Carbon Pollution Reduction Scheme - Price Impacts
FACT SHEET 12
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By placing a limit on greenhouse gas pollution, the Carbon Pollution Reduction Scheme will impact on prices across the economy.
Changing the relative prices of goods and services
The carbon price created by the Carbon Pollution Reduction Scheme will change the relative prices of goods and services across the economy. As a general principle, the prices of goods that are emissions intensive to produce will rise relative to those that are less emissions intensive.
This change in relative prices will provide businesses and consumers with incentives to adjust their behaviour, invest in low-emissions technologies and help Australia reduce emissions. Over time, this will lead to changes in the things we produce, the way we produce them, and the things we buy.
Impact of the scheme on the cost of living
The ultimate impacts of the scheme on the cost of living will depend on final decisions on scheme design, including scheme coverage, and how ambitious we are in bringing down our emissions. The Consumer Price Index (CPI) is the best overall measure for changes in the cost of living for households.
For illustrative purposes, preliminary modelling of a carbon price of $20 per tonne, introduced in 2010-11, suggests an average increase in the cost of living of around 0.9 per cent. This effect takes account of the Government's decision to offset the impact on the price of fuel early in the scheme. It is likely that the impact on the CPI from the introduction of the scheme will be largely one-off - it is not 0.9 per cent per year.
Assuming that the impact of the carbon price is broadly linear, this implies that a $10 carbon price would have roughly half this effect and a $40 carbon price roughly twice the effect.
The overall impact of the scheme on an individual household's welfare will also depend on other factors, including household consumption patterns and the ability of households to adjust consumption patterns in response to higher carbon prices.
The Government will take a considered and consultative approach to the design of the Carbon Pollution Reduction Scheme to ensure that it is economically responsible and consistent with the Government's broader fiscal strategy, including taking account of the inflation challenge.
The Government's strategy to fight inflation - including through responsible budgeting and investment to expand the productive capacity of the economy - will help place downward pressure on inflation.
The provision of compensation to households and the flexibility of the labour market will play critical roles in limiting the potential for increases in the costs of living to flow through to ongoing inflation.
The flexible and dynamic structure of the Australian economy means that it is well placed to make these structural changes. Building on this flexibility through the Council of Australian Governments (COAG) National Reform Agenda and Australia's Future Tax System Review will facilitate a smoother transition to a carbon constrained world and provide new opportunities for sustained employment and higher living standards.
Helping households transition to a low emissions economy
While the overall increase in the cost of living is expected to be modest, even a modest increase in the cost of living impacts on household budgets.
Given recent significant increases in global energy prices and the current cost of living pressures facing households, the Government recognises that households already face strong current incentives to reduce their fuel use. The Government has committed to permanently cut fuel taxes on a cent for cent basis to offset the price impact on fuel, and to review the adequacy of this measure periodically.
The Government will also use every cent raised from the sale of carbon pollution permits to help households and business adjust to the scheme and to invest in clean energy options. The Government will pay particular attention to helping low and middle income households meet the increased costs of living flowing from the scheme.
The powers of the Australian Competition and Consumer Commission under the Trade Practices Act 1974 will assist in ensuring that increases in prices following the introduction of the scheme can be examined appropriately. This will help address concerns that unscrupulous businesses will use the introduction of the scheme to unfairly profit at the expense of other businesses or households.
July 2008
