Labor’s household environmental investment plan

Labor’s plan to offer low interest government loans for household investments in environmentally friendly technologies and have them paid back according to ‘capacity to pay’ (which I presume will actually be a HECS like approach through the tax system) is probably a sound idea. It promotes rather than constrains and there is a clear externality identified. Nonetheless, it has drawn some criticism; especially with regard to who is being subsidised and the fact that it is not a carbon tax or more comprehensive plan.

The interesting thing for me is not who is being subsidised but who is excluded; specifically, households ove earning over $250,000. The thing is, why exclude them. They consume more but also cause, consequently, a greater externality. Indeed, the subsidy will, at least in the short-term, put up the price of environmentally friendly investments, making it less likely they will invest in them. And that is where there is a bigger bang for the environmental buck. This is usually why subsidy plans are more comprehensive (not to mention the administrative complexity of an additional means test).

But there is a way to make sense of all this and it is good news for the environment. If your plan was to put in a stronger measure like a carbon or water tax, then we know that that will disproportionately hurt the poor who are constrained in precisely their ability to fund larger, once-off investments in environmentally friendly technologies. So the economist’s reaction, provide a means tested subsidy to soften the blow. Seen in this light, this plan is a precurser to something many of us have been after, a comprehensive strategy. I look forward to seeing it; hopefully, before the election. So those worried that this is either economically efficient or arbitrary should take heart. That very fact suggests there is more to come.

2 thoughts on “Labor’s household environmental investment plan”

  1. It’s a good point Joshua, but I’m not sure that this is a good way to counteract the equity problems of a carbon tax: I doubt it will be the poorest households who take up these loans. It will be for homeowners, not renters, for a start and I think solar panels, water tanks, solar hot water systems etc are really luxuries for most people.

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