Small Cost of Living Increase from Australian Carbon Pricing

CSIRO have released the report "The Carbon Price and the Cost of Living: Assessing the impacts on consumer prices and households" (November 2011). Commissioned by the Climate Institute, the report by the Commonwealth Scientific and Industrial Research Organisation (CSIRO) estimates that the $23 per tonne carbon price in the Clean Energy Legislative Package, passed last week, will increase consumer prices by 0.6% in 2012/13, and 0.1% in 2015/16. This is 0.1% lower than the government economists estimated. This assumes the cost of carbon will be proved on and that sellers will not take the opportunity to increase prices further.

CSIRO released:

1. Summary: The Carbon Price and the Cost of Living – Summary Report: Assessing the impacts on consumer prices and households (13 pages, 600 Kbytes PDF),
   
2. Full report: The Carbon Price and the Cost of Living: Assessing the impacts on consumer prices and households (122 Pages, 2 Mbytes PDF).

Key findings: The Carbon Price and the Cost of Living

• The proposed carbon price, starting at $23 per tonne, could result in an increase in consumer prices of 0.6% in 2012/13, and a second impact of up to 0.1% in 2015/16, assuming full cost pass through of the carbon price liability. These results are slightly lower than the impacts of 0.7% and 0.2% estimated by Treasury (2011a).
  • These results are considered ‘upper bound’ estimates, implying actual impacts on prices could be smaller than 0.6‐0.7%, with actual impacts depending on the degree to which costs are passed through to prices over time.
• The impact of the carbon price on consumer prices is around one quarter of the 2.5% impact on consumer prices of introducing the GST, and smaller than the impact of drivers of other major events that led to an increase of consumer prices over the last two decades, such as the trade and exchange rate impacts of the mining boom (2007/08) which had a 1.6% impact on consumer prices.
  • Unlike most major recent consumer price impacts, other than the GST, the introduction of a carbon price will be accompanied by assistance to households through tax cuts and increases in government benefit payments.
• Estimated impacts on electricity prices are similar to other studies. While the carbon price impact on electricity prices is smaller than the impact of recent increases network costs, the carbon price adds to these, continuing recent trend price increases. This highlights the importance of household energy efficiency, and of minimising increases in network costs.
  • The impacts on food prices are likely to be small (around 0.5% on average), and less than historical variability in food prices over time.
• We estimate that the carbon price will result in an overall increase in expenditure of $9.10 per week in 2012‐13, less than the Treasury estimate of $9.90 per week. This estimate is based on applying the price changes to the latest household expenditure data. Price impacts are made up of increases of $3.20 in electricity and gas costs, $1.20 in food costs, and $4.70 in other costs (such as clothing, recreation costs).
• Households with higher incomes and expenditure are estimated to face higher dollar increases in costs, but lower impacts as a share of expenditure. This is because low income households spend a larger share of their income on electricity and gas, which have larger price impacts from the carbon price.
  • The carbon price impact on low income households is equivalent to 0.8% to 0.9% of expenditure across all low income households, ranging from $4.30 per week for a single adult to $8.60 per week for couples with dependent children (reflecting different expenditure levels).
  • For high income households the carbon price impact is typically equivalent to 0.6% to 0.8% of expenditure, ranging from $6.60 per week for a high income single adult to $17.90 per week for a high income couple with dependents.
• Household assistance is focused on low and moderate income households, with middle income households typically receiving assistance that offsets most but not all of the impact of the carbon price.
  • Low and moderate income households receive significant assistance, generally outweighing the average price impact for these households by a significant margin.
  • The balance between impacts and assistance for middle income households is sensitive to the specific circumstances of households. In most of the cases examined, middle income households receive assistance that is larger than the average impact for that household type. However, in some cases, middle income households examined are eligible to receive assistance equivalent to 60‐95 percent of the carbon price impact.
  • High income households typically receive only limited assistance under the government’s policy.
• Overall, the analysis finds that the projected impacts of the carbon price fall well within the range of recent historical experience of changes in consumer prices and household cost of living, and that most households will receive assistance that offsets all or a significant portion of the impact of the carbon price.

From: Hatfield‐Dodds, S, Feeney, K., Shepherd, L., Stephens, J., Garcia, C., and Proctor, W., 2011, The Carbon Price and the Cost of Living – Summary Report: Assessing the impacts on consumer prices and households, A report to The Climate Institute prepared by CSIRO and AECOM, CSIRO/AECOM, Sydney.