Ask the economists: are the levers right to reduce emissions?
Julia Gillard's answer to climate change still left a number of questions in the minds of economists. Will her economic levers result in lower emissions? Crikey asked some of the nation's top economists.
Julia Gillard's answer to climate change still left several questions in the minds of economists. Will her economic levers result in lower emissions?
Crikey asked some of the nation's top economists for their thoughts on the two burning issues: is there enough incentive for households, and industry, to change behaviour?
Saul Eslake, program director (productivity growth) at the Grattan Institute:
I suspect the measures announced by the government won't have much impact on the behaviour of households -- although I do think they could have some significant impact on the behaviour of businesses, including businesses selling products such as electricity to households, and that's where the "low hanging fruit" are to be found. I don't think households will materially cut their use of electricity -- any more than they have done in the face of the significant increases in electricity prices over recent years -- and they certainly won't change their use of petrol, since they're not going to face any new "price signals" encouraging them to do so. Reductions in household consumption of emission-intensive products will only come about as a result of changes in the emission intensity of what businesses sell to them.
I actually wonder whether there might not be "too many" measures seeking to induce industry to cut their emissions. If the government believes putting a price on carbon is necessary to get industries to cut their emissions, invest in renewable, etc (which I do too), then why do we need yet another layer of expensive "direct action" measures as well? Especially given the evidence presented by the Productivity Commission (and by my colleagues here at the Grattan Institute) that these measures are expensive and inefficient ways of procuring emissions reductions.
Additionally, there's quite a bit I don't like about the household compensation measures. I can't see any valid reason for over-compensating pensioners or anyone else by 20%; there are some other peculiar and indefensible anomalies (e.g. "seniors" with investment income of $80,000 being among the biggest "winners" in dollar terms while a single income family with one child and earning $65,000 is a net loser); and the changes to the income tax system run totally against the "canons" of good tax reform since they entail a narrowing of the base and increases in the rates of income tax, whereas "good" tax reform is about broadening the base and lowering the rates of any particular form of taxation.
Craig James, chief economist at CommSec:
Household: business as usual, especially by lower-income households that are significantly or wholly compensated. Elasticity assumed is -0.3, so a 10% lift in prices leads to 3% drop in consumption but that may be over-stating the true situation as this assumes all other things being held equal.
Industry: a cost of $23 a tonne, rising over time is clearly an incentive. Listed companies are constantly tasked by shareholders and analysts to reduce costs and thus improve profitability. So incentive exists to investigate ways to reduce costs. And where firm has pricing power, clearly firms will pass on as much of the cost as they can.
Professor John Quiggin of the School of Economics at the University of Queensland:
The idea that compensation offsets price incentives is a fallacy. If energy becomes more expensive, and incomes rise in a way that leaves people about as well off as before, sensible households will spend less on energy and more on other things.
That said, at the prices in question, the big effects will be on industry rather than households. The $23/tonne price is only about 2.3 c/kWh for electricity, which is smaller than the increases we have seen for some time. I think the scheme will have a significant effect on industry.
Chris Caton, chief economist at BT Financial:
Yes, home owners will change their habits. The extent to which that will happen is questionable; we can't be exact about this. But when you make something more expensive there is a greater incentive for people to turn out the lights. The non-polluters will over time shift away from electricity usage, and the polluters, the top 500 companies, will be encouraged to innovate.
Warren Hogan, chief economist at ANZ Research:
Yes I think people will cut their energy use. The increase in prices give will them incentive to be more efficient and save money. This is also a high-profile announcement and it will make people quite aware that by being more efficient they will be saving money.
And certainly over time industry will start to cut emissions. There is not just the financial incentive for industry relating to the tax, there is also the industry assistance initiatives from the policy package that will assist in the restructuring of businesses and industries to shift to lower emissions emitting sources of energy.
Josh Williamson, senior economist at Citi Investment Research and Analysis:
Initially, we do not expect the majority of households to reduce their energy consumption. Compensation for low to middle income earners appears sufficient to allow them to continue with their existing energy demand. In other words, there isn't a negative income effect to lower consumption. The other reasons why households will probably continue with existing energy consumption patterns is technology. Unless households have real-time metering that allows them to know the cost their energy use at a point in time they will lack the price signals to alter their behaviour.