Sinead Ryan and Charlie Weston give you expert advice in Personal Finance
DESPITE strong opposition and an upcoming election, carbon tax was increased in the Budget – although not by the €10 per tonne recommended by the Climate Change Advisory Council, amongst others. Nonetheless, if the €6 per tonne increase seen this year is maintained, carbon tax will reach €80 per tonne by 2030. This is the level recommended by many bodies, including the Joint Oireachtas Committee on Climate Action. It is also proposed in the all-Government Climate Action Plan.
The only immediate effect is on petrol and diesel, with the increase on other fuels such as coal, gas and oil delayed until May 2020. Electricity will not be affected at all. But what is the impact of carbon taxes? Do they really reduce emissions, or simply raise our living expenses? And if so, by how much?
Carbon has been taxed at €20 per tonne since 2014, and costs approximately €3.42 per week per household (not per person) on average. Once the increase of €6 is fully applied, this will rise to €4.45 per household per week, assuming no change in behaviour. The actual amount paid by each household of course depends on the number of people in the household, where they live and how much they spend.
However, this average amount of €3.42 is relatively low. It is far less than excise duty on alcohol and tobacco, with a total of €1.9bn paid in 2018 compared to €431m paid in carbon tax last year. Carbon tax represents less than 10pc of total excise duties on petrol and diesel – in fact, carbon tax currently represents a mere 2pc of our total spend on commodity taxes. Why then does carbon tax provoke such controversy?
One potential reason is that a carbon tax is levied on a tonne of carbon, but it may not be commonly understood what a tonne of carbon actually is or means. A tonne is one thousand kilograms – a thousand bags of sugar, or the weight of a small car. Burning 430 litres of petrol will emit one tonne of carbon. A 50-litre petrol tank would have to be filled and emptied eight-and-a-half times before a tonne of carbon is emitted. For a driver who fills their tank every week, it will be well into December before they have emitted a tonne of carbon – which means they will be a total of €6 worse off come mid-December due to the carbon tax increase.
Another reason for opposition to carbon tax stems from the idea that it doesn’t work – that behaviour does not change in response to carbon taxes. This is simply not true. All goods and services follow what is known as the law of demand – as prices rise, demand falls.
This law holds for carbon just as it holds for any other goods, and can be seen easily from the data.
ESRI researchers have examined how expenditure on various goods changes as prices change.
They find that expenditure on energy decreases as prices increase – just like any other goods. Obviously the higher the tax, the greater the behavioural change, but it is not the case that behaviour does not change at all – it does.
Secondly, if evidence is needed that prices influence emissions, we need only look at the Irish emissions profile post 2014. In 2015 there was a significant decrease in international fuel prices – the price of diesel decreased by almost 20pc between 2014 and 2016. This led to an increase in the use of fuel, and an increase in energy-related emissions of more than 9pc in the same period.
After 2016, fuel prices recovered and emissions increases reverted to just over 1pc in 2016. There are concerns that the carbon tax will have varying affects across households and economic sectors. Poorer rural households, the peat industry and hauliers are considered most vulnerable. A great deal of the political debate around carbon tax focusses on compensating these vulnerable groups.
However, offsetting measures such as increasing fuel rebates available to the haulage sector may undo any good from increased carbon taxation. Well-designed policies can limit the impacts for vulnerable households and sectors without eliminating the incentives to decrease emissions. Furthermore, policies can assist households and companies in switching to low-carbon alternatives.
If the impacts of carbon taxes on households is therefore limited, what of the impacts on the wider economy
and emissions? The evidence shows that even an increase in carbon tax to €80 will have negligible impacts on the overall economy.
Yes, increased carbon taxes increase the price of goods, decreasing consumption and hence economic growth. However, these impacts are in the range of a 0.01pc decrease in the growth rate of the economy. They pale in comparison to other economic uncertainties the Irish economy faces. Research at the ESRI estimates that emissions will be reduced by 15pc by 2030 due to an €80 carbon tax. A considerable decrease given the limited economic impact, but not enough to reach the Irish EU emissions targets.
In addition, the cost of taxing carbon must be considered against the cost of doing nothing. First of all, there are obvious costs for the planet, society and the economy from continuing to emit carbon. In Ireland, the effects of climate change over the coming decades could include damage to coastal areas as a result of rising sea levels. Storms and rainfall events will intensify, leading to increased flooding. Summer water shortages may become more commonplace, and water quality may decrease. New pests and diseases may arrive.
Secondly, Ireland will face fines if we continue to miss our climate targets. The cost of these fines is currently unknown, but is estimated to be up to €600m in the case of the 2020 target. This €600m must be paid for somehow – either through increased income, VAT or other taxes, through reduced social protection payments or by decreasing expenditure on health, education and other areas of public investment. The cost of not taxing carbon rarely enters the debate on carbon taxation, but is an important and relevant consideration.
A wide range of measures is required to tackle climate change. Carbon taxation is one of many, but the costs and benefits of carbon tax, along with any alternative measures, must be clearly identified. There is no room for misinformation in this important debate.