Ireland has to move on carbon tax – why are we still arguing about it?

Ireland has to increase tax on carbon – by a lot and over a sustained period. Our greenhouse gas emissions are way above target and we will soon start to face big fines as a result. And if we don't move soon, our rising emissions will mean we not only miss 2020 targets, but also fall even further beyond meeting longer-term goals. Yet still the Government tip-toes towards the inevitable. Having flunked a small rise in last year's budget, it will only now say it will "consider" it for the 2020 Budget. Don't worry too much though – we are only talking about the future of the planet.

Higher carbon taxes on fossil fuels is a key recommendation in an interim Joint Oireachtas Committee report on climate action. But it has adopted the classic Irish political holding position of calling for more study, in this case to find out how to protect poorer households and how to use the money raised.

Will this request delay further a decision to increase carbon taxes which was put off in last October’s budget? We shall see.

1. Why do we need a carbon tax?

So people decide to use less polluting fuels and there is an incentive for businesses to develop more environmentally-friendly products and processes.

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The economic theory is the price we currently pay for fuel does not reflect the environmental damage of the resultant carbon emissions.

"Putting a price on carbon is the most effective economic tool for meeting the goals of the Paris Agreement on mitigating climate change," according to a blog by Franziska Funke and Linus Mattauch of Oxford university, among the authors of a landmark study on the issue published in the Nature Climate Change journal.

Carbon emissions at current levels are what economists call a market failure – the price on the market is too low to reflect the consequences. Way too low. Putting a realistic price on carbon “makes carbon-intensive production and consumption more expensive and creates an incentive for economic actors to turn to lower-carbon alternatives,” according to the blog by the Oxford experts.

Governments can set this price in two main ways – putting a tax on carbon, or introducing an emissions-trading system, making big business pay when they use more polluting fuels. Carbon tax is not a magic answer – but the vast majority of economists see it as a vital step.

A total of 51 carbon pricing schemes have been implemented or promised among the developed economies responsible for 80 per cent of emissions – 25 emissions-trading schemes and 26 carbon taxes.

However, the price in most schemes is way too low to reflect the environmental cost. Sweden, with a price of €114 per tonne, is a notable exception. It is now introducing an emissions tax on air travel, from €6 to €39 per flight leaving Sweden, depending on distance.

But in many other countries to price put on carbon is way too low to reflect the environmental cost – more than €150 a tonne on most estimates – and many have not yet bothered at all.

2. What is happening in Ireland?

Ireland is well behind on its carbon emission targets and faces significant fines from 2020 as a result. There is debate about just how heavy these would be to start out, but they could quickly climb into the hundreds of millions annually. Under our international commitments, emissions from big energy reliant businesses; power generation, big manufacturing plants and so on, have to fall by 40 per cent from 1990 levels by 2030. For the rest of the economy the target is a 30 per cent cut from 2005 levels by 2030 – and 20 per cent by 2020. According to Prof John Fitzgerald of the Climate Change Advisory Council, we can’t meet the 2020 targets “even if we stand on our heads”. So we need to aim for 2030.

The Government is set to invest billions in environmental measures in the coming years – everything from energy generation to encouraging electric cars to retrofitting government buildings. But this will only get us a third of the way towards our targets. Other questions remain – including what happens in agriculture.

But a higher price of carbon is essential if Ireland is to have any chance of meeting our targets. And here we get to the carbon tax, phased in since 2009 and costing €20 per tonne of CO2 emitted, thus putting a heavier burden on more polluting fuels such as coal.

An ESRI study pointed out this tax in an Irish context is “relatively low”, accounting for just 7.6 per cent of total excise duties levied on petrol and 14 per cent for diesel.

This amounts to about 5 cent on a litre of diesel or around €2.40 on a 40kg bag of coal. Even doubling the rate, the ESRI said, would only increase diesel prices by about 7 per cent.

The Climate Change Advisory Council recommended carbon taxes be set at €80 per tonne of CO2 by 2030.

Importantly, a final report this week from the Joint Oireachtas Committee on Climate Action agreed, though it called for more study on protecting poorer households before we move, as well as analysis on how the proceeds are distributed.

