Overcoming the fear factor

 In the previous two articles in this series I’ve shown that:

– Carbon pricing would have a relatively small impact on household budgets (Part One);

– Householders tend to react strongly to energy price rises because they have limited ability to avoid or moderate their impact, making politicians fearful of imposing a carbon pricing scheme (Part Two).

In this article I’d like to outline four key things politicians could do to help voters become more comfortable with the energy price rises that will flow from a price on carbon pollution.

Number 1 – Offer credible and easy to understand financial help

Politicians, in fact, have a very effective mechanism for reassuring consumers about energy price rises. All the money government will raise from carbon pricing can be returned to householders (provided they don’t give it all away to business first) so they are no worse off as a consequence of carbon pricing.

But for such a measure to provide effective reassurance, it must be easy to understand and credible. Unfortunately the CPRS involved a wide variety of adjustments to existing taxes and cash transfers, requiring no less than 27 pages of tables to explain how much compensation different households would receive. While adjusting existing taxes and transfers may be easier for government to administer, this complexity makes voters suspicious that the government is about to do something tricky which will leave them worse off.

Government would do better to structure its household compensation package, according to the following format, to make it simpler and more credible:

– Compensation should be delivered in the form of a single cash payment delivered each quarter, that is separate to other taxes or cash transfers. It can then be easily identified by householders as compensation for the carbon pricing scheme.

– The formula for determining the amount of compensation households receive must be simplified into a base payment that every household would be entitled to, up to a household income threshold defining those able to readily afford the cost increases (for example the CPRS white paper defined this as $160,000). Payments would be structured around a fixed amount per person per household. This payment would not vary depending on how much income you earn, or how old your children are, or whether you are an aged pensioner or a self-funded retiree. Provided you fall below the income threshold, you qualify – simple as that.

Payments per person would be set at a level such that they were likely to over-compensate the average household without access to reticulated natural gas (a key influence on the carbon intensity of energy supply). While much simpler than the CPRS, such a structure will still provide a greater amount of compensation to low income households. This is because they tend to consume less energy than wealthier households. Also it still accounts for the challenges of “working families” raising children, by tying compensation to the number of people within the household.

– On top of this simple, universal, base compensation structure, a fund should be set aside to assist those with exceptional circumstances (for example, people who have a health problem that requires them to operate energy intensive health equipment). Criteria for eligibility and the basis for payments could be developed in conjunction with health and community service non-governmental organisations, and social service departments of state governments. By dealing with the small number of exceptional circumstances in a separate fund, it avoids excessively complicating the core household compensation package. This is essential to community understanding and acceptance, but will not neglect the needs of the small number of people that are especially disadvantaged by a carbon pricing scheme.

– In terms of petrol, the government’s plan to offset the petrol excise one-for-one for the carbon price impact is poor policy, but relatively good politics. It seems extraordinary that a one cent per litre annual increase is so hard to implement. Yet there is tremendous political sensitivity around petrol prices, and a high degree of variance in transport needs and options amongst members of the community. This may mean that introducing a carbon price with a three-year petrol excise concession is the best we can do.

By structuring the household compensation package in such a way government will have an easily understood and communicated response to concerns about energy price rises along the lines of, “households can expect a cheque for $75 per person to arrive in their letter box by no later than 31 March. This is expected to fully compensate almost all households for price rises due to carbon pricing.” This would be infinitely better than the 27 pages of tables we have within the current CPRS.

It is possible that this compensation package will come at greater cost than what is proposed under the CPRS. However there is a very obvious and justifiable way to pay for it. Our study, Restructuring the Australian Economy to Emit Less Carbon, found that the current CPRS provides over $20 billion in free permits to businesses that could not be justified on the basis of preventing carbon leakage or protecting jobs. This could be restructured in such a way that much of this money could be freed up to help the small number of displaced workers, reduce the cost of achieving a given emissions target, and provide more than enough money to fund a simplified household compensation package.

Number 2 – Explain what people will get for their money, other than a “trading scheme”

When listening to some of those extolling the virtues of an emissions trading scheme, one could be forgiven for thinking that its purpose is to support Australia’s financial sector. It really needs to be communicated to people in more tangible terms if they are going to be willing to accept an increase in energy prices. People understand what a cap on pollution is. They also understand that if you make polluters pay for their pollution, they will produce less of it. The benefits from the “trading” in permits seem far less obvious.

Part of the problem around householder credibility in “trading schemes” may lie in the extensive amount of free permits proposed for businesses. While economic theory suggests that it should make no difference to firms’ incentives whether they receive their permits for free or not; it makes households very suspicious.

A levy, such as that used to pay for Medicare, illustrates that people can willingly accept a cost if the burden is fairly shared and there is a clear link to societal benefits.

Number 3 – Avoid sudden surprises and information vacuums

If there is one thing householders hate more than an energy price rise, it’s a large and sudden energy price rise that they weren’t expecting. Politicians need to be upfront with households that energy prices will rise, while at the same time reassuring them that the rises will be small, and assistance will be provided. If politicians try to implement a carbon price without openly discussing price rises, then it’s likely the information vacuum will be filled by all sorts of myths, and the public will be angry when the price rises eventuate.

A further point to this issue is that the earlier we start the process of cutting emissions, the more gradual the necessary price rises will be and the smaller the disruption. Greenhouse gases are largely a function of long-lived infrastructure that takes time to replace. A price on carbon introduced in 2011 or 2012 is likely to result in more tolerable costs on householders, than waiting several years and then trying to achieve emission targets in a rush.

Number 4 – Help consumers to avoid poor energy efficiency choices

Detailed research dating as far back as the 1970’s oil crisis, indicates that householders generally dedicate limited attention to energy operating costs of the equipment they purchase. This is understandable, considering the small incremental cost imposed by less efficient equipment on household budgets.

Providing information helps, but not in the form often favoured by politicians of an advertising campaign. History suggests these yield poor results. And information needs to be supplemented by minimum standards that remove highly inefficient products from the marketplace. Incentives can also play a useful role, but need to be very well thought out to avoid simply paying for activities that would have occurred anyway.

Unfortunately, Australian energy efficiency policy to date has been a series of grab-bag ideas, which have not been integrated into a considered and comprehensive strategy.

Tristan Edis is a research fellow in the energy program at the Grattan Institute

This was the final in a three-part series of articles. Click here for Part One, and for Part Two, here.