The Carbon Price: The Tim Tams are safe; not sure about hyperbole

So word leaked out this morning that the Carbon Price was going to not wreak the  expected havoc on the price of consumer goods. It was reported that the price of Tim Tams would increase by $0.012. This I guess means my masterful plan to stock up on chocolate biscuits and reap the windfall gains once the world comes to an end with the institution of a carbon price was rather misplaced.

Oh well, no less stupid than suggesting the mining industry is fighting for its survival, I guess. 

But let us not be side-tracked, when Julia Gillard came out at noon and announced the carbon price, it was a significant moment. One of the criticisms of the Rudd Government was that is didn’t make the tough decisions; didn’t do anything unpopular. Putting a price on carbon is definitely in the tough decision pile, and quite snuggly fits in the “unpopular” drawer as well. Deciding something which heretofore had been free will now have a price is not something that happens everyday.

The whole policy can be read here (56 pages – have fun). The Treasury modelling is here (even more fun).

To say that it is pretty complex is to take a big drink out of the understatement bottle. So let’s have a quick squiz at a few things:

First the Government has come up with a bit of a video on how the carbon price works. I quite like it:

It’s simple yes, but not demeaning, and not boring like the bloke with the power point trying to explain the RSPT. Do not underestimate how few people understand how a carbon price works. I would bet a majority think it is like a GST or is something we need to account for in our incomes tax returns. So explaining how it works is item number one for the Government.

Now to the announcement:

The introduction of a broad based carbon price in Australia, commencing from 1 July 2012 with a fixed price period and transitioning to a fully flexible cap-and-trade carbon pricing mechanism on 1 July 2015.

• The fixed price will commence at $23 per tonne of CO2-e;
• Coverage of the scheme will include stationary energy, most business transport emissions, industrial processes, non-legacy waste, and fugitive emissions, with direct liability under the mechanism limited to large emitters;

The price was not a shock – it had been leaked on Thursday. The general reaction seems to be – yeah that’s lower than we’d like, but higher than we’d hate. The Treasury modelling gives a nice graph on where it sits visa vis the European carbon price:

So it’s pretty comparable.

What does it mean for prices?

So not a big hit to prices; a lot less than the GST – but remember as well the GST was accompanied with much bigger compensations and tax cuts. But the difference of course is the GST was meant to do that, the carbon price is supposed to be felt – Abbott is exactly right when he says that.

When it goes to the flexible ETS in 2015, the rules are thus:

Pollution caps:

• Five years of pollution caps will be announced in advance and extended each year to maintain a minimum five year period of caps at any given time.
  Price cap:
  – A price cap will operate in the first three years of the flexible price period. The price cap will be set at $20 above the expected international price in 2015/16 (as set in regulations no later than 13 months before the end of the fixed price period) and will rise by five per cent in real terms each year.
  – A review of the role of the price cap will occur after the first three years of the flexible price period.

Price floor:

• A price floor of $15, rising by four per cent in real terms each year, will operate for the first three years of the flexible price mechanism.
• A review of the role of the price floor will occur after the first three years of the flexible price period.

So a minimum of $15, and a maximum of $20 above whatever is the international price.

What else was there?

• International linking will be allowed in the flexible price scheme;
• Kyoto compliant credits from the Carbon Farming Initiative will be able to be used for compliance.
• The establishment of a new more ambitious 2050 target for emissions reductions which will be set at 80 per cent below 2000 levels.
• The establishment of a new independent Authority – the Climate Change Authority – which will provide advice to the Government on progress towards meeting announced targets;
• make recommendations on pollution caps, voluntary action, trajectories, long term emissions budgets and mechanism design issues;
• conduct regular reviews on the carbon price mechanism, NGER reporting, the Renewable Energy Target and other matters upon request.

The Climate Change Authority is interesting – it will be headed by former Reserve Bank head Bernie Fraser, and will advise the Government on the carbon pricing mechanism – including future pollution caps, which will in effect help determine the carbon price under the flexible pricing system – because it will determine how many permits are in the market. The CCA will also work with the Productivity Commission on issues such as assistance to polluters. The Productivity Commission report will be looking at such matters as: “Industry sectors where there is strong evidence of windfall gains as a result of the assistance.” Of which you can bet there will be many, given emissions-intensive trade-exposed are getting free permits covering 94.5 per cent of their activities affected by the carbon price. (This point alone pretty well renders Abbott’s suggestions that the mining industry is fighting for its survival and that Whyalla will be wiped off the map are complete bulldust)

But enough of this; let’s get down to a couple things – what will it do to emissions:

As you can see a big swag of the reductions in carbon emission come from overseas. Abbott will be onto this, suggesting it is a waste of tax payers money (and also trying to suggest his own policy would not require such abatement if it was to get to 5 per cent reduction). What it also shows is that in terms of domestic levels only we are not going back to the stone age. Two per cent by 2050 sounds like nothing, but bear in mind the population will grow to an expected 35 million by then, so we’ll have an extra 13 million people generating 2 per cent less emissions.

