01.Carbon price and you
Few issues in recent times have stirred such divisive debate and frenzied commentary as the Australian Government's proposal to put a price on carbon emissions. CHOICE takes you beyond the political bluster and spin-doctoring and looks at what the newly announced carbon price means for Australian consumers.
What’s the problem?
For all the political argy bargy, it is easy to lose sight of the consensus on climate change policy in Australia – both Labor and The Coalition agree that the prospect of dangerous climate change requires action, and are committed to reducing Australia’s carbon emissions by a minimum of 5% below 2000 levels by 2020. The Government has now announced an additional long-term target to reduce emissions by 80% below 2000 levels by 2050.
Who pays the carbon tax? Is it on my tax return?
The carbon price will apply directly to around 500 of the largest carbon emitters in Australia. This is because it’s seen as more efficient to apply the scheme to a small number of very large emitters. Most are heavy industry, like electricity generators, and together they represent around 60 per cent of Australia’s annual carbon emissions.
Emissions are measured based on the amount of carbon that is released into the atmosphere from a process, for example from smelting aluminium or burning coal. The companies who produce these emissions will be required to purchase a permit for every tonne of carbon emissions they release. Some, like the steel manufacturers or cement producers, will receive compensation to help them remain competitive in international markets, where carbon obligations vary.
The catch for consumers is that some of these costs will flow through to many of the goods and services that we use every day, from power to food and groceries. Businesses will behave as they usually do, which is to look for ways to reduce their costs, increase their profits and stay competitive. Along the way, they will inevitably pass some of these costs on, but they will also look for opportunities to reduce their carbon liability, for example by changing a manufacturing process to make it less carbon-intensive or by purchasing lower-cost permits, and so passing on less costs. That’s the point of the carbon price - using competitive pressure of the market to drive change.
What’s the cost, and will it increase?
The initial carbon price will be set at $23 per tonne from 1 July, 2012. According to the Australian government’s modelling, this price is likely to increase the cost of living by an average of 0.7 per cent in the first year, and another 0.2 per cent in 2015-16.
The impact on prices is estimated at $9.90 on average weekly expenditures in 2012-13, comprising $3.30 per week on electricity, $1.50 on gas and $0.80 on food. This is balanced against average household assistance of $10.10 per week.
Some areas of the economy have been exempted from the carbon price, for example household transport fuels, light on-road commercial vehicle transport fuels, off-road fuel in agriculture, forestry and fishing, and agricultural emissions.
The carbon price will increase by 2.5% per cent a year until 2015, when it will become flexible. After 1 July 2015, the price will be determined by Australia’s target for reduction of carbon emissions, which will increase over time, and the cost of emissions reductions available in Australia and also overseas. So basically the price is likely to increase, but innovations in technology, for example the growth of cheaper low-carbon energy supplies, will put downward pressure on the price.
Where does all the money go?
The revenue from the industry buying carbon permits will be distributed by the government back to households and business as compensation and support for low-carbon technologies. So with more assistance for industry, less will be available for consumers, and vice-versa.
Depending on who you talk to, this is either a giant money-go-round and field day for accountants and lawyers, or a real incentive for everyone from business to households change their behaviour and save money by switching away from carbon-intensive goods and services. In reality, it is likely a bit of both.
Which households are getting compensation?
The government is providing more than 50 per cent of the revenue raised by the scheme back to households in the form of compensation for the increased cost of living from a carbon price. This will be distributed in the form of tax cuts, and increases in pensions, benefits and allowances, depending on whether you are a worker, part of a family with children, a pensioner or self-funded retiree or welfare recipient. You can find out more about the level of household assistance you may receive by by visiting the Australian Government website www.cleanenergyfuture.gov.au.
The Government says that over four million households will receive assistance equal to at least 20% more than their average price impact, with almost six million assisted to meet the average impact, and around eight million receiving some form of assistance.
This means that two-thirds of households will receive at least enough to cover the average price impact of the carbon price, with nine out of 10 households receiving something.
