Trying to measure the savings from the carbon tax is a mug's game

The removal of the carbon tax was meant to save the average household about A$550 per year.

So a year after the repeal of the tax, have we got our savings?

An analysis by the Herald Sun newspaper says no.

It claims that (Victorian) “households saved less than A$300” over the course of the year. This was made up of about A$112 in reduced electricity prices and A$98 in cheaper gas. The Herald Sun was unable to find anything else, so the amount of concrete savings they tracked down is certainly well under A$300.

This is not surprising. Even if they had looked much harder, the journalists would have failed to measure the household savings. A moment of reflection will tell you that trying to isolate any effect of the carbon tax outside the regulated energy sectors is a pretty silly task.

Why? Well, let’s think about what else has buffeted household budgets and general prices over the past year.

A big factor has been the exchange rate. The trade-weighted index of the Australian dollar has dropped about 10% in the past year.

Of course, this reflects a range of changes in exports, imports and exchange rates. But if we pick a currency that matters to import prices (and therefore to households) like the Chinese Yuan, the Aussie dollar has fallen about 20% in the past year.

Against the US dollar the fall is even bigger: almost 22% over the past year.

Despite a bumpy ride, the Aussie dollar has ended up pretty constant against the euro (in case you’re planning a holiday in the Greek islands). But the dollar’s weak performance against other major currencies will undoubtedly have pushed up pretty much all import prices for households.

Imported goods account for about 20% of Australian household expenditure, which means that a household on an after-tax income of A$45,000 per year (roughly middle income) has faced a rise in the cost of imports of about A$900 over the past 12 months.

So the exchange rate changes alone have probably eaten up the carbon tax savings, and then some. If you wanted to isolate the carbon tax effect on prices, you would first need to pull out all of the exchange-rate effects from those same prices.

Issue of interest

Of course, not everything has run against households, and the carbon tax savings have not been the only windfall. The Reserve Bank of Australia has lowered the cash rate by 0.5% over the past year. If your household has an “average” home loan of A$300,000 and your bank has passed on half of the cut in the RBA’s interest rate, this should be saving you about A$750 per year.

Of course, interest rate changes affect business costs and prices in all sorts of ways. So if you want to work out the effect of removing the carbon tax, you’ll also need to pull out all interest-rate effects on prices.

These are just a few of the big changes. There are many more little changes that push prices up or down every day. Trying to separate out the effect of the carbon price repeal from all these other effects is either a mug’s game, or a year-long project for a PhD student!

So what about the Herald Sun’s effort? The article doesn’t contain too much serious analysis. It mainly looks at how energy prices have changed, energy being the main sector that paid a direct price under the carbon tax. Yet even here, the story is confusing.

In its 2014 price trends review, the Australian Energy Market Commission noted that:

…residential electricity prices are generally flat or falling around the country and we expect that to continue due to a combination of falling demand, increased competition and tighter rules on network costs.

In other words, even without the removal of the carbon tax, there were already significant pressures pushing electricity prices down. These will continue over the next few years.

So, where’s my $550 then?

Does this mean that the claimed savings due to the removal of the carbon tax were hokum?

No, just impossible to prove. Holding everything else constant, the carbon tax pushed up prices to households. That was the point of the carbon tax.

Unfortunately, the government at the time didn’t do a great job of selling the scheme and, unlike British Columbia in Canada, didn’t bring the public along to support the scheme.

The change in government in 2013 and subsequent removal of the carbon tax last year undoubtedly brought prices back down. The “rockets and feathers” phenomenon means that prices probably went up faster when the tax was introduced than they fell when it was removed. But over a 12-month period, prices will have fallen, holding everything else constant.

But the point is we can never hold everything else constant, and so we will never be able to show exactly how much households have saved through the removal of the carbon tax. We may get empirical analysis over time but until someone gets down and dirty with the household pricing data (dirtier, ironically, than a tabloid newspaper), we will not be able to separate out the carbon tax from the huge range of other factors that have affected the spending power of Australian households over the past year.

So if you can’t find your A$550, don’t worry. No one else can find it either. It might be there somewhere, or it might not.

But if you’re going to worry about it, you should probably be worrying about interest rates, currency markets, electricity demand, and a heap of other things too.

Stephen King does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.