What it also shows is just how damn hard it is to reduce carbon emissions. And given no one – not even those economists who do not like the carbon tax – thinks a direct action policy such as suggested by Tony Abbott will reduce emissions more efficiently, it gives an indicator of the job ahead of Abbott – especially if he wants to tell us it can be done without abatements sourced from overseas.

To believe Abbott is right is like suggesting price increases of cigarettes has been less effective at reducing smoking than warnings on packets. Sure warnings and nicotine patches (essentially direct action measures) are great, but if smokes still cost $4 a packet, a hell of a lot more of us would still be smoking.

What the ALP will focus on is the reduction compared to what would have happened had there been no carbon price. In her speech announcing the policy, Julia Gillard said:

By 2020 our carbon price will take 160 million tonnes of pollution out of the atmosphere every year.

That’s the equivalent of taking forty five million cars off the road.

That’s a good figure to spout. It makes sense to put things in a form people can grasp. 160 tonnes of carbon sounds a lot, but is it – you feel like you need to know a climate scientist to ask to find out? 45 million cars on the other is a lot and you don’t need to be a bloke in a scientific white coat to grasp it (you just need to ignore that the main driver of car use, petrol, is excluded from the carbon price!). 

But what will it do to the economy – especially electricity generation. This graph is pretty instructive:

Notice the green column next to “brown coal”? Err no? That’s because it ain’t there. By 2050 it is planned that no brown coal fired power stations will be operating. Black coal ones also take a big hit. They are replaced by a huge boost in renewable.

This policy is hoping to change the economy. As the Treasury modelling states:

Over time, the electricity sector will move away from coal-fired generation to renewables, with renewable energy growing from 10 to 40 per cent of the generation mix by 2050, and conventional coal-fired generation falling from 70 to below 10 per cent of the generation mix by 2050.

The key is that “over time” bit. The statement also contains:

Once commercially viable, carbon capture and storage (CCS) technology will deliver significant emission reductions, comprising almost 30 per cent of generation by 2050.

Which is ummm… optimistic. It ends with:

Of course, the exact mix of generation will depend heavily on a range of uncertain factors, including the cost of new technology and the price of energy commodities like gas.

In other words, we hope it’ll get there, but geez, we’re talking 2050.

So that’s the result, but let’s get down to what it is all really about. This policy might be about reducing carbon emissions, but it is also just as much about the compensation, and the changes to the tax system.

The big sell item is that “9 in 10 households will get a combination of tax cuts and payment increases.” This is a bit tricky – it certainly doesn’t mean all 9 will get their costs fully met – but then again, given what the carbon price is meant to do, nor should it.

First let’s look at the changes to the rates and taxation and the increasing of the tax free threshold from $6,001 to $18,201

Tax Scales	2011-12		2012-13		2015-16
	Threshold ($)	Marginal Rate	Threshold ($)	Marginal Rate	Threshold ($)	Marginal Rate
1st Rate	6,001	15%	18,201	19%	19,401	19%
2nd Rate	37,001	30%	37,001	32.50%	37,001	33%
3rd Rate	80,001	37%	80,001	37%	80,001	37%
4th Rate	180,001	45%	180,001	45%	180,001	45%
LITO	Up to $1,500	4% withdrawal rate on income over $30,000	Up to $445	1.5% withdrawal rate on income over $37,000	Up to $300	1% withdrawal rate on income over $37,000
Effective tax free threshold*	16,000		20,542		20,979

Now the key aspect of all of this is that this legislation will be separate to the legislation introducing the carbon price. This means if the Liberal Party wants to oppose it all, they will have to vote against tax cuts.

I don’t think that would disappoint the Labor party.

The other aspect is the compensation.

Among the compensation assistance are increases to Family Tax Benefit A , the pension, and the ‘Essential Medical Equipment Payment’.

