LPG conversion grant

The decision of the Howard Government to provide a grant of $2000 towards the cost of converting existing cars to LPG, a a grant of $1000 for installing LPG in new cars, is a political decision designed to offset community perceptions that the Government is not doing enough to protect motorists from rising petrol prices.

The Government cannot really do anything to change petrol prices since these are determined by (i) international oil prices and (ii) the Government's 38.1 cent per litre fuel excise policy. The former cannot be controlled and the latter cannot plausibly be cut - a 10 cent cut per litre would blow a permanent ongoing hole in the public sector budget - a hole that will be hard to refill were petrol prices to ease. And an easing in petrol prices seems certain - Paul Higgin's sees a fall in prices to less than $40US per barrell within 3 years as increased supplies come onstream and conservation measures bite- there is a dramatic potential for conservation in low income countries such as China and India where fuel efficiencies are low.

Essentially the grant transfers income from those who do not make LPG conversions (including those who don't drive, those already with LPG and those with fuel-efficient cars who don't need to convert) to those to do. This type of transfer is inequitable.

It was not the case that consumers were unaware of the possibilities for conversion - there are excess demands for conversion already as motorists scamble for cheaper fuels. Markets were already working - oil imports had already fallen strongly with these pressures, public transport usage had increased as had the use of small cars and LPG conversions were up 116% from last year. (Thanks to Andrew Norton for these links).

But as political moves go it is still not the worst thing that could have happened. Consumers still have to face up to high petrol costs and will make fuel and car-purchase decisions reflecting this fact. A petrol subsidy would have been more defibitely the wrong way to go - small mercy for being saved from this.

Of course LPG prices are likely to rise internationally as people around the world make LPG conversions. The pressure to do this globally is fostered by LPG's better ability to deal with pollution and global warming concerns. LPG prices have increased at 4 times the rate of increase in the CPI over recent years. Moreover, the government has already announced that excise on LPG will be levied at 50% of the rate of petrol from 2012 but if LPG becomes increasingly popular the excise may shift beyond this.

There is a good discussion of the LPG subsidy by Andrew Norton at Catallaxy.