The Carbon Price and the Cost of Living - The Climate Institute

AECOM
The Carbon Price and the Cost of Living
9 November 2011
11
Figure 4: Carbon price value passed through by major sector, assuming full cost pass through (2012/13)
$bn,2011$
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Source: AECOM and CSIRO calculations.
2.3 Step 3: Calculate price increases for household consumer goods and
services
The third step in the method is to calculate how these increased input costs flow through the economy to result in
higher prices for household goods and services, and other economic output. In this report the term inflation is
used to include a one off impact on the price level but does not necessarily imply a change in the overall rate of
inflation. (As discussed in Section 3.1. the findings of the study suggest there will be no impact on the rate of
inflation apart from the one off impacts identified in 2012/13 and 2015/16.)
This calculation is based on detailed economic data that captures the buying and selling relationships between all
the economic sectors as defined in the national input-output tables. This study used the input-output tables as the
base as these divide the economy into one hundred and eleven industries and seven end use categories,
including household expenditure, and provide data on transactions between these. This allows us to trace the
indirect impacts of the direct cost increases across thousands of supply chains throughout the economy. For
example, the retail trade sector purchases 1.4% of electricity generation and 2.4% of gas supply. This means that
a share of the direct carbon price impacts on electricity and gas flows through to retail trade, and then through to
the final price of goods like clothing and footwear. The analysis aggregates all of these flows from direct emitting
sectors and allocates them across end-use sectors. Costs will flow through to clothing and footwear, for example,
from chemical manufacturing (producing nylon or synthetic soles), and iron and steel (zips, studs and reinforced
parts for boots), as well as from electricity (used directly in clothing manufacturing), and indirect cost pass through
from other sectors.
The analysis adjusts the input-output data for price changes from the base year data (2006/07) to 2012/13, based
on historical inflation data to 2011 and projections to 2012/13. The resulting estimated price changes for different
goods and services are then weighted to reflect domestic consumption patterns (rather than production).
The results are shown in Figure 5. Key insights from the analysis include:
- Retail electricity prices are estimated to increase by 10% due to the introduction of a carbon price, assuming
full cost pass through. This is consistent with estimates published by Treasury (2011a, 2011b).