Insulating insulation

The insulation plan is one of those things that seems to tick lots of boxes. It is something that is environmentally friendly, saves energy costs and looks set to be able to soak up the unemployed and in a way that is related to location. But I would be remiss if I didn’t delve into it further.

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It isn’t clear what the insulation cost per home is but the government has capped it at $1,600 but their estimate of average spend is closer to $1,200 per home (that is $2.7b/2.2m). I don’t know about the market structure of this industry and whether imports are possible but it is possible that a lack of competition relative to the new size of the market will mean that most households will reach that cap. (If you look at CSR’s share price yesterday, it jumped 10 percent on the news of the policy. It is party time.).

On the benefit side, the average energy cost savings for households is estimated to be $200 per annum. But think about that. Those savings possibilities were already there and are a private benefit. So the investment should pay for itself in 6 to 8 years. However, at historic interest rates, playing around with NPVs, my guess is that this makes the investment marginal for most households.

But those energy costs are supposed to save us 4.7 million tonnes of carbon emissions per annum. That comes to around 2 tonnnes per household. At a carbon price of $35 per tonne, that adds $70 per year to the investment calculation and would be enough to take it over the line for households.

That raises the question: why not just wait for the ETS to send those price signals? This brings it all forward, which is possibly a good idea as part of a stimulus, but as John Quiggin notes, it also relaxes the ETS cap.

I also have some concerns about the idea of insulating homes. That’s great if it’s additional to the impact of the emissions trading scheme, but not so great if all it does is make it easier for electricity companies to meet their targets.

And because it is a policy rather than a voluntary action (recall for those, environmentally conscious consumers could make these investments and at the same time shelve permits to make sure they actually reduced emissions), it is true that the social benefit of $70 might not actually be realised if emissions increase elsewhere. So there is more work to be done here to guarantee that this is a socially effective policy intervention.

[Update: I was thinking about the whole owner-occupier versus renter thing. For home-owners the handout is worth up to $1600. For landlords it is worth up to $1000. Now there are a couple of issues here. First, the landlords can presumably deduct the cost and so didn’t need as much to do this previously. But the flip side is that they are not direct beneficiaries as this comes off their tenant’s energy bills. I guess that will be shared in the form of higher rents but with all dwellings in the same sub-market likely to have insulation, that is far from clear. So the asymmetry is puzzling as the incentive misalignment appears stronger for non-owner-occupier dwellings than owner-occupiers. Hopefully, some yet to be released background paper might explain this one.]


5 thoughts on “Insulating insulation”

  1. Although, the main game for this policy was job creation, the environmental spin-off, and energy affordability spin-off, may have been secondary considerations that got this policy over the line.


  2. Do we know how this will be structured?

    I would imagine the best approach would be for some kind of direct purchase by government, as opposed to a post-purchase rebate system, would be most appropriate. Otherwise the cost per house would almost certainly be at the cap. 

    I’m guessing the “owner-occupier bias” may have more to do with either politics or the logistics of the rollout than incentive structure


  3. I would be very surprised if many landlords insulated rental properties. It seems to me that insulation is one of those things that isn’t obvious and so tends to be ignored in rental decisions. Because tenant’s get the benefits the landlord would have to be hoping for higher rents but renters will undervalue the insulation.


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