http://vinnies.org.au/files/pdfs/National/SocialJustice/20080411-SJ_Gaurnet_Report_submission

CARBON TRADING Alternative pricing principles that deliver both social equity and environmental outcomes

Author:

Gavin Dufty

Manager of Policy and Research St Vincent de Paul Society Victoria

Table of Contents Background......................................................................................................3 Introduction ......................................................................................................3 Tariff Structures ...............................................................................................6 Single rate tariffs: .........................................................................................6 Two rate tariffs..............................................................................................7 Tariffs of the future .......................................................................................8 Tariff design - social justice and environmental equity.....................................8

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Background The St. Vincent de Paul Society (commonly known in Australia as ‘Vinnies’) is a global charity organisation present in over 130 countries.

The St. Vincent de Paul Society assists Australians experiencing poverty and exclusion. Much of the charitable work is carried out by around 40,000 volunteer members visiting people in their own homes and providing material assistance, support and friendship. Other assistance is provided by around 620 ‘Vinnies’ shops, crisis accommodation services in all states, various nursing homes and outreach services.

Australian Bureau of Statistics Australian Social Trends data 4102.0, released on 7 August 2007, demonstrated that in 2003–04, the mean weekly equivalised disposable household income for low economic resources households was $262, while for the same period, the mean weekly equivalised household expenditure on goods and services for low economic resources households was $309. These are the people we assist.

Introduction With the federal government’s announcement of a carbon trading scheme to be implemented no later than 2012 we can expect an average household electricity price increase of approximately $200 per annum.

There is an assumption by many that higher prices will be a tool to encourage households to consume less energy. This is intended to act as a deterrent to over-consumption of resources and also as an incentive to invest in energyefficiency measures.

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However when residential electricity demand elasticities are considered, that is how much household energy consumption will reduce as a result of the increased prices, it still equates to a $150 increasei.

Such a price increase may not appear to be a substantial amount to average households but for lower income households, in particular pension and benefit recipients, this increase is equivalent to a week’s incomeii.

Not only is this a relatively large price increase for people on low incomes, it also fails to acknowledge that they use less energy than the average households.

Viewed as a proportion of their weekly expenditure, low income households expend almost double the amount compared to the average household.iii To be specific, ABS figures show that pensioner groups expend 5.5% of weekly outgoings on utilities costs, compared with approximately 3% for couples with two children.

Low income households spend less in dollar terms but more as a proportion of their income. Thus, price increases impact disproportionately upon pensioner and other low income groups, even though they consume less than the average.

This highlights the perverse and disproportional impact such a price increase will have on many disadvantaged households, in effect disproportionately penalizing them for energy consumption levels that are below the community average.

Furthermore, these current policy frameworks and associated price increases will also fail to deal with current housing and appliance stock and the associated issues this raises for many of these households. For example,

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among those fortunate enough to be home owners or home purchasers some have the opportunity to invest in energy-efficient appliances and other ways to reduce consumption (provided they have the disposable income or savings, or the support from Government incentive schemes to do so), but for public or private tenants who are not responsible for, and have no control over, major household appliances such as hot water and cooking appliances there is no support or incentives.

It also provides no assistance for those households that have little or no access to alternative fuel sources such as natural gas. This is a particular issue for those in the non-metro area.

These are critical issues and highlight the need for a more detailed policy framework to be immediately announced to ensure that social equity principles complement the environmental outcomes that we strive to achieve as a nation.

The St Vincent de Paul Society proposes that much of the potential detrimental social impacts can be ameliorated though the Government implementing electricity consumption pricing principles.

These pricing principles would not only serve to protect low income, low volume households but support and reward those that implement energy conservation strategies.

There is a range of models for energy pricing and these vary across States. In addition to a levy, these policy settings can also affect consumption and some provide stronger protection for low income households.

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Tariff Structures Most commentators and casual observers are imagining a flat charge of $25 per tonne pricing structure for carbon trading to apply, but that when applied to households, Governments / energy providers have the ability to allocate the charge in various ways across other charges and electricity pricing structures, each having a different outcome in terms of protection of low income households and on incentives to reduce demand.

The obvious way to apply this charge is to apply it to the standing or fixed charge that exists on most, if not all, domestic electricity bills. The effect of this results in increases to the cost of energy for small volume households relative to higher consumption households.

Other ways that the charge could be allocated include: single rate tariffs, two rate tariffs and tariffs of the future.

