How taxation can help make the world a more sustainable place

A judicious mix of tax carrots and sticks is required to drive long term behavioural changes in relation to environmental sustainability.

In brief:

• Environmental taxes have been with us for quite some time but haven’t really been employed as a tool to affect behaviour or tackle climate change.
• There is strong evidence in the form of the plastic bag levy to show that taxation can influence behaviours for the better.
• The Government needs to make changes to the Irish taxation system if it is to meet its Paris Agreement and other environmental obligations.

The challenges presented by an ageing global population, rapidly depleting natural resources and the ravages of climate change have made sustainability a more pressing issue than ever before. Making the world more sustainable has become an economic, social and environmental imperative. But achieving that goal will require a significant change in mindset and behaviours for people, businesses and governments.

While there are many ways to drive behavioural change one of the key levers available to governments is taxation, both as an incentive and deterrent.

Arguably there cannot be economic or social sustainability without environmental sustainability. Implemented successfully, “sustainability taxation” can play a key role in delivering the environmental aspect. Sustainability taxation is a broad term and encompasses both the stick of higher taxes and the carrot of incentives and subsidies.

To drive real change sustainability taxation needs to be implemented in such a way that it provides certainty in terms of its impact on personal income levels and incentivises businesses in a way that allows them to continue to grow and make revenue increasing investments while doing the right things for the environment.

Environmental taxes have, to a certain extent at least, been seen as a poor relation in most countries when it came to generating revenue and changing behaviours. In reality, they were merely a nod to climate change issues.

Less than 10% of EU Member States’ total revenue from taxes and social contributions came from environmental taxes in 2018.

However, we have now reached a point where real and effective steps are being taken to combat climate change and create a more sustainable environment, even with a global pandemic raging. A range of factors are at work here including the rising clamour from a younger generation of climate activists led by Greta Thunberg among others, the increased focus on decarbonisation and Corporate Social Responsibility (“CSR”) on the part of businesses, and growing consensus at government level – as evidenced by the US re-joining the Paris Accord.

Here in Ireland, we have with the last Budget increased our commitments and actions to achieving environmental sustainability. However, there is still a large gap between those commitments and how we are going to achieve them.

As things stand, very little revenue (6.9% in 2018) is generated from environmental taxes and that level actually fell in 2019 according to the CSO. A total of €5 billion in environment related taxes was collected in 2019, a drop of 2.1% on 2018. This was the second successive year where environment related taxes have decreased. The main reason for the fall related to a decrease in the Public Service Obligation Levy, the charge that all electricity customers in Ireland pay to contribute to the costs associated with producing sustainable and renewable energy.

Of even greater concern has been the fall in environmental taxes levied on households. According to the CSO, these taxes totalled €2.7 billion, a 66% share of environmental taxes, in 2010. By 2019 they had actually fallen to €2.6 billion, a 52% share of the total environmental tax take.

Environment taxes levied on service and manufacturing industries did increase somewhat over the same period, however. In 2010, service industries paid €1.0 billion, a 23.3% share of total environment taxes, while manufacturing paid €400 million, a 10% share. These figures rose to €1.6 billion (32.1%) and €700 million (14.5%) respectively in 2019.

We currently have 15 different environmental taxes in Ireland encompassing energy taxes, transport taxes and pollution and resource taxes.

While this sounds like a high number, the amount of tax collected from those sources is low in proportion to the overall tax take and, very little of it is ringfenced for sustainability purposes.  Accordingly, there is little evidence to suggest that the application of environmental taxes has been used to achieve a more sustainable environment.

That said, it is apparent that even the limited environmental taxation in place has had an impact on behaviours. In 2002 the Irish Government introduced a €0.15 environmental levy on plastic bags at points of sale in order to reduce their consumption and adverse effects it had on Ireland’s landscape. The levy was increased to €0.22 in 2007.

The result was a reduction in publicly discarded plastic bags from 5% pf litter pollution in 2001 to just 0.13% in 2015, according to the Department of Communications, Climate Action and Environment.

While the current Carbon Tax rate may not have a huge impact on individual households and businesses, the increases planned for the coming years will certainly become a financial burden. The tax has increased from €6 per tonne to €26 per tonne since 2018 and is scheduled to further increase to €100 per tonne in 2025.

The regressive nature of the tax may be unfair to many, but there cannot be real and lasting change without some degree of pain. The onus is on the Government, however, to protect the most vulnerable in society when it comes to bearing that pain.

Certain businesses will also need some level of protection. For example, those businesses more severely impacted such as road hauliers should be offered the means and support to move to more sustainable energy sources in a way that ensures their continued viability.

On the other hand, it is important that those businesses and sectors which contribute most to carbon emissions are sufficiently targeted. For example, agriculture is a major contributor to Ireland’s greenhouse gas emissions but is arguably the least impacted by the environmental taxes currently in place. Indeed, according to the CSO, the sector contributed just €60 million, or a 1.3% share of environmental taxes, in 2019.

It is inequitable to exempt some industries from the tax for what are effectively purely political reasons. However, applying the tax fairly and in a way that does not cause irreversible economic or social damage is a very difficult balancing act.

The focus should not be solely on the stick, carrots will also be required to achieve long-term behavioural change. The reduction in the Motor Tax rate on diesel cars is a case in point. While this has subsequently come to be seen as misguided due to its singular focus on CO2 emissions the impact on sales was undeniable. Between 2007 and 2017 the proportion of new passenger car sales accounted for by diesel models rose from 33.6% to 60.0%.

Incentives clearly work when it comes to helping people and businesses move away from environmentally unfriendly practices. However, it is important to have safeguards in place to ensure that no one takes undue advantage of such incentives.

Ireland has certainly made progress in its efforts to become a more environmentally sustainable country, but it has a long way to go. Luckily, the wind has shifted, and the burden is no longer falling on Governments alone. Businesses now also have a clear imperative to adopt CSR strategies and to reduce their carbon footprints dramatically. Indeed, EY recently announced it would become carbon net zero by 2025. Individuals are also adopting very welcome changes in behaviour.

But the Government must still shoulder its fair share when it comes to taxation. While a review of the Irish tax system in general is something for consideration at another time, ways to make the system more environmentally sustainable will need to be found within the current framework if real progress is to be made towards meeting our commitments under the Paris Agreement.