Impact of the carbon tax on households

When you delve into the quantitative data on energy and carbon emissions it appears that there is little basis for households to fear carbon pricing. The energy price rises we're likely to experience are pretty mild for most households and most businesses in comparison to their overall expenditure. And the money raised by government through requiring polluters to pay a carbon tax or purchase carbon permits doesn't just disappear into the ether. It can be redistributed back to households such that they are no worse off – although some polluting businesses will be less profitable.

Getting a reasonable feel for energy price rises over the next decade is actually a reasonably straightforward calculation that can be demonstrated transparently, without the need for fancy economic models.

In terms of electricity, for each kilowatt-hour we consume, around 1 kilogram of carbon dioxide is emitted (slightly more in Victoria and slightly less in most other states). Based on the carbon price of $23 per tonne of carbon dioxide then the price of this electricity would increase by 2.3 cents per kilowatt-hour, at most. Multiply this by average Australian household consumption of around 6,000 kilowatt-hours per annum, and the additional electricity spend is $120 per household per year. If the carbon price was $40 (about the level required by 2020 to make reasonable in roads into decarbonising the Australian economy) then of course the price will increase by 4 cents, and the household spend by $240 per year. 

In terms of petrol, which has been excluded from the scheme but in the interests of economic efficiency should have been included, the average emissions released from burning a litre of fuel driving your car are about 2.3 kilograms of carbon dioxide (slightly higher for diesel). At $40 per tonne of carbon dioxide, or 4 cents per kg, this equates to an increase in fuel prices of 9.2 cents per litre.

For natural gas, around 70 kilograms of carbon dioxide is released for every gigajoule consumed, so that's a price increase of $2.80 per gigajoule. For the average Australian household this equates to an extra annual cost of $60.

This change in energy prices over a decade if the carbon price were to rise to $40 is all summarised in the table below, and put into perspective against current household retail prices to illustrate the proportional change in prices.

These price rises are not insignificant, but considering they would gradually unfold over ten years they are hardly unprecedented (if we followed the original timetable for an emissions trading scheme).

For example, between 2001 and 2008 the cumulative change in petrol prices was 70.8 cents per litre. This made life difficult for some heavily car-dependent households, but overall our economy prospered. By comparison, a carbon pricing scheme will involve a gradual increase in petrol prices of less than a single cent per annum on average.

Also, it's not widely known that electricity prices increased by more in proportional terms over the past decade than they will as a result of a $40 carbon price.

In terms of examining what's actually on the table with a $23 carbon tax that excludes petrol, the CSIRO and AECOM looked at the direct impacts as well as flow-on effects throughout the economy of higher energy prices on the goods households buy. The proportional increase in prices for various categories of household expenditure are illustrated below. This illustrates that by far the biggest impact is on electricity and gas, the price rises expected on other items of expenditure tend to be pretty small at below 1%.

Estimated price increases for different household goods and services, assuming full cost pass through (2012/13)

Source: CSIRO and AECOM (2011)

But what is really extraordinary is how small these cost increases are once you put them in perspective to households' overall weekly expenditure. The Australian Bureau of Statistics undertakes a survey every few years of Australian households' weekly expenditure. It provides a very detailed breakdown of how Australians spend their money, listing over 500 different items ranging from mortgage repayments, to bottled gas for your BBQ, and even underwear.

CSIRO and AECOM used this data to then extrapolate how the price rises estimated above then translate into an overall impact on household expenditure. Electricity has the biggest single impact increasing overall household expenses by 0.2%. Carbon cost impacts on food are negligible so even though food is a large expenditure item for households it only leads to a 0.1% increase in household expenses. Then we end up with a whole lot of rats and mice which when lumped together as ‘other' contribute 0.3% increase in household expenditure. Altogether the impact is 0.6%.   

Estimated impact on consumer prices in 2012/13, assuming full cost pass through

Source: CSIRO and AECOM

If we then put this into perspective against a number of other drivers of increases in prices historically we can see that the carbon price will not involve any kind of radical impact on the cost of living. The chart below illustrates some examples of inflation spikes in the past relative to the carbon price. Interest rate increases and insurance services in 1995 for example led to a spike of 1.5% in annual inflation versus the 0.6% of the carbon tax. Also worth noting is that major climatic events (expected to become more severe if we don't reduce carbon emissions) such as the 2011 floods and Cyclone Yasi have had comparable impacts on inflation.

Projected inflation impacts in historical context, 1990-2020

Source: CSIRO and AECOM