Friends of the Irish Environment call for wide-ranging carbon tax

national | miscellaneous | press release Thursday October 02, 2003 02:09 by Friends of the Irish Environment

FIE’s recommendations in relation to the proposed carbon tax include:

-There should be no exemptions from the tax for the large polluters.
There have been proposals that the biggest polluters should be exempted from the tax in order to protect their economic position. This would lead to a greater burden on all other economic sectors and consumers. It would both be unfair and lead to higher emissions than would be achieved on a level playing pitch.

-Poorer households must be compensated.
Because poorer households spend a higher percentage of their income on energy than wealthier households, they must be compensated. This should be through changes to the social welfare and tax systems and investment in insulation and other energy efficiency measures.

-Money raised should be used to fund a transfer to a low-carbon economy.
A substantial part of the money raised should be used in a decarbonisation fund, to bring about a rapid change to a more energy-efficient, renewables-based economy.

Submission in relation to Carbon Tax



1. Need to take a long-term view

The taxation of greenhouse gas emissions/ carbon dioxide emissions/ fossil fuel related carbon dioxide emissions should introduced in order to work towards both short and long-term objectives.

The specific short-tem objective is to reduce emissions in order to meet or exceed Ireland?s Kyoto commitment. However, the appropriate longterm objective should be to bring about long-term changes in the operation of the economy to a low-carbon economy. Therefore in considering the taxation proposed, we emphasise the need to take a long-term view. This has significant consequences. Some production and consumption models which might continue to be practical under the Kyoto commitment albeit at an economic cost to other sectors will simply be impossible assuming the introduction of further commitments based on the UNFCCC goal of avoiding?


2. Price is not sufficient

We welcome the proposed introduction of fiscal measures. In many instances they will alter prices such as to bring about the desired change in activity. However, we wish to emphasise that it is not sufficient to make changes to the tax system alone. Other areas of economic policy also need to be changed, including: infrastructural and other investment policy, regulation policy, etc.

The National Climate Change Strategy specifically disavows ?business as usual?. We wish to emphasise that reducing greenhouse gas emissions is not a question of adding a carbon tax to ?business as usual?. There are many instances where the extra expense will simply be paid due to a lack of alternatives or the presence of incentives for some economic actors to maintain current emissions levels (and pass on costs). The economic policy environment must ensure that the appropriate incentives to emissions reduction exist. We will return to the supporting policy environment below.


3. Scope of the tax
We are concerned that the tax is proposed to be limited to energy related the production of CO2 from fossil fuels. The National Climate Change Strategy envisaged the introduction of taxation on greenhouse gas emissions, and made the important point that the taxation should be as broad as possible:

?The development of a broad greenhouse gas taxation regime,across all relevant sectors and gases, will assist in ensuring identification of the least cost approach for the economy as a whole in meeting our commitments.?

The policy set in the Strategy was as follows:

?Appropriate tax measures, prioritising CO2 emissions, will be introduced from 2002 on a phased, incremental basis across a broad range of sectors in a manner that takes account of national economic, social and environmental objectives.?

For practical reasons we can understand why land use related emissions should not be included. However, point source emissions of both CO2 and other greenhouse gases should be included.

In particular, cement production makes a very substantial contribution in the emission of CO2 from limestone in addition to its emissions derived from fossil fuel use. Cement has been dropped. Similarly there will be other smaller non-combustion CO2 emissions from industrial processes. There are also point source emissions of other greenhouse gases which should be discouraged, such as emissions of industrial wastes, methane from landfills etc.

The scope of the tax should be limited only by practical considerations. Anything else introduces arbitrariness and unnecessarily reduces the effectiveness of the tax. Indeed it could constitute a state aid.


4. The rate or rates of tax
There are a number of possible bases for calculating the rate of tax:
· carbon damage estimates
· Fund for decarbonisation
· attempt a calculation of rate needed to reach compliance with Kyoto
· work out cost of CDM/JI/ Match rate to carbon trading


4. 1 Carbon damage estimates

Recent work by Feasta and Friends of the Irish Environment has come up with an estimate for damage due to fossil fuel emissions and recommends as follows:

Thus, to remove the subsidy, at least an extra ?14,000 million should be raised in taxes on energy and of this a tenth should be either be put into the health budget on top of the current spending, or paid out in compensation to those with, say, respiratory complaints, or used to minimise future emissions. The remainder, at least ?12,500 million each year, should be spent on projects which will benefit future generations and thus compensate for the damage we are doing to them. As this figure is roughly half of the sum being invested in the country each year, it means that roughly half of all investment projects should have as their primary goal the well-being of future generations rather than the creation of incomes and profits for people living now. Suitable projects for this future-first investment fund could include Ireland making a rapid switch to complete reliance on non-fossil fuels.

4.2 Decarbonisation fund

The idea for this is essentially that in the last sentence of the extract above: the institution of a capital fund for the switch to non-carbon energy systems. The carbon tax could be set at the necessary level to supply this fund. This would involve the logical steps of working backwards from the desired goal to establish the most effective means of achieving it and setting the tax rate to raise the necessary revenue.

