Carbon tax fact and fiction - What should we make of the criticisms?

There were reports of some motorists queueing to fill up their tanks ahead of the imposition of the additional carbon tax at midnight on Budget night. If so, many will have spent more on driving to the station than they will have saved in tax. Even if they had a diesel car, they will have saved less than €2 on a 60-litre fill. Yet the carbon tax debate is now hot and heavy between those who say the Government should be moving faster – and other who say this is just yet another tax and won’t make any difference So what, are the facts and how does criticism of the carbon tax stand up to scrutiny?

What is the plan?

The Minister for Finance Paschal Donohoe announced an increase of €6 per tonne in the carbon tax to €26 per tonne. The extra tax on motor fuels came in immediately, though as carbon tax is a relatively small part of the overall tax burden on diesel and petrol, the increases at the pumps were limited. The application of the additional tax to other fuels such as coal, peat and home heating oil, is to be delayed until next May, after the winter.This means an additional €90 million will be raised. The Minister also clearly committed the Government to continuing to move towards the target agreed by a a majority of the Joint Oireachtas Committee earlier this year to increase the tax to €80 per tonne by 2030.

Carbon taxes are being introduced because the market price does not take account of the cost of burning fossil fuel on the environment – a negative externality, in the economic jargon. Carbon taxes are also intended to increase spending and research by business on cleaner technologies – because they see there will be more demand for these. But while the theory may be obvious, the practice is controversial.

Criticism 1: ‘It won’t work’

The initial increase in the tax will have a negligible immediate impact – the Climate Change Advisory Council had called for a €15 initial rise, arguing that quick action was needed to start changing people's mind-sets. The longer term plan to keep increasing the tax should start to influence people's behaviour, but only if they are fairly sure it will happen.

Budget 2020: Donohoe presses pause button due to hard Brexit threat

---

Cliff Taylor: The three Budget 2020 decisions over which sparks will fly

---

Cliff Taylor: Pre-budget figures show extent of no-deal Brexit threat

---

Budget 2020: Five things you need to watch out for

---

The bulk of economists and the major international and domestic advisory bodies all agree that putting an appropriate price on the use of carbon is an essential part of climate policy.

An ESRI research paper, The Economic and Distributional Impacts of an Increased Carbon Tax, published on budget day, says moving the tax to the €80 per tonne target would lead to a 15 per cent cut in Irish emissions below what they would otherwise be – a useful contribution, but showing that a range of other policies would also be necessary.

The tax on its own will not fully decouple carbon emissions from growth, it said. However it is seen as an important step towards meeting our target of having emissions 30 per cent below 2005 levels by 2030. So far, we are running way behind.

Evidence from big energy consuming businesses – big power station, industrial plants and airlines – does suggest that putting a price on carbon has a significant impact. These companies are subject to an EU Emissions Trading System – effectively incentivising firms to burn less fossil fuels. This has led to emissions from these sectors now being 21 per cent below 2005 levels.

Canadian province British Colombia introduced a carbon tax in 2008, which rose this year to 40 Canadian dollars a tonne (about €27.30 a tonne). It is quoted by both sides of the debate. Overall emissions are back at 2007 levels, but with the economy having grown significantly, the bulk of studies show that emissions are lower than would otherwise be the case, with a number putting the reduction at about 10 per cent. There is evidence of significant changes to car use and per capita emissions in a growing province are down about 12 per cent. The province is also now a leader in so-called cleantech industries.And the carbon tax is now a big issue in the Canadian federal elections.

The Scandinavian countries have let the way on carbon pricing, with Sweden having a tax since 1991, now around €117 per tonne.While the Swedish economy grew by 60 per cent since the introduction of the Swedish carbon tax in 1991, carbon emissions decreased by 25 per cent.

– Verdict

The evidence suggests that carbon pricing does work, but that modest taxes have modest results. Those who got ahead of the game, notably Sweden, show impressive results. Elsewhere more modest taxes suggest that the tax works, but on its own is not the answer. In economic jargon, carbon tax is seen as a “necessary but not sufficient” answer to the climate crisis. And the political problem is that while a higher tax will bring more results, it will also be more difficult to sell.

