Mark Latham posed a question in his Op Ed to the Australian Financial Review yesterday which bears thinking about. It was this:
“How can the Greens support Labor’s policy of overcompensating consumers for the financial impact of a carbon tax, knowing that more money for carbon-hungry households means more emissions?”
Maybe the Greens reckon the opposite, that when the price of energy goes up that demand will go down? They wouldn’t be alone here.
Latham has previously written that if a household is over-compensated it would tend to go and buy additional energy hungry appliances (put in another pool pump, put a second or third fridge in the garage to keep that six pack cold). So, as I understand it, he is claiming that there will be more energy use if households are over-compensated.
However, this doesn’t make any sense in basic economic theory or practice. Economists would always point out that whether you provide zero compensation, under-compensation, exactly equal compensation or over-compensation, the price signal remains the same (the electricity price) and so the incentives remain the same. Where is the incentive to buy energy hungry appliances when there are so many other better uses for that cash?
A household concerned about their household budget and bills will wonder what could be done to reduce its expenditure. With higher electricity prices comes an even stronger incentive to do so. Why would anyone specifically go out and buy an energy hungry appliance just because they had been given some cash? Surely there are better things to spend money on than a third beer fridge in the garage, burning a hole in your pocket with its high use of energy while keeping a six-pack cold?
I’ve done some calculations: a standard bar fridge uses around 300-350kWh per year, which at 20c/kWh churns through $60-70 per year in electricity costs. With carbon, the rate goes up to 22-23c/kWh which equates to $70-80 per year, or $10 per year more.
So plugging in that new energy hungry appliance means that you might not stay over-compensated for very long. The additional energy costs would start to eat up that extra compensation fairly quickly.
Basic economics says that if the price of something goes up then demand will go down. That is what has happened already with price rises for energy in the last few years. How anyone can argue the opposite is beyond me.