A carbon tax, if well designed, could benefit poorer families and reduce emissions, according to the Economic and Social Research Institute.
In a paper published on Thursday the ESRI says a blunt carbon tax would hurt poorer households more as they spend a greater proportion of their income on fuel than wealthier homes. However a targeted ‘recycling’ of the taxes, redistributing more of the revenues back to poorer homes, would “actually reduce income inequality”.
And the capacity of such a system to reduce inequality would increase as carbon taxes increase, says the institute.
Titled, Carbon Taxation in Ireland: Distributional Effects of Revenue Recycling Policies, the paper says if a tax of €30 per tonne of carbon was introduced households would spend about an additional €3 per week on energy. A tax of €80 per tonne would see costs go up about €7 per week.
An amount of carbon dioxide is emitted – perhaps just a few grams at a time – when fossil fuels like gas and petrol are burnt. Over time these build up to a tonne of carbon.
The households worst affected by a blunt carbon tax would include poorer rural households, single-parent households, low-skill workers and those living in older dwellings. With a carbon tax “every household bears some cost but the cost is greatest for the poorest households,” the ESRI said.
Addressing these issues could be achieved by the “appropriate recycling of the revenue raised by a carbon tax”, the ESRI says.
There could either be a flat-rate allocation back to households regardless of income, or a more targeted one.
“A flat allocation . . . compensates poorer households more than richer households as a proportion of expenditure.
“However, a more targeted measure benefits the poorest households far more . . . The targeted measure is therefore more progressive, which is appropriate given that higher incomes emit higher levels of carbon.”