ESRI report criticises 'regressive' carbon tax

A CARBON tax will be “markedly regressive” in that it will hit poorer households disproportionately, according to a paper published yesterday in the Economic and Social Review. However, the paper says revenue from the tax could be used to negate the effect on households while still leaving a substantial surplus.

The paper estimates that a €20 per tonne tax on CO2 emissions outside the EU emissions trading scheme would cost the poorest households in the State approximately €3.50 per week, and the richest households €5 per week.

For the lowest 10 per cent of households in terms of income, the average burden was estimated as being 2.1 per cent of disposable income, while for the highest decile, the equivalant figure is 0.3 per cent.

Household energy consumption for heating and cooking is virtually constant across households, though consumption of transport fuel is linked to income.

Low income households tend to be less fuel efficient and to rely more on carbon intensive fuels, the authors note. However, low income households for the same reasons have greater scope for reducing their carbon usage.

The indirect impact of the tax, which would have a general upward effect on prices, is estimated by the authors to range between €0.50 and €1.50 per week, per household, across the household population, with the level increasing with income.

The study examines a number of welfare/tax packages that could be used for compensating households for the direct effects of the carbon tax and opt for one they find most preferable.

In this scenario, there would be a €2 per week increase in all welfare payments, a €104 increase per year in tax credits, and an €0.80 increase per week for each child of social welfare recipients.

A €20 per tonne of CO2 tax tax would raise an estimated €550 million per year. Using some of this to pay for the increases outlined above would leave a surplus of €190 million.

The authors suggest households should not be compensated for the indirect impact of a carbon tax, as this would interfere with the desired objective of driving consumers away from more carbon intensive goods.

The authors say that, in 2006, Irish greenhouse gas emissions were 25 per cent higher than in 1990, and 11.5 percentage points above the Kyoto target.

One-fifth of this gap is to be bridged through the purchase of carbon credits, for which €290 million has been allocated by the Government. In the period to 2020, Ireland has to cut its emissions outside the EU trading scheme by at least 20 per cent as compared with 2005.

Almost 60 per cent of the emissions outside the EU trading scheme are CO2 with the rest being methane (CH4), mostly from cattle. “Therefore any strategy aimed at reducing these emissions should target both CO2 and CH4,” the authors say.

The Distributional Impact of a Carbon Tax in Ireland was written by Stefano Verde, of Trinity College, Dublin, and Richard Tol, of the Economic and Social Research Institute.