Q&A: How will the Taoiseach’s carbon tax plan work?

According to Taoiseach Leo Varadkar, all new revenues raised by new or increased carbon taxes in Ireland will be ringfenced to pay for coping with climate action and helping the poor to deal with higher fuel costs. But what does this mean for the budget, Irish politics and you?

What is the Taoiseach now saying about carbon tax?

Carbon tax is currently levied at a rate of €20 a tonne, the level in place since the tax was introduced in 2010 during the economic crisis. The Taoiseach points out that there was cross-party consensus – in the report from the Joint Oireachtas Committee on Climate Action – on increasing the tax to €80 per tonne by 2030. However, the political decision remains how quickly the increase should be introduced and what to do with the revenue raised.

In pre-budget papers drawn up by Government officials in the Tax Strategy Group, one option outlined was to increase the tax by €10 a tonne in 2020 and by €5 each year thereafter to reach the target. We should note in passing that most experts now believe that the “real” price of carbon should be set a good deal higher, at €150 a tonne or more.

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Does this mean carbon tax will be increased in the budget next month?

Probably. Last year the Government rowed back from announcing an expected rise. And the political sensitivity of all this is obvious and could mean any rise is limited. The key issue will be whether the Minister signals a programme of successive rises in the years ahead to reach the €80 per tonne target – this is what might start to change people’s behaviour. A €10 increase would add around €1.70 to a 60-litre petrol fill, €26 to a 900-litre kerosene delivery for home heating and around €1.20 to a 40kg bag of coal.

So more cash for the exchequer?

Well, yes and no. The key new part of the Taoiseach’s UN speech is where he refers to what might happen with the revenue raised. The joint committee had outlined two options. Both included measures to protect those in so-called fuel poverty – poorer households that spend proportionately more on fuel. For the rest of the revenue, option one involved spending it on “green” projects in areas like housing, energy and public transport. Option two was to give the money back to households via lower taxes or higher welfare payments, or some other kind of direct payment. This would mean the net impact on household incomes would be limited, but people would still have an incentive to use less fossil fuels.

The Taoiseach has clearly expressed a preference for option one – protecting poorer households and spending the rest on green projects and on measures to help areas where there are job losses due to environmental measures.

Will this fly politically?

The Department of Finance undertook a public consultation which expressed support for protecting poorer households and investing in public transport. There was little support for the option of paying the money back to households, one which had originally found some support in Fine Gael. The option of paying money back would, however, have been complicated in terms of deciding who should get what and how. While there is general support across much of Leinster House for increasing carbon tax, the details could yet be controversial and rural TDs will come under pressure in relation to higher fuel charges, for example.

How would it work in practice?

The most obvious way to help poorer fuel-dependent households would be to increase the fuel allowances, paid to 370,000 households during the winter months at a cost of €233 million per annum. Some cash would also likely go to schemes to help people to retrofit their homes run by the Sustainable Energy Authority of Ireland.

The rest of the money would probably be allocated to a special climate action fund to help pay for projects in areas like sustainable transport, energy and housing and so on and for special projects in areas like the Midlands. The Department of Finance is not a fan of setting cash aside for specific areas – so called hypothecation of revenue – as it argues that it reduces the flexibility of the Minister for the day. However, politically this is the only way a carbon tax will fly. Note that the Taoiseach referred to new revenues raised, so the existing cash raised by the levy may continue to go to the central exchequer.

What does this mean for the exchequer?

Directing some of the cash to green projects will help the exchequer, as otherwise this cash would have had to come from general funds. So there would be some net benefits. Currently the tax raises a modest €430 million a year and the department estimates that a €5 a tonne increase would raise €108 million and a €10 rise would raise €216 million. These are modest sums given the scale of investment needed in areas like public transport and energy, though a plan to increase the tax successively over a period of years would gradually add its importance, but the vast bulk of the funding for “green projects” in the Government’s investment plan – a planned €23 billion by 2027 – will still come from the central exchequer.