Climate costs will hit average household by $783 a year, Treasury officials think tax or benefit changes might help

The paper represents the view of its authors, Treasury’s Cory Davis, Boston Hart and Benjamin Stubbing, and not the view of Treasury as an organisation. Photo / AP

Officials at Treasury reckon the rising cost of tackling climate change could see double-digit percentage increases in the cost of electricity, petrol and food.

In a paper, they said these cost increases, which are the result of Emissions Trading Scheme price increases, would hurt low-income households, and looked at whether increasing core benefits, Working for Families tax credits, or the Winter Energy Payment might be one way of blunting the harsh social consequences.

The paper represents the view of its authors, Treasury’s Cory Davis, Boston Hart and Benjamin Stubbing, and not the view of Treasury as an organisation. It was published as part of Treasury’s regular publication of analytical economics papers. However, the scenario it presents is a very real one.

The current Government has said it wants to lean heavily on the ETS to reduce emissions. This will likely mean fewer ETS units being issued over time, and a higher ETS price, which will flow through into higher costs for households.

The paper looked at what would happen if a reference 2018/19 NZU (the right to emit a tonne of carbon) of $24.73 a tonne, rose to $134.90 a tonne. The authors warn there are some strong assumptions in calculating these figures, although it appears the only direction for the carbon price in the future is up, if the Government’s statements around the ETS are to be believed.

Under this scenario, electricity costs would have risen 14.2 per cent, petrol would have risen 13.4 per cent, food costs would have risen 0.6 per cent, gas prices would have risen 17.4 per cent, diesel would have risen 22.5 per cent, and airfares would have risen 5.7 per cent.

The authors found that high-income households would face the highest absolute cost increases. These households spend more on these goods, and therefore cost increases in those areas would see them spend more overall.

The higher carbon price would increase the average household’s expenditure on those goods by $783 a year. For the top 20 per cent of households, this increase would be $959 a year, while the bottom 20 per cent of households would see costs increase by $553 a year.

The changes are regressive, meaning lower-income households would be hit harder, proportionally. Low-income households would see their expenditure increase by 1.83 per cent of their disposable income, while high-income households would see costs increase by 0.48 per cent. Across all households, costs would increase by an average of 0.82 per cent.

The authors reckoned these distributional impacts could be even more stark, as high-income households could avoid some of the costs of climate change by switching to an electric vehicle or making their home more energy-efficient.

The authors then looked at what these changes would mean for some model households. Households receiving working for families, sole parent support, and the supported living payment would be hit hardest.

The authors then looked at what to do. They looked at giving each household $783 a year to compensate for the mean cost-of-living impact across all households.

Another idea was to give individuals payments, rather than households. These would be $283 or $200 depending on someone’s living situation.

The authors also modelled a more targeted approach, based on increasing benefits by $13.65 per week or increasing the eldest child Family Tax Credit, which is the part of Working for Families received by both beneficiaries and non-beneficiaries, by $825 a year.

Treasury also looked at increasing the Winter Energy Payment by $676.

All of these policies made the impact of higher carbon prices less regressive. The idea of a universal per household carbon dividend was the most progressive and actually resulted in some low-income households getting more money from higher ETS prices than they would lose.

These come at significant cost though, with a universal policy coming in at about $1.3 billion a year - while the benefit changes or Working for Families, and Winter Energy Payment changes were only forecast to cost between $180m and $504m a year.

The current Government is looking at using ETS revenue to fund transfers in a kind of climate dividend. However most people disagree that this is a true dividend because it funnels ETS revenue into a conventional tax cut.

The Climate Change Commission’s recent advice on ETS settings warned against this style of tax cut.