The Irish Carbon Tax

Frank Convery and Louise DunneUniversity College Dublin

• Economy & Emissions• History & Lead-up• Key features of Tax• Other Environmental Taxes in Ireland• Next steps

Ireland CO2 equivalent emissions & GDP (OECD (2010), EPA (2009a))

Ireland CO2 emissions/GDP (using exchange rates) 1970 – 2007 (IEA,

2009)

Recent HistoryFrom 2000 onwards carbon taxes in government discussions:

•2000: The National Climate Change Strategy •2002: Budget Speech

Huge opposition from business •2004: the Minister announced that the Government has concluded its examination of carbon energy tax proposals and had decided not to introduce such a tax •2007: National election, after which the party with the largest number of seats (Fianna Fail) combined with the much smaller Green Party to form a Government. Combating climate change was prioritized by the Green Party•2007: Programme for Government commits to reducing its greenhouse gas emission by 3% annually over the lifetime of the Government and identifies the phasing in of appropriate fiscal instruments, including a carbon levy, on a revenue neutral basis over the lifetime of the Government as a key policy instrument.

Commission on Taxation (2009)• Terms of reference in relation to carbon tax were quite

specific: Commence work immediately in the area of the carbon tax, because it required a new tax charge and structure and were reminded that the report would assist the Government in assessing the structure and implementation of a carbon levy in Budget 2010.

• The Commission received submissions from Irish stakeholders during the process.

• Recommendation 9.1 of the final Commission report is that ‘A carbon tax on fossil fuels should be introduced’ (p. 342) of €20 per ton CO2 (to be linked to the international carbon market in subsequent years).

Key features of Irish Carbon tax

• A carbon tax at a rate of €15 per tonne of carbon was introduced on fossil fuels in December 2009. The tax applied to petrol and auto-diesel with effect from midnight, 9 December 2009; and from 1 May 2010 to Kerosene, Marked Gas Oil, Liquid Petroleum Gas (LPG), Fuel Oil and Natural Gas.

• Amount of €15 applied as close to EUETS price and seen as bearable and a good starting point

• Coal and Peat are covered but subject to a Ministerial order so no specific date yet. One of the big problems is smuggling of coal across border from N. Ireland.

• The carbon charge was applied also to aviation gasoline, which is aligned to the petrol rate, and the rates for heavy oil used for recreational flying and boating, which are aligned to the auto-diesel rate (Department of Finance, 2010).

• The charge is also applied to heavy oil and liquid petroleum gas that is used for horticultural production in a glasshouse, or for the cultivation of mushrooms. There is relief provided for biofuel, and for biofuel that is mixed or blended with hydrocarbon oil where the biofuel accounts for more than 10 per cent of that mixture or blend (Ibid.)

• Administratively it is an upstream tax, as there are a small number of suppliers.

Key features of Irish Carbon tax• Exemption from the tax applies to participants in the EU Emissions

Trading Scheme (ETS) in respect of fuels so covered. On that basis, electricity is not covered by this tax. There is a full relief from the tax for gas and solid fuel which is shown to the satisfaction of the Revenue Commissioners to have been supplied for use in the generation of electricity, and for a partial relief from the tax for any gas delivered for use in an installation that is covered by a greenhouse gas emissions permit.

• Estimated to raise €330M per annum (50% from transport; 30% other oils; 20% gas, coal, peat)

• Pure Carbon tax – Ireland a forerunner• No specific earmarking but revenue to be provided for

– Boosting energy efficiency– Rural transport– Compensating lower socio-economic groups

Impact on Emissions• The table below assumes a carbon tax of €20/tCO2, rising to €38 t/CO2 in 2020 with

revenue used to reduce income taxes (Tol et al., 2008). Most of the reductions are in the power generation sector. Without climate policy, carbon dioxide emissions in 2020 would be 10% higher. Most of the emission reduction is realized in electricity, where emissions fall by 34%. This compares to a target of 20%. In the rest of the economy, emission reduction is only 1%. This compares to a target reduction of 39%.

• The impact of climate policy on 2020 carbon dioxide emissions (000 tCO2 equivalent) (Tol et al., 2008, p.9)

No policy Tax + ETS Difference Target

CO2 from

power generation

15,307 10,074 5,232 -34% -20%

CO2 from

other sources

42,273 42,680 532 -1% -39%

Total CO2 58,049 52,285 5,765 -10% -27%

Other exemption negotiations

• Negotiations were underway to allow full or partial exemptions/rebates to companies in strong binding agreements. The Commission on Taxation (2009) report suggested the carbon tax design should allow for the possibility that companies with legally binding action-based and/or target-based emissions reduction agreements with Sustainable Energy Ireland (SEI) could be accommodated. (ISI 393/EN 16001)

• However, these firms will not be exempt

Equity• The overall expected additional costs on households is €2-€3 per

week . Extra cost ranges from €150 p.a. (€100 direct & €50 indirect) in lowest socio-economic decile to €300 p.a. at highest level. The average is approx. €240 p.a. (€140 direct and €100 indirect)

• Inflation effects estimated to be 0.35% in a full year• Accompanying measures announced are aimed at improving the

energy efficiency of low-income households. €50m of carbon tax yield will be used to help those at risk of fuel poverty and €130 million allocated for energy efficiency measures. A vouched fuel allowance scheme will be introduced to offset the increases for low income families, which still has to announced in detail. An Inter-Departmental/Agency Group on Affordable Energy convened by the Department of Communications, Energy and Natural Resources is due to make recommendations on the precise nature of the measures.

