Phased carbon taxes can work if offset by other reliefs, says IMF
INTRODUCING carbon taxes in a phased way alongside other tax changes that help middle and lower income Irish families offset the charges is the best way to win approval for them, according to the International Monetary Fund.
A Fund research paper, published after Budget 2020 implemented a smaller than expected hike in carbon taxes, said that failure to win popular support for carbon taxes risked them being abandoned.
Sweden has a long-standing experience of carbon taxes and started with a $28 (€25.34) charge per tonne in 1991 rising to $127 per tonne this year.
“The tax was introduced as part of a broader reform including the reduction of taxes on energy, labour, and capital,” the Fund said in a report on climate taxes.
“Higher social transfers and reductions in the basic rate of income taxes helped to offset burdens for lowand middle-income households, while competitiveness concerns were addressed through a lower initial rate for industries,” the Fund said when describing the Swedish approach.
Minister for Finance Paschal Donohoe plumped for a €6 hike in the price of carbon to €26 a ton instead of the €10 expected and said he would favour raising the tax each year to 2030 so as to hit the target, which aims to slash pollution and slow global warming.
Crucially, he ring-fenced the €90m that the tax will raise in 2020, setting aside funds to protect those who stand to lose most from the tax rise and who can least afford it .
The balance of the funds will be used to fund environmental improvements and will not go into the general budget fund.
Minister Donohoe, who presented the coalition’s fourth budget this week, has outlined plans to redraw Ireland’s tax regime, broadening the tax base, streamlining VAT rates and looking at property taxes at a future date.
According to a report from the Economic and Social Research Institute, 8.7pc of Irish households suffer from “severe” energy poverty and cannot afford to keep their home warm.
In contrast to Sweden’s experience, French President Emmanuel Macron triggered months of riots on the streets of Paris when his carbon taxes were introduced amid feelings that the Parisian elite was ignoring the concerns of rural France.
Reducing the basic rate of income tax for lower earners helped offset impact