Monday, 14 December 2009

Budget 2010: carbon tax

Nat O'Connor: The Taoiseach goes to the UN climate change summit in Copenhagen flanked by two Green Party Ministers. Budget 2010 introduced Ireland's first carbon tax at €15. Ireland has never looked greener, but have we got carbon tax right?

The Economist magazine (5-11 Dec 2009) says that "Economists reckon a carbon price of around $40 is needed." (p. 12). That's around €27.
Friends of the Earth present a more technical paper here.

I am not an expert in this area, but I have a few queries that I hope others can answer.

A carbon tax is meant to be a one-off pricing of carbon emissions and it is meant to be a sufficient disincentive so that the producers and consumers in the economy make a decisive shift away from oil and other carbon-heavy resources. We are setting our tax at just over half the recommended level, so it looks like we'll have to nudge it up incrementally over time. Yet, isn't incrementalism part of the problem, that we need to be decisive about this in order to create the disincentive effect?

We already disincentivise a number of carbon-heavy things in our economy, such as through the 'old reliable' excise on petrol and diesel. But we effectively have a situation where carbon price is mixed in with excise. Wouldn't it be more ecological to undertake a thorough set of tax changes and replace excise with carbon tax, plus ensure that carbon tax meets the full €27 in all cases?

To clarify the point, we are now going to have two situations in parallel:
1. Some fuels (like petrol, and coal since 2005) are affected by Mineral Oil Tax. I am going to assume that there is more than enough tax added to bring it over a carbon price of €27 or more. Hence, we could convert some of the excise to carbon tax.
2. Some fuels (like turf) are only affected by the new carbon tax, so the carbon price is effectively €15. We should really go the whole way and increase carbon tax here to €27.

A carbon tax in one country seems to depend on other countries also having a carbon tax, so that oil-based products are already carbon-taxed when they arrive in Ireland. In the absence of global agreement on this, should Ireland impose some or all of its own carbon tax on imported goods (like plastic) from countries that do not impose an equivalent tax?

In short, if we are taking global heating and climate change seriously, why shouldn't Ireland go all the whole way and introduce a carbon tax at €27 (or more)?

Of course, the disincentive to use carbon-heavy resources assumes that it is possible to move to alternatives. In this respect, governments must lead the way towards alternative energy sources, public transport, etc. But these too will either require governments to spend (and carbon tax provides revenue) or else they require private investment (which will be more incentivised by a strong carbon tax, not a weak one).

The Economist editorial (p. 11) provides a reality check about getting this right:
"Although the benefits of averting... catastrophe are incalculably large, the costs of doing so should not be enormous - as little as 1% of global output, if policy is well designed... This newspaper reckons that the world should fork out, rather as householders spend similar proportions of their income on insuring their homes against disaster."

Later in the same piece, they note: "A percentage of global economic output is affordable for a worthwhile project. Saving the banks has cost around 5% of global output."

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