Monday, 7 September 2009

Carbon taxes - not 'just another tax' according to Commission

John Barry: This post is a very quick ‘cut and paste’ pulling together some of the main carbon and environmental related aspects of today’s Report, which will require more analysis in the coming weeks.

The Commission’s recommendation that a Carbon Tax be imposed (p.28) is on many levels to be welcomed, and is clear evidence of the influence of the Greens in government – since this was part of the 2007 agreed programme for Government between Fianna Fail and the Green Party. While there may be some debate as to whether the suggested level (€20 per tonne, p.342) is sufficiently high to encourage a shift away from carbon-intensive energy, heating and transport activities, there is at the very least in the report a clear beginning heralding long-overdue environmental tax reform in Ireland. It is a moot question as to whether now, given the economic recession, is the time to introduce a carbon tax.

It is particularly welcome that the potential adverse knock-on effects of such a tax on the most vulnerable members of society are explicitly recognised. As the report puts it, “Imposing a tax on the leading greenhouse gas (carbon dioxide) will incentivise the action needed in ways that leave the response up to the emitter and that reflect the polluter pays principle – in essence those who emit more pay more. We also recommend that specific arrangements be put in place to ensure that those who experience energy poverty will be fully protected from the impacts in terms of price rises” (p.2, also p.330). This sensitivity to the unequal distributional impacts of a carbon tax is to be welcomed.

The commission recommends the hypothecation of the carbon tax (in keeping with recommendations from research and other carbon taxes). “We recommend that carbon tax revenue should be used, in the first instance, to combat fuel poverty. The overall effects of the carbon tax on vulnerable households should be appraised to ensure that such households (urban and rural) are cushioned from the effects of the tax.” (p.367). This explicit hypothecation of taxes ensures the revenues raised from a carbon tax do not simply disappear into the black hole of general taxation (which could undermine any public support for such a measure) – a key component of the commission’s concern that the carbon tax not be viewed as simply another tax, but one with behavioural effects at the individual level. As the Commission puts it, a carbon tax “should be visible at the point of final consumption, to help ensure that behavioural change aspects are maximized and it is not seen as ‘just another tax’.” (p.12). Another implication (though not explicitly stated in the report) is that a carbon tax signals a shift towards a low carbon economy. The commission rightly prioritises ‘energy efficiency’ as the main focus of fuel poverty efforts, given that this is often the best value for money and ‘bang for your buck’ in terms of combating fuel poverty as well as addition benefits in terms of potential job creation, something which dovetails with the arguments for a ‘Green New Deal’discussed in previous posts.

The Commission, in part in keeping with the Smart Economy document from last December, is keen to be seen to be promoting the ‘Green Economy’ (Part 9 of the report ‘Tax and the Environment’), though oddly there is only one cross-reference to the Smart Economy document in the report (and that in relation to innovation, rather than the Green Economy). Another welcome feature of the report is the recognition that the introduction of a carbon tax is within the context of broadening the tax base, rather than imposing new taxes, and in particular it should lessen the burden taxation on labour (p.73). In the words of the Commission: “Broadening the base by introducing an annual property tax and a carbon tax is generally better for Irish economic growth than increasing rates of income tax.” (p.77).

In relation to transport emissions, the Commission states “We support the introduction of fiscal measures aimed at reducing car use,” (p.361), given that transport emissions from cars are the fastest growing component of Irish CO2 emissions. Their proposals include: VRT exemption for electric vehicles; workplace parking levies; tax-exempt cycle to work schemes where cycles are treated as tax-exempt benefits in kind, road pricing and congestion charging.

Perhaps we are witnessing the slow beginnings of a shift in our taxation system – where the state taxes 'bads' such as pollution and not 'goods' such as income and employment. As the report puts it “A broad programme of environmental tax reform would shift the tax burden from ‘goods’ such as employment, to ‘bads’ such as pollution”. (p.331).

A final question is whether such environmental tax reform will be enough for the Greens in government, in the light of NAMA and the prospect of an upcoming savage budget?


Marise said...

I was a bit concerned that carbon, although important, is being somewhat singled out. I am not sure about how taxation can be used to improve behaviour in other areas, but as they mentioned rubbish pickup charges, how about taxation on excessive packaging? And then the other elephant in the room is emissions from animal husbandry. Farmers are beleaguered already, but farm methane is also a worry. Farms are also the largest users of water; how will water charges affect them? On that subject, water charges should not go to the general exchequer either; they should go to improving the water infrastructure, perhaps diveded among the county councils according to county population.

John Barry said...

Thanks for the comments Marise. Taxation is one way to get behaivour change (if done right of course!). Here the success of the plastic bag level is a great example. On the methane issue - you're right - methane is a more potent green house gas (by a factor of 20) than CO2 and the commission excluded it from their recommendations on the basis of its difficulty to measure accurately and the adminstrative problems with taxing it. I;m not sure I agree with the COT on that and in my view we will have to deal with all CC emmisions not just C02. I tend to agree with you on the ring-fecning of water charges - just as the COT ring-fenced the carbon tax revenues for allievating fuel poverty and encouraging energy efficiency, likewise water charges would be best earmarked for improving water infrastructure and improving water efficiency.