John FitzGerald: Polluters need to be hit in their pockets

Tax on carbon must rise to make it dearer and reduce its damage to environment

 Joseph Curtin and Laura Burke of the Climate Change Advisory Council:  Switching from fossil fuels to electricity to power heating and transport will be crucial to tackle climate change. Photograph: Nick Bradshaw

Joseph Curtin and Laura Burke of the Climate Change Advisory Council: Switching from fossil fuels to electricity to power heating and transport will be crucial to tackle climate change. Photograph: Nick Bradshaw

 

This week the Climate Change Advisory Council, of which I am chairman, published its annual review. In it, the council set out its serious concern that Irish greenhouse gas emissions are rising, not falling, so that the State is going backwards not forwards in tackling climate change.

The most important step we can take is to ensure that using carbon becomes more expensive, to reflect its damage to the environment, and give a strong incentive to individuals, households and businesses to change behaviour. Raising the tax on carbon would discourage us from using fossil fuels, which generate so much greenhouse gases. Most importantly, it would send a signal to both households and companies that it will pay to invest in systems and technologies that minimise or eliminate carbon emissions. Unless the cost of polluting behaviour hits people in their pockets, other measures to tackle climate change are likely to prove ineffective in addressing the scale of our challenge.

An increased carbon tax would provide revenue to the Government, which could fund measures to compensate low-income households for the impact of higher fuel prices, and to finance other measures to reduce harmful emissions. Using some of the proceeds from carbon taxes to cut taxes on labour would also raise employment. The Climate Change Council recommends that the next budget should increase carbon tax from €20 a tonne of carbon dioxide to at least €30 a tonne. This would add about €1 to a bag of coal and about €0.25 to a bale of briquettes, as well as increasing the price of oil and gas.

Political consensus

While most politicians support tackling climate change, there also needs to be a strong political consensus around the specific steps that can make a difference. Given the Dáil arithmetic, raising carbon taxes will require that all the main political parties are on board.

Switching from fossil fuels to electricity to power heating and transport will be crucial to tackle climate change – but only if electricity generation is decarbonised. However, the EU’s Emissions Trading Scheme (ETS), which affects the costs of fuel for electricity generation, is failing and is unlikely to be reformed before 2030. The ETS should have resulted in a sufficiently high price for fossil fuels to close coal and peat stations across the EU. However, the allocation of emissions permits was far too generous. As a result, the price of polluting has been very low and coal-fired power stations will continue to be profitable across the EU for the next decade.

Generating clean electricity is critical to helping halt climate change

An alternative strategy would be for the Republic and key European partners to impose a suitable variable tax on carbon used in the electricity sector, raising the minimum carbon price. Important research undertaken in UCC shows that if a coalition of countries in northwestern Europe (eg France, the Netherlands, the UK, Ireland and Scandinavia) introduced such a tax, it would ensure the closure of coal-fired generation in the participating countries, resulting in a substantial reduction in carbon emissions. The higher wholesale price for electricity would also be likely to make renewable electricity more profitable, saving on subsidies. Interestingly, setting a minimum price for carbon would add less to households’ electricity bills than the current “public service obligation” subsidy for renewables and peat does.

Minimum price

The UK has already very successful results from setting a minimum carbon price for electricity generation and the Dutch government is now implementing such a policy. The French government is also very interested in this policy.

The alternative approach, already announced by the Government, is to take regulatory action to close coal-fired generation – a welcome development. While this would achieve a major reduction of about 7 per cent in Irish emissions, it would also enhance the profitability of gas-fired generators. Unlike a tax-led price hike, it would not raise any revenue, so it’s a second-best policy.

Instead, the Republic should join a group of Northern European countries by introducing a suitable variable tax on carbon. Collective action, albeit by a subset of countries, would minimise the negative competitiveness effects of higher prices. The outcome would see the closure of coal-fired generation. However, unlike closure by regulation, this move would also put pressure on using other fossil fuels, including gas, to produce electricity.

It would obviously be preferable to set an adequate EU-wide carbon price floor. However, the countries with major dependence on coal, such as Poland and Germany, are reluctant to support such an approach. That shouldn’t stop Ireland, or any other country, from going ahead. Generating clean electricity is critical to helping halt climate change.

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