Australia's Future Tax System

Architecture of Australia's tax and transfer system

12.1 Impacts of the Scheme on Households

The Australian Government's Carbon Pollution Reduction Scheme Green Paper (Australian Government 2008c) outlines the ways in which the scheme will affect households.

First, it will change the relative prices of goods and services faced by all households. It will also affect particular groups of households (such as workers in particular industries, or regional communities) directly through changes in production patterns in the economy, and may change the value of companies owned by some households.

Price impacts

All households will face changes in the relative prices of the goods and services that they purchase as carbon prices are incorporated into businesses' cost structures. The precise impact of the scheme on the prices of particular goods will depend on many factors and will change as production practices evolve. However, as a general principle, the prices of goods that are emissions intensive to produce will rise relative to those that are less emissions intensive to produce.

Final decisions on scheme coverage will also affect the ultimate price impacts of the scheme. If the initial coverage of the scheme includes all emissions sources other than those from agriculture and land use, and given the offsetting adjustment to fuel taxes, it is likely that price impacts will initially be concentrated in electricity and gas prices. The prices of other goods will also rise as the carbon price permeates the economy. The extent of the increase will depend on the emissions embodied in the production of the good or service; the extent to which the threat of imports limits the ability of producers to pass through cost increases; and the availability of substitutes.

Impact of structural changes

The demand for goods which are less emissions intensive to produce or which enable firms to lower their carbon footprint is likely to increase. Conversely, demand for goods that are more emissions intensive to produce is likely to decrease. This will induce structural change in the economy, both initially and into the future, opening up employment opportunities in some industries and regions while constraining them in others.

To some extent, these changes in production patterns are not unlike the changes that take place on a continual basis in any dynamic economy. The Australian economy has proven resilient to a wide range of domestic and international shocks in recent decades because its flexible structure allows resources (both capital and labour) to move between industries based on the market's assessment of where they would be most productively employed. This flexibility has enabled a protracted period of strong economic growth, even in the face of sometimes quite difficult global circumstances. Australia is, therefore, well placed to manage changes in production patterns in response to the new challenges posed by climate change — the critical issue is to recognise that a flexible, responsive economy will manage change best and will provide new opportunities for sustained employment and economic growth, and higher living standards.

However, workers and regions are generally less able to diversify their income sources than businesses, so it is appropriate for the Government to provide targeted assistance to address instances where a clear and sizeable burden might be imposed on particular segments of the community, such as a group of workers or a particular region.

While existing structural adjustment measures provide a means to assist affected workers and regions, the Government proposes providing additional support as required through the Climate Change Action Fund and the Electricity Sector Adjustment Scheme. This assistance would be designed to facilitate structural adjustment for individual firms, workers and regions.

Wealth impacts

A more diffuse impact of the scheme on households will be through its effect on wealth. The scheme will affect the value of companies, increasing the value of some and reducing the value of others. These changes in value will ultimately flow through to the owners of companies. To the extent that individual households have diversified wealth holdings, the value of some of their assets may increase while the value of others may decrease in response to the introduction of the scheme.

In taking a decision to hold wealth in a particular company, individuals must assess the likely risks and returns to that company. It would be inconsistent with past practice and inappropriate for the Government to provide compensation to households for wealth effects flowing from a policy decision. However, the Government's provision of industry assistance measures may reduce these wealth effects to some extent.