Carbon tax and price shock

In these two earlier posts, I commented on the need for carbon compensation to be attached to energy bills. I focused on the political benefits of such an approach. But there is another, more important reason for compensating low-income households this way.

Rather than  the monthly bills that we receive for many subscription / contract services we use, electricity bills arrive quarterly. This can cause significant price shock to low-income households with limited access to savings and credit.

This is especially the case when energy prices are rising significantly, and households are not only hit with three months worth of expected usage, but three months of accumulated additional increases as well. This is often an unexpected increase.

Again, with a lack of capacity to save and limited access to, or existing over-reliance upon, credit, this can spin into a major source of hardship.

So, how does this relate to carbon compensation? The likely approach by the Government is to allow the full pass through off energy costs onto consumer bills, and then compensate through the tax and transfer system. No doubt this is easy to sell. The Coalition would have a more difficult time arguing against ‘tax cuts’ (code for smaller government) than they would rebates and ‘tax churn’ (code for bigger government).

However, by providing small weekly/fortnightly income increases untied to utility costs, this does very little to mitigate the significant increase in price shock through quarterly energy bills. Most likely, a significant number of households on marginal incomes would divert the ‘compensation’ to other pressing needs (food, credit card debt, schooling for kids, etc) rather than save for the now swelling energy bills.

This is a recipe for disaster, with a likely increase in financial hardship and ‘energy poverty’, as some call it.

This might be different if we had monthly energy billing, but we don’t. Some vulnerable households use Centrepay and other bill smoothing services, but most do not. Especially those that never expected to be in hardship (i.e. those facing temporal hardship such as the newly unemployed or over-mortgaged and facing increased interest rates).

Compensation primarily through the tax and transfer system may be a simpler, and politically useful, method for carbon tax compensation, but that does not make it the most effective option.

Anyone working in this space, we need to encourage the Government to consider committing part of the compensation directly through energy bills. This is in effect not dissimilar to the already floated compensation directly through petrol pump prices.

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2 responses to “Carbon tax and price shock

  1. The problem with this approach is that if the compensation arrives concurrently with the higher energy bills, then the whole notion of discouraging the use of carbons through price signals will be negated. This is also a problem with the proposed approach to compensating for petrol price increases.
    Perhaps the compensation could be paid quarterly, but it should not be shown on the energy bills or be directly related to energy bills and it definitely should not be paid proportional to the amount of energy consumed as is proposed for petrol.

  2. Hey Dave

    This is a common misunderstanding of the issue of price signals from a carbon price.

    We spoke offline about this, and I’m glad that you’ve had a chance to read my earlier posts on the effectiveness of price signals, and other causes of price increases anyway.

    This doesn’t mean that price signals are not important, it’s just not so much at the household level.

    Because the wholesale electricity market is a central bidding pool, with generator bids stacked up and the cheapest dispatched first, it is in the wholesale market that ‘rational choices’ can be expected to be made and price signals have the most direct impact. This is where the choice of brown coal vs black coal vs gas vs renewable is made; where the biggest short-term and carbon savings will arise; and where long-term decisions on what new plant to build will be based.

    One of these days, I’ll do a post on the impact of price signals on the wholesale market. Maybe.

    – joel.

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