An alternative model for Carbon Taxes

In Blog by Denis Naughten

I opposed the increase in the rate of carbon tax earlier this week because I vehemently disagree with the current carbon tax structure as it fails to differentiate between those who can avoid paying this tax and those who do not have any choice but to pay it. This is what I said in Dáil Éireann: https://youtu.be/MG1sdsKdZas

 

While Budget 2021 talks about reforming motor tax and VRT, and further sets out increases of carbon tax up to €100/tonne, it has missed a golden opportunity to introduce these taxes in a manner that will drive change by focusing on congestion and, instead, just looks at fuel consumption.

 

Carbon taxes must be about driving change to a more sustainable country, which is far less dependent on imported fossil fuels. It is about getting people out of cars and onto buses and trains. It is not supposed to be about increasing Government income.

 

I strongly believe that those living in rural areas – that’s 37% of our population – do not have alternatives available to them, particularly in relation to public transport, and as a result cannot avoid paying this tax.

 

Regressive Geographical Tax:

 

In addition, this tax is also regressive because those living in rural communities will pay far more in carbon tax than those living in urban areas. Yet the people living in our cities will have jobs locally and alternative transport solutions available to them.

 

By the time 2030 comes along and we have a carbon tax of €100 per tonne, half the households in Dublin will be paying less than €9.11 per week in transport costs when the Dublin Bus subsidy is taken into account. Yet rural commuters will be paying €39.50 a week – up to four times than those with a bus passing their door every few minutes. (see note 1)

 

When one looks at the heat aspect of this, based on current rates a typical rural household will pay €1 more per week in 2030 than those living in Dublin. In practical terms, the difference will be greater because the Government will subsidise carbon removal from the gas network through biomethane whereas families in rural areas will have to borrow substantially to move away from oil. (see note 2)

 

Motor Tax Congestion Charge:

 

As we all know previous alterations by the Green Party in Government to the motor tax regime had a far greater impact on the uptake of diesel vehicles than projected. Altering motor tax in an Irish context was a far more effective tool in changing behaviour than any incremental tinkering with carbon tax, which motorists complain about and then just absorb. It fails to lead to action and this results in policy failure which will leave us with a far greater challenge as we move closer to our 2030 targets.

 

Therefore, a congestion charge designed around motor tax would be a far more effective tool in moving those who can from their cars onto public transport. Those who choose to use their diesel car on a high frequency bus corridor will pay significantly for the luxury of doing so. It would encourage motorists who cannot avoid using their car to drive it in a more sustainable way by reducing their speed to 100kph on motorways, avoid rush hour or walk the last 1km to work or school.

 

The alternative, which I put forward, would be to use the national car test and revise that regime to provide for an actual emissions profile of individual vehicles. (note 3)

 

That would treat rural areas – people driving long distances – in a far more equitable manner because they will have a much lower emissions profile than vehicles on congested streets. It would act as an effective congestion charge in this country and would encourage the retrofitting of vehicles and the use of alternative fuels.

 

Dripfeed Taxes won’t work:

 

I support the principal of carbon taxes and that is why I stated at the very outset that I am opposed to this carbon tax structure. I am opposed to a dripfeed model which again fails to motivate people to avoid the tax and change their approach.

 

This was opposed by colleagues inside Government and on the Oireachtas Committee on Climate Change because politicians love (a) gentle taxes that don’t cause a ‘political’ shock or pushback and (b) they want people to actually pay the tax so that they have money to ‘give away’.

 

In Government I strongly argued against the current approach in favour of:

(i) incremental jumps in carbon tax for example in 2023, 2027 and 2030 which gives people an opportunity to change how they use their car or what car they actually use, in order to minimise the amount of tax they pay by providing them with advance warning.

(ii) carbon taxes should vary with the cost of a barrel of oil, because if the carbon taxes increase significantly but the price of oil collapses then it will not bring about the type of step change that we require, the converse could have a devastating impact on our small open economy  (note 4)

 

 

More Complex Solutions:

 

I fully accept that structuring environmental taxes so that they do not take in additional money makes them more complicated but, more importantly, drives the change that is needed instead of the confrontation that has postponed climate action in the past.

And by using targeted investment we have the opportunity to actually reduce the carbon tax which motorists pay on diesel by up to 50% as well as dealing with a problem that we have in disposing of waste oils.