It is also worth noting that an ESRI study estimated a much higher rate might be needed – up to €300 per tonne – to meet Ireland’s targets. This is not currently on the political agenda but it illustrates the uncertainty about how much Ireland needs to do. This will be one of the defining economic issues we face – even if we are only slowing facing up to it.

3. So why the delay?

Having avoided any moves in the last budget, Minister for Climate Action Richard Bruton said carbon taxes would be "considered" for Budget 2020. So there is still no commitment. But why is Ireland so slow to act?

– One reason is the political environment. Internationally, the paper by the Oxford researchers points to the need for high trust in the political system to smooth the introduction of such taxes – Finland, Norway, Sweden and Switzerland are the only countries with taxes over $40 a tonne and surveys in all four show high trust in politics – a rarity today internationally.

International experience shows the political risk.This week, in an election in the Canadian province of Alberta, a right-wing government replaced a centre-left regime,promising that its first action would be to scrap the “job-destroying carbon tax”, in direct contravention of the policy of the Canadian government.

For Ireland, Pete Lunn, who heads the behavioural economists unit at the ESRI points to the difficulty of introducing new charges in the wake of the austerity era of higher taxes and lower spending.

Politicians on all sides remember the debacle that was water charges.

– There are also those with the most to lose from higher carbon taxes and arguments about who should be compensated and how.

The ESRI carbon tax study showed while lower-income households would pay less extra in cash terms than better-off households, it was a bigger burden for these householders as a proportion of their overall spending. Carbon taxes are regressive and measures are needed to address this.

The committee called for more study on how to protect the least well-off households, pointing to official studies showing that more than a quarter of homes suffered from some kind of “fuel poverty”, defined as spending 10 per cent or more of your income on fuel.

– There is a wider debate about what happens to revenues from a carbon tax. At the moment the €440 million raised each year goes to the central exchequer.

However, international studies suggest acceptability is likely to be raised by using carbon taxes for specific environmental purposes, or via some kind of direct return to households.

This directing of carbon tax revenues into a special fund was a recommendation of the Citizens’ Assembly study on the issue and of the Joint Committee report.

There are two ways to spend the money raised. One is to direct some of the cash to protect lower-income households and use the rest for environmental projects. The other is to give the cash back to households, ensuring as part of this that lower-income, fuel-poor households do a bit better.

The logic of the latter is that while the State does not gain any cash, households who use less carbon – or change their behaviour to do so – gain more. But the former would direct cash straight back into environmental projects.

– The nature of the tax, even with a payback system, is a tricky sell. The Oxford researchers point out that the costs are concentrated but the benefits are diffused – the opposite of the ideal to win acceptance. Lunn says that people tend to put a lower value on potential gains than losses, meaning any payback system will be controversial.

Central to any move would be the announcement of a plan to gradually increase the charge annually to 2030, with higher costs year-on-year key to encouraging people and companies to change their behaviour. This clearly has its political dangers.

Behavioural economics also teaches that people favour outcomes that happen more quickly, Lunn said, rather than things that are further away, another difficulty in selling a tax aimed at a long-term goal.

One wrinkle here is that people show almost as much concern for something that happens in, say, 20 or 30 years time, as they do to something in five years time. Neither beats a return which happens in under a year.

One plus for the carbon tax, he says, is that in most cases it is just added to existing charges – we already pay excise on fuel, for example. Thus it does not face the barrier of being an entirely new bill, like the water charges.

– Making the political case for the tax is important. Persuading people it is essential – and can work – is vital.

Even the labelling of the tax can be important, with some countries opting for a CO2 levy, for example. “You have to put the trade-off in front of people and explain the rationale,” says Lunn. Some 80 per cent of people in the Citizens’ Assembly supported the concept, so there may be some fertile political ground.

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The bottom line is that there is an unanswerable case for increasing the price of producing and burning carbon and that all the international research points to this as essential to combat global warming. Yet taking the step to doing it remains politically tricky, with the Government seeking a “cross-party consensus” on all the issues. Part of this is provided by the Joint Committee report, but People Before Profit remain strongly opposed and Sinn Féin wants other measures in place before higher tax is introduced.

With a general election likely in the next year, it remains to be seen if the bullet will be bitten in Budget 2020. The carbon tax costs households an average of €200 a year now. How high are we prepared to go? How far do we have to go?