Colm’s columns

Colm Rapple
Irish Mail on Sunday, December 20, 2009

The carbon tax is a nonsense. It will have scant impact on our carbon emissions. It’s inequitable, in so far as it will bear heaviest on low income earners. And it is economically inefficient in that it will adversely affect the competitiveness of many Irish businesses. It will also give a massive boost to cross border shopping, not for groceries and drink but rather for solid fuel.

It’s another example of the good intentions and woolly thinking that has informed much of the Green Party’s input to Government.

With some honourable exceptions, there seems to be a reluctance to criticise this tax, perhaps because of a fear of being accused of killing polar bears. Or perhaps there was so much in the budget that it has just got sidelined.

There was widespread opposition to the tax when it was first mooted by Charlie McCreevy some years ago, some of it from within the civil service. In a submission presented to Charlie McCreevy at the time, the Department of Transport maintained that a carbon tax could cause significant economic damage without any corresponding economic benefits. It argued that the tax would have little or no impact on the behaviour of transport users or on the level of emissions from the transport sector.

That latter point is not even disputed by Green Minister, Éamon Ryan. Demand for fossil fuel products is, as he put it himself,  relatively inelastic. In other words even a large increase in price doesn’t have much impact on the amount purchased. That’s particularly true of motor fuels, which will be bearing almost two-thirds of the carbon tax burden.

The ESRI estimated that a €20 carbon tax — €5 higher than is being imposed – would reduce fuel consumption in the transport sector by only 1.1% over eight years. The plain fact is that there is limited opportunities for fuel switching. It will take more than a few cent on the litre to discourage private motorists from driving.

Too much of the tax burden imposed on private motorists is charged on the actual vehicle through VRT and VAT and too little on the actual process of driving. The logical approach would be to cut the tax on cars and greatly raise the tax on fuel. That  might encourage a shift to public transport.

But not, of course, if public transport gets more expensive. Yet the current tax will bear more heavily on rail transport than it will on cars. Auto-diesel has gone up by 4.4% in price as a result of the carbon tax. The price of the marked gas oil used by Iarnród Éireann will go up by 8.7% when the tax is imposed in May.

Consumer prices have on average fallen sharply over the past year. But not the cost of public transport. Rail fares are up 8.3% while bus fares are up a massive 11.7%. The carbon tax will exacerbate the upward pressure on prices.

That will impact not only on passengers but also on freight services. There is not much more that road hauliers and Iarnód Éireann can do to become more efficient. The haulage fleet is relatively new and Iarnód Éireann has replaced most of its older locomotives. So the carbon tax isn’t going to have any significant impact on emissions. But it will have an impact on competitiveness. The extra cost will be passed on to businesses and inevitably to consumers.

It’s little wonder that the Department of Transport strongly recommended that all public transport operations including rail, bus and taxies be exempt from any carbon tax. A full exemption should also apply to rail freight operations while licensed road hauliers and own account operators, it recommended, should be subject to a preferential rate of tax.

No doubt Brian Lenihan will continue to be under pressure to grant such exemptions over the coming months.

The difficulties of imposing a hefty tax on coal and turf, will also be brought home to him. He has delayed imposing this element of the tax to allow “a robust mechanism to be put in place to counter the sourcing of coal and peat from Northern Ireland where lower environmental standards apply”.

But lower prices are likely to be a greater problem than lower environmental standards. Arigna Fuels Ltd, which operates about 25 miles from the border, estimated that a price differential of €10 would be enough to send its retail customers north to shop. The carbon tax will put up the price of coal by about €45 a tonne, an increase of 11%. Briquettes will go up by about 40c or 10%.

The Revenue Commissioners have pointed out that while it can exercise control under EU agreements on cross border movements of alcohol, tobacco and oils, there isn’t much it can do to prevent the movement of other goods. That’s why the excise duties on matches, mineral waters and video players were abolished.

The arguments used for abolishing those taxes, apply equally to any new tax on coal for domestic use, the Revenue Commissioners warned. There is a danger, they added, that imposing the tax on domestic use of coal could “lead to such control difficulties as could undermine, to some extent, the credibility of the tax”.

Those 4 X 4s will come in useful.

