Impact of the Carbon Pollution Reduction Scheme on consumers
The committee received evidence that consumers will experience the
impact of the Carbon Pollution Reduction Scheme (CPRS) through increased fuel
and energy prices. This will in turn lead to increased grocery prices, putting
additional pressure on consumers, particularly low income households. Chapter 8
details the evidence received about the expected extent of retail fuel and
energy price increases and the impact of that on the community.
Consumer price signal
Some witnesses argued that for an emissions trading scheme (ETS) to
work, consumers need to receive a price signal. For example, the Australian
Industry Greenhouse Network argued 'unless the consumer is paying then this
scheme is not working. That is the nature of the beast.'
A similar argument was put by BP Australia: 'if we are going to have
behaviour change and change in investment, everyone has to see the price signal
of carbon, either directly or indirectly, via energy prices.'
The National Generators Forum explained to the committee that the retail
cost of electricity is:
...made up effectively of two parts. One is the transport and
network costs, which are regulated because that is a natural monopoly. The
other part is what I would call the commodity cost. The proportion is
approximately fifty-fifty...The commodity area is reflective of the costs of
producing power...In terms of the wholesale area, that is the area that will be
impacted by a CPRS. That is where the carbon cost will factor into the price of
electricity paid by the consumer...There will be a direct impact in terms of
carbon costs to the commodity and there will be an indirect impact to the cost
of transporting the commodity as a result of changes to the transmission
The National Generators Forum anticipated that the 'wholesale price of
electricity under the current proposed scheme will roughly double by 2020 and
will probably triple by about 2025.'
The committee received evidence from a number of witnesses, including
the Australian Academy of Technological Sciences and Engineering and the
Australian Council of Social Service that the CPRS will lead to increased
retail electricity prices.
The Energy Supply Association of Australia explained that the increase
to the retail cost of electricity 'could be higher than 25 per cent'.
The Australian Council of Social Service noted that this will impact low
income households: 'Low-income consumers...will pay more for electricity and a
range of other products. So they will be paying higher prices.'
The Australian Council of Social Service also noted:
...retail prices for electricity and gas are increasing at
rates that make the CPRS impacts look relatively minor. Factors such as input
fuel costs, infrastructure and drought are all at work...
The committee received evidence that higher electricity prices for
business will lead to higher prices for other goods and services. The Australian
Chamber of Commerce and Industry explained to the committee that 'typically, if
businesses have higher energy prices they will pass those on to a final
The Collie Chamber of Commerce and Industry explained to the committee that
increased electricity prices will have a significant impact on the community:
In a town that has already been identified as being at social
and economic disadvantage, the likely implications of significantly higher
electricity prices would mean that many families would suffer severely...
Household energy consumption
The Clean Energy Council explained the break up of energy consumption in
households to the committee:
Roughly 30 per cent is water heating, then the heating of the
house itself is the next 20 to 25 per cent, and then white/browngoods are
taking up a larger slice of the rest that is left. Lighting is about six per
BP Australia informed the committee that 'If the permit price is $25 a
tonne then that would be roughly 6c a litre'
The Australian Council of Social Service argued that fuel price increases
have a disproportionate effect on low income households:
...higher prices for these products flow through to all
consumers quickly. They have an immediate and disproportionate effect on
households with low incomes...
Low-income households spend relatively less on those products
but more as a proportion of their income. With regard to transport and car use,
there are often few alternatives for low-income families in rural and regional
The Commonwealth Scientific and Industrial Research Organisation (CSIRO)
made a similar argument:
If fuel prices do rise, those with low incomes will be most
vulnerable as spending on fuel represents a greater proportion of their
disposable income. In addition, this group tends to have fewer resources to
invest in alternative fuels or more efficient vehicles. Regional communities
and those located on the urban fringes will also be disproportionately impacted
owing to their higher fuel use, higher fuel prices relative to cities and fewer
options for reducing motor vehicle travel.