The international High level Commission on Carbon Pricing said in 2017 that by 2020 carbon prices needed to be $40 to $80 a tonne to meet the Paris goals, rising to $50 to $100 by 2030. Given trends in the meantime, these figures may now be higher.The bulk of schemes internationally are well behind this.

Criticism 2: ‘It isn’t fair’

Carbon taxes hit some people harder than others – this is the whole idea after all. The heaviest polluters pay more. However, opponents say that in some cases those hit hardest don’t have the option of changing their behaviour – for example people in rural areas will often have no alternative but to travel by car. And electrical vehicles remain pricey. This week’s ESRI study shows that rural households are more exposed than urban ones on average and that poorer rural households would be hardest hit. In urban areas, middle-income households take the hardest income hit, due largely to their use of cars.

Another common criticism is to ask why should households be targeted, when they are responsible for only around 10 per cent of emissions. This ignores the fact that carbon tax also hits businesses – with larger ones covered by the EU Emissions Scheme. This does penalise big carbon emitters and forces them to reduce or pay up, but critics argue that it is less penal than a straight tax on carbon. A coherent strategy across all sectors , including agriculture which is responsible for one third of emissions, has still to be fully spelled out, even if the Government’s climate change strategy this year starts to set the framework.

– Verdict

Fairness is going to be a crunch issue in this debate. Some of this will come down to the way raised money is spent – see below. A coherent, communicated strategy is vital, according to international research, if the Government is to have any hope of getting acceptance for the tax. A much-quoted paper by two Oxford researchers – Why is carbon pricing in some countries more successful than others – finds that countries with high levels of trust in politicians have most easily introduced the tax. Think Scandinavia and Switzerland. The public trusts that politicians are doing the right thing – and will use the money well. In most other countries, scepticism and an element of populism now holds sway, This means politicians need to work harder to gain acceptance for higher carbon taxes.

Criticism 3: ‘They’ll only waste the money anyway’

One of the most contentious issues in carbon taxation is how the money is used. Voter acceptance in British Colombia initially was helped by a direct return of cash to voters generally and businesses via straight tax and welfare payments, though some money now is also earmarked for investment. Here, the Government has opted to return some cash via direct payments such as fuel allowances to poorer households, spend some in areas most-affected by climate change policy, notably the Midlands and use some for investment in green projects such as greenways, car-charging points and so on. Vital to the politics of the tax will be public acceptance of these spending measures – and persuading people that much of the money raised is not just being used to support things that were going to happen anyway.

The Oxford research says that “redistributing carbon pricing revenue as a regular carbon dividend is the single most promising option for enhancing political acceptability”, although it adds that other approaches can also work. This route is supported here by the Green Party.

The political problem, the Oxford paper says, is that the costs of carbon tax are obvious and concentrated on households while the benefits tend to be diffuse. This means support can be lacking. Hence the Government will have to demonstrate that poorer households are being protected and hope for support for the policy for example in the Midlands, where cash is being spent.

International experience is mixed. While British Colombia won acceptance – not without a significant rump of opposition– the Australian government had to abandon a carbon tax in 2014 – and protests forced French president Emmanuel Macron to cancel a planned fuel hike. This is really tricky political territory.

The ESRI also sees advantages in cash being returned directly to households, notably allowing a progressive result where less well-off households do best. Giving all the money back in tax has a better economic impact, but means the better-off make the gains. Overall, the ESRI calculates that the tax would push up fuel price by 10 per cent by 2030 – so while the initial hit is small, the long-term trend would be significant.

– Verdict

How the money is spent looks likely to be just as controversial as the tax itself. Behavioural scientists identify “ solution aversion” as a big risk – people often don’t believe scientific evidence if they don’t like the obvious remedy it suggests. Spending carbon tax receipts and a wider coherent policy – for example promoting electric cars, charging points and affordability – may help to overcome this.