This article first appeared in the Adelaide Review on 25 March 2015. It can see seen here: https://www.adelaidereview.com.au/commentary/article/when-prices-go-up
The abolition of the price on carbon, or the carbon tax as it was colloquially known, has seen consumers turn up their heater, power up their lights and ramp up their consumption of electricity.
One of the rarely reported aspects of the quarterly national accounts is the breakdown of household consumption expenditure. When the Australian Bureau of Statistics releases the national accounts every three months, buried away in the data set is information on the volume of electricity consumed by the household sector.
The Gillard Government introduced a price on carbon in July 2012, a policy that was repealed by the Abbott Government two years later (July 2014).
During the two years that there was a price on carbon, the price of electricity rose as a result and the volume of electricity consumed by households fell by 7.6 percent. During this time, Australia’s population rose by a little over three percent, meaning that per capita electricity consumption was down by close to 11 percent. This is a quite massive decline that shows that one of the motivations of pricing carbon, to moderate the growth of energy and electricity consumption, was working very well.
The so-called ‘price signals’, which in this case means higher prices for electricity, saw consumers switch to lower energy appliances, be more careful in their use of power – including perhaps adjusting their heating and cooling a degree or two, meaning less power and direct savings to their hip pocket. As any decent economist would argue, price signals work and the higher price for electricity saw demand fall. It is a textbook case of economics delivering in the real world.
When the carbon tax was repealed, the price of electricity fell. Prime Minister Abbott noted, exuberantly, that the price fall due to the ending of the carbon tax “was the biggest ever recorded”. And that is indeed correct. In the September quarter 2014, electricity prices, as measured in the consumer price index, dropped a never-before recorded 5.1 percent and were flat in the December quarter.
With the price of electricity falling with the repeal of the price on carbon, consumers reacted as economists would expect. The volume of electricity consumed by households rebounded a thumping 4.8 percent in just two quarters. Again, for the economics profession, this was a case of price signals impacting in the real economy only this time; the lower price sparked a pick up in demand and consumption.
The issue of the government being able to influence consumption patterns through taxes and charges is also apparent in the staggering fall in tobacco consumption, as tax hikes have pushed cigarette prices higher. Since the mid-1970s, there has been a 4,000 percent increase in cigarette prices, which has been a major factor driving tobacco consumption lower. While factors including advertising bans, the 600,000 or so consumers of tobacco products who have died over the past 40 years (no longer buying tobacco), health awareness campaigns and in very recent times plain packaging laws, the volume of tobacco consumed per capita has fallen a staggering 80 percent.
Price signals were a factor behind the Abbott Government’s ill-fated Medicare co–payment where it was argued that the impost of an out-of-pocket expense to patients to visit the general practitioner would deter some people from going to their doctor. That was how the co-payment scheme was going to help reduce the budget deficit via lower bulk billing, given that all of the proceeds from the payment were to go to a Medical Research Future Fund.
The end point of this, and especially in the example of the imposition and then repeal of the price on carbon, is that consumers do respond to price signals in a way that standard economic theory would suggest. When the price of something goes up, including when that price rise is driven by a deliberate government policy change, demand and consumption of that good or service falls.
Which raises some interesting policy choices. Should the government increase the increase the tax on alcohol? Impose a tax on sugary drinks and junk food? Some health advocates suggest these policies would be effective in reducing consumption of alcohol, sugar and junk food. If the government wants to see demand for these items fall for reasons linked to improved health outcomes for the population, it is certain that a price hike via a tax impost would do the trick.