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Sharing the carbon price pain


The purpose of carbon pricing is to change human behaviour towards reducing carbon pollution of the atmosphere.

It's not meant to be easy. In fact, the more painful it is, the more successful it's likely to be. 

But political reality demands that the Government makes it easier to swallow by offering relief in the form of tax cuts and other compensation. Then because compensation eases the pain, it works against changing behaviour. It makes the Federal Government's carbon pricing scheme appear pointless.

Imagine if the Government compensated smokers for higher tobacco taxes that were designed to stop them smoking. They would be able to afford to pay the higher cost of cigarettes, and it's likely many would. There would be no pain and no gain.

It follows that if the Government compensates us for higher electricity bills, there is little incentive for us to use less electricity.

That is unless the point of pain is isolated from the point of relief. In other words, if the bill arrives and the compensation has been forgotten or spent on something else, those with tight cash flow will experience hardship and feel compelled to reduce their use of electricity. 

This could be the point at which the scheme works. But it will be thanks to the poor, who are usually those with the tightest cash flow. Australians on higher incomes are more likely to have a larger cash flow and will therefore lack the motivation to change their behaviour.

So the poor will share the greater part of the burden of carbon pricing.

Last week the St Vincent de Paul Society issued a statement indicating it was 'particularly concerned about very low-income households living in rental accommodation'. 

'These families have absolutely no room to move when it comes to choices about energy consumption, and little ability to manage the price shock of higher utility bills.'

Gavin Dufty, Vinnies' Victorian Manager of Policy and Research, said the proposed compensation package fails to capture some of the significant variations in impact due to utility billing cycles, household location, household type and household needs.

He advocates a 'percentage offset on energy bills' for the poor, rather than forcing them to rely on a form of compensation that is removed from the point of pain.

'Given our regular encounters with people already experiencing the threat of energy disconnection, we want to work closely with both the Government and the energy retail industry to ensure that all Australian households are effectively guaranteed access to energy as an essential service.'

The Government is to be commended for its attempt to use carbon pricing to redistribute wealth to the poor. But unless it fine-tunes its proposals along the lines of the Vinnies recommendations, it could have the opposite effect and make life difficult for those on low incomes.

Michael MullinsMichael Mullins is editor of Eureka Street.

Topic tags: Michael Mullins, Vinnies, Gavin Dufty, carbon tax, poor, St Vincent de Paul Society



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Existing comments

The carbon price in the short term is not designed to change consumer behaviour but to encourage the polluters to adopt new technologies. It would be good if you helped make this clear.

Sara Dowse | 18 July 2011  

Full agreement with Gavin Duffy's alternative method of compensation. However, the root of the problem Michael discusses is the energy producers passing on their increased cost to the consumers. The same applies for all large energy-use industries. As long as they can pass on their increased cost to the customers, there is reduced motivation to invest the capital necessary to achieve significant energy reduction.

As an environmental engineer, I find advising corporations on how to reduce energy consumption a frustrating exercise. This is because modifications to achieve anything above about 6% energy reduction needs 5 to 10 years for return on investment. Financial managers do not sign off on expenditure in excess of 3 years payback period. This is the whole reason a cost is put on carbon. If the additional cost can be redistributed to customers, "problem solved, no need to modify anything."

Because payback can be achieved within 3 years, the miniscule government target of 5% energy reduction does not require a carbon cost to make it economically worthwhile. To motivate expenditure to significantly reduce energy consumption, the initial target must be at least 15% reduction, and the additional costs NOT to be passed on to customers.

Ian Fraser | 18 July 2011  

Compensation for more expensive electricity does not necessarily get spent on more expensive electricity. Other goods like jumpers, blankets, more efficient heating/cooling/lighting and even a good book to read in bed are more affordable.

