Carbon Tax
With just three days to go to one of the most challenging budgets of recent times, the introduction of a new carbon tax is widely expected to be announced. The strong speculation is that a carbon price of €20 per tonne will be chosen as the initial floor level for Ireland’s new carbon tax. The experience in other countries which have adopted a similar tax would suggest that this figure will rise over the course of time. However, concerns still exist in business and society over how this tax will be utilised, with calls for government to focus its carbon taxation strategy in establishing Ireland’s international reputation as a green economy and not as an exercise in plugging the country’s fiscal debt.
The Commission on Taxation report recommended the introduction of a carbon tax and specifically stated that the tax should be set at the level equal to the carbon price for emissions trading under the EU ETS (international price of emissions). However, as these prices adjust in line with demand and supply, there is a need for a floor price which can be monitored to ensure it remains effective.
Based on a floor price of €20 per tonne of carbon, initial indications suggest that the government can expect to raise between €400m and €500m in 2010, and the ESRI estimates that it will cost the average household between €3 and €6 a week. This breaks down as €5 extra on a bag of coal and 50 cent more for a bale of briquettes and a five cent per litre increase in petrol and diesel.
However, as recommended in the Commission on Taxation report and also advocated by the ESRI, this tax should be “revenue neutral” with revenue generated ring-fenced and used to offset other taxes or reduce costs for individuals or businesses. A recent report by Professor Paul Ekins of University College London Energy Institute cautioned that a carbon tax if simply introduced as a new revenue stream would be “anti-competitive” and a burden on industry.
Although this is a Green Party priority, the concern remains that the government has simply latched on to carbon tax as a revenue-earning proposal from the Commission on Taxation, intended to close the gap between its income and expenditure.
France is also considering the introduction of a carbon tax in 2010, becoming the largest economy in the world to do so. Under the most recent proposal France would charge €17 for every tonne of CO2 emitted in 2010, which is close to the actual market value of carbon quotas and Ireland’s proposed €20 rate. To date there has been no clear indication as to how the revenue generated from the tax will be used.
Lessons must be learned from other European countries that have pioneered this type of tax and used the tax to encourage changes in consumer behaviour.
Finland was the first country in the world to introduce a carbon tax in 1990 and the tax has increased a number of times since its inception. Official Finnish studies show that CO2 emissions are five percent lower than they would have been without the carbon tax. Under a tax reform programme, Sweden introduced a carbon tax in 1991 when the government reduced general energy taxes. Sweden also provides subsidies or exemptions for energy derived from renewable or sustainable sources, and official data shows that businesses have notably shifted their energy sources from fuel oil to biofuels.
In Denmark a carbon tax was also adopted as part of a broader energy tax and subsidy package. While nearly 6% of Danish tax revenues are made up of environmental taxes the government has simultaneously invested heavily in wind power which created a viable alternative for companies. The UK has implemented a range of environmental taxes, including the Climate Change Levy, a tax on commodities such as coal, gas, etc used by commercial customers and the Landfill tax which taxes people and organisations when they discard waste in landfill sites. As well as these measures, the UK has provided a number of incentives for growth in the generation of electricity from renewable sources. The UK has also set a stretch target of reducing its CO2 emissions by 34% by 2020 – a step which purely from a ‘green branding’ perspective on the international stage demonstrates ambition and long term strategic policy making.
The introduction of a carbon tax can also be the springboard to place Ireland in the foreground as a location for companies and finance operations that specialise in supporting the rapidly expanding GreenTech, carbon and renewable energy industries. The recently revised “Programme for government” estimates that 127,000 jobs can be created in the “green and smart economies” – figures which in the current economic climate cannot be ignored.
The report of the High Level Group on Green Enterprise which was published this week made a number of recommendations with a view to establishing Ireland as a leader in the GreenTech space. These include:
• Promoting green sectors that can drive exports and jobs
• Deliver green zones and a green IFSC
• Create world-class research in niche areas
• Remove basic hurdles to the green economy
This report also recommends that revenues from a carbon tax should be used to support the development of the green economy.
It is important to recognise that much activity is already underway in Ireland to enhance our green credentials, however more can still be done to reap the full effects of this activity.
For example, there are currently a number of programmes and schemes which are run by Sustainable Energy Ireland which could be further funded by carbon tax revenues. The Home Energy Saving Scheme provides grants to homeowners who are interested in improving the energy efficiency of their homes in order to reduce energy use and costs, while the Warmer Homes Scheme provides a variety of energy saving measures to households on low incomes.
Carbon tax revenues could also be ploughed back into energy-efficient schemes and initiatives to encourage businesses in Ireland to become more environmentally friendly by adopting cleaner technologies, thereby reducing energy costs. The recently launched Energy Demand Reduction Target Programme (EDRT) involves the promotion of energy services by energy companies in Ireland and has the potential to reduce energy costs and related CO2 emissions, create further employment and develop a market for energy services in Ireland.
The Commission on Taxation recommended that the new carbon tax should be clearly visible at the point of sale to ensure that it would not be seen as just another tax and that it should have the effect of influencing individual behaviour. IBEC have voiced support for a carbon tax that is based on a scenario where the revenues collected are recycled, ultimately reducing costs for businesses.
We have already seen the positive effects of linking the Vehicle Registration Tax to CO2 emissions and the provision of additional business taxation reliefs for vehicles with lower CO2 emission levels. Perhaps some of the revenue generated from the carbon tax should be used to further encourage the use of eco-friendly vehicles?
The Green Party has consistently said that the main purpose of the carbon tax is to change behaviour and not to raise revenue for the government. The main aim of environmental tax reform must be the reduction of greenhouse gas emissions and not to improve the efficiency of the economy. Other jurisdictions have reaped the benefits of using their carbon tax regimes to promote investment in alternative energy sources while reducing CO2 emissions. Let’s hope that we learn from that experience.
