The massive squeeze on people’s spending power is causing dilemmas for Government policy.
Next month’s budget may simultaneously push up fuel prices by imposing the previously agreed annual increase in carbon tax — and also extend reductions in tax on fuel already in place from early in the crisis to help hold prices down.
This will be one of the trickiest areas of budget planning and there are likely to be rows both within Government and between Government and Opposition on the carbon tax issue.
The wider context is the impact of the cost-of-living crisis on the climate agenda — higher fossil fuel prices provide a big reason for investment in renewables, but managing the transition while more renewable energy comes on stream is really challenging.
And recent EU data show emissions increasing here as the economy recovered after Covid-19, with Ireland falling further behind on its climate targets.
1. Response to the cost-of-living crisis
As the fuel price crisis hit, the Government announced a range of temporary reductions in the price of auto diesel, petrol and gas oil to help households and businesses. Reductions of around 15 cent to 20 cent were applied to a litre of auto diesel and petrol respectively in March to apply until October 11th.
The Government also cut the VAT rate on gas and electricity from 13.5 per cent to 9 per cent, until the end of October. These are expensive and are estimated to have cost the exchequer €450 million. Nonetheless, the likelihood is that the budget will extend them.
Petrol and diesel prices, while well above their level of before the Ukraine war, have eased from their highs, leading to lower prices at the pumps — though their trend in the months ahead remains uncertain. Wholesale gas prices, however, have soared further and if this is maintained it will knock on to significantly higher gas and electricity prices — almost half of Ireland’s electricity is provided from gas-fired stations.
Extending these fuel price measures — in whole or in part — on budget day will be expensive and deciding for how long to do so very difficult. It underlines the dilemma of temporary budget measures — there is always pressure to roll them forward and costs can build.
2. The carbon tax dilemma
Carbon tax was introduced in 2009, initially on motor fuels and later extended to other liquid fuels and natural gas. It is expected to raise over €650 million for the exchequer this year.
In Budget 2021, the Government committed to annual increases in carbon tax as a key climate policy measure, encouraging people to use less fuel, with the highest tax on the biggest polluters.
In tandem the revenue raised is ring-fenced to provide special welfare supports to poorer households threatened by fuel poverty, to help to fund the national retrofitting programme and to assist farmers transition to more climate-friendly ways of operating.
The Finance Act after the 2021 budget legislated for annual increases each year out to 2030, based on charging an additional €7.50 per tonne of carbon dioxide emissions. The increases are due to come into effect the day after the budget for petrol and diesel and in May 2023 on home heating oil.
The increases which are due to be imposed would mean a rise of €1.28 in the carbon tax on a 60 litre petrol fill, €1.48 on the same amount of diesel for your car, €19.41 more for a 900 litre tank of home heading oil and €16.98 on an average annual gas bill. These are not large increases in the scale of what we have seen over the past year.
But if the Government is extending a 20 cent per litre cut in the price of a litre of petrol and at the same time adding back a bit over 2 cent a litre via carbon tax you can see why there might be disagreements and a “why bother?” argument on the carbon tax element.
The total carbon tax element of a litre of petrol would rise to just under €1.40 and on a 900 litre fill on home heating oil would rise to €125.47, so the annual rises are adding up. There is, of course, politics at play here too, with the Green Party attached to the carbon tax agenda.
The argument for continuing with the carbon tax programme is probably threefold. One it is in legislation — though this can be reversed, of course. Two, it is part of vital climate change policy and an important signal. And three, the revenue raised goes toward important policy goals and if the increase is put off one year, what is to stop it happening again and this cash having to be found elsewhere — or not at all?
The last budget implemented increases in certain welfare payments, some specifically recommended by the Economic and Social Research Institute (ESRI), to address the fuel poverty issue while carbon tax revenues also support the Sustainable Energy Authority of Ireland’s residential and community energy efficiency schemes — such as grants for retrofitting, insulation and solar panels.
Part of the difficulty in seeing the correct way forward is uncertainty about fuel prices. It is likely that we are seeing the end of the cheap energy era which prevailed for many years up to around 2020, but how high prices will go — and where they might settle — is very hard to tell.
Higher prices for petrol and diesel in particular will encourage people to drive less and adopt electric cars. Higher gas prices are more problematic, as now — for example, there are no alternatives for electricity supply on days that the wind doesn’t blow. Gas is a key fuel in the energy transition and so this is a key issue.
3. Signing up for climate change
In the light of a cost-of living crisis, to what extent can we expect people to sign up to the climate change agenda? Are their actions not more likely to be driven by just finding ways to keep their house warm and transporting themselves around?
ESRI economist Dr Pete Lunn says that Irish people’s commitment to climate change policies should not be underestimated — before the cost-of-living crisis they had put it third in a list of key national priorities in an ESRI survey behind health and housing.
While the cost-of-living is now probably top of the list, Lunn — who heads the ESRI’s behavioural economics unit — says that people may accept the logic of higher carbon tax if the context is explained to them, as well as the use of the funds raised.
Politically, Lunn says “I don’t want to imply that this is easy” but says his instinct is that the public can be brought along, given the increasing evidence in particular of the impact of climate change.
In response to the twin threats of climate change and the cost-of-living crisis, the message, he says, is that the Government needs to communicate that it will help people and particularly the worst affected, but that the cost of polluting fuels relative to other prices in the economy must continue to rise.
Senior International Monetary Fund (IMF) economists, in a recent blog, argue strongly that the response of governments should not be to try to stop fuel prices rising.
They say “suppressing the pass-through to retail prices simply delays the needed adjustment to the energy shock by reducing incentives for households and businesses to conserve energy and enhance efficiency.”
Instead they argue policy should concentrate on protecting lower income households who are worst hit by higher energy costs. In this way, they say, climate change policies can be advanced while also protecting those most at risk. Politics, however, and the scale of the price increases is pushing for wider supports in many countries.
4. How far can governments go?
There have been arguments about how far governments can go. Most have routed money to households. Some have imposed emergency taxes on the profits of energy to help pay.
France has capped price increases for the majority of households at 4 per cent this year but the cost of its energy policies are rising and there are fears that consumers and businesses could face big increases next year unless supports are extended.
The French government has already had to offer to buy the 16 per cent of giant nuclear energy company EDF that it does not already own for €10 billion as it tries to manage the market and future investment and is separately facing a €7 billion law suit from the company because it forced it to sell energy to other power companies at a discount to try to keep prices down.
France’s nuclear industry, which provides the bulk of its electricity, gives it more options in this area, though the European Commission has also discussed the concept of some kind of an EU-wide price cap and is examining how electricity prices are set.
Ireland imports the vast bulk of its energy, bar gas produced in the Corrib and renewable power. Some kinds of price caps — such as in the UK where prices now change every three months — can delay price increases for a period and provide some regulation. But higher prices flow through sooner or later.
Windfall taxes on the profits of energy companies would also be of limited use in Ireland — though wind power generators are doing very well out of the current price move. But the bottom line for a country like Ireland is that either the consumer or the taxpayer- who funds household supports — is always going to foot the vast bulk of the bill when energy prices rise. There is no easy way out.