Varadkar seeks to avoid Macron’s mistakes on carbon tax

The gilets jaunes protests in France, sparked by a hike in carbon tax, "probably sent a shiver down the spine of politicos in Ireland". That is how analyst Joseph Curtin, who specialises in economics of climate change, reads it.

With each passing weekend, growing unrest escalated as a supposedly progressive measure embracing sustainability assumed the scale of “water charges multiplied by 100”, he observes.

The yellow-vest movement will leave TDs even more on edge about a proposed rise in Ireland’s meagre carbon tax.

The short-term, politically expedient thing to do might be to quietly abandon moves to increase the current rate of €20 per tonne of CO2 and set it on a rising trajectory over the next decade, as promised in the autumn.

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But carbon tax applied in the right way is the single most effective way to shift people to a decarbonised world quickly and to reduce carbon emissions. And Irish emissions are going in the wrong direction, out of step with most of Europe, and far short of targets we have committed to.

“Ireland is consistently ranked among the worst performers on climate action within the EU, yet a proposal to increase the carbon tax by €10 was passed over in Budget 2019,” notes Curtin, who is senior research fellow at the Institute of International and European Affairs (IIEA).

On a per-capita basis, Irish people generate 13.7 tonnes of carbon a year, compared with an EU average of 8.7 tonnes. What’s more, “a significant compliance gap has opened up with respect to legally binding targets, posing risks to the exchequer, potentially reaching billions of euro by 2030 in a business-as-usual scenario”.

Socially sensitive

Curtin believes Ireland must not abandon its climate commitments and carbon tax has to be in the mix. Macron reduced wealth tax and increased carbon tax at the same time but “not in a socially sensitive way”, he says.

At the height of the protests, economist Thomas Piketty tweeted: “If he wants to be president of the 2020s, Macron must reinstate the wealth tax and allocate the revenue to compensate those who are the most affected by the rises in carbon tax, which must continue.”

Piketty observed in a blog: "Macron has spent considerable time in explaining to the country that the 'premiers de cordée', ie the leading fortunes and industrialists, should be treated with care; the top priority was to grant tax cuts to the wealthiest, and as a start, the wealth tax abolished. All this was done at top speed, in a spirit of invincibility and without the slightest qualm of conscience."

Macron is paying a heavy price for lack of political nous. As the Irish Government ponders how to scale up the tax, Curtin hopes the right lessons are learned. “The first thing is to make it as fair as possible ... and not be ‘revenue raising’ ... and bring the people with you.”

Minister for Climate Action Richard Bruton has accepted the need to decarbonise with timelined actions, combined with a carbon tax with clearly flagged increases, allowing consumers time to adjust. This declaration comes with his message that communities and individuals must be on board if it is to work.

The current reality, as chairman of the Climate Change Advisory Council Prof John FitzGerald has said, is that carbon is traded at too low a price.

“And therefore the technologies depending on carbon [fossil fuels] are most cost-effective compared to low-carbon alternatives,” Curtin explains.

Tilting the balance, however, often omits a key dimension, he says: people and politics. International experience suggests that without citizen support, “higher carbon taxes will remain politically infeasible, high-carbon industries will be protected and climate action will be stymied.”

Carbon tax models

Curtin has applied research from political economy and behavioural economics to explore how a carbon price could be designed to win political and social support.

Working for the IIEA, he outlined four options by way of “carbon tax that works for citizens”. They are summarised as: straight to exchequer; revenue neutral, fee and dividend, and targeted green investment.

1 Carbon tax straight to exchequer
Simple to administer but the tax is regressive: Rich households pay more overall but poorer households pay relatively more of their income.

2 Revenue-neutral model
Uses the wider tax system to offset the negative impact of carbon tax – for example, lowering income taxes and excluding the most vulnerable from payment of the new tax. This may neutralise some criticism, but international experience suggests the option will still be politically unpopular.

3 Fee and dividend
Every household would receive a monthly or quarterly cheque in the post, or money via electronic transfer, to help offset the cost of a carbon tax increase. Those who have low-carbon lifestyles benefit more.

4 Targeted green investment
Spend carbon tax revenue on green investments targeting particularly affected groups. If used to alleviate fuel poverty (for example, to support retrofitting of houses), it can be highly equitable and help to minimise the risk of public opposition to the tax.

All four focus on different approaches to utilising the revenue raised. The first two options have traditionally garnered most attention. The third and fourth are now receiving much greater policy focus internationally and at the highest level within Government, and among Dáil parties of late.

