3.3  Taxes and Prices

In view of the uncertainly regarding the precise charge on carbon dioxide that will come into effect from the year 2007, three carbon tax rates of $7, $15 and $25 per tonne of carbon dioxide are examined here. As the values of final demands are measured in thousands of dollars, a tax rate of, for example, $7 translates into a value of of 0.007.

The left side of Table 4 shows the effective carbon tax rates for 22 commodity groups. These calculations were made for each of the three carbon tax rates, expressed in thousands of dollars per tonne of carbon dioxide. Displayed on the right side of Table 4 are the new effective ad valorem tax rates. When wishing to analyse the effects of the carbon taxes on commodity prices, the values of are not directly comparable because the existing ad valorem tax rates, , differ across the commodity groups. Attention is therefore turned to the effective carbon tax rate, .

For each of the three carbon tax rates, petrol etc (commodity group 15) faces by far the greatest price increase. Figure 1 shows the expected budget shares of total expenditure devoted to petrol, for a range of total weekly household expenditure levels, by households with two adults and two children. These are based on estimates of the budget share relationship specified in Appendix B. The inverse relationship between weekly expenditure and budget shares for both smoking and non-smoking households is indicative of the majority of types of household and shows that low-income earners spend a proportionately greater amount of their budget on petrol than high income earners. Similarly, domestic fuel and power (commodity group 6) and food (commodity group 1), both of which face substantial price rises as a result of the carbon tax, also form higher proportions of the budgets of lower-income earners. This is illustrated in Figures 2 and 3, which replicate the inverse relationship, found above, between budget shares and total expenditure.

These findings suggest that the carbon tax may have a proportionately higher impact on those households with relatively lower total household expenditure, for any given household type. However, the effect of a carbon tax is not unambiguous. The price of food consumed outside the home (commodity group 2) also rises substantially, and in this case higher-income earners spend a proportionately larger amount of their budgets on this good. Overseas travel (commodity group 13) incurs the fourth largest price increase, and its budget share increases with total expenditure.[11]

Following petrol, household services (commodity group 9) incurs the second largest price increase. This commodity group directly corresponds to the rubber, plastic and other chemical product manufacturing industry (industry no. 19), whose output has the second highest carbon content.

Figure 1 – Budget Share Allocated to Petrol by Household Type 10

Figure 2 – Budget Share Allocated to Food by Household Type 10

Figure 3 – Budget Share Allocated to Domestic Fuel and Power by Household Type 10