Carbon tax compensation, part two: An alternative

Part one of this post criticised the assumptions behind the proposed model of household compensation under the Rudd Government’s CPRS. Part two, below, looks at an alternative approach.

Based on part one of this post, we could start with the below principles for developing the compensation mechanism.

1. No low-income household is to be left worse off

2. The political threat of rising prices is neutralised

3. The limitations of a carbon price are acknowledged

4. It must be simple to understand and communicate

To me, the most simple, and most simply administered, way of meeting these principles would be to offset the carbon tax costs to households directly through the electricity and gas bills, via the retailers. Retailers already administer State based energy rebates, and so the IT capacity and regulatory tools already exist.

For many, there will be a question of whether the compensation is targeted or universal. I would argue that building community support is centrally important given the ability of the coalition to divide the community on this issue, therefore compensation should be universal. It would also reduce any wedge between wealthy/middle-income households and low-income households on the carbon tax.

This would not only neutralise the ‘rising energy prices’ scare campaign, but would also placate the retailers by making the payments easier to administer. The flow on from that is reducing indirect costs to billing system changes that would be later passed on to customers.

But electricity and gas bills will not be the only cost to rise. Part one of this post already discussed whether petrol price increases due to a carbon tax could be offset by reductions in petrol excise.

There would also be many indirect cost increases, as farmers, producers, manufacturers and the transport sector all look to pass on costs to consumers. Ultimately, these costs will be quite minor and not noticed by most of the population. However, for low-income households this is where increases in benefits and tax cuts at the bottom end of the scale should be adjusted.

A comprehensive household electricity, gas, and petrol compensation scheme will not use all the revenue collected by a carbon tax. Additional revenue will be available for research, compensation to trade exposed industries and community assistance where localised employment is affected by the transition to a greener economy.

But it is also clear that a carbon tax will not be the single tool that reduces our emissions by the required amounts. It is important that the Government look for instances of market failure in the carbon markets, and use complimentary measures (also called ‘direct action’ on the other side of the fence) as appropriate. Complimentary measures include appliance/white good/car efficiency standards, assisting developing technologies and industries, low-income household retrofit programs, supporting voluntary action, building standards, etc.

With this mixed approach in mind, Brian’s recent post Larvatus Prodeo makes for interesting reading.


One response to “Carbon tax compensation, part two: An alternative

  1. Pingback: Carbon tax and price shock | Translations

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