A carbon tax is supposed to be an environmentally-focused tax to drive behavioural change in 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, which is to drive behavioural change. The focus of an environmentally focused tax should never be on revenue but rather on motivating that behavioural change. If we are serious about moving away from our dependence on fossil fuels, then we need a model for a carbon tax that is fluid.
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 the type of step-change we require will not be realised, but it will cause huge financial hardship to families particularly low-income families and rural-based families.
So, we need to build into our carbon taxation model a ‘swing mechanism’ that adapts to the ever-changing cost of a barrel of oil.
For example, over a decade ago it was believed the carbon taxes that were then introduced would drive the type of change needed to decarbonise our economies. This was based on a projected increase in the price of a barrel of oil before shale fracking technology and other factors distorted the market. As a result, the price of Brent crude oil went from $114 per barrel in June 2014 to just $20 per barrel in January 2016, which undermined that entire policy tool.
At the opposite end of the spectrum, when the price of a barrel of oil increases sharply, there is a direct impact on the cost of living for families, as well as having a devastating impact on economic growth.
I have raised this specific proposal with the Eurogroup President and Minister for Finance, Paschal Donohoe TD, on many occasions. His response to me on the introduction of a more flexible approach to carbon taxes was that the model would undermine the revenue stream generated from carbon taxes; revenue that is used to fund the retrofitting of homes. This I believe can be overcome by ring-fencing the additional unplanned VAT generated from the inflated fuel prices to replace the lost revenue from carbon tax income.
Not only would such an approach be far fairer for families but it would also ensure that falls in the price of oil will not impede our progress towards a carbon-free society!