The Sustainable Transport Coalition of Western Australia argued that the
fuel price increase resulting from the CPRS:
...would be less than the current tax differential between
Australia and most industrial developed economies...Since most developed
economies already operate with transport fuel prices in excess of those that
would apply with an emissions trading scheme, there is no reason to expect that
the Australian economy would be unable to adapt to the effects of such a
The CSIRO argued that:
...the potential impact of carbon pricing on transport prices
is relatively modest...recent increases in the oil price will far exceed anything
that we will see even in the next few decades from the impact of the carbon
Mr Frank Topham, the Manager of Government Affairs and Media for Caltex
Australia, argued that:
...the CPRS does not realty [sic] do anything significant to
reduce greenhouse gas emissions from fuel despite the increase in cost to
consumers, which could ultimately be 10c a litre or more.
Mr Michael Roth, the Executive Manager of the Royal Automobile Club of
Queensland (RACQ) argued that the CPRS 'will not reduce driving or greenhouse
He also argued that:
...any real fuel price increases will still result in little
change to total emission levels due to the low demand elasticity of fuel.
Demand for fuel is relatively inelastic, and therefore any increase in fuel
price only leads to a small decrease in consumption.
Mr Roth provided further explanation about the impact of price on demand
Increasing the price of anything will reduce the consumption
of it to some extent. Fuel is acknowledged, in the research internationally and
the local research, as being quite inelastic, so an increase in fuel price will
reduce the demand for fuel, but only very slightly. The short-term elasticity
is usually considered as about negative 0.1, and the long-term elasticity is more
in the realm of minus 0.3 to minus 0.5...There is a longer-term effect, mainly
through the choices of vehicles that people purchase as they turn over their
...in the short term, car fuel use declines about 1.5 per cent
with any 10 per cent concurrent increase in the price of fuel...
Caltex Australia also commented on the inelasticity of demand for fuel,
'Price does little to change motorists' consumption behaviour so the necessary
changes will inevitably come from new vehicle technologies'.
The Australian Council of Social Service argued that fuel prices have an
impact on grocery prices, 'higher fuel prices affect the checkout price in
increments all along the chain of production.'
Further, 'rural and regional communities are particularly exposed to price
increases for basics–for fuel and food.'
The Sustainable Transport Coalition of Western Australia also argued
Higher oil prices will affect grocery prices through the
impacts on the cost of production (oil-based fertilisers, in particular) and
transport, but the impact does not need to be proportionate to the increase in
the cost of oil.
There are many aspects of the food distribution system that
could be improved, to reduce the transport intensiveness of what we buy.
As discussed in chapter 7, the Chamber of Commerce and Industry of
Western Australia argued that increased fuel costs will affect Western
Australia, particularly the north west of the state, due to geographic
isolation and reliance on long distance freight.
Fuel tax adjustment
The committee received some evidence supporting the fuel tax offset,
however the majority of organisations that addressed this topic opposed the
The Carbon Pollution Reduction Scheme: Australia's Low Pollution
Future – White Paper (the White Paper) stated:
The Government recognises that people have limited
flexibility to respond quickly to changes in fuel prices but that, over time,
transport choices are influenced by price changes.
To give households and businesses time to adjust to the
Scheme, the Government outlined transitional arrangements for fuels in the
Green Paper. It will provide ‘cent-for-cent’ reductions in fuel taxes as a
transitional measure. It will also provide transitional assistance to
agriculture, fishing and heavy on-road transport industries. Liquefied
petroleum gas (LPG), liquefied natural gas (LNG) and compressed natural gas
(CNG) will also receive assistance.
The assistance will give households and key industries time
to adjust to the Scheme.
The RACQ explained that they support the fuel tax offset 'as it will
offer relief to those households that cannot access walking, cycling or public
transport alternatives and are dependent on driving.'
