Carbon Price Household Assistance

Patricia Faulkner AO

Adviser to the MPCCC19 April 2011

This presentation seeks to:

Propose issues for consideration in establishing how low income households will be assisted to adjust to the impacts of a carbon price.

The presentation will cover:

• Objectives of assistance

• Key policy / administrative choices

• Characteristics of low-income households

• CPRS household assistance – the base case

• Why change the CPRS package

• Where is the current level of consensus /debate?

The objective of household assistance should be …

• Initially, assistance should help low income households meet the cost of living impacts of a carbon price, without adjustment of their energy usage.

• In the longer term, assistance should help high energy using, low income households reduce their emissions / energy costs and adjust to a low carbon economy.

What share of Carbon Price Revenue should go to households?

Share derived by a bottom up costing of a fair package of assistance required

Share is balancing item after need for business assistance is calculated

×

Which households should be assisted with “cash” …

• Low income – bottom two income quintiles (total disposable income)

• Middle income families with children

• All income levels

Assistance to low income households will be ‘generous’ and fair: Prime Minister’s interview with Laurie Oakes, 27 February 2011.

What are the potential mechanisms for providing assistance?

1 “Cash”- Flat dollar sum (assistance relates to cost)- % increase (assistance relates to income)- Overcompensate (buffer)

2 Concessions – based on average cost

3 Rental assistance increase

4 Utilities allowance increase

5 Programs to educate / purchase / renovate

6 Paid in advance

Should energy efficiency programs be funded?

For high energy using low income households?

All households?

Who should administer?

Third sector

Retailers

Government

?

Should the objective be fairness or should other priorities be pursued?

Assist households to afford energy (fairness)

Improve productivity

Improve participation

Disadvantaged community development / improvement

Should complementary effort be considered in conjunction?

Block tariffs

National Energy Efficiency Program

Education (myretailer.com)

Pricing transparency

Effort to control network charges

Low-income households spend less money but a greater proportion of their income on energy than

high income households…

Notes: Derived from wave 9 HILDA data. Analysis is restricted to households with total 2008-09 disposable income greater than $10,000 and less than or equal to $100,000. Outliers in energy expenditure data (more than 50 per cent of income spent on electricity, gas and other heating) are also omitted from analysis; this resulted in sample loss of 0.7 per cent.

500

700

900

1100

1300

1500

1700

1900

$

01

23

45

67

89

10

Per

cen

t

10000 20000 30000 40000 50000 60000 70000 80000 90000 100000

Household disposable income, $

% of income (left axis) $ amount (right axis)

2009Annual expenditure on gas, electricity and other heating

Expenditure on energy, as a proportion of income is variable for all, including for low income households

Indicative energy bills for residential customers as a share of disposable income – Sydney and surrounding regions 2011-12

Source: IPART, 2011

Some low income households are high energy users

Household electricity usage (MWh per year)

Source: IPART, 2010

Low-income households have limited access to capital to make appliance and housing adjustments

Weekly disposable income (equivalised) by income quintiles, 2007-08

Source: ABS, Household Income and Income Distribution, 2007-08

Low-income households have limited access to capital to make appliance and housing adjustments

0

20

40

Lowestquintile

Secondquintile

Third quintile Fourthquintile

Highestquintile

Equivalised gross household income

Per

cen

tag

e

Proportion of people unable to raise $2,000 for ‘something important’,by equivalised gross household income

Source: ABS, General Social Survey, 2006

Roughly equal proportions of low income households receive their principal income from pensions/allowances as from wages

Number of people in first and second quintiles by principle source of household income (equivalised), 2007-08

Source: ABS, Household Income and Income Distribution, 2007-08

Pensions and allowances

Wages

The characteristics of 1st quintile low income households are distinctive

Household composition by income quintile

Source: 2003-04 Household Expenditure Survey

Note: Quintiles derived using equivalised household income.

IPART found that large electricity using households on average:

– Had more occupants, although on average these use less per person than smaller households

– Were more likely to be couples with children– Had higher incomes– Lived in free-standing homes

Pensioners and retirees were generally low energy users.

Source: Residential energy and water use in Sydney, the Blue Mountains and Illawarra, IPART, 2010, p.42

CPRS – expected outcomes of proposed assistance – the Base Case

• Around 90 per cent of low income households (or 2.6 million households) would have received assistance equal to 120 per cent or more of the average cost of living increase for that income group.

• On average, low income households would have been $190 better off per year. ($3.65 per week)

• Around 97 per cent of middle income households would have

received some direct cash assistance.• Around 50 per cent of middle income households (or 1.7 million

households) would have received assistance equal to their average cost of living increase for that income group.

• Motorists protected from higher fuel costs by ‘cent-for-cent’ reductions in fuel tax for the first three years.

• All households to receive support to take practical action to reduce their energy use and save on energy bills through …

Source: CPRS White Paper, p.17-1; Media Release, Ministers Swan, Wong & Macklin, 25 August 2009; Media Release, Minister Garrett, 30 December 2009.

CPRS – mechanisms for assistance• Wage earners would have received assistance through

increases to the Low Income Tax Offset and Dependency Tax Offsets. (paid less tax)

• Income support recipients would have received assistance through percentage increases in Pensions, Allowances and Family Tax Benefit. (received more income)

CPRS income definitions (per annum)

Low Middle

Single Up to $30,000 $30,000-$80,000

Couple Up to $45,000 $45,000-$120,000

With children Up to $60,000 $60,000-$160,000

Source: CPRS White Paper, p.17-6

The changed context: electricity prices have risen steeply since 2007

Retail electricity price index (inflation adjusted), capital cities

Source: State of the Energy Market 2010, Australian Energy Regulator

Emerging consensus / debate

• Priority should be given to low income households (2 lowest quintiles). Flat rate compensation based on average cost plus an overcompensation factor.

• Increase assistance with number of children• There is a need to think about low income private

renters• Targetted energy efficiency programs support for

low income households

Related ideas beyond assistance

• More education and transparent pricing (myretailer.com website)

• Block tariffs – progressive pricing• National Energy Efficiency Program• More effort to limit network costs

Debates

• Pay a concession – discretionary cash ?• Who can administer / run EE

– Retailers– Not for profits– Government

• Emergency relief funds will need to increase

Thank you