George Bennett | 18 July 2011  

Well said, Sara!
All the consequences of a particular economic measure cannot always be foreseen.
It seems to be taken for granted that "the big polluters" in order to compensate themselves for having to pay a carbon tax will put up the price of their products. This price will trickle down through the economy. If "the big polluters" can sell their products at a higher price and still maintain their market share where is the incentive for them to research and adopt new technologies? Competition? In today's global economy, where's the competition?
The poor in Australia may be doing it tough, but they are a lot better off than the poor in Asia whose pay and conditions make it possible for the comfortable in Australia to enjoy plasma TVs and air-conditioning and the PCs I and my family enjoy without thinking.

The economists and the scientists and the politicians seem to have abrograted the issue of climate change to themselves why arenn't ethicists and psychologists speaking up?

Oh, I forgot, they need access to The Fourth Estate to do that and the stories from ethicists and psychologists just don't make good TV or newspaper headlines.

Uncle Pat | 18 July 2011  

Michael Mullins wrote: “The Government is to be commended for its attempt to use carbon pricing to redistribute wealth to the poor”. Julia Gillard and Bob Brown are playing a game of Robin Hood and do nothing for the environment. If the Government would care about helping to move Australia towards a low carbon use economy, then there are far more effective ways to do so. For example the Government can legislate for energy suppliers to increase the renewable portion of their energy portfolio by about 3% per year. Large companies and Government Departments can also increase the portion of renewable energy consumption by about 3% every year.

Legislations with no carbon taxes has the advantage that companies and other large energy users (Government Departments) can decide how to achieve this instead of having the monies removed and given to a new jumbo bureaucracy . The Government had some good schemes like supporting the installation do domestic hot water systems and solar PV installations, home insulation etc. Most of these initiatives have helped countless householders and tenants in lowering the energy bill. Spending money to help to permanently reduce energy consumption makes a lot more sense than to give “compensations” in form of cash. The Carbon Tax is possible is just plain stupid in every regard.

Beat Odermatt | 18 July 2011  

Everyone accepts that our garbage and sewage must be dealt with properly. And it has now become clear that we cannot send unlimited quantities of carbon into the atmosphere without world-wide damage, if not disaster. Essential action will require effort and dollars - and should be borne by those best able to pay.

Bob Corcoran | 18 July 2011  

Sara's point at @1 is very important: the tax sends a message to investors that polluting industries will face increasing costs, so better to look for something else. I'm not sure about Gavin Dufty's desire that "all Australian households are effectively guaranteed access to energy as an essential service" because there is a difference between essential and luxury. When the elderly couple next door to me moved out 6 months ago, in came, as tenants, a single mother, her daughter and their dog. There have been very few days when the air-conditioning hasn't been on night and day (it's opposite my bedroom window). For her, essential must mean that the house is never more or less than 18 degrees. I keep thinking I will get air-conditioning, but somehow manage to survive without it.

Russell | 18 July 2011  

As one of St Vinnies volunteers in one of the poorest suburbs in Melbourne, I have found high private rents are a bigger problem to the poor than electricity bills. Rather than pay compensation for electricity costs,the poor need cheaper rents or much higher rent subsidies. As for power generation, why don't the political parties promote nuclear generated power?---much cheaper, safer and cleaner than coal.

Bill Barry | 18 July 2011  

Thank you for this but it misses the point of the Carbon Tax, which is to encourage the big polluting industries to begin to find ways to reduce their pollution.

Roland Ashby | 18 July 2011  

I think several points are being missed in the welfare rush here.

Firstly, if the price of carbon based energy is forced up cleaner energies become more viable, and hopefully in the longer term will be used more. This is Saras' point, and Ian Frasers problem solved.
Secondly, nothing Australia does will meaningfully reduce global carbon, so we're in it to maintain some sort of moral high ground. Thus, politically it's best if it can be as painless as possible for the masses.

Direct payments to industry for using alternative energies (sounds a bit Liberal) would also work, but the money has to come from somewhere. However, I imagine somewhere in the labour paradigm it's prefereable to take money from industry and give to the population rather than the nother way round.

Chris Stephens | 22 July 2011  

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