Single rate tariffs: Flat rate tariffs (allocation via a flat rate tariff) - In allocating its charges this way it tends to favour households with larger consumption as the total unit cost per energy, including the fixed and other charge, declines and consumption increases.

Inclining block tariff – The charge could be allocated via an inclining rate tariff. In allocating its charges this way it tends it send a signal that delivers a more you use the more you pay price structure. These tariff structures tend to reward low consumption households and penalize higher consumption households. As such, they tend to advantage households with lower numbers of occupants as well as energy conscious households.

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This tariff tends to promote energy consumption for the lowest consumption households and energy conservation for higher consumption households.

Declining block tariffs – The charge could be allocated via a declining block tariff. This delivers a more you use the less you pay price signal. These tariffs tend to favour larger consumption households, (higher consumption households tend to be wealthy and/or larger families). When the impact of the fixed charge is factored in it accentuates this price signal. As such it promotes energy consumption as all additional consumption is cheaper than previous consumption Seasonal tariff / summer demand tariff – The charge could be allocated via a seasonal tariff. These tariffs are designed to reflect the additional cost of energy at particular times of the year. Currently they do not occur in electricity.

However with increased summer demand as a result of air-conditioners this may be a tariff of the future.

Two rate tariffs Off peak tariffs and Time of use tariffs – The charge could be allocated via Off peak and time of use tariffs. These tariffs reflect various costs of energy relative to the time of day – and lower the price at times of lower demand Typically these tariffs benefit those households with the ability to shift consumption or have consumption in off peak periods. As such they tend to advantage households that are not at home during working hours and disadvantage those that are, for example households with young children, or households with older occupants that are no longer in the workforce.

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Tariffs of the future With the planned rollout of interval or “smart meters” there is a potential for much more sophisticated tariff design. These include: Dynamic tariffs (enhanced time of use) – The charge could be allocated via dynamic tariffs which are a much more sophisticated time of use tariffs. For example, rather than being applied with certainty at particular times of the day these tariffs could be much more dynamic, reflecting prices hour by hour. In fact the proposed technology theoretically has the ability to deliver 48 changes in a household electricity tariff per day!

It’s hard to predict who will be the winners and losers with these tariffs as there is little known data on when the price changes would occur or the extent of the price changes, or the relationship of these prices to household energy consumption.

Tariff design - social justice and environmental equity Given the reality of both increased electricity costs and increased volatility in electricity prices, Vinnies propose that many of the detrimental social impacts can be ameliorated though the Government implementing electricity consumption pricing principles.

In effect, electricity tariff structures would become an inclining block structure a pricing structure that reflects the principle of: the more you use the more you pay.

This would serve a number of policy objectives: Firstly, it would provide a “life line” price cap for low income households. This price cap would serve to partially protect many low income energy consumers Page 8 of 10

from carbon pricing being loaded up in the first block of electricity consumption. This is a potential risk as the most carbon is produced from base load generation and, as such, costs associated with carbon trading could be passed though in the first block of consumption rather than consumption at moderate or high levels.

Secondly, such pricing principles would not only provide a reward for those households with low electricity consumption, they would also serve as an incentive for all household to reduce consumption to a particular level, thus supporting and rewarding those households that engage in sound environmental practices.

Thirdly, such a proposal would be consistent with, and complement, calls by some for households to be issued with a carbon emissions budget.

Fourthly, such a proposal would increase electricity costs for households with large consumption (costs they would be exposed to without the introduction of pricing principles), thereby making alternative energy sources such as solar photo voltaic technologies more cost competitive.

Finally, it would complement the planned interval meter (smart meter) roll out allowing these pricing principles to be implemented as the smart meters are installed in households providing a real and practical use for this technology.

These pricing principles introduced in conjunction with targeted audit and retrofit programs, adjustments to the broader energy concessions and rebate programs and the introduction of education strategies that assist households with practical behaviour change would go a long way towards ameliorating the social impacts of carbon trading and complement and assist the community in achieving meaningful greenhouse emission reductions.

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i

Langmore, M and, Dufty, G Domestic electricity demand elasticities: Issues for the Victorian Energy

Market, June 2004, (available online at http://www.vinnies.org.au/files/VIC.2004%20June%20%20Domestic%20Electricity%20Demand%20Elasticities.pdf ) ii

A guide to Australian Government Payments, 20 March – 30 June 2007 Australian Bureau of Statistics Household Expenditure Survey, detailed expenditure items, 20032004 iii

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