Fuel poverty in Ireland

• In 2005, 15% of households spent over 10% of their income on energy and this is expected to rise to 19% of households in 2010 (due to energy prices rising higher than incomes) (Tol et al., 2008).

• New tax is regressive, but this can be addressed with compensation measures. However, this will miss approximately 55,000 households

• Regional distribution issues in commuter belt

Fuel Tourism

• It is estimated that between 5 and 9% of petrol and up to 20% of diesel sold in Ireland was consumed abroad (drivers from Northern Ireland and trucks getting on ferries) (Fitzgerald et al., 2008). This data is from models rather than sales figures.

• Highly dependent on Euro/Sterling exchanges and relative excise in UK and Republic of Ireland over time.

• The carbon tax would be expected to reduce the extent of this and associated CO2 (though it would rise in UK). The overall loss to the Irish exchequer is estimated to be €9M

Other issues

• Although methane from agriculture is up to 30% of Irish greenhouse gas emissions it was not included in new taxes in the 2010 budget due to political considerations, problems of measurement and complex administration

• July 2010: Tax on the carbon windfall profits of utilities - they had benefitted from the free allocation of allowances in the EU ETS

Why now?• Ireland has had a coalition government between

one of the major political parties and the Green party for the past 3 years which led to the Programme for Government discussed above and the commitment to introduce a carbon tax within the lifetime of the government.

• Timing: due to the recession of the past 2 years, there is a need for general tax revenue.

• Ireland has been promoting a framework of transitioning to a ‘Smart Economy’ (which includes environmental sustainability image)

Why now?• There have been good statistics, modelling and forecasting

available to government from various think tanks, researchers and NGOs as well as a increasing consensus amongst commentators that the polluter pays principle is an important aspect of dealing with environmental problems

• As the tax does not apply to large emitters who are part of the EU ETS, and the large emitters who are not part of this entered into negotiations with the government to employ voluntary agreements instead of a carbon tax, the most influential lobby groups did not oppose the tax.

• The lengthy and detailed stakeholder consultation process that the Commission on Taxation invited resulted in this new tax being well thought-out, more politically acceptable and nuanced than it would have been without this.

Other Environmental taxes – paving the way

Plastic Bag levy– Initially set at €0.15 per bag and was raised to €0.22

in 2007– Number of bags sold dropped from 1 billion to 85

million in the first year – Plastic bag levy revenues (approximately €120 million

up to end-2008 ) are earmarked for the ‘Environmental Fund’

– There is no evidence from the household survey that even those who are unemployed feel that it is ‘unfair.'

Transport taxation system

The Irish tax treatment of motor transport comprises:– Once off purchase tax: vehicle registration tax (VRT)– Annual charge: motor tax, regardless of usage level– Usage charge: auto fuel taxes, comprising excise duty and VAT– Fiscal measures to encourage more environmentally friendly travel

• 2008: “Rebalancing” of vehicle registration tax (VRT) with tax based on emissions rather than engine size

• Motor tax was also rebalanced and changes were made to the capital allowances and leasing regime for business cars, to link the availability of relief to CO2 emission levels.

• Changed patterns of new car purchase very rapidly – (85% of new cars now in lower emission bands)

• Air travel tax (2009)

Landfill tax

• Introduced in 2002 to encourage the diversion of waste away from landfill and generate revenues that can be applied in support of waste minimisation and recycling initiatives.

• Goes to ‘Environmental Fund’• The initial rate was €15 per tonne. This increased to

€20 in 2008, and to €25 in 2009• A €13 million fund has been set up to encourage

businesses to become involved in manufacturing recycled waste into products that can be sold on. Currently, Ireland exports 1.5 million tonnes – three-quarters of all annual recycled waste

Waste Charges

• By 2005 pay as you throw by waste or volume mandatory (34 local authorities) (However, reports of private operators offering flat fees again recently)

• Annual charges for collection and disposal of 120 litres of waste a week range from €195 per annum to €440. Some local authorities also charge for recycling and/or composting bins.

Next steps

• Ex post analysis on revenue, carbon emissions• Documenting extent of regressivity• Leakage• Public opinion