesel itself.

VW’s skulduggery raises the question of whether other carmakers have been up to similar tricks, either to meet Europe’s laxer standards on NOx emissions or its comparable ones on fuel economy—and hence on emissions of carbon dioxide. BMW and Mercedes, VW’s two main German peers, rushed to insist that they had not.

Even if other makers of diesel vehicles have not resorted to the same level of deception as VW, the scandal could mean that these cars struggle to meet standards applied rigorously to both types of emission. Some fear that this may be the “death of diesel”. So be it. There is still scope to improve the venerable petrol engine; and to switch to cleaner cars that run on methane, hydrogen and electricity, or are hybrids. A multi-billion-dollar race is already under way between these various technologies, with makers often betting on several of them as the way to meet emissions targets. If VW’s behaviour hastens diesel’s death, it may lead at last, after so many false starts, to the beginning of the electric-car age.

Focussing on events here in the UK, The Daily Telegraph reports that:

A team of British scientists repeatedly warned the Government that emissions of a deadly pollutant from diesel cars far exceeded official safety levels. The scientists measured emissions from tens of thousands of diesel engine cars as they drove past sensors on roads in tests carried out since 2011.

The studies, funded by the Department for Environment, Food and Rural Affairs (Defra), showed that on average diesel cars emitted four times the legal limit of dangerous NOx gases.

Their findings appear to have been ignored by successive governments which have continued to offer generous tax subsidies to encourage people to buy diesel cars, which now account for half of new cars sold in the UK.

The scientific studies of roadside emissions were carried out by a team from King’s College London and paid for by Defra. The studies showed that NOx emissions have not declined since 2006 despite increasingly stringent requirements from the European Union.

Dr David Carslaw, who led the research, said: “What our studies show is that when these vehicles are officially tested they pass the European emissions standards but when you test them on the road they on average are emitting four times more NOx pollutant.

“We expected to see really substantial reductions in NOx emissions but that has not happened. There is a huge gap between what the manufacturers report and what is actually happening.” He added: “It has been known for some time and Defra are certainly aware that concentrations [of NOx] have not decreased.”

Here’s The Telegraph’s video summary of events thus far:

They continue with a claim that:

Suggestions of collusion between governments and the motoring industry have been bolstered by an allegation from a former transport minister that David Cameron agreed to delay imposing a new emissions limit after a personal request by Angela Merkel, the German chancellor, to protect her country’s motor industry.

Norman Baker, a former Liberal Democrat MP and transport minister in the Coalition, made the claims in a new book.

“Angela Merkel rang the Prime Minister and asked him effectively to defer the arrangements that had been carefully negotiated. He agreed to that, idiotically, and got something inconsequential in return,” said Mr Baker.

Evidently it will be quite some time before all the ramifications of “VWGate” become clear. If things pan out the way The Economist are suggesting perhap the landscape of the European motor industry will look very different in a few years time? However in the short term we here at V2G UK cannot wait to discover what the likes of David Cameron, Angela Merkel, DEFRA and the DfT have to say about the matter tomorrow morning!