Carbon Price Household Assistance Patricia Faulkner AO Adviser to the MPCCC 19 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 Ministers interview with Laurie Oakes, 27 February 2011.

What are the potential mechanisms for providing assistance? 1Cash -Flat dollar sum (assistance relates to cost) -% increase (assistance relates to income) -Overcompensate (buffer) 2Concessions – based on average cost 3Rental assistance increase 4Utilities allowance increase 5Programs to educate / purchase / renovate 6Paid 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 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.

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 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, Source: ABS, Household Income and Income Distribution,

Low-income households have limited access to capital to make appliance and housing adjustments 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), Source: ABS, Household Income and Income Distribution, Pensions and allowances Wages

The characteristics of 1 st quintile low income households are distinctive Household composition by income quintile Source: 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) 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