The assistance is designed to be permanent and will rise over time based on CPI, which will reflect increases in the carbon price.
So how is the government going to help consumers with the cost increases passed on?
Taxpayers with annual incomes of up to $80,000 a year will get tax cuts from 1 July 2012, with around 60% of taxpayers getting a cut of at least $300.
This will by achieved through a tripling of the tax-free threshold from $6,000 to $18,200, with a further increase in 2015 to $19,400.
Age pensioners, along with recipients of the Disability Support Pension or Carer Payment, will receive assistance totalling a 1.7% increase in the maximum rate of the pension, with an annual increase of up to $338 for singles and $255 for each member of a couple.
In the first year of the carbon price, 75% of the pension increase will come in the form of an advance lump sum in May-June 2012 (ahead of the carbon price starting), with the assistance reverting fortnightly payments from March 2013.
Self-funded retirees who hold a Commonwealth Seniors Card will receive the same assistance as age pensioners, delivered through the Seniors Supplement, and may also benefit from tax cuts.
Families who receive Family Tax Benefit Part A will get an increase of up to $110 per child per year, while recipients of Family Tax Benefit Part B will receive up to $69 per family per year. This is in addition to tax cuts.
Students who receive allowances such as Youth Allowance, Austudy and Abstudy will receive an increase equal to 1.7% of the maximum rate, totalling up to $177 for singles and more for those with children. This is in addition to tax cuts.
Jobseekers will receive an increase totalling 1.7 per cent of the maximum Newstart Allowance rate, and recipients of the parenting payment will also receive an increase totalling 1.7% of the maximum rate, totalling up to $289. This is in addition to tax cuts.
Both students and jobseekers will receive lump sum payments in advance of the carbon price starting.
Low-income households who don’t receive enough assistance from tax cuts or government payments will be able to claim a new $300 annual Low Income Supplement, while assistance is also not counted for the purposes of state government public housing rent calculations.
For those not in the above categories – for example, an individual taxpayer without dependents earning over $80,000 a year – the average cost-of-living impact is forecast to be over $441, rising to $528 for an individual earning $100,000 per year.
Why are businesses getting compensation?
Some businesses have less choice about how they pass on carbon costs to consumers. For example, those who operate in international markets and compete with overseas companies not constrained by a carbon price will receive assistance to reduce their carbon obligation. This assistance will be reviewed once the majority of other countries adopt similar carbon obligations. Others will receive assistance to help change the way they do business, for example in the coal industry.
What will a carbon price do?
The case for pricing carbon argues that there is a real environmental and economic cost from carbon emissions, but that it’s not being paid by those who produce those emissions.
The government has proposed a scheme that puts a fixed price on every tonne of carbon emissions for the first three years (from 2012 to 2015), becoming an Emissions Trading Scheme (ETS) after 2015. With an ETS the price of emissions will vary depending on supply and demand, like in any other market, for example fruit and vegetables, or gold.
An ETS is said to be the most efficient way of reducing carbon emissions because it drives emission reduction by industry towards the cheapest sources, whether in Australia or overseas. Some people refer to the Government’s proposal as a ‘tax’ is because it has a fixed price for the first three years.
Some people argue that Australia has a very small share of global carbon emissions (around 1.5%) and that our actions will make no difference. The counter-argument says that if everyone with a small share of emissions took this approach, nothing would happen, and more than that, the sooner we take action, the lower the overall cost for our economy – and for consumers – in making the transition. According to this argument, Australia has a lot to lose from unrestrained climate change impacts, and our best chance of convincing other nations to act is to take credible action ourselves.
The biggest single source of Australia’s carbon emissions (around 38 per cent in 2009) is electricity generation, which is dominated by coal-fired power. Other major sources include transport and agriculture, which contribute around 15 per cent each. In 2008, Australia’s carbon emissions per person were reported to be among the highest in the world, at around four times the global average, with only Bahrain, Bolivia, Brunei, Kuwait and Qatar ranking higher.