Placing a tax on carbon emissions can act both as a deterrent and as a source of revenue with which to finance clean energy solutions.
Policy’s Political Origin
The carbon tax was actually first introduced back in 2004, but was rejecterd by the Irish Government. It was not until 3 years later in 2007 when the Fianna Fail-Green Party coalition government was formed and promised to reconsider the idea. This then eventually led to Ireland’s first carbon tax policy budgeted for 2010.
The governing coalition was formed along with the Progressive Democrats, economically centrist favouring private enterprise and low taxes, as well as with the Green Party. As a result, the carbon tax policy was realized in with the Green Party in charge of setting environmental legislation supported by the largest political party in Ireland.
In February 2011, the Fianna Fail party lost its political position and was replaced by the Fine Gael party, which has a centre-right focus. A number of the legislations with regards to environmental policy are still on-going and continually being developed for long-term increases in the country’s efficiency.
Goals
In September 2008, the Irish government officially announced that the country had entered into a recession period. Once considered to be one of the world’s biggest economic success, Ireland became one of the worst casaulties of the 2008 global recession. During the depths of Ireland’s financial crisis, the Carbon Tax was initiated to help reduce its staggering deficit and improve the country’s environmental and economic outlook.
Ireland implemented environmental policies with the aim to reduce its current emissions by 80% by the year 2050. One of the greatest means to achieve this is through the Carbon Tax. The government imposed taxes on most of the fossil fuels used by homes, offices, vehicles and farms, based on each fuel’s carbon dioxide emissions. On May 1 of 2010, the Carbon Tax was applied to kerosene, marked gas oil, liquid petroleum gas, fuel oil and natural gas.
To provide a glimpse of the price increases, the Carbon Tax resulted in a price increase of kerosene (heating oil) by 4.3 cent a litre, meaning an extra €43 Euro on 1000 litres, which is about 6.5% increase in 2010. Adhering to the 4 year National Recovery Plan as released by the Irish government in 2010, the Carbon Tax would be doubled by 2014. Furthermore, household trash is weighed at the curb, and residents are being billed for anything that is not getting recycled. Other taxes are tied to automobile emissions, and the Irish pay purchase taxes on new cars as well as steep annual registration fees in proportion to their vehicle’s emssions.
What Emissions are Exempted?
The Carbon Tax does not apply to electricity since the cost of electricity in Ireland is included in the pricing under the Single Electricity Market, its electricity sector. Similarly, users of natural gas can also be exempted from this tax, given that they have proof of utilizing the gas to generate electricity. Furthermore, a partial relief from the tax is granted for natural gas used that is covered by a greenhouse gas emissions permit issued by the Environmental Protection Agency. Producers of pure biofuels are also exempted from being charged the Carbon Tax as well.
Near the end of year 2012, grants are being introduced for a period of time to homeowners for upgrading their old oil or gas boilers to high efficiency condensing boilers. The standard for the boiler to be considered as “high efficiency” is referred to with a “seasonal” efficiency of at least 90%. So now, under the launch of this new scheme, Irish householders can get a grant of €560 Euro towards the cost of a new efficient oil or gas boiler.
Policy Implementation Overtime
In the long-run, these introduced policies have delivered results economically and environmentally. Standing as one of Europe’s highest-per-capita producers of greenhouse gases, with levels matching to those of the US, Ireland has seen its emissions to drop more than 15% since introducing the 2008 when the recession hit. Although one can argue that much of this decline is due to the economy breakdown, it was observed that the Irish shifted to greener fuels and cars, and adopted the recycling practice quickly when they were faced with the introduction of environmental taxes.
The implementation of environmental taxes has also played a crucial role in Ireland, as it led to significantly reducing the country’s deficit. In 3 years time, the Carbon Tax has raised approximately 1 billion euros ($1.3 billion) overall, including 400 million euros in 2012. Thus, this resulted in providing the government with 25% of the 1.6 billion euros in new tax revenue. So, this revenue contributed to the narrowing of the Irish government’s budget gap in 2012 and was able to avert a rise in income tax rates as well.
Apart from the revenues that it brought in for the government, automakers such as Mercedes came out with powerful cars that had emission ratings as low as the tiny Nissans. Moreover, some landfills eventually closed due to the amount of trash being reduced, and the market for reneweable energy sources grew to be more competitive as fossil fuels became more costly, allowing Ireland’s wind power industry to thrive.
Cost-Effectiveness of the Policy
The cheapest way to meet its emission target is to set the marginal cost of emission equal for every source. It marginal costs are not equalized across all sources, then the total economic costs are higher than necessary. For example, it is the same for a ton of carbon dixoide to be emitted from power generation and a ton emitted by transportation, so it is fair to to treat them alike and tax emissions from both at the same level. However, some may argue for cost-benefit analysis and set the tax equal to the social cost of carbon, but how do we measure that? The desirable level of the Carbon Tax is complicated because others may argue that the tax should be set at a level that is sufficiently high to meet the emission target and so on.
Approximately 45% of Ireland’s carbon dioxide emission and 30% of greenhouse gas emissions are already regulated by a price mechanism – the ETS. So, one possible proposal is to set the carbon tax equal to the future price of tradeable permits. In this way, every source will pay the same per emitted ton, which is fair and economically efficient. Furthermore, even though Ireland’s emissions are a small fraction of global emissions, the Carbon Tax can also act as a signal to the country’s commitment to international climate policy.
Distributional Effects
The Carbon Tax increases the price of energy, which means that firms are less competitive on the world market, as well as households having less money to spend on their other consumptions. The economy can slow down as a result of this, but the revenue from the Carbon Tax can be used to compensate household and companies to stimulate the economy. So the tax disproportionately affect the poor, but such taxes also penalize the wealthy, who consumer more.
The prices of basic commodities rising are particularly hard on the poor, and government needs to provide subsidies for low-income families. The welfare of polluters is at the minimum when polluters are taxed to achieve environmental efficiency, since they will be charged with the abatement cost of reducing pollution and the tax associated with their emission levels.
The Active Retirement Ireland group proposed a distribution of an additional €4 per week for those receiving a state pension due to the tax. The ESRI has also speculated that the tax would weigh more heavily on rural households, which make up 42% of Ireland’s population. These added tax revenues may be redistributed to balance out these income affects.
Final Thoughts
The Carbon Tax seems like it is adding revenue to the budget during economic recession to help it recover at the cost of polluters. This tax is least favoured by polluters, and even though a tradeable permits may be introduced, it is unlikely and unfeasible due to high transaction costs. We could probably say that a subsidy can be introduced, but this is also very unlikely since the government is still faced with problems from the recession. Sthey could review their spendings to increase energy efficiency and reduce costs, as well as new technology like wind energy that is thriving in Ireland.
References
1.http://topics.nytimes.com/top/news/international/countriesandterritories/ireland/index.html
2.http://www.nytimes.com/2012/12/28/science/earth/in-ireland-carbon-taxes-pay-off.html?_r=0
3. http://www.planetizen.com/node/59972
4.http://www.moneyguideireland.com/category/carbon-tax
5.http://en.wikipedia.org/wiki/Carbon_tax#Republic_of_Ireland
6.http://www.trcommons.org/2013/01/why-the-new-york-times-loves-the-irish-carbon-tax/