Tuesday, 17 June 2014

Khaki is the New Black

There's been a lot of chatter on twitter and the net in the past week regarding the effectiveness (or not) of Plain Packaging for cigarettes in Australia.  As best as I can tell, it started with the publication of a report in the Australian by Christian Kerr purporting to show that not only was plain packaging ineffective in reducing smoking rates, they had in fact gone up!  The report claims an increase in 0.3% in the number of cigarettes sold in 2013 compared to 2012 (when PP started).  Not much, and certainly less than population growth, but this is against a slide of 15.6% of quantity sales over the previous four years

Whoops.  Is it possible that plain packaging has actually reversed the long term trend in reduced smoking rates?

Of course, one of the main source for the article is an unreleased report from InfoView, compiled on behalf of the tobacco industry, which makes it a little hard to verify.  There are other (unreferenced) sources listed as well, although most of them could be said to have an interest in continued healthy sales of tobacco, so what are we to make of all this?

The report was jumped on straight away by "Australia's Leading Economist & Speaker" (his own words), Stephen Koukoulas in a blog entry in which he explains that there is no possible way in which cigarette sales have gone up since plain packaging was introduced.  To back this up, he wasn't using dodgy, unpublished statistics from the tobacco industry. No.  Nothing short of the ABS (Australian Bureau of Statistics) for him.  Unimpeachable.  And he's right on that score.  The ABS cannot be said to be carrying a torch for anyone - impartial and independent.

Here's his helpful tweet referencing the document (he doesn't reference it in his blog), and here's a link to the relevant table from the ABS.  (The actual page linked to is here)
It's actually row 12 in the Excel spreadsheet you want.  Click the link in row 12 and it takes you to a set of data (in Column C) that measures 'volume' of tobacco sales in Australia quarterly from September 1959 to the present.  You can see that it rises steadily to peak in the early 80s, and then starts to drop off again.

Sems an open and shut case.  Tobacco volumes are down!  An Stephen Koukoulas self-righteously jeers at The Australian for being so transparent in just making up shit to make the Gillard government look bad (it might be worth pointing out here that The Kouk was, at one stage, the economic advisor to PM Gillard).

At some point, Judith Sloan from the Australian weighs in, TheKouk then has a go at her, Jack the Insider has his say, and even the dearly departed Dr Craig Emerson, PhD (Economics) has to put his two cents in (on twitter, 16 June 2014)

Except the ABS data doesn't show actually quantities of tobacco sold.  It uses a measure called Chain Volume Measures (the ABS explains it here - how's your maths?).

This is where the analysis gets interesting.  

Chain Volume attempts to measure the volume of a good (where volume is defined as price times quantity) bought by Australians each year, taking out distorting factors like inflation or CPI, changes in price from year to year and so on.  For most products, where the price for all individual items in a category roughly rise or fall at the same rate, Chain Volume does a pretty good job of measuring 'Volume' of a product sold in a quarter.  The ABS article shows a series of calculations, and I have recreated Table 5 in Excel*, using the formulae in the article linked above.

It clearly shows that the Chain Value Estimate increasing as time goes on, as both quantity sold and price increase.  This is a pretty normal situation for most goods in an economy that is growing.  Note in the above table that there is a clear preference for Apples over Oranges, probably because they're cheaper.

But cigarettes are different.  Brand is everything!  People tend to buy not so much on price, but on 'flavour' and other unquantifiable properties.  Cheap cigarettes sell in fairly low quantities (ok, I haven't got a reference for this, but hang in there.)  Let's be honest, this argument was a big selling point for Plain Packaging in the first place. Take away the brand and people won't want to keep smoking.  Apparently cigarettes in Plain Packaging taste worse anyway.

But what if instead of giving up or reducing, they switch to cheaper ciggies?  I mean, if there's no Brand allegiance, and they're going to taste worse anyway, why not save a few quid?  And with a price saving of up to $7 a pack for the cheapies, what's to lose?

So, I fiddled with the Excel table above, and plugged in some values** modelling two cigarette brands, where the premium brand had the most sales, despite quite a large price difference in Period 0.  Suddenly in Period 2, this switches over, with the bulk of purchases now coming form the cheaper brand.  I have also built in first a decrease of total quantity sold from Period 0 to Period 1, and then a slight overall increase, in line with the data from Christian Kerr and Jack the Insider.  It's interesting to see the results. (I've also extended the model by an extra Period)

The model shows, as per the ABS data, a drop in the Chain Value Estimate (in yellow) across all three years, while at the same time, an increase in actual consumption (in green).

