The effect of rising energy prices for the economic wellbeing of households - Essay Example

? Table of Contents Introduction 2 The effect of rising energy prices for the economic wellbeing of households 3 The likely effect of increases in the cost of traditional sources of energy for the energy consumption patterns of Australian households 5 The effect of increased government cash payments (such as increased pension payments) on household budgets, energy consumption patterns and economic wellbeing 7 Conclusion 8 Bibliography 10 Introduction A significant economy reform program was announced by Australian government for securing the future with relatively clean energy. It is a transition plan that will transform the economy of the country gradually; it will be implemented by taking initiatives in four key areas namely carbon pricing, non-conventional sources of energy in place of conventional energy, enhancing the efficiency of energy consumption and management as well as land reforms. But the foremost component of this transition plan is the carbon price mechanism and several complementary measures along with the assistance plan for the household and large emitters of the pollutants in the current economic structure (Beyza, 2007). As the time passed by, the business as well as household focused on the relevant details of this plan and researchers forecasted the consequences and impacts of this plan extensively. The current essay models the impacts of the proposed mechanism of carbon prices on the household economy by discussing the consumer behaviour theories and keeping in view the fact that proposed plan promises to return most part of the revenue generated through carbon price mechanism to the household (Deborah, 2010). A package of measures also came along this plan; these measures outline the policy of the Government to curtail the instantaneous effects of carbon pricing mechanism on the household economy. When viewed from this angle, the impact of carbon prices as well as measures to manage its effects will be cumulative and significant for the household budgets. Before we discuss the impacts of this mechanism, it would be better to explain its most contrasting features (Deborah, 2010). It is planned that the mechanism will be implemented from the date of 1st July 2012. For the first three years the carbon prices will remain fixed for each year i.e. $ 23, $ 24.15 and $ 25.40 for first, second and third years respectively. The second phase will commence on 1st July 2015 and carbon price remains flexible during this phase. The determination of the prices will be based on the Emission Trading Scheme (ETS) along with the transitional cap as well as floor implementation. It is also determined in the proposed plan that carbon permits will be sold to the pollution emitters and the revenue generated through these sales will be invested for encouraging the production and consumption of clean energy. It will also ease the cost burden coming up with the transitional phase. Various direct and indirect methods will be devised to assist different sectors of the economy including the household1. In light of this brief introduction of the carbon price mechanism, the following section of this essay discusses the continuously rising prices of the energy during the first phase and their impacts on the economic well being of household with special emphasis on various theories of consumer behaviour. The effect of rising energy prices for the economic wellbeing of households It is evident that the increasing carbon prices will definitely flow through the consumer as household is one of the largest users of the conventional energy. The increase in prices of the fuel will disturb the household budgets; the prices change in the prices of the essential goods like food, clothing, and land for shelter will take place due to the continuous rise in the carbon prices during the first phase of the implementation of this plan (Kardes et al., 2010). On the other hand, the supply demand theory suggests that the demand for carbon fuels will be discouraged due to the increasing prices of the carbon fuels. The following figure depicts the effect of increasing prices of fuels on the budget line of the household economy while the prices of the other goods remain same. It is evident that with every rise in the price of the fuels, the budget line moves outwards. On the other hand, decrease in prices shifts the budget line inwards. This shows the evident impact of the fuel prices on the household economy as the budget lines are considered as the budget modelling tool for the consumers (Barraud 2008). Figure 1: The impact of increasing prices on household budget According to consumer behaviour theory, price changes directly affect the budget lines, demand and supply curves. With this argument it is also important to discuss the measures of the government to minimize these effects, it is clearly stated in the plan that each cent of the revenue collected through carbon permits is determined to aid the small and middle income domestic economies. The most of the assistance is destined to be provided through tax cuts, an analysis of the carbon price mechanism reveals that nine out of ten houses will reap this assistance. The assistance will be sufficient to compensate for the disturbances in budgets of low and middle income household economies due to the rising prices of the carbon and conventional fuels (Andrew and Gerald 2007). The next section of the essay explores the impact of the increasing prices of conventional sources of energy on the patterns of energy consumption in Australia. The