It is possible to blend renewable oils (HVO – Hydrotreated Vegetable Oils) at a rate of 50% into the diesel used in the transport and agricultural sectors, as well as by motorists, which would see the amount of carbon tax to be paid slashed in half rather than increased.

We must also take measures to tap into the huge renewable energy potential off our coast which has the potential to supply 10 times Ireland’s electricity needs. This additional renewable electricity could be auctioned off to other EU countries and the funds used to reduce the cost of electricity to Irish families.

Reducing the cost of electricity would act as a positive incentive for the public to invest in subsidised renewable electricity heating systems rather than forcing up the cost of heating homes with fossil fuels without providing an alternative.

Don’t Copy the Continent:

Our climate measures need to provide unique solutions to the problems and opportunities we have in Ireland and not a copy and paste of ideas from somewhere else that will not deliver for Ireland or Irish families struggling to meet current living costs. That is why I came up with the concept and secured the establishment of the Climate Action Fund.

And we also need to look at taxation models in this country that suit an Irish situation, rather than copying and pasting a model coming from continental Europe that will not drive the type of change we need to see here.

The measure introduced in Budget 2021 penalises 37% of our population who live in rural areas and do not have alternative modes of transport.

They are not getting their broadband delivered more quickly , there are no new provisions being made and the funding for the National Broadband Plan is unchanged from the spend I had previously secured as Minister and they are not bring provided with any new supports to work remotely.

 

 

 

 

Note1:

In their 2019 paper on ‘Carbon Taxes and Compensation Options’ (https://www.esri.ie/system/files/publications/BP202001.pdf ) the ESRI using data from the 2015–16 Household Budget Survey (HBS), it shows on page 10 (Figure 5) that if the carbon tax increases by €10 then this would cost half of Dublin households an additional €1.15 a week and Rural commuting households, highest 10%, an additional €3.93 a week on average.

On the Dublin Bus subsidy per home in Dublin, we have used data from the 2016 Census (https://www.cso.ie/en/csolatestnews/presspages/2017/cp4hf/) which shows 479,683 households in Dublin. For consistency we have then used the 2016 Dublin Bus PSO cost figure to enable a valid comparison (Table 7b in https://www.nationaltransport.ie/wp-content/uploads/2020/09/NTA-Bus-and-Rail-Statistics-Final-for-Web.pdf ). Based on these figures the Dublin Bus PSO subsidy per home in Dublin works out at €124. One caveat we would make is that there are households living outside of Dublin that use Dublin Bus services so this would just need to be born in mind.

 

Note 2:

In relation to the query on average consumption for heat or the cost of €10 increase on natural gas versus oil, Table 10 on pg. 17 of the Tax Strategy Group paper on Climate Action (https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwiCws7BobbsAhUiRxUIHSgiAUUQFjAAegQIARAC&url=https%3A%2F%2Fassets.gov.ie%2F86999%2Fd525b314-3751-4936-83b8-5084fe6e4263.pdf&usg=AOvVaw1cNFbqxNO0705uHFGlBC09) provides figures on the impact of a €100 increase for a typical fuel bundle. For oil (kerosene) this shows an additional cost of €258.27 and for natural gas the comparable figure is €226.15, which is a differential of €33.12 which is approximately €1 per week for the weeks central heating would be used during a typical winter. It must be noted that Government is already funding projects through the Climate Action Fund to reduce the carbon intensity of natural gas but has yet to fund any project which could have a similar impact on home heating oil.

Note 3:

As we all know the alterations to the motor tax regime in the last decade had a far greater impact on the uptake of diesel vehicles than projected.  The resulting increase in the number of diesel vehicles, particularly in cities, is giving rise to health concerns due to health implications of higher NOx (nitrogen oxides) and particulate emissions associated with these vehicles. Both NOx & black carbon from diesel emissions also contributes to warming of the atmosphere.

 

By revising the structure of the National Car Test testing regime we could provide an actual emissions profile for each individual vehicle. It would thus treat those in rural areas, driving longer distances more fairly as these vehicles would have a lower emissions profile than a vehicle on congested city streets.

 

Such a measure would encourage the retrofitting of diesel vehicles, including to alternative fuels, and support the conversion of the fleet over time to petrol hybrids and Electric Vehicles, as motorists would see a direct benefit in their rate of motor tax, based on the actual emission profile of the vehicle. On the other hand it would not disproportionately hit the haulage and agricultural sectors that are so reliant on diesel as a fuel.

