To beer fridge or not to beer fridge

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.

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  1. I don’t get how this tax could be useful.
    I would have understood it if the purpose would have been to set a stable support a green industry with high tech jobs, non offshorable jobs, research etc… And solve our Dutch disease at the same time.

    But with compensation, what s the point. More useless red tape and friction.

    Whatever, this useless tax is dead in the water, will never happen.

  2. While what you have said is sound, the issue that they are being over compensated remains.

    I am yet to hear a sound explanation for why low income house holds need to be over compensated? It looks like a vote buy guised as an environmental policy that makes us feel like we have morals in the face of global warming.

    If a “household concerned about their household budget and bills will wonder what could be done to reduce its expenditure” why is it that low income households have been and remain, the least efficient uses of energy in face of rising prices over the last five or so years? And why is the next price hike going to make the difference?

    • I am yet to hear a sound explanation for why low income house holds need to be over compensated?

      Not sure on the exact details of how the over compensation is calculated so this could be off the mark … but would expect the argument would have something to do with lower income earners paying a higher proportion of their income on utilities, so the over-compensation is needed to maintain downward pressure on the proportion of the income that is spent on utilities.

  3. There is also the ‘basic economic fact’ that cheap energy is the driver of our economy and increasing the price of it will hit right at the heart of the nation. And to acheive what? Some arbitrary reduction of a totally harmless gas?

    60% of people are against it. NT just passed a law exempting themselves from any effects (which, whether they have constitutional authority or not, doesn’t matter as it will more than likely delay it enough for the Coalition to take power). This law is more than likely dead in the water and if the ALP do manage to pass it they will be commiting political suicide.

  4. Dam,

    The tax is being drafted as legislation. Not only is it a fait accompli, it will probably be structured in a way that will make it almost impossible to repeal.

    Make no mistake, it’s coming.

    • could be fun to watch, I dont expect many pollies to vote for it.useless and unpopular, not many upside to it.

    • That’s disappointing. Most people I speak to aren’t in favour of this questionable tax. They have little confidence in this government’s credibility and ability due to its current ‘blend of skills’.

      Attempting to force this upon people is hubris.

    • I disagree – its the inevitable outcome of expecting genius and competency in politics when you let the fools decide the best “managers” of government.

      And I don’t mean pre-selection – I mean the booth.

      • Hmm, honesty and integrity are a mere fantasy, but power and control is the order of the day.

        I guess the adage ‘bullsh*t baffles brains’ is prevalent on many levels – giving and receiving.

        Well, it looks like we’re doomed…

    • And you are happy with this? You are happy that they will structure it so it’s impossible to be repealed? Despite the fact that this government weren’t elected and only managed to scrape enough seats for a minority government by saying they WOULDN’T do this?

      Honestly, any freedom loving Australian should be up in arms about this blatant disregard for the democratic process. It is a totally unacceptable abuse of power.

      • Hear Hear!

        Individual politicians would have to vote against the Bill in Parliament. Legislation has to be passed to go into Law. The only hope is that public opinion sways party politics. Likely?

    • Labor haven’t got support of all the independents. Yet. Windsor sitting on fence.

      Greens haven’t approved to the compensation because theres no details. The Greens sunk K. Rudd’s/Wong’s first package due to the compensation to industry.

      How is it fait accompli?

  5. Households have fairly price inelastic demand for electricity. Changing the price won’t effect use much. If they save money it will mostly go elsewhere and if it costs more they will mostly just pay more rather than reduce use.
    The same is not true for energy suppliers, they have to compete with each other and other sources of energy. As the cost goes up with the tax they see strong incentive to reduce emissions.

    Subsidising households won’t change the effectiveness or lack of for the tax much at all. Compensating the energy sector would have a big effect.
    Further any overcompensation will mostly go to other consumption rather than just more electricity and provide some stimulus to counter the austerity program. Which I see as a good thing. A surplus is a bad thing right now and we should not be trying for it.

    • Part of the problem is that fixed cost supply charges are so high. If supply charges were scrapped or significantly reduced, and consumption prices increased, then I think we would see more change in behaviour. As it is now, your bill is always going to be a significant minimum price each quarter which means any gains from switching off a few lights or not buying that bar fridge are likely to be marginal and therefore not greatly influence consumer behaviour.

      However given the structure of the electricity market, fixed supply charges are a reality.

      • Carbon E Coyote

        This is not correct. Go and have a look at your last electricity bill. Fixed charges are less than 20% of the cost. Fixed charges about 70c/day; variable charges of about 20kWh/day on 20c/kWh = $4. Even if you’re a frugal user of power (eg 10kWh per day) the variable costs still greatly outweigh the fixed.

  6. Carbon E Coyote…Latham is right, you have misinterpreted his claims and you have failed to consider how this would play out for many struggling families in reality.

    You conclude by saying:

    “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.”

    Latham never said that the price signal of the carbon tax wont steer people away from carbon hungru appliances…

    But by OVERcompensating some people, then they have the ability to keep living the exact same way without suffering any financial signals then what had existed before the whole scheme.

    – So overcompensated consumer X spends $1000/year for carbon purchases pre-tax/compensation.
    – After the tax and compensation come in, consumer X costs have gone up from $1000 to $1100….BUT due to the idiotic overcompensation promise, this means that the consumer X now has $1200 to spend on carbon purchases.

    So consumer X can spend the exact same way they did previously (same appliances/no upgrade, same ebergy use habits)…and still be $100 better off.

    How can anyone argue that a system designed like this has the potential for some consumers to actually increase their energy use?

    A consumer would happily spend their $100 “compensation windfall” on MORE heating if they had been skimping on heating due to the cost pressures they were facing.

    Latham was spot on…the overcompensation tactic used to bribe voters has the clear potential to increase the carbon footprint of some families

    • Latham is correct insofar as overcompensating some consumers provides them with an increased budget that they *could* spend on even more polluting products.

      The question is the extent to which consumers are actually responsive to price changes and how long it takes for them to adjust spending. Latham’s position seems to be that “basic economics” has got it wrong on consumer’s responsiveness to price, instead drawing on Smith, Keynes, Galbraith and Veblen to argue that overcompensated consumers will not adjust their spending patterns in the face of higher prices.

      As for whether there will be shift to more sensible consumer choices beyond the immediate introduction of the scheme, Latham has nothing to say.