Caltex Australia argued:
It doesn’t make sense to impose a carbon price on motorists
then immediately offset it with an excise reduction. In fact, the way the
excise reduction proposal works will actually reduce the price of petrol for
several years so emissions from petrol are likely to increase. That’s not an
environmentally sound policy.
BP Australia also explained that they do not agree with the fuel tax
offset because they:
...want to get a carbon price signal throughout the economy.
The excise offset effectively delays that for three years...If your goal is to
put a carbon price throughout the economy, then do it.
The Biofuels Association of Australia also argued against the fuel tax
The main issue we have with the CPRS is the government has
essentially exempted fuels. They are saying that petrol will not be affected by
a CPRS for three years from 2010, even if the CPRS is brought in in 2010. That
means there will be no pricing signals for biofuels until at least 2013 on the
The committee received evidence that raised concerns about the veracity
of the modelling undertaken by the Department of the Treasury with respect to
the impact of the CPRS on consumers.
The Australian Council of Social Service stated:
We are concerned that Treasury in the modelling underestimate
some price increases, particularly for non-energy products that have high
energy content, including food.
We have some concerns about the Treasury modelling,
particularly about the non-energy price impacts. I am concerned, for example,
that energy prices that begin to increase are going to increase the production
costs for food—the storage and sale and retail costs of food. I think we have
underestimated those impacts.
Assistance for consumers
The South Coast Labour Council explained that they strongly support the
equity measures in the CPRS which compensate low income earners for increased
fuel and energy costs.
Mr Tony Westmore, the Senior Policy Officer (Electricity) for the
Australian Council of Social Service, argued that the compensation for
households appears to be adequate stating 'we are reasonably satisfied that most
people will be accommodated in what looks like a 2.5 per cent increase in
benefits and arrangements through the family tax system.'
However, Mr Westmore also raised concerns about the ability of low
income households to purchase low emissions technology:
With low-income households, even if Newstart allowance is increased
by 2.5 per cent, that is 2.5 per cent of $225 a week. It is not the kind of
thing that is going to empower someone to do very much. It will not even
empower someone to be able to afford a high-efficiency light globe, for
example. But if the CPRS is robust and if the targets, trajectories, changes
and transitions that it engenders are serious enough then we will see some change—and
low-income households will buy different kinds of electricity and hopefully
will find work in different kinds of jobs.
Mr Westmore further argued that low income households will be worse off
if climate change is not addressed:
...in the absence of significant work to ameliorate the effects
of climate change low-income household people are going to be even worse off.
They are the people who have the least capacity to cope to adapt, to move, to
change, and we have come to believe that climate change is coming and it is
coming reasonably quickly.
The National Institute of Economic and Industry Research put forward an
alternative perspective, arguing 'that the assistance to consumers should be
strongly related to their participation in energy efficiency improvements'.
Overall impact of the CPRS on consumers
The committee is of the view that the evidence outlined above clearly
shows that the CPRS will lead to increased fuel and energy prices for
Australian consumers. It is also clear that increased fuel and energy prices
will lead to increased prices in other goods and services.
Mr Leon Bradley, from the Western Graingrowers Committee and the
Pastoralists and Graziers Association of Western Australia argued: 'I do not
think there is any question that if you impose this scheme you will lower
living standards for every Australian...'
In considering the impact of the CPRS on consumers, the committee agrees
with the view expressed by Mr David Pearce, Executive Director of the Centre
for International Economics who stated:
...you may be able to compensate the household in the first
round increase in prices, but households are also workers, and they are also shareholders,
mostly through superannuation funds and so on. So the idea that you can compensate
the household for the cost of the scheme is, I think, misleading...
The committee is particularly concerned about the impact of higher fuel
and energy prices on low income households. In addition, the committee is
concerned that increased fuel and energy prices will lead to increases in other
goods and services, including grocery prices, particularly in light of the
evidence received that increased fuel prices will do little to reduce
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