 

This could act as a very effective congestion charge, as those vehicles driving on congested streets or during times of heavy traffic would have a higher emissions profile.

 

The approach has the added advantage of encouraging a voluntary transition over a short period, while ensuring that those who acted on Government policy are now not seen to be penalised.

 

This proposal formed one of the conclusions of an OECD Environment Ministerial in Paris in 2016 and the technology is now available to make this a reality.

 

Note 4:

A long term roadmap on carbon pricing is essential in order to create certainty for business in its medium to long term investment decisions.

 

It is important that the roadmap on carbon tax is focused on the core objective of driving behavioural change in business and households not on increased revenue. While there is a consensus on carbon pricing across the EU, we also see the impact a combination of commodity oil price increases and Government taxation has had in France previously with the yellow vest protests.

 

The Climate Change Advisory Council has stated that the Irish Government should set out a clear trajectory to ensure that we have a carbon tax rate of not less than €80 per tonne by 2030.

 

In my view, this is best given effect by setting a minimum effective floor price for a barrel of oil (equivalent) of €200/barrel (or $230) in 2030, with an associated trajectory to be developed between now and 2030.  This proposal is one that I as Minister have taken up with the World Bank and highlighted at the Global Climate Action Summit in San Francisco in September 2018.

 

The reason I believe we should move to a minimum floor price for the barrel of oil, is that such a taxation method is less vulnerable to short term volatility in commodity oil prices and thus less likely to face public reaction such as that experienced in France.

 

This would also act as a powerful signal for private sector investment decisions, reorienting them towards decarbonising options. And this is the signal that urgently needs to be provided by both EU and global Governments.

 

If we just look at oil companies global spending, on aggregate they allocated just 1.3% of their capital expenditure on low carbon projects in 2018.  The companies argue that they have to justify investing in green energy projects which are less profitable than their traditional business. If we are to keep fossil fuel reserves in the ground, then we need to turn this commercial reality around.

 

Within the EU including Ireland we believed that the carbon taxes that were introduced a decade ago would drive the type of change needed in our economies, but that was based on a projected increase in the price of the barrel of oil before shale fracking technology and other factors distorted the market.  For example the price of Brent Crude oil went from $114 in June 2014 to $20 in January 2016.

 

We now fear that some oil producing countries are using oil production and the resulting commodity price of the barrel of oil for broader geopolitical reasons.

 

The novel approach that I’m proposing would address the risk of falling fossil fuel prices that can undermine the traditional carbon tax approach.

 

We also find ourselves, particularly within the Eurozone economy, in a situation where a rise in oil prices weakens economic growth and raises inflation. We have already seen this year that higher oil prices are having a knock on impact on companies operating costs within the Eurozone.

 

By introducing a floor price for a barrel of oil which increases incrementally, we can decouple production from the retail price of oil and its resultant impact on inflation. This will achieve our policy objective of driving behavioural change. It will also reduce our global economic reliance on fossil fuel, which would be driven through research and innovation funded by the oil companies, themselves.

 

Under such a model, the tax rate for carbon products would be set on an annual basis based on our trajectory to 2030, on a formula to be set out in legislation that is solely related to the forecast price for a barrel of oil equivalent in the coming year, with a possibility for intra-year force majeure adjustments, should there be a dramatic change in pricing over the year itself.

 

The argument could be made in financial circles that this would lead, over time, to volatility in the tax take, but we all know that a taxation system based on revenue from fossil fuels is not sustainable in the medium term.

 

Therefore, this approach to carbon taxation aligns with our longer term economic priority of ensuring a broad and sustainable tax base, underpinning stable and predictable tax revenue.

 

It is also important to note that the Society of St Vincent de Paul, spent more than €4m in 2017 helping households with fuel and utility bills, and this will have increased in 2018 with rising fuel costs. This is on top Department of Social Protection payments of some €200m annually through the fuel allowance.

 

As a result, it is imperative that funds generated through such a taxation model are reallocated as compensation for those disproportionately impacted upon by such changes namely rural communities and families in fuel poverty. Over time the funds generated could be used as a dividend back to the public to assist them with retrofitting their home and moving to sustainable fuel sources. This would also remove the tax revenue from the day to day budgetary model and allow it to become a tax neutral tool to drive change rather than increase taxes.