The negative economic impact of a new carbon tax could be more than offset if the money raised was used to cut income tax, according to new research from the Economic and Social Research Institute (ESRI). The Minister for Finance, Mr McCreevy, promised in the Budget to introduce such excise duties on fuel to cut greenhouse gas emissions from the end of 2004. Cliff Taylor, Economics Editor reports.
The research, to be presented at an ESRI conference in Dublin this morning, focused on a tax based on a charge of €20 per tonne of carbon monoxide. This would be raised through increased excise duty on all fuels, with the heaviest duty on coal and peat, the worst polluters.
This would increase the price of all fuels to industrial and consumer users. The researchers - Ms Adele Bergin, Prof John FitzGerald and Ms Ide Kearney - estimate that, for households, this would add some 19 per cent to coal costs and 36 per cent to the cost of peat. The percentage increases for industry would be greater as, in the case of business, the distribution margin included in the price is much lower.
The new tax regime would succeed in reducing the burning of the worst polluting fuels, the researchers calculate, and would bring about almost two-thirds of the necessary reduction in Ireland's greenhouse gas emissions by 2010. Under the Kyoto Protocol - the international agreement on greenhouse gases - emissions here should be no more than 113 per cent of their 1990 level, with the reductions from current levels happening between 2008 and 2012. Currently emissions are more than 25 per cent above their 1990 levels.
The tax increase considered in the report would add 0.6 of a percentage point to the consumer price index. However, the researchers calculate that if the money raised, estimated at around €860 million, was returned via lower income tax, the net result would be higher economic growth. This is because the competitive gain from lower income tax would more than offset the disincentives from the increase in excise duties.
Some high energy use sectors of industry would be expected to suffer and may require support, according to the ESRI researchers.
They say the most efficient response from the ESB would involve the closure of the oil and peat-fired stations, although this would be politically sensitive. Even though the Moneypoint station burns coal, the amount it produces means it would probably remain in production until 2012, at least. The researchers conclude that postponing the imposition of the carbon tax until the end of 2004 may mean the full benefit in terms of greenhouse gas emission does not fall inside the 2008-12 target period.
A separate paper, presented at the conference by Ms Sue Scott and Mr John Eakins of the ESRI, calculates that poorer households would suffer most from the excise duties imposed as part of a new carbon tax regime.
If the bulk of poorer households is to be insulated from the adverse effects, some 23 per cent of the revenue would have to be used to provide compensation, mainly through the welfare system. This compensation was factored in by the other researchers in their assessment of the overall impact of such a tax.