You can go over to the excellent website Clean Energy Future to find out how much the carbon price will affect your net income. (As an aside – it is great to see a Government website that doesn't look  like it was designed by a blind accountant).

Now back after the budget, Matt Cowgill did an excellent post of what is the average Australian income. He found:

a single person, living alone, would need around $36 000 in disposable income to sustain the typical Australian’s standard of living. Following a widely-accepted methodology, each additional adult adds $18 000 to this figure, so a childless couple would need a disposable income of $54 000 a year to enjoy a median standard of living. Each child adds $10 800 to this figure.

A couple family with two children would therefore have needed $75 600 disposable income in 2007-08 to have the same standard of living as the typical Australian.

So let’s bear those figures in mind when we look at the impacts of various scenarios:

First, single people:

Single Person No kids

Incomes	Price Impact	Assistance	Net Cost	Per Week
$30,000	$229	$323	-$94	-$1.81
$35,000	$251	$303	-$52	-$1.00
$40,000	$270	$303	-$33	-$0.63
$45,000	$287	$303	-$16	-$0.31
$50,000	$304	$303	$1	$0.02
$60,000	$346	$303	$43	$0.83
$70,000	$392	$266	$126	$2.42
$80,000	$441	$16	$425	$8.17
$90,000	$485	$3	$482	$9.27

So let’s add a few thousand onto Matt’s figure of $36,000 to update to today’s figures (his were 2007-08), and the $40,000 single person actually comes out $33 a year better off. Nothing astounding, but certainly nothing to lose sleep over. It’s only when you get up to $70,000 a year income that the single person starts feeling more than $1 a week pain. And remember as well that’s only if you don’t do anything to change the price impact (ie use less energy). The estimates also assume (correctly) that the more you earn the more you spend. But I doubt the single person on $40,000 is going to shed too many tears for the poor sod earning $80,000 who decides to spend more each week, because they can. Perhaps it might just be wise to turn off the plasma when you’re not watching it.

What about if we add a child into the equation?

Single Person 1 Child 5-7 Years
Incomes	Price Impact	Assistance	Net Cost	Per Week
$30,000	$371	$864	-$493	-$9.48
$35,000	$376	$1,119	-$743	-$14.29
$40,000	$381	$1,419	-$1,038	-$19.96
$45,000	$386	$1,545	-$1,159	-$22.29
$50,000	$392	$442	-$50	-$0.96
$60,000	$408	$442	-$34	-$0.65
$70,000	$434	$391	$43	$0.83
$80,000	$475	$391	$84	$1.62
$90,000	$511	$391	$120	$2.31

Yes, those on around $50,000 and with one child – ie around the median using Matt’s figures will be $50 better off a year. Not much again, but no harm either – and remember as well they would be better off if they change their behaviour. The price impacts assume no change in behaviour. But look at the $45,000 level. Under these assumptions you are $1,159 a year better off.

The reason for this is because targeting those under median incomes to bear the brunt of a carbon price is dopey. They don’t have much opportunity to adjust behaviour – they actually are spending money on needs and not just wants.

What about the DINKS – double income, no kids:

Couple, Double Income (50-50 split), No Kids
Incomes	Price Impact	Assistance	Net Cost	Per Week
$60,000	$455	$646	-$191	-$3.67
$70,000	$480	$606	-$126	-$2.42
$80,000	$512	$606	-$94	-$1.81
$90,000	$547	$606	-$59	-$1.13
$100,000	$582	$606	-$24	-$0.46
$110,000	$618	$606	$12	$0.23
$120,000	$658	$606	$52	$1.00
$130,000	$700	$606	$94	$1.81
$140,000	$744	$531	$213	$4.10
$150,000	$788	$281	$507	$9.75
$160,000	$833	$31	$802	$15.42
$170,000	$873	$6	$867	$16.67
$180,000	$913	$6	$907	$17.44
$190,000	$954	$6	$948	$18.23
$200,000	$994	$6	$988	$19.00

Until you together earn over $100k, you’re sitting pretty. But then it starts to bite or nibble in the case of the $1.81 a week for households on $130k.

Once you get over $150,000 you will notice the hit – nearly $10 a week. But let’s not forget if you’re on $150k you’re not struggling – you’re about $70,000 a year above the median. 

