How a carbon tax needn’t break household banks

Posted on 25 February 2011

There’ll be, no doubt, lots of wailing and gnashing of teeth about how the awesome, large and novel carbon tax will send Aussie battlers broke. But it needn’t be that way. Let’s assume that the government will provide tax relief to low-middle income households (because that’s what they reckon they’ll do). Here are two scenarios to help make my point.

Both of the following households earn median income ($66,820 according to the ABS, 2007-08). Today, they spend money on goods and services in the same way as most Australians. Hypothetically, their carbon-intensity spending breakdown might look like:

  • 15% household income ($10,023) on high carbon-intensity items (eg. coal-fired electricity, petroleum, etc.)
  • 85% household income ($56,797) on medium-low-no carbon-intensity items (eg. food, clothes, mortgage, water, council rates, trips to the movies, bags of potting mix, whatever you like).

Let’s imagine that high carbon-intensity items increase in price by 10%, and that medium-low carbon-intensity itemsĀ  increase in price by 1% (on average – some would increase by more, many wouldn’t increase at all). If this family’s spending mix remained the same, then they’d be spending $1002 more on high-intensity products and $567 more on medium-low intensity products.

Let’s also imagine that the government provides tax breaks to average families to the value of $1,350. This might be because the government has made the reasonable assumption that the average Australian’s spending on high-intensity items would decrease somewhat due to the price signal.

Household A are average consumers. They don’t think too hard about where they spend their money. Some products on their supermarket shelf become more expensive and they consequently buy them less frequently. Petrol increases in price a bit, so the family make a little bit more of an effort to catch public transport or walk. All up, they change their spending mix to be 12.5% on high carbon-intensity items and 87.5% on med-low-no carbon-intensity items. They’ve expended minimal effort on this, and are around $50 worse off per year.

Household B are savvy, informed consumers. They seek out discounts, they aggressively change their spending behaviour to get the most bang for their buck. They also care a bit about the climate, providing more of an incentive to buy low intensity stuff. When high intensity items become more expensive, these guys avoid them like the plague. They get rid of one of their two cars, using carshare, public transport, bikes and legs as a substitute. They put in solar hot water to cut their electricity bill. They manage to cut their spend on high intensity items from 15% to 5% of their income. That represents a change from $10,020 to $3,341 and they consequently spend $63,476 on med-low-no intensity products. In total, they are spending $969 more per year due to the tax, but the $1,350 rebate leaves them around $380 a year *better off*.

The numbers are made up, but the principle is about right. The message is – if there’s a carbon tax and households are compensated, by aggressively curbing spend on high intensity products, some households will actually manage to come out in front.

(Image from http://www.mikejs.com/)


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