likely effect of increases in the cost of traditional sources of energy for the energy consumption patterns of Australian households The anticipated outcome of the increased carbon prices are the low traditional fuel consumption in the household as well as business sector. According to the laws of supply and demand the increase in prices lead towards reduction in the demand but has positive association with the supply (Kardes et al., 2010). This relationship is explained by the following figure which illustrates the movement of demand curve with the increasing prices of the energy. (Price of fuel Per Unit) 50 30 D.C 10 0 Demand of fuel Figure 2: Demand curve for fuel From the above example and theory discussed, it can be conferred that energy consumption will show decline in the first phase, the fixed price phase, but it may increase during the flexibility phase where the prices may fluctuate either positively or negatively. But the incentives given to the green and environment friendly energy source may lead toward the substitution effect. During these three years, the prices of the alternate and renewable sources of energy may decline to such an extent that they become less than the prices of carbon based or conventional fuels. Moreover, the policy of encouraging the clean energy may lead towards the expansion of the clean energy production. Thus the supply of the green energy will be abundant and it will substitute the high carbon fuels. The consumer awareness and substitution effect can collectively (Figure II) bring about the desired results. The theory and the future prospects of the proposed plan significantly indicate that the consumption patterns of Australia will experience a shift in the coming years; this shift will be from traditional sources of energy towards the increased share of renewable and non – conventional sources of energy. This can be illustrated by the example of the electricity prices that may increased due to the increased fuel prices. The substitution effect is illustrated in the figure given below. Figure 3: Substitution effect on Electricity prices As the government is determined to compensate the low income families by providing them with tax cuts, again the income effect may cancel the substation effect and results may alter significantly. There are few risks involved in the carbon price mechanism but the government has tried to minimize the risks through the emission trade scheme. This scheme will be aided by the cap and floor determined by the emission of the gases, in summary the energy consumption patterns of Australia are going to shift to some extent if not drastically. The final part of this essay will throw light on the impacts of the cash payments on the part of the government to the household budget, patterns of energy consumption described above and economic well being of the household. The effect of increased government cash payments (such as increased pension payments) on household budgets, energy consumption patterns and economic wellbeing The proposed plan also suggests that increased cash payments to the pensioners and other government employees will bring income effect into play. The following figure illustrates this effect with fuel and some food items, the extra payments cause the budget line to shift outwardly parallel vice versa (Deborah, 2010). Figure 4: Income Effect on fuel and food items The enhanced income will enable the household economies to consume more energy and other items. It will result in the improvement in the living standards of the low income people such as pensioners. As far as energy consumption patterns are concerned, the increased income will have a positive impact on the energy consumption, the increased prices of the traditional energy sources may shift the energy consumption towards the green energy consumption because of the incentives provided to this industry through this plan. Conclusion The above discussion clarifies that carbon price mechanism will affect the economic well being, energy consumption patterns and trends, household economies. The analysis of this price mechanism with respect to theory of consumer behaviour shows that increased payments to the middle and low income families and tax cuts for the household economies will have a positive impact on the energy consumption and trends of energy consumption will shift from traditional to non conventional sources of energy. Bibliography Andrew, Gerald. Who pays taxes and who receives government spending? An analysis of federal, state and local tax and spending distributions, 1991–2004. 2007. http://www.taxfoundation.org/files/wp1.pdf (accessed 09 03, 2011). Barraud, A. A. “Poverty Effect from Trade Liberalisation in Argentina.” Journal of Development Studies 44, no. 3 (2008). Heutal, G, and D Fullerton. “The general equilibrium incidence of environmental taxes.” J Public Econ, 2007: 571-591. Hoyer, Wayne D. Consumer Behavior. Hover: Mason:South Western Publishers, 2010. Kardes, Frank, Maria Cronley, and Thomas Cline. Consumer Behavior. New York: Cengage South Western, 2010. Louden, David L., and Albert J. Della. . Consumer Behavior: Concepts and Applications. New York : McGraw Hills, 2002. Peterl, Paul, and Jerry C. Olsen. Consumer Behavior. New York : McGraw Hills, 2009. Solomon, Michael R. Consumer behavior: buying, having, and being. New Jersey: Prentice Hall, 2010. Ural, Beyza. TheThe Impact of Trade Reform on Household Welfare in a General Equilibrium Framework: Empirical Evidence from India. 2007. https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=mwit2007&paper_id=33 (accessed 09 03, 2011). Read More