The carbon tax is supposed to be an environmental tax to drive behavioural change when it comes to the use of fossil fuels. In such circumstances the most effective tax is the one that brings in little revenue because it is doing what it should do, namely, driving behavioural change.
Today, a carbon tax has no impact on behaviour because of the dramatic increase in the cost of fuels over the last 6 months. It was never envisaged that this tax would place additional financial hardship on families during an energy crisis, but that is exactly what it will do tomorrow when it is set to increase for domestic heating fuels.
If we are serious about moving away from the dependence on fossil fuels then we must have a model of carbon taxation that is fluid. I mean this to be a model that takes into consideration the ever-changing cost of a barrel of oil.
Carbon taxes should vary with the cost of a barrel of oil because even if carbon taxes increase significantly but the price of oil collapses, then it will not bring about the type of step change that we require.
For example, a decade ago it was believed that the carbon taxes then introduced would drive the type of change needed in our economies. That was based on a projected increase in the price of a barrel of oil before shale fracking technology and other factors distorted the market. So, the price of Brent crude oil went from $114 per barrel in June 2014 to just $20 per barrel in January 2016, undermining that policy tool.
At the opposite end of the spectrum, when the price of a barrel of oil increases sharply this has a direct impact on the cost of living for families, as well as having a devastating impact on a small open economy. We are seeing that impact today because Ireland is more exposed than most EU countries to oil price volatility.
This is a proposal that I have presented as Climate Minister to the Department of Finance, to environmentalists and also directly to Minister Paschal Donohoe TD. Responding to my proposal in the Dáil recently, Minister Donohoe said “In fairness to him, he has raised this on many occasions, in the Dáil and elsewhere. The one difficulty with the model he makes a case for is that it gives no clarity at all to the Government regarding what our future revenue from caron taxation could be. As the Deputy knows, carbon tax plays a role in helping us to fund all the changes that he and the Government want to see happen regarding retrofitting and how we can make progress towards energy independence”
The only credible argument put up against my proposal of a more flexible approach to carbon taxes is that it leads to uncertainty with regard to the amount of revenue coming into the Government’s coffers, but as I’ve said this should not be the basis of environmental taxes in the first instance.
The reality is that families now have to decide whether to put food on the table or buy fuel to heat their homes because of this approach to using a carbon tax to fund the retrofitting of homes across this country.
But there is a solution to this problem and that is to ring-fence the additional unplanned VAT income that is currently being generated from the inflated fuel prices that we are all paying, to replace the lost income from the carbon tax. This would ensure that families do pay excessive carbon taxes when the price of fossil fuels increases and at the same time it would secure the revenue Government wants to carry out the retrofitting of homes.
So there is no longer an argument against a fluid approach to carbon tax rates. For every increase in the price of a barrel of oil, the carbon tax should be lowered to lessen the impact of that increased cost on consumers and families, providing a practical measure to address the impact of inflation. The opposite scenario should also apply. For every decrease in the price of oil the carbon tax should be increased by a defined amount.
We have introduced minimum pricing of alcohol so why not introduce it for oil? On this occasion, let us not hand the additional money back to the oil companies.
We should have a clear trajectory to ensure that we have a carbon tax rate of not less than €100 per tonne by 2030, but I believe this is best-given effect by setting a minimum effective floor price for a barrel of oil at €210 per barrel in 2030, with an associated trajectory developed from now out to 2030. We should ask the OECD to develop such a model in conjunction with the Government.
By setting a floor price for a barrel of oil that increases incrementally up to 2030 we can decouple production from the retail price of oil and its resulting impact on inflation. Moving to a minimum floor price for petrol, diesel, home heating oil and gas ensures that such taxation measures are less vulnerable to short-term volatility in commodity oil prices, thus are less likely to place undue financial hardship on Irish families when oil prices spike. This would also act as a powerful signal for private sector investment decisions, orientating them towards decarbonising options rather than just hedging against oil price volatility.
The novel approach I am proposing would also address the risk of falling fossil fuel prices that can undermine the policy to move away from fossil fuels. This will achieve our policy objective of driving behavioural change and importantly will also reduce our global economic reliance on fossil fuels.
This is what I said in the Dáil earlier this week