Ok, families. First a couple with only one income and one kid who has just started school:

Family, Single Income, 1 child 5-7 years
Incomes	Price Impact	Assistance	Net Cost	Per Week
$30,000	$364	$767	-$403	-$7.75
$35,000	$372	$791	-$419	-$8.06
$40,000	$374	$791	-$417	-$8.02
$45,000	$388	$442	-$54	-$1.04
$50,000	$406	$442	-$36	-$0.69
$60,000	$433	$442	-$9	-$0.17
$70,000	$467	$391	$76	$1.46
$80,000	$507	$391	$116	$2.23
$90,000	$542	$391	$151	$2.90

Compare to having no kids – you do better. A single person on $70,000 with no kids is $126 a year worse off, here you are now $76 a year worse off. Once again – get up higher – say $90,000 a year and you are $151 worse off. Maybe it is time for the other partner to look for some work. For example if that $70,000 was from two incomes, one of $49,000 and one of $21,000, the family would actually be $585 a year better off.

Which leads us to two incomes, two kids – one pre-school, one at school:

Family, Dual Income (70-30 split), children 0-4 and 5-7 years
Incomes	Price Impact	Assistance	Net Cost	Per Week
$60,000	$501	$773	-$272	-$5.23
$70,000	$526	$1,274	-$748	-$14.38
$80,000	$553	$1,064	-$511	-$9.83
$90,000	$594	$819	-$225	-$4.33
$100,000	$638	$661	-$23	-$0.44
$110,000	$667	$466	$201	$3.87
$120,000	$696	$306	$390	$7.50
$130,000	$735	$306	$429	$8.25
$140,000	$774	$306	$468	$9.00
$150,000	$812	$306	$506	$9.73
$160,000	$850	$306	$544	$10.46
$170,000	$889	$306	$583	$11.21
$180,000	$934	$306	$628	$12.08
$190,000	$978	$306	$672	$12.92
$200,000	$1,022	$306	$716	$13.77

Again using Matt’s media of around $80,000, you see that such a household will actually be $511 better off a year.

This remains even if the incomes of the two are equal rather than one fulltime and one part time

Family, Dual Income (50-50 split) children 8-13 and 13-17 years)
Incomes	Price Impact	Assistance	Net Cost	Per Week
$60,000	$510	$843	-$333	-$6.40
$70,000	$546	$803	-$257	-$4.94
$80,000	$578	$803	-$225	-$4.33
$90,000	$610	$679	-$69	-$1.33
$100,000	$650	$679	-$29	-$0.56
$110,000	$674	$679	-$5	-$0.10
$120,000	$694	$606	$88	$1.69
$130,000	$734	$606	$128	$2.46
$140,000	$775	$531	$244	$4.69
$150,000	$817	$281	$536	$10.31
$160,000	$859	$31	$828	$15.92
$170,000	$899	$6	$893	$17.17
$180,000	$943	$6	$937	$18.02
$190,000	$986	$6	$980	$18.85
$200,000	$1,030	$6	$1,024	$19.69

Tony Abbott will no doubt focus on the red parts – the people who are worse off. He did this today – take this from the Liberal’s media release:

For example, a policeman and a nurse each earning $70,000 a year with one dependent child will be on average $230 a year worse off even after compensation. And that’s just for starters.

Notice the “each earning $70,000” rather than “together earning $140,000”. And certainly no mention that such a family brings in around $60,000 more than the median family…

Nonetheless the hits are there – some small, some large – and it will be up to the Labor Party to convince the public that the cost is worth it to reduce carbon emissions.

But now the framework is set. Abbott’s hyperbole about the end of times looks decidedly overblown – and his performance in his press conference suggested he is still trying to work out how he is going to counter the tax cuts, and the fact that the big hits are to households well above the median rate.

Gillard, once again looked comfortable – but she often does when introducing new policy and gearing up for the fight. She has been less impressive once the battle is joined and Abbott has found his spin.

And so now we prepare for the fight – armed with some facts and not just assumptions. Will that change the fortunes of the ALP and the LNP? Or has the battleground been set already and the voters will take the tax cuts and still stay firmly opposed to the ALP?

Today Tony Abbott’s attack lost a bit of puff, and it would be tempting for the ALP to focus on that aspect, but, for mine, the best thing the Labor Party could do now is to ignore him, and just get out there and sell this policy.

There is plenty of time to show up Abbott’s outlandish predictions for the dopiness they are, for now Julia Gillard need to focus on the electorate, not the opposition.