The grass is greener

Labor’s HECS-for-watertanks plan has drawn some bouquets and brickbats in today’s press (it seems that if you talk about money and water, you can’t help but get media coverage). But I couldn’t help noticing that two of my fellow Ozeconbloggers are critiquing it from diametrically opposite positions. Harry Clarke takes the view that the subsidies should be means-tested (presumably meaning that he thinks the $250,000 cap is too high). Joshua Gans thinks that the $250,000 cap is a bad idea, since rich households impose a bigger negative externality on the environment.

FWIW, I recently estimated that the cutoffs for the 95th and 99th percentiles of the pre-tax household income were $196,000 and $311,000 respectively. So even if you think Joshua is right, we’re only blocking 3-4% of the population from getting the grant.

Update: In comments, Joshua and Harry take the opposite positions to those that I represented above.

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5 Responses to The grass is greener

  1. Joshua Gans says:

    Actually I thought a means test was a good idea IF you are going to follow this with a broader strategy. If not, then there is an issue. The question surely isn’t how many households are above $250K but instead what share of energy they consume? Those Toorak mansions require lots of heating.

  2. harry clarke says:

    I actually didn’t think the subsidty should be means-tested at all. I was mainly interested in Kevin Rudd’s motivation for doing so which were ludicrous.

    Of course if the idea of the subsidy is to correct a Greenhouse gas externality and is efficiency-driven then it should be across the board so I agree with Joshua.

    Even so this is really dumb policy. This is a very socially inefficient way of addressing externalities since the technologies are so high cost. And of course the best thing to do is to prrice carbon and water supplies appropriately.

  3. Kevin Cox says:

    A major problem with schemes like this are administration costs. Some back of the envelop calculations on the Queensland scheme of rebates on water tanks gives a conservative cost of 20% of the total value distributed to administer the scheme. This came from a calculation of numbers reported in a newspaper article. From memory there were 150+ people employed processing the rebate requests.

    A friend who received a rebate on changing his car to use LP gas received a quote for the change before the rebate was announced and a quote after. The increase in price took much of the rebate value.

    Rebates and low cost loans distort the market particularly when are time limits and no alternatives.

  4. David says:

    Not all of these are high cost Harry. Insulation can be very cost effective. One thing I’m interested in is how the scheme applies to property investors (ie, landlords). Homeowners are more likely to take out loans for energy efficiency improvements as they will reap the rewards from lower energy bills in the future. But I doubt that landlords can capture the returns from investments in these things as easily from higher rents (do tenants look at how good the roof insulation is before they rent a place?) so maybe the loans would help there? How does it apply to landlords with household income over $250K who rent homes to low income tenants who would benefit if their landlord got a no-interest loan to improve the house’s energy efficiency?

    I think it’s an interesting policy, probably with only very modest benefits but also only modest costs.

  5. derrida derider says:

    Oh come on, people, it’s just an election gimmick – expect to see more boondoggles like this from both sides as the pressure is on nearer the election. Fortunately this one won’t be a big expenditure.

    The idea of a means test on it is doubly idiotic though, for the reasons people have already pointed out. I reckon Rudd will drop that idea as soon as he gets a proper costing of the option as the admin costs (let alone the compliance burden for the punters) would probably be more than the program savings. This may have to wait until after the election, of course, when he’ll have access to public service advice.

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