The carbon price and the cost of living

• CSIRO

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Report image: The carbon price and the cost of living

14 November 2011This study provides an independent analysis of the impacts of the Government’s proposed carbon price on the cost of living for Australian households. The project provides an in-depth and transparent analysis of one aspect of the economic analysis undertaken by Treasury (2011a, 2011b) with other government agencies.

To assess the impact of the carbon price, the study calculates the economy-wide carbon price liability, models how this flows through to different sectors, and calculates how this will increase consumer prices. 

The Government’s carbon price package would impose a $23 price per tonne of carbon across a wide range of energy sources and industrial emissions.  The carbon price does not apply to passenger vehicles and light transport vehicles, or to off-road fuel use by the agriculture, forestry and fishing industries.  While the carbon price is applied only to around 500 large carbon emitting firms, the analysis assumes this cost is passed through to their customers (i.e. other firms), and through the economy to consumers. 

The analysis finds that the impact on prices in most sectors will be small, even assuming 100% pass through of the carbon price to final consumers. This is because the economic value of the carbon price is very small in relation to the economy as a whole: total value of carbon permits is estimated at around $8.5 billion in the first year, less than 0.6% of the $1,550 billion projected value of the economy in 2012-13. 

Comparing the projected overall impact on consumer prices to other inflation events that have contributed to annual inflation outcomes suggests that the carbon price impact is likely to be smaller than the drivers of other major events that affected consumer prices over the last two decades, including the introduction of the GST, the trade and exchange rate effects associated with the mining boom before the GFC (2007/08) and higher food prices associated with floods and storm damage in 2005/06 and 2010/11. 

The carbon price impact on retail electricity prices is noticeable, continuing recent trend increases in electricity prices, but the size of the impact is not as large as recent increases in network costs.  The projected carbon price impact is around half to two thirds of the anticipated increase in network costs from 2010-11. Nevertheless, the carbon price will add to electricity prices, highlighting the potential importance to households (and others) of achieving greater energy efficiency, and of minimising increases in network costs. 

The Clean Energy Future package also includes assistance to households delivered mainly through increases in benefit payments and reductions in personal income rates.  This 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.

Overall, the analysis suggests that: 

• the projected impacts of the carbon price are relatively modest, and fall well within the range of recent historical experience of changes in consumer prices and household living costs; and  

• most households will receive assistance that offsets all or a significant portion of the cost impact of the carbon price.