“However, a politically feasible carbon tax design could legitimately incorporate elements from all four options,” Curtin stresses.

Bruton has said the Department of Public Expenditure is assuming a carbon tax of €100 per tonne by 2030 in the model it uses for shaping future economic policy – five times higher than the rate that applies today.

How the tax works

A carbon tax is a percentage levy applied to motor and heating fuels as well as other carbon-intensive goods and energy products. The more carbon-intensive the good or fuel is, the higher the tax, and so the greater is the incentive for people to use less of it.

Currently it adds about €2.10 to the cost of a 40kg bag of coal, 45 cents to a bale of briquettes and 5.3 cents to a litre of diesel. If the level of tax assumed by the Department of Public Expenditure was applied, it would add €10.50 to a bag of coal, €2.25 to a bale of briquettes and 26.5 cents to a litre of diesel by 2030.

In effect, the tax falls mainly on transport and heat. Heavy industry and power generation comes under the EU’s Emissions Trading Scheme. Agriculture would not be included and requires a discrete solution, in Curtin’s view. Ideally the tax rate should be linked to 2030 emissions reduction targets and increase automatically in light of these.

For all its merits, it is unlikely the tax would ever be high enough to be a silver-bullet solution. So major policy shifts on retrofitting buildings, electrifying transport and on land use would also be necessary.

Curtin favours “fee and dividend” or “targeted green investment”, or a hybrid of the two, although he accepts that setting up an administration system for fee and dividend would present difficulties . It is easier in countries with a mandatory identity card system that indicates where everybody lives.

The benefits of the transfer is that it is “tangible, immediate and obvious”, and he believes it should go to the individual rather than the household.

The ethics of simply taxing fossil fuels and rewarding taxpayers is not an issue, as “you still get the price effect” in shifting behaviours towards sustainable consumption of renewables, while it allows for a rapid increase in carbon pricing. “But it depends on how high the tax is.”

In some countries, he notes, they had high carbon taxes but failed to secure a major shift in consumption, which prompted consideration of the green investment route. The Swiss carbon tax is a hybrid; one-third goes to green spending, while much of remaining revenues go to households as uniform lump-sum transfers. In Canada there is a slight premium for rural households.

“These design elements can be horse-traded politically to win political support for the proposals across the political spectrum,” he suggests.

Oireachtas report

Green Party leader Eamon Ryan favours the "fee and dividend" option, which he hopes will be endorsed by cross-party consensus by the end of January, and that the action will be contained in the report of the Oireachtas Climate Action Committee.

It is examining how best Ireland should respond to climate change given the Citizens’ Assembly findings and the National Energy and Climate Plan being drawn up by the Government, which is set up on a temporary basis and is due to report by the end of January.

FitzGerald has repeatedly said all-party consensus is essential in scaling up carbon tax and securing its acceptability.

Discussion between parties has been progressing well, with support for an increase from €20 per tonne of CO2 to €90 per tonne steadily by 2030, Ryan says. Committee chairwoman Hildegarde Naughton, of Fine Gael, was similarly optimistic before Christmas.

Paying back through the social welfare system or the tax system are possible mechanisms, Ryan says, but he favours “the straight cheque”. This was how Irish Water processed refunds to householders and is easy to implement, he adds.

The “fee and dividend” is progressive in that it benefits the less-well-off more, although there are always pockets of unfairness. “It gives the sign we need to give” in shifting from fossil fuel use. The public would not favour recycling revenue, he contends, while to expect that the tax would finance other mitigation measures “is not going to happen”. This best approach politically is to “keep it simple”.

Broad support

Both Taoiseach Leo Varadkar and Minister for the Environment Richard Bruton have broadly supported the fee and dividend option, subject to detailed evaluation. Speaking about the matter in a pre-Christmas interview, made public on Thursday, Varadkar said: "I'm very much of the view that the money raised from carbon tax from households should be given back to households."

Ryan, who will continue to test the political waters in seeking consensus, has yet to speak to People Before Profit TD Bríd Smith, who at the height of the French protests said: "If the only solution offered is extra taxes on ordinary people, we will lose this fight. It is the fossil fuel industry itself and their profits that must be the target."

All options require strong political leadership and skilled communications in outlining benefits to citizens, Curtin says. A design option that avoids the label “tax” and uses the term “fee” is preferable, especially in a country where there is suspicion of government.

If money is being given back to citizens, “dividend” could be usefully deployed, he says. The route taken will be tested to the full, as he predicts it will have to “overcome popular cynicism and lobbying from fossil fuel interests”.