Cost of living decreases if carbon price repealed?

I was asked this week to pull together some information on what effects the Federal Coalition’s repeal of the carbon price could have on households, specifically as regards their income and expenses (excluding environmental costs/benefits), with the background of whether any cost of living decreases could be used to justify cutting back on other welfare programs. This is only a very quick analysis (and I’ve doubtlessly missed some more rigorous analysis that others have done), but my short answer is that cutting welfare programs due to an abolition of the carbon price is a bad idea.

The most recent and comprehensive source of information on this is the Clean Energy Legislation (Carbon Tax Repeal) Bill 2013 Explanatory Memorandum. I’ve only skimmed it, but the gist is:

• The carbon price will be removed
• Household compensation will be kept at current levels, but no longer increased
• The ACCC will have new powers to investigate failure to pass through carbon price reductions for regulated supply (i.e. gas and electricity)

Taking these in turn:

Removal of carbon price

Focussing purely on the lower monetary costs that consumers will bear (in the short and medium term), the Carbon Tax Repeal Bill Memorandum states:

“Recent modelling by the Australian Treasury suggests that the removal of the carbon tax in 2014-15 will reduce the Consumer Price Index by around 0.7 percentage points than it otherwise would be in 2014-15. … Treasury modelling suggests that the removal of the carbon tax in 2014-15 will leave average costs of living across all households (based on existing expenditure patterns) around $10.50 per week (or around $550 over the year) lower than they would otherwise be in 2014-15.” (p. 12)

Household compensation

The carbon price was introduced concomitant with household compensation (through the form of lower taxes), so that low income households (<$30k/a for singles) would be fully compensated, and middle income households ($30k-$80k/a for singles) partially compensated. This compensation is not being removed, so to the extent that lower carbon prices are passed through the benefits will be felt fully.

I say “fully”, but there is a small change: household compensation was legislated to increase in line with the carbon price. (The carbon price is legislated to increase from $24.15/t in 2013-14 to $25.40/t in 2014-15.) Here are the changes to the household compensation package, from the Clean Energy (Income Tax Rates and Other Amendments) Bill 2013 Explanatory Memorandum, p. 8

 
In combination with marginal tax rates it should be possible to calculate the value of the foregone compensation, though I haven’t undertaken this exercise (and it should be balanced with consideration of lower costs in the possible absence of a carbon price).

ACCC powers

The ACCC’s new powers are explained in Chapter 4 of the Carbon Tax Repeal Bill explanatory memorandum, but two articles by Tristan Edis are worth reading for an overview of the issue:

• http://www.businessspectator.com.au/article/2013/11/11/policy-politics/abbotts-first-broken-promise
• http://www.businessspectator.com.au/article/2013/11/12/policy-politics/food-prices-and-carbon-cost-myth

Essentially it’s difficult to see the ACCC effectively pursuing any organisation for failing to pass through lower carbon costs unless they operate in a regulated environment (e.g. power, gas) where the price differentials are transparently and exogenously set. Prosecuting supermarkets or other non-regulated industries? I highly doubt it (and hence am doubtful of how much of the modelled $10.50/week in savings will be passed through).

As regards the effect of carbon prices on electricity, see my previous post: The Effect of the Carbon Price on Electricity Prices. There are interaction effects with other policies (e.g. the Renewable Energy Target) that I’m omitting; I aim to add these to this post later.