4.3 Attempt a calculation of the rate needed to meet Kyoto commitment

This requires a confident overview of the demand elasticity in energy consumption and the technical changes which can be mae to reduce emissions. In addition it needs a clear picture of what other measures are to be taken to reduce emissions. As such it would have to be integrated with the review of the National Climate Change Strategy. This option integrates easily with the two previous options.

4.4 Work out cost of CDM/JI / Match to carbon trading

Under this model, the rate would be set by the price of carbon in the EU emissions trading regime, or the international emissions trading regime when that comes into operation. At the short-term economic level, this would have the advantage of creating a level playing pitch for economic operators and removing any incentive to work the system. At the same level it would have the disadvantage both for the Exchequer and for business of introducing considerable uncertainty into the level of tax to be levied in the future. However, the more fundamental objection is that this will not necessarily bring about the long-term economic shift to a low-carbon/no-carbon economy which is required. For this reason we do not favour this option.


5. Whether and how the rate or rates should be phased in
The most important aspects are that the tax which is now well overdue is introduced as soon as possible and that the rates for future years are announced as far in advance as possible.


6. The appropriate collection mechanisms;
Collection should occur at the most practical points: point of import for imported fuels, point of sale for peat, point of emission for non-fuel industrial emissions.


7. Whether there should be rebates for those with legally binding negotiated agreements;
We are strongly opposed to this proposal. It would be a breach of the polluter pays principle. The purpose of taxes is to reduce greenhouse gas emissions and to do so as fairly and as cost-effectively as possible. Exemptions from that taxation are likely to result in a number of negative consequences (unless specifically designed to eliminate those consequences in which case they would be little different in effect than the even implementation of the tax). These include

a. reduction/removal of incentives to reduced greenhouse gas emissions. It is important that the incentive to reduce emissions continue below any target which a negotiated agreement would set. This would contradict the general principle of a negotiated agreement.

b. failure to minimise the burden on the economy as a whole. We feel that the welfare of the economy as a whole is the relevant economic consideration in this case. In any market economy the interests of particular businesses are not necessarily those of the economy as a whole. (Appropriate measures should of course be put in place to deal with any social impacts of declines in particular industries/ industrial sectors should these arise.)

c. lack of equity. It would be unjust were certain polluters, by virtue primarily of the size of their emissions to be protected from taxes and market forces which other businesses and indeed consumers are or will be subject to.

d. failure to incentivise best practice. Any negotiated agreement which set a simple target would fail to incentivise best practice should that be or become a higher standard than the target.

e. removal of inter-sectoral and inter-producer incentives. Many GHG-intensive products/services compete with less intensive products/services whether in the same or in another economic category. E.g. aviation competes with rail, cement competes with wood. It is vital that the economic incentive which will help to reduce emissions be allowed to operate. Negotiated agreements risk becoming in effect a hidden subsidy to more polluting industries

f. removal of incentives for economic conversion. Economic conversion to less GHG-intensive production and consumption patterns is an essential aspect of long-term policies to reduce GHG emissions and of bringing about sustainability. A conversion from cement-based to wood-based building is a good example of this type of conversion. Negotiated agreements must not hinder this economic conversion. Instead incentives and information should be put in place to accelerate this conversion for both environmental and economic reasons.

We have had a look at the SEI study and can see no cogent reason why the reductions would not be achieved under a carbon tax with the level of technical advice involved in that study. A carbon tax is after all a very effective incentive to reduce emissions.


7a. Should the tax be applied to those included in emissions trading?
The emissions trading regime is operating on the basis of ?grandparented? emissions permits for trading. It would be fundamentally unfair if certain sectors of the economy were to be exempted from the carbon tax because of involvement in the EU emissions trading regime. Such an exemption would mean certain large businesses would receive a right for free which other sectors of the economy have to pay for.

We recommend that carbon taxation be applied to businesses receiving grandparented permits. This taxation should at special rates set to recover the value created by the emissions trading scheme which would otherwise be an unfair competitive advantage and an unfair regressive transfer of wealth.




8. The impact on competitiveness

The proposal will affect the relative competitiveness of different industries depending on the degree to which they contribute to carbon dioxide emissions. It is desirable that this should happen.

Impacts on competitiveness on an international level will mean in a few instances where major polluters are concerned that emissions are transferred from Ireland to other countries. This is of no value from the point of view of reducing total greenhouse gas emissions. However, if the rest of the economy and society is not to unfairly bear a burden which should be borne by the polluter, this is inevitable.

In the long term, the switch to a low-carbon economy is necessary, and there are substantial advantages to taking a lead in this transition.


9. The impact on households and the appropriate mechanism if low income households were to be compensated;

We note the analysis by the ESRI indicating a disproportionate impact on low income households and believe it is essential that these households be compensated. This compensation should take the form of changes to the social welfare and tax systems and additionally capital investment to increase energy efficiency in these households. We agree with the ESRI?s proposals in this regard.


