The impact of a price on carbon
The carbon pricing debate
By Dr Janet Stanley
While the price on carbon has not yet been announced by the Gillard Government, indicative costs can be ascertained from work done by National Economics in relation to the Rudd Government‘s proposed CPRS. The calculations given below are based on 2006 prices and 2001 Household Disposable Income (HDI), therefore can be viewed as indicative only.
At a carbon price of $25 a tonne, this will cost households with average consumption patterns a further 1.6 % of their annual expenditure or $805. If this is utility adjusted (where costs and benefit are weighted according to the relative prosperity of those receiving the benefit or bearing the cost) this extra expenditure would be 0.7% or $351.
These calculations, modelled by National Economics, are based on the carbon component (used directly and in production) of goods and services consumed by 20 different household types. It is assumed that this carbon price raised from high carbon emitting industries will be passed on to consumers (highly likely) and that the consumers don’t substitute to other goods and services with a smaller carbon content and therefore a lower price (likely to happen for some households in some circumstances).
This cost can be compared with the cost of not imposing a carbon tax – a perspective rarely examined. Carbon emissions have resulted in a world average post industrial temperature rise of 0.8C. Even if all greenhouse gas emissions cease now, due to processes already set in motion the temperature is set to go to 2C, a level generally agreed that it is unsafe to go beyond. Life will change for many as we move towards that 2C rise, set to occur in less than 20 years time if emissions are stabilised now.
For example, with rainfall changes such as lower rainfall and higher evaporation rates in SE Australia, and more extreme weather, food production will continue to become less certain and the cost of food will rise, a world trend already becoming more noticeable.
Not least of the issues are the risks society is apparently willing to take. At 450 parts per million of greenhouse gasses in the atmosphere, which will lead to a likely risk of a 2.1C rise in world temperature, there is still a 2% chance that the temperature could rise up to 6C (a figure at the extreme end of a possible normal distribution bell curve). A temperature rise of 5C and over is equivalent to the amount of warming which occurred between the last ice-age and today, the impact of which is far outside human experience.
A comparison between future monetary costs to households arising from climate change related factors with a present carbon price is very difficult, due to the many uncertainties present. However, it is clear that the trend of increasing prices and reduced welfare will be difficult for some people even with small temperature rises. The number of people adversely impacted will expand as the temperature rises. The author would argue that an extra $805 for the average household is a small price to pay to contribute to a world response to reduce emissions. By comparison, the GST costs the average household approximately $4,571 annually.
However, a carbon price will not impact on all households equally. Low income households will be disproportionately adversely affected as they spend a higher proportion of their income on direct energy (energy in the home and petrol).
A carbon price of $25 will cost an increase in annual expenditure of 2.3% for people with a very low income compared with an extra 1.5% for people with a high income, or utility adjusted only 0.4%. Without compensation, a carbon price will be a lot more burdensome for low income households who are less able to move from higher carbon products, the changeover price (e.g. to a more energy efficient fridge) being beyond their budgets.
A high income household may well choose to just pay the extra cost of products as the price rises are small when compared to their income.
The comparison doesn’t stop there though. A poor person has a carbon footprint of 22.3 tonnes annually while a rich person has a carbon footprint of over double this – 57.8 tonnes. True equity principles would dictate that a person should pay in proportion to carbon usage and that additional measures should be placed on the carbon content of luxury items.
Dr Janet Stanley is a Chief Research Officer at the Monash Sustainability Institute.