Greenhouse, equity and fuel excise reductions Media Release

May 19, 2008 - 10:01am

Budget week 2008 witnessed a proposal from the Coalition for a 5c reduction in fuel excise and a suggestion for the taxation review to consider the removal of GST from the overall excise.  These proposals would be a boon for wealthier more polluting households, and detract from efforts to shift to cleaner, more climate friendly transport solutions.

In 2005, a low income individual spent on average $19 per week on petrol compared to an upper income family that spent on average $62. This Policy Brief discusses the social equity and greenhouse implications of these proposals, based on data from a soon to be published CSIRO/ANU research paper for The Climate Institute on energy affordability and climate change.

Table 1 provides estimates of the different level of expenditure on energy by different household types based on published and unpublished data from the ABS Household Expenditure Survey. Expenditure on petrol rises significantly as income grows. In general, high income households spend more than twice as much on petrol.   Upper income families with one or more children spend more than three times as much on petrol than low income individuals, and more than twice as much as low income families. However as a proportion of income, low income groups send around twice as much a upper income groups.

Table 2 shows that higher income households also have higher levels of car ownership than low income groups. For example, the $70,000-$110,000 household income group is more than twice as likely to own two cars than the $15,000-$25,000 income group.

As such, “flat rate” proposals based on petrol expenditure will provide a considerably greater cash benefit to high income individual and households than it will to people on lower incomes.  This is important to remember when considering options for insulating low income households from rising petrol prices (regardless of whether they are caused by higher world prices or from the introduction of a domestic emissions trading scheme).

It is also important to note that while petrol has very low short run elasticity, the proposed reduction in petrol prices would be expected to boost demand, as it creates an expectation that future prices would be permanently lower than they  would otherwise be.  Reducing petrol excise would thus boost fuel consumption and lock in choices based on expectations of lower prices, reducing the use of more fuel efficient cars and other transport options.  This would actually make communities more – not less – vulnerable to future increases in world fuel prices, as well as encouraging increased greenhouse emissions.

Serious attempts to insulate lower income households from petrol price increases would be delivered more equitably through more targeted and effective policy measures.  The urgency of shifting to a clean energy future would suggest a better use of scarce resources would be a combination of more directed targeted support and investments in energy efficiency and affordability initiatives – e.g. public transport, fuel efficiency standards. Reductions in fuel excise would reduce funds available for such measures.

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