10. Whether and how any revenue recycling should operate.

Taxation of emissions and resource taxes should progressively replace other forms of taxation. Carbon taxation should be seen as part of this process.

Revenue derived should be used to:

1. Compensate low income households
2. Establish a decarbonisation fund
3. Substitute for other forms of taxation.


11. Making the tax visible

Suppliers of energy and energy services should be required to note the carbon tax component on all bills, to increase public awareness of the tax. We believe this tax will if properly implemented (in particular if as part of a package which benefits lower-income households), enjoy a substantial level of public support.


12. Do not undermine the tax with subsidies

It is essential that the desired impacts of the tax on the relative cost of various energy options is not undermined by other policies. There is a real risk that the impacts of the tax would be compensated for by increases in other subsidies. Feasta and Friends of the Irish Environment have identified subsidies to fossil fuel use in Ireland which in our view should be eliminated or reformed. Two of these subsidies give rise to particular concern:

1. PSO cross-subsidy for peat-fired electricity

This cross-subsidy will amount to ?58 million in 2004. If carbon taxation is introduced, peat-fired electricity will be uneconomic. The Department of Communications, Marine and Natural Resources is not clear as to how this will impact on the PSO. It is essential that this subsidy is not increased to undermine the desired impact of the tax. Doing so would impose a substantial additional burden on the economy and society and lead to substantial avoidable CO2 emissions.

2. PSO subsidy to internal aviation

This subsidy is expected to amount to ?20 million in 2003. While carbon tax will not have as strong an impact as it would in the case of peat, we emphasise that here also, the tax must be allowed to have its desired impact of discouraging economically sub-optimal carbon emissions.


13. Responsibility for other measures

It is striking from the consultation documents and from the ongoing business as usual policy environment that the Department of Transport, the Department of Communications Marine and Natural Resources. and the Commission for Electricity Regulation have no effective policies to reduce greenhouse gas emissions.

It is particularly striking that those Departments are criticising the carbon tax proposal on the grounds that it will be ineffective. In making that contention they are substantially correct. The primary reason for this is that those Departments continue to operate policy environments which are stimulating growing greenhouse gas emissions. It will not be sufficient to introduce a tax when these Departments continue to operate policies which encourage further growth in emissions. While it is outside the direct scope of the carbon tax itself, we wish to make some comments to emphasise the need for action within those two departments in particular.

13.1 Electricity

As mentioned above, environmental/sustainability considerations are neither integrated into national electricity policy nor into the work of the Commission on Electricity Regulation. The response of the DCMNR on page 42 of the consultation paper simply predicts an increase in electricity demand, with no indication that it has a policy to control or limit demand.

There are fundamental conflicts between the operation of the electricity regulation system and environmental policy. In order to reduce demand for energy and electricity the financial incentives operating in the electricity regulation structure must incentivise demand reduction.

Electricity regulation is directed at control of price per unit of electricity with the result that the incentive for producers is to maximise consumption, and if consumption is reduced, their profits are reduced. Nine states in the USA have done differently, decoupling profits from sales volume and providing that where a customer makes savings in electricity bills, the utility will share some of those savings. See www.raponline.org . This leads to substantial investments in demand reduction and energy conservation measures.

We recommend that the electricity regulation structure be redesigned to incentivise demand reduction and energy conservation.

Difficulties in implementation of renewables in Ireland reflect a failure to priorities the development of renewables as part of electricity regulation/liberalisation. The European Environment Agency has identified that the success of wind in Denmark, Germany and Spain is due to the payment of a fixed price to producers. Indeed Ireland and Norway are now the only countries using competitive bidding for renewables.

In addition, the design and management of the electricity grid should facilitate decentralised generation and the availability of net metering for small-scale generators/consumers.

13.2 Transport

The EEB has identified transport-related emissions are the biggest obstacle to meeting greenhouse gas emissions targets.

Current government policy specifically seeks to increase levels of aviation. Aviation makes a disproportionate contribution to emissions for distance travelled compared to other travel modes. At the same time it enjoys a highly favoured policy position. We recommend that policy measures seeking to promote aviation be discontinued and aviation fuel be subject to the same rate of excise duty as motor fuels.

Current roads policy is based on a ?predict and provide? model. It fails to recognise the phenomenon of ?induced traffic? i.e. provision of infrastructure stimulates demand and leads to higher emissions. Unless this is changed there is no likelihood of meeting either CO2 or NOx emissions reduction commitments. We recommend that current road-building plans be reviewed to acknowledge the induced traffic effect and to remove the focus on time-savings as primary target and instead to address safety problems and provide local bypasses where needed.

Improving the relative attractiveness of rail will lead to a transfer from road to rail thereby making a significant contribution to emissions reduction. An effective strategy for reducing CO2 emissions from transport must incorporate plans to favour rail over road both for freight and passengers.