Whether tax will change behaviour the big question


ANALYSIS:HOUSEHOLDERS WHO use peat briquettes or coal for home heating as well as people commuting long distances by car are likely to be hardest hit by the long-promised introduction of a carbon tax in December’s budget, which could raise up to €480 million a year depending on the rate that’s applied, writes FRANK McDONALD

The Green Party has been pressing for a carbon tax since it joined Fianna Fáil in government in 2007 and it now has the explicit support of Minister for Finance Brian Lenihan. The Royal Irish Academy has also rowed in; Dr Sue Scott, author of its latest statement on climate change, has long advocated such a measure.

The tax is expected to be levied on all carbon emissions from the “non-traded sector” of the economy, focusing on the fossil fuels used for transport and heating, in particular. Even people travelling by bus or train will have to pay more, and the tax is also expected to be levied on domestic air travel.

Electricity bills will be unaffected, however, because the ESB and other power generators are included in the EU emissions trading system (ETS). As a result, everyone who uses electricity has already been paying a hidden extra charge since the European ETS came into force two years ago.

The introduction of a carbon tax was one of the key recommendations of the Commission on Taxation in its report, published last month, with the avowed aim of reducing Ireland’s CO2 emissions. And like the Economic and Social Research Institute, it suggested that this should be “revenue neutral”. In other words, the carbon tax would be offset by reductions in other taxes or by recycling the revenue it raised to fund energy-efficient incentives for households and businesses. These could include providing grants to people experiencing “fuel poverty” to insulate their homes and thereby reduce heating bills.

The tax would be levied in line with the carbon content of different fuels. Thus, a bale of peat briquettes might cost 52 cent more while a 40kg bag of coal might incur a levy of €2.38, or €56 per tonne. These figures are based on an assumed carbon price of €20 per tonne; yesterday, the price was just €14 per tonne.

Given that the price of carbon fluctuates from day to day, a floor level would have to be set for Ireland’s new carbon tax if it’s to play any role in reducing emissions – otherwise, it would be rather pointless. Thus, the tax is more likely to be pegged at €20 per tonne initially, although this would probably rise over time.

The Commission on Taxation recommended that a carbon tax should be clearly visible at the point of sale to ensure it would not be seen as “just another tax”. That’s what was done with the levy on supermarket plastic bags when it was introduced in 2002, to encourage shoppers to change their habits.

The same sort of “transparency” applied to the Government levies on insurance premiums and credit cards. However, it is unclear whether this will be extended to the carbon tax; it may simply be added to the already high rates of excise duty on petrol and diesel, which have never been shown in filling station receipts.

In the absence of someone having a viable alternative means of transport, accountants Deloitte Touche said a carbon tax was “not likely to have a material impact” on petrol or diesel consumption – unlike the plastic bag levy, which had an immediate impact on consumer behaviour because alternatives were available.

Chartered Accountants Ireland, in its commentary on the Commission on Taxation report, suggested that the imposition of a carbon tax would result in an increase of about five cent per litre in the cost of petrol and diesel, with a corresponding increase in the cost of home heating oil. Thus, it may barely be noticed.

“The biggest change, from a domestic standpoint, would be in the price of peat briquettes and coal – the former because it wasn’t subject to mineral oils excise in the past; the latter because of an exemption in respect of domestic use,” it said. The effect may be to encourage switching to gas, for example.

Peat, traditionally an indigenous fuel for Ireland, has the highest carbon content, with 4.14 tonnes of CO2 emitted per tonne of oil equivalent (TOE). Coal comes second with a score of 3.96 tonnes, followed by fuel oil (3.18), diesel (3.07), petrol (2.93), LPG (2.67) and natural gas (2.30) – the least carbon-intensive fossil fuel.

Finland, which still has an abundant supply of peat, has cleverly redefined it as “biomass” – a form of renewable energy, even though it clearly isn’t. But sources say there is no indication that Bord na Móna intends to follow the Finnish example; it recently announced that its long-term plan is to get out of peat production.

Finland was the first country in the world to introduce a carbon tax, in 1990, and was followed soon after by Norway and Sweden. Their example has since been emulated by Denmark, Britain, Slovenia and New Zealand. French president Nicolas Sarkozy has also announced plans to impose a “climate energy contribution” on fossil fuels.

An EU-wide carbon tax is supported by Sweden and France, but opposed by Britain, which has always bristled at the idea of Brussels dabbling in fiscal policy. “We do not support the idea of a mandatory, pan-European carbon tax,” a British spokesman said firmly at a meeting of EU finance ministers in Gothenburg earlier this month.

Reducing global CO2 emissions will be at the core of the Copenhagen climate change conference in December. Going there with a carbon tax under its belt will give the Irish delegation more credibility in calling for others to take concrete steps to reduce their emissions. But whether the tax will actually do so is anybody’s guess.

Frank McDonald is Environment Editor

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