Let them eat cake! Carbon tax means cake will cost 10 cents more as majority of manufacturers swallow price hikes

Despite fears about increased costs for business and consumers once the carbon tax comes in this weekend, the price of a $25 birthday cake will increase by less than 10 cents and most manufacturers are planning to absorb any price increases.

SmartCompany readers have been asking us exactly what the price increase on goods will be after the weekend, so we spoke to Adam McHugh, economist at Murdoch University, who has investigated the impact of the carbon tax on the price of a $25 birthday cake.

McHugh was prompted to research the impact of the tax on a cake after John Hewson was famously unable to identify how the GST would increase prices on a cake. He then saw an article in The Australian by a member of the Institute of Public Affairs, which said the cost would be impossible to calculate without further information.

McHugh discovered the article was written by one of his students and so set out to undertake some “reasonably straightforward” calculations on cakes.

McHugh calculates the impact of the carbon price scheme on a $25 birthday cake will be less than 10 cents.

“For products that are not very energy intensive like a birthday cake, you are not going to see much of an impact to the final consumer,” he says.

Despite the complex looking nature of McHugh’s calculation (one of the elements is pictured above), he says the impact of the carbon tax is clear.

“The mathematics is actually reasonably straightforward if you have the knowledge, but it takes a while to get the knowledge,” says McHugh.

The calculation is based on the $23 a tonne carbon price with a rise of 0.38% in the first year of the carbon scheme and then near to zero in the two following years.

“It can be solved through a system of simultaneous equations assuming that all the compliance costs are passed through to the final equation,” he explains.

McHugh says his calculation is based on “very conservative assumptions”.

“It assumes firms don’t change their behaviour and keep polluting as much as they used to. That’s probably not going to happen, firms are probably going to change behaviour as that is the whole point of the tax,” he says.

McHugh also stresses that the carbon tax is a one-off increase. Even based on the assumption that nobody changes their behaviour, the impact of the tax will be “very close” to zero in the second and third year of the tax.

“This idea that prices will go up, and up and up is not true, there will be a slight increase in the first year and then, if anything, it will be pared back and so it will converge back to the price that would have been charged without the carbon tax,” he says.

McHugh says apart from the increased cost of electricity, consumers will see very little impact of a carbon price, although the Australian Industry Group claims this is because many businesses will be wearing price increases themselves.

The AIG surveyed 200 manufacturers asking whether as a result of the carbon tax they intended to increase their selling prices from July 1, 2012.

Less than half intend to try to put up their prices immediately, and of the manufacturers that intend to increase their prices, 51% will try to raise prices on all of their items; 22% will try to lift prices on more than half of their products; and 27% will try to raise prices on less than half of their products.

The AIG found 60% of manufacturers do not plan to increase their selling prices, and will instead absorb the cost rises.

“Pricing intentions vary greatly across the manufacturing spectrum,” Innes Willox, chief executive of the AIG told SmartCompany.

“Just 11% of food and beverages manufacturers plan an immediate price increase, but up to 60% of manufacturers of construction materials (including high-emissions products such as steel, cement and bricks) will try to do so.”

Willox says businesses already under pressure from the high dollar and high costs now face the uncertainty of how they will be impacted directly and indirectly by the carbon price.

“This is undermining confidence and detracting from investment,” he says.

“The vast bulk of businesses do not know how much of the increased costs faced by energy producers and others with direct and indirect liabilities will be passed on to them.

“They also don’t know whether they can pass those costs on to their own customers, whose confidence is already shaken by doubts about our lopsided economy and the worsening global outlook.”