A new VAT system with a variable rate based on embedded carbon emissions of consumer goods would raise 14 per cent more VAT and reduce greenhouse gas (GHG) emissions by 6 per cent, according to researchers from the Economic and Social Research Institute (ESRI).
The basic principles of this proposed green VAT and the concurrent shift from production-based emissions calculations to a consumption-based emissions model were explained at an event in Dublin on Friday.
ESRI researcher Miguel Tovar outlined the research model that would introduce a 4 per cent base rate for all commodities on to which a variable rate based on embedded GHG emissions would be added. “Under this scheme, we would obtain an increase of 14 per cent in VAT tax revenues and a 6 per cent reduction in emissions,” said Mr Tovar.
He suggested social transfers to people on welfare payments and a reduction in income tax would counterbalance any inequities caused by price rises. “This combination of increased social transfers [payments] and reduced income tax would compensate households most impacted by more expensive products,” he said.
His ESRI research colleague Kelly de Bruin explained the so-called polluter-pays emissions accounting system fails to adequately capture emissions of some of the world’s largest companies that produce goods in the developing world [with lower or no carbon taxes] and sell them in the developed world.
“These companies cater for the cheap goods that people want to buy, and a consumption-based emissions system is the only way to tackle this,” she said.
Hans Zomer, chief executive of the environmental organisation, Global Action Plan, said that a consumption-based approach moves the focus away from the narrow discussion of sectoral emissions ceilings to highlight how so much of Ireland’s share of global climate pollution is unfairly outsourced to other countries.
“It’s an invitation to build a fairer and better country and world. Our lifestyles are subsidised by the global poor, particularly in what we buy and we need to acknowledge this. The current economic model is fundamentally flawed. There are opportunities to do better,” said Mr Zomer.
Ms De Bruin explained how the production-based emissions accounting system does not include the emissions that Irish consumers create in other countries.
“In 2019, our production-based emissions were 61 million tonnes, but our consumption-based emissions were 106 million tonnes, and householders had the biggest share of these consumption based emissions,” said Ms De Bruin.
Taking the example of a Japanese car imported into Ireland, Ms De Bruin said in a consumption-based emissions accounting system, Ireland is responsible for the carbon emissions of that car.
“Ireland’s global carbon footprint is a lot higher than its national carbon footprint. And calculating consumption based emissions is a fairer model because it doesn’t penalise countries for producing goods that others use,” she said.
The production-based carbon taxes are currently used in the EU, based on targets set out in the Paris Agreement.
However the European Commission is in the process of introducing a so-called carbon border adjustment mechanism that will put a carbon tax on imports of products into the EU to prevent companies from moving carbon-intensive production outside Europe.
This measure also aims to encourage industry outside the EU to introduce their own carbon taxes to contribute to global emissions reductions.