Carbon Tax and climate policy : Where are we heading?

With all the attention focused on the fairness or unfairness of the Budget cuts, its only new tax measure – the Carbon Tax – has passed almost unnoticed.

You have to wonder if there would be a Carbon Tax at all if it wasn’t necessary to keep the Greens in government or to give the Minister for the Environment, John Gormley, and the large entourage accompanying him, something to wave triumphantly as evidence of Ireland’s commitment to tackle climate change at the Copenhagen Conference. In other circumstances – a government that didn’t include the Greens, an economy not in crisis – would the tax itself have been formulated differently?

ESRI economists have long argued that a Carbon Tax is the best way for Ireland to meet its international climate change obligations. It should be the cornerstone of climate policy, they say. The Commission on Taxation also recommended in favour of the tax.
The new Carbon Tax is based on a rate of €15 per tonne; slightly higher than ESRI projections of what it should be. On Budget night, it was applied to petrol and diesel. In a few months time, it will be applied to home heating oils and gas. Coal and peat fuels remain exempt, even though these fuels emit more CO2. The grounds for exemption are unclear, including any argument about minimising cross border smuggling rackets. Is it possible that it’s yet another sop to older age groups, who prefer the properly lit fire of old and for whom having to change the conventional methods of home heating would pose an unwelcome disruption?
As announced, the Carbon Tax will raise an estimated €250m in 2010 or €330m in a full year. It will save an estimated 175,000 tonnes of carbon emissions, or 250,000 in a full year, according to the Minister for the Environment and Green Party leader, John Gormley.
In terms of tax policy, the tax marks the first decisive switch away from labour to ‘green’ taxes. Its objective is to wean us of our carbon addiction and at the same time deliver an environmental dividend in reduced emissions. It is revenue neutral, up to a point anyway, since the bulk of its proceeds will be channelled into desirable environmental objectives like retrofitting the housing stock to provide better home insulation (€166m) at the rate of 100,000 homes per year, with the spin-off of 6,000 construction jobs next year alone.

Will it work? In other EU countries with a well–established carbon tax, such as the Nordic countries, the rate of the tax has been increased over time so that it now makes a not insubstantial contribution to overall tax revenue. Add in domestic water charges and a property tax in next year’s Budget, and we may be well on our way in a few years time to spreading the tax burden away from direct income earners and more widely among the community.

Perhaps a more important issue is whether the tax will achieve its environmental objectives, and if so, at an acceptable cost? 2008 is the first year in the Kyoto compliance period of 2008-2012. To meet our Kyoto target of no increase in GHG emissions greater than 13%, Ireland would need to average 40,556Mt of CO2 equivalents per annum. In 2008, we managed 44,965 Mts. At most the limited Carbon Tax will deliver an insignificant saving of 175,000 tonnes of a 4.49 Mega tonnes excess, a drop in the carbon ocean.

In his Carbon Budget statement to the Dail, John Gormley expressed disappointment that, despite the economic crisis, the figures for 2008 reveal only a 1% decrease against a 3% target. (A decrease of about 4% is projected for 2009). The Minister put it down to the weather, specifically last year’s extended cold winter which caused a rise of 8.7% in emissions form the residential sector. This conclusion is debatable since the residential sector only contributes about 10% of the emissions total anyway and, therefore, could not wholly account for the target shortfall.

The substantial increase in the Budget  for  ‘green’ research may ultimately throw some light on where the problem lies, but only insofar as sufficient projects are focused on that aspect. Meanwhile, speculation rests on agriculture and transport as the two main culprits.

There are question marks over the feasibility of the ‘electric cars’ initiative, so enthusiastically championed by the Energy Minister, Eamon Ryan, either to make any difference in the short term or even as the right solution to reducing Ireland’s private transport emissions in the long-term.

As yet, no coherent policy has been developed on agricultural emissions. It’s doubtful one will emerge in the lifetime of this government, since the farming vote has largely deserted Fianna Fail for Fine Gael. The main government party might have real political difficulties in endorsing any policy that might alienate it any further from the farming community

A further question mark arises over the government’s plans to use the proceed of the Carbon Tax to retrofit the housing stock. Compared with FG’s and Labour’s respective plans, John Gormley’s target of 6,000 construction jobs arising from 100,000 retrofits annually appear modest.

But even they may prove wildly over-optimistic: grant-aid from the government to insulate your home is one thing, coming up with the rest of the dosh that may be required is another. Will householders want to borrow the sum of €15,000- 20,000 needed to make up the difference, or, even if they were willing, will the lending institutions be forthcoming?

There’s also the issue of personal choice. If the retrofit will not add substantially to the sale price of your home, and you were planning to move to a larger house in a few years anyway, why bother? Expensive retrofits only make sense if there is certainty of remaining in the same house and recouping on the investment through lower energy costs over a long period; or if they apply to public housing stock.

Then there’s the question of fairness – why should the ordinary taxpayer shell out for a Carbon Tax that is used to deliver a government subsidy to others to reduce their own energy costs, and therefore their Carbon Tax liability, in the longer run?

John Gormley has also announced his plans to publish a Climate Change Bill in the first quarter of next year. The Bill will enshrine the commitment to a 3% annual reduction in emissions of 3% each year, with an 80% target for achievement by 2050. Future governments, however, would have the power to modify these targets.

An Office of Climate Change will be established, but not as a separate quango. It will be located within the EPA. Given the plethora of agencies and advisory bodies already concerned with climate change, you have to wonder if there’s a real need for another one. Surely the Office for Climate change already exists: i.e. the Environment Section in the Minister’s own Department.

We may be heading in the right direction, but it’s no harm to reflect that the currently favoured policies to reduce total emissions may carry a substantial risk of failure. The ones already in place don’t work. The long term costs and benefits of the suite of policies remain unclear.

Rather than the hot-headed and politically charged exchanges that marred the recent Dail debates over the Carbon Tax and the Carbon Budget, and ill-conceived policy charters promising spurious ‘green jobs’ targets and ‘green economy’ Utopias, a more sober public discussion on our climate change policy is urgently required.