The Government has decided to abandon its plan to introduce a new carbon tax next January. Ministers believe that the environmental benefits the tax would deliver do not justify imposing higher fuel costs on consumers and business.
The proposed carbon tax was part of the Government strategy to reduce greenhouse gas emissions as part of its commitment to the Kyoto protocol, an international agreement on the issue.
The tax would have involved new excise duties, with the heaviest charge on the most polluting fuels to get users to move to cleaner alternatives.
In a surprise development it is understood that the Government decided that the impact in terms of cutting greenhouse gas emissions was not large enough to make the case for going ahead with the tax.
Ministers are also likely to have been influenced by fears that the tax would be unpopular and would be seen as a further imposition on consumers, particularly motorists.
Rather than deal with the issue on Budget day, it is understood that an announcement will be made shortly - possibly as early as today - that the carbon tax has been abandoned.
The Government climate change strategy to achieve the Kyoto targets involved a reduction in emissions of around nine million tonnes a year.
Studies had estimated that the carbon tax would have achieved a reduction of about 0.5 million to 0.75 million tonnes.
The Government never indicated the rate at which it planned to introduce the tax, but it would have led to an increase in the cost of a range of fuels.
This would have necessitated measures to recompense less well-off consumers.
A Department of Finance paper had suggested that the tax could be phased in over a period of years, starting at a rate of €7.50 a tonne, which would have raised upwards of €200 million for the Exchequer from next year - and more in subsequent years.
This would have led to a further rise in ESB prices next year and an increase in the cost of other fuels, particularly heavy polluters such as coal and peat.
The Government's decision is also believed to have been influenced by the recent rise in oil prices on international markets.
Although the price of crude oil has eased in recent weeks, the average price of fuel this year will be substantially higher than in 2003.
Already petrol prices have risen and substantial increases are on the way for electricity and and gas. In this environment, Ministers were believed to have been loath to sanction further rises.
A public consultation process on the proposed tax had shown opposition from business lobby groups and hauliers, and indicated considerable consumer resistance.
This is understood to have reinforced the view of the outgoing Minister for Finance, Mr McCreevy, that there was no case to introduce the tax.
It is believed he wanted to clarify the issue before leaving to take up his new position in Brussels.
The Minister for the Environment, Mr Cullen, had supported the introduction of the tax, and the Government announcement is likely to emphasise that it remains committed to reducing greenhouse gas emissions and will intensify efforts to do so using other measures.
However, the decision is likely to annoy environmental lobby groups, who have urged stronger action to reduce harmful gas emissions and are likely to argue that the Government is abandoning a central part of its climate change strategy.
Business lobby groups will welcome the move, as they had argued that higher fuel prices could hit competitiveness.
The biggest polluting firms would have been exempted from the tax, as they are covered by a separate emissions trading scheme, but smaller firms and hauliers would have been hit.
