Carbon tax and Budget 2017

Professor Brian Ó Gallachóir examines how the Government could demonstrate a commitment to climate action and have more money to spend on budget day.

A carbon tax provides an incentive for us to use less fuel and to use cleaner fuels.

Ireland introduced a carbon tax in 2010. This tax applies to certain fuels that we burn for heating (natural gas and heating oil) and for transport purposes (petrol and diesel). The rationale for this tax is that it places a financial cost on the damage caused by the carbon dioxide emissions released when we burn these fuels. The current tax rate is €20 per tonne of carbon dioxide released into the atmosphere. The more we pollute, the more we have to pay. Different fuels release different amounts of carbon dioxide, for example coal has a higher carbon content than oil, oil has a higher carbon content than natural gas, etc. The carbon tax rate for renewable forms of energy (including wood, liquid biofuels and renewable gas) is zero. The carbon tax provides an incentive for us to use less fuel and to use cleaner fuels. It can prompt us to think more about upgrading how we heat our home or businesses or about changing to cleaner forms of transport. It complements other financial incentives, such as grants available for home insulation, heating controls and electric vehicles, tax relief for compressed natural gas as a transport fuel,  etc.

This carbon tax currently generates significant revenue, about €400 million per annum. Looking to Budget 2017, If the carbon tax rate was increased by a further €10 (to €30 per tonne of carbon dioxide released), this would mean an additional €200 million would be available to spend in Budget 2017. The current Government budget discussions centre around an additional spending of €1 billion, so an additional €200 million would provide scope for significantly more demands to be met. It could be used for example to reduce income taxes or to invest in additional public services (for example health or education) or in infrastructure (for example rural broadband).

So what would an increase of €10 per tonne of carbon dioxides mean? On the one hand it would provide a clear and timely signal of Ireland’s commitment to climate action as we move towards the historic ratification of Paris Agreement on climate change in advance of the forthcoming UN climate conference in Morocco in November.

It is important also to consider what impact an increased carbon tax would have on us in terms of our energy bills. This carbon tax is applied to transport and heating fuels. It does not apply to electricity or to other large emitting installations because they have their own carbon dioxide reduction targets and carbon price that is determined through their participation in an EU-wide Emissions Trading Scheme.

Regarding transport fuels, an increase of €10 in carbon tax would mean an increase in purchase price of less than 3 cent for a litre of petrol or diesel (currently retailing at about €1.28 for a litre of petrol and €1.14 for a litre of diesel). This is not a significant price increase, when we consider that petrol and diesel are still about 40c per litre lower in price than they were four years ago. Another factor is that petrol and diesel prices do vary from one petrol station to another and in towns and cities around Ireland and this price variation is typically more than 3 cent per litre. This suggests we are not too responsive to price variations in transport fuels.

For a typical annual mileage of 18,000 km, our annual transport fuel bill is about €1,400. This additional €10 carbon tax rate would result in an increase of between about €15 to €20 on this annual fuel bill. This also means that by itself it is not a huge incentive for us to change what car we drive or how we get from place to place. But it might prompt us to think about it and explore what other options might be available. Of course the impact is greater on those who do more driving (including taxi drivers, truck drivers, etc.).

When it comes to home heating, on average households spend about €1,500 on oil or natural gas. A €10 increase in the carbon tax rate will typically mean an increase of about €35 – €45 in this annual heating bill. To ensure this doesn’t push vulnerable homes further into energy poverty, an increase of €1.50 in the weekly fuel allowance rate would compensate for this tax increase. To put this into perspective, the current fuel allowance rate is €22.50 per week for 26 weeks starting October 3rd and it was increased by €2.50 per week Budget 2016 which took effect from January of this year. This increase in fuel allowances to compensate vulnerable households for the carbon tax increase would cost about €16 million per annum. This would mean that the Government still has over €180 million additional money to spend in Budget 2017.

I’m struggling to see a downside to this.

Brian Ó Gallachóir is Professor of Energy Policy and Modelling at University College Cork’s Environmental Research Institute and is a Principal Investigator in the SFI MaREI Centre.