Government needs to reveal carbon tax plans

BUSINESS OPINION: Charlie McCreevy may have left a healthy Exchequer position for his successor but he has also left a dilemma - a promise to introduce a new carbon tax from January at a time when energy prices are already rising sharply, writes Cliff Taylor.

Tomorrow, the energy regulator will give the go-ahead for double-digit electricity and gas price rises. ESB prices are being pushed up by higher oil prices, while gas costs are rising due to the need to fund Bord Gáis's investment programme and a big rise in UK prices, pushing up the price of imports.

Meanwhile, higher oil prices on world markets are pushing up the price of petrol and other fuels.

Enter the carbon tax. The idea is to introduce a taxation measure to control greenhouse gas emissions and assist in meeting the State's targets under the Kyoto protocol. Carbon tax is one of a range of measures designed to help achieve this - the plan also involves emission limits on the largest polluting firms, which must "purchase" additional allowances if they exceed limits.

The Government has yet to outline how the tax will be applied but consultation papers have given some idea. The carbon tax would work like excise duties, with the highest tax on the most polluting fuels - peat and coal. Additional excise would be added to that already applied on many fuels, with new taxes on gas, coal and peat.

A Department of Finance paper made some estimates on the basis that the tax would be phased in over a period of years, starting at €7.50 per tonne of greenhouse gas emissions and rising to €20 a tonne. However, the Government has still to outline how it expects it to work in practice.

There is a case to introduce tax measures as part of the drive to limit the output of greenhouse gases. However, carbon tax may only make a limited contribution to cutting emissions, while imposing a significant extra burden on business and consumers. Another, more potent, threat is that the tax will be used as a crude revenue raising measure for the Exchequer, allowing the new Minister to ease the brake on spending.

The 100 biggest polluting plants will not be subject to the tax, as they are covered by emissions trading. They have all been given emissions limits and will have to go on the open market and "buy" the right to exceed these limits.

However, the rest of industry will be hit by carbon tax. And this is where the Government needs to be careful. Businesses already face a hike in the price of most fuels. If the carbon tax comes in, it will lead to a further electricity rise - probably in mid to high single-digit percentage figures on the basis of a €7.50 per tonne tax - as well as a rise in petrol, diesel and oil.

Many fuel prices are already set to rise due to a separate EU agreement to increase the tax on fuel inputs under the Monti directive, which has yet to be transposed into Irish legislation.

There is a case for putting higher tax on the more polluting fuels but whatever is introduced in January must take account of increases already coming through in fuel and energy prices and the competitiveness of industry.

This is particularly the case as the contribution of the tax to reducing emissions is not enormous - an estimated 0.75 million tonnes of CO2 reduction at €7.50 per tonne. Total national emissions are some 66 million tonnes, according to figures from the Environmental Protection Agency, which show that they have fallen since 2001 due to the switch in electricity transmission to gas plans and the closure of IFI.

The Finance paper estimated a tax at €7.50 per tonne could raise €200 million per annum, increasing to €625 million at €25 per tonne.

Factoring these sums into the annual budgetary arithmetic could allow the new Minister to plan for a higher level of spending over the next few years. Some of the money would likely go to compensate less-well-off households hit by a higher fuel tax bill. And the ESRI has estimated that the economy would benefit if some was also used for general income tax reductions.

Policy always goes wrong when one policy instrument is used to pursue a range of objectives. And the danger is that the carbon tax is introduced under the cloak of environmental protection but that the primary goal is to raise money. The planned introduction is just months away. But, under the cloak-and-dagger Budget system we operate, we may not know how the Government plans to answer these key issues until Budget day.

There has been a consultation process on the new tax but we are in the dark about what the Government now plans and how it intends to use the money. It must publish its carbon tax plans before the Budget and allow time for change in the light of analysis and debate on key areas such as competitiveness. The mess that is decentralisation should alert the Cabinet to the danger of springing major policy changes in toto on Budget day.