Carbon tax considerations

If the Government chooses to increase the carbon tax, there will be distributional consequences. Those who spend heavily on petrol or diesel for road vehicles, or on home heating oil, will pay more. Households which use coal or briquettes would also be affected.

There is a head of steam building up behind the notion that no higher carbon tax should be introduced unless there is full offsetting action to compensate the losers.

Unless the Government could somehow identify how much each citizen is out of pocket and send them a cheque equal to the extra tax, there is no practical way to achieve precise compensation.

Since the idea behind the carbon tax increase is to change consumer behaviour, shifting demand away from high-carbon items, there would be little point in the proposed increase if its impact were to be fully neutralised to the point where nobody noticed. In any event, full neutralisation of the impact is impossible as well as pointless – taxes do not change behaviour if people get subsidies to offset the intended impact.

Opposition

Opposition to the proposed increase, expected to feature in the budget speech next Tuesday, is coming from two sources. Those on the political left see a possible replay of their success in stopping water charges and argue that a higher carbon tax will hit poorer households. Some rural TDs see a threat aimed specifically at their constituents. Until the details are revealed, it is impossible to assess the extent of the impact in either case.

At present, there is a carbon tax at the rate of €20/t, which works out at just over 5c/l on diesel, petrol and home heating oil, with the effect proportionate to their carbon content on the retail price of other home heating fuels.

There have been calls for the tax to be increased to €80/t eventually, but this will happen in stages over several budgets. Next week, the minister is expected to announce a further increase, possibly to no more than €30/t. This will translate into an extra cost for diesel of about 2.5c/l, on top of the current price at the pump, which is about €1.35, with an extra 2.5c also imposed on petrol and heating oil.

Fuel prices

For diesel and petrol, this is hardly a big deal – the proportionate increase for green diesel is higher, as it is for home heating oil, since these fuels escape the heavy excise duty imposed on automotive fuels and the base price is lower.

It is fair to point out that petrol and diesel prices regularly rise and fall by a few cents every few weeks, due to fluctuations in the oil market, and have risen recently by more than the minister is likely to impose, without any great public outcry.

The Economic and Social Research Institute (ESRI) released a report a few months back which demonstrated that a big increase in carbon tax, say to the eventual target of €80/t, would adversely affect lower income groups, since their budgets include a higher exposure to the cost of the items affected. The issue raised by the ESRI cannot be ducked through all future budgets.

Motor taxes

Poorer households will eventually need to be reassured, through some measures in the tax and social welfare system that would help offset the carbon tax impact and the ESRI has promised to investigate options in a future report. For now, the minister could consider a simple change in motor taxation.

In addition to taxes on fuel, motorists pay a steep tax on purchase in the form of vehicle registration tax (VRT), additional to VAT and which is the source of higher vehicle prices in Ireland versus the UK, where only VAT is charged.

There are also annual motor ownership taxes, and neither the purchase tax nor the annual tax rise or fall in line with mileage travelled or with carbon emissions. All they do is raise revenue.

Extra tax on fuel could be offset through reductions in the purchase tax or ownership taxes, without diluting the desired impact of the higher tax on fuel.

Mitigating the impact on households which rely on heating oil and solid fuel like briquettes is not so straightforward.

It is the Government’s declared intention to encourage the conversion of homes to electric heating, using heat pumps which will utilise electricity whose generation is being de-carbonised. But this is a long-term project and will take decades.

In Ireland, the big issue in energy policy will eventually turn out to be electricity prices. The reliance on electricity for road transport and for home heating is set to rise. Unless the Government can manage the shift to low-carbon electricity at minimum cost, carbon tax will be the least of their worries.

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