Now, I'm not suggesting that this is actually what has happened, merely showing that there are circumstances in which this can happen.  However, with various bits of data around the country showing increases in quantities sold, increases in the number of smokers, and a decrease in the Chain Value (ie money spent on cigarettes), this model would go a long way to explaining all the disparate and seemingly contradictory data surrounding Plain Packaging and smoking rates.

In Summary

  • Smoking rates have been dropping for a long time, primarily due to price signals and public health campaigns.
  • Plain Packaging was introduced in Dec 2012 in order to reduce smoking rates further.
  • There appears to be some evidence that since PP was introduced, smoking rates have not fallen at the same rate as previously, and may even have increased slightly, despite Australians spending less on tobacco.
It seems at this point in time, the best case scenario for PP is that it has had no effect on smoking rates.  We really need more time and data to tell for sure.

*Here's a screen shot showing the formulae I used, for anyone that wants to play around with it or verify my maths.

**The values have not come from any research on actual sales in Australia.  They were chosen to model a situation where the price profile of a group of products made a significant and unusual change, to show a weakness in the Chain Volume Measure model used by the ABS.  I believe that the way I have used the model reflects the behaviour of smokers following the introduction of Plain Packaging.

Sunday, 1 June 2014

Are you worried about Fukushima?

I was asked a question on twitter today by a rare breed - an articulate tweeter, interested in actual debate.

The question was in relation to alternate energy, after I had suggested that Nuclear power as a more environmentally friendly alternative to both fossil fuels and off-grid solar PV cells.  The question was:

You're concerned about battery leaks with solar yet ok with nuclear?

And my response was absolutely! Let's think about the environmental risk posed by off-grid storage in term of the Fukushima nuclear disaster. Obviously Fukushima was, and remains, an environmental catastrophe. There is no denying that the effects of the breakdown can be measured across the breadth of the Pacific Ocean, and radiation levels remain high in Fukushima itself.

But lets run a hypothetical - what if, instead of the nuclear power plants at Fukushima, we had a distributed network of off-grid, PV cells. Off grid, because the suggestion was to use batteries as storage to allow for base-load delivery. Yes, there are other ways to store power for base-load, but the question related to batteries, so bear with me.

So lets do some sums.

The Fukushima power plants were rated at a total of 6.7GW of power. Let's assume that this was replaced with the equivalent amount of solar cells on houses, plus battery storage to provide for a week's energy (for times when there is significant cloud cover and so on). To provide 6.7GW of power for a week, a total of 6.7x10^9 x 24hours/day x 7days Wh of energy, or 66x10^9Ah of battery storage.

In our distributed network, this could be provided by a number of 110Ah batteries in each residence, 600 million batteries in total! The particular batteries I've used for this calculation each contain approximately 28kg of lead, and 7L of acid (there's a little bit of guestimation from me on this).

In total then, our earthquake and tsunami would have left 16.8 millions tonnes of waste lead, and 4,200 million litres of acid potentially spread over the land and in the ocean. These, too are catastrophic figures, and would represent a pretty severe environmental disaster in their own right.

Is it possible to figure out which one is worse? The radioactive waste, or the massive amounts of lead or acid? Possibly. Both would certainly leave long-lasting environmental impacts for years to come, and require a mammoth clean up effort to make the land liveable again. The analysis of which one is 'better' could take considerable time.

One point to take from this though is that no form of energy is really clean and safe. There are risks for any source of energy. The above event is a catastrophic event, but imagine a distributed installation of 600 million lead-acid batteries, with the responsibility for maintenance being shared by millions of people. There is bound to be some leakage, irresponsible disposal and environmental damage somewhere. By comparison, the nuclear power station is maintained by a team of highly trained people with government oversight. What is better - a low likelihood of a huge catastrophe, or almost certain localised environmental degradation that goes unnoticed and unmeasured?

Rather than decide "Nuclear is bad' or 'Nuclear will save us', perhaps a more sober analysis and understanding of the risks of each type of energy is a more realistic sort of debate to have. All energy sources have their risks, all will have an impact on the environment. Which will have the least, and which can be most effectively managed, and how is it managed, are much better questions to ask.