Proposed carbon tax could benefit poorer households

The average tax bill on households from the proposed new carbon tax could be around €250 per annum, according to a study from the Economic and Social Research Institute (ESRI). The tax need not hurt the poor, the report says, because the revenue raised could be more than enough to compensate them.

In the report, commissioned by the Environmental Protection Agency, the ESRI says that a strategy could be devised that leaves the poor better off on average than before the tax.

More than 90 per cent of households on low income can be targeted to receive compensation at least equal to or slightly above €246 a year. This is the estimated average household bill, if the tax were to be levied at €20 per tonne of carbon dioxide.

The Government has promised to introduce a new carbon tax at the start of next year but has not outlined how it will be levied.

The ESRI study considers the effects on the economy of the measures. It shows that, "if properly designed, an economy-wide carbon tax or tradeable emissions permits scheme could leave national output unchanged or even slightly higher".

If the revenue raised from carbon taxes was used to cut social insurance contributions or income tax, the net effect might actually be to increase national output, as well as reducing emissions of greenhouse gases.

However, the report warns that if emissions trading permits are given away free to big business - as is the case in the EU-wide scheme commencing next year - the economy could be damaged. This is because of a loss of revenue to the Government which could accrue from auctioning these emission rights, meaning less revenue will be available to offset the negative impact on competitiveness from the tax in general.

A tax of €20 per tonne of carbon dioxide would bring almost 40 per cent of the necessary reduction in Ireland's greenhouse gas emissions by 2010, as targeted by the Kyoto protocol rules. The measures would add around 0.6 percentage points directly to consumer prices and would also raise energy costs to industry. However, the negative impact on competitiveness could be "more than offset by the positive impact of a cut in direct taxation using revenue from the tax".

"As well as being efficient, carbon taxes can be fair," says ESRI researcher Ms Sue Scott.

The impact of the tax would hit the poor, who spend relatively more on fuel than the better off "because they use fuels that are high emitters of carbon dioxide and because they cannot easily change their heating equipment". However, the size of the revenue from all sectors "would allow poor households to be compensated many times over".

To compensate poorer households, the ESRI proposes that the current fuel allowance scheme, paid as part of social welfare, could be increased and expanded. Income tax rates and thresholds applied to low incomes could also be adjusted to compensate the less well-off. Using this system, lower-income households could actually be better off.