Colm Rapple
Irish Mail on Sunday, September 6, 2009

Tax is going to replace NAMA as the hot economic topic tomorrow with the publication of the Tax Commission’s report. Much of it has already been leaked and it appears that few of the proposals are going to find their way into December’s budget. The notable exception is a carbon tax, much beloved by the Greens and certain to be introduced if they are still in office.

The residential property tax seems likely to be long-fingered. Changes in income tax are likely but mainly to consolidate and simplify the current mishmash of tax levies and PRSI. A change in the relief on pension tax relief is long overdue and was on the cards even before the Commission was established, and a clear-out of some remaining tax breaks has been signalled.

But the carbon tax seems to be a certainty. At the behest of the Greens, the Programme for Government includes a commitment to phase in a carbon levy and its rapid introduction is sure to be demanded in the current review of the programme.

The big question, however, is how far the initial environmental justification for such a tax is going to be superseded by a desire to raise money for a cash strapped exchequer. If that is going to be the objective, then a carbon tax that will hit hardest at the poorest, fuel inflation and erode competitiveness is not the best way to go about it.

A carbon tax was first proposed in 2002 and abandoned by Charlie McCreevy in 2004 after he published a discussion document and garnered submissions.

The 100 or so largest energy users in the country have were given carbon quotas by the State some years ago. Those quotas cover most, if not all, of their emissions and, although they didn’t have to pay for them, they are free to sell surplus quota on the open market. In total they account for about a third of the country’s total emissions and they are likely to be exempt from the proposed carbon tax.

A tax rate of between €7.50 and €25 per tonne of CO2 was suggested at the time and in its submission the Greens, then in opposition, proposed a rate of €20. The sole objective was to encourage people to switch from more highly polluting and therefore more highly tax fuels, to less polluting options.

All the revenue was to be recycled, It was to be evenly split between increasing social welfare payments, cutting VAT, reducing employers’ PRSI and funding grants to promote energy efficiency.

A carbon tax of €20 is estimated to raise consumer prices by about 0.6%. That’s the average but the impact will be far greater on poorer families. It is estimated that about 300,000 households rely on solid fuel ranges or open fires as their main source of heat. The tax could add over 20% to the cost of solid fuels but far less to the cost of gas, heating oil and electricity.

Many of those who rely on solid fuel are on relatively low incomes. The top ten percent of income earners spend only 4% of their disposable income on fuel while the lowest ten percent spend about 16%.

When the Exchequer was awash with money, it was easy to argue that all of the extra revenue from a carbon tax should be spent  ameliorating the impact of higher fuel prices on family budgets and business competitiveness. But will that logic hold in the current climate. And if not, does the carbon tax make any sense at all.

Charlie McCreevy was not always right – far from it – but his reasons for abandoning the carbon tax back in 2004 are worthy of consideration at this time.

He concluded that the environmental gains from a carbon tax could not justify the difficulties created, particularly to households. He pointed out that most of the fuels and other products involved were already subject to excise duties that could easily be increased as an alternative to introducing a new tax.

Even with a complicated array of compensation, revenue recycling and abatement measures, a carbon tax, he believed, would produce adverse social and economic effects.

Colm Rapple
Irish Mail on Sunday, 17th February 2008

A carbon tax as proposed by the Green Party would push up the price of motor fuel and heating oil by about 8 cent a litre, add 52 cent to the price of a bale of briquettes and about €2.40 to the price of a 40kg bag of coal.

The tax could raise over €500 million a year for the State coffers but some experts believe that it might have little or no impact on the level of carbon emissions.

That has all been established already in a raft of reports prepared by the Department of Finance and in 117 detailed submissions to the proposals made in 2002 by the then Finance Minister, Charlie McCreevy. In the end he decided that it wasn’t worth the effort.

But the Green Party has got it back on the agenda and the current Finance Minister, Brian Cowen, has asked the new Commission on Taxation to treat it as a priority. It’s not clear, however, what that means. The Commission has until September of next year to publish its findings and there is nothing in its terms of reference requiring it to present an interim report.

When it was last proposed most Government Departments, including those now headed by Green ministers, agreed that any tax should be phased in over at least four years. But the Greens are urging its speedy introduction and while, in terms of reducing carbon emissions, the tax may be little more than a symbolic gesture pandering to the Green’s constituency, it could be expensive to administer, inequitable in its effects and harsh in its impact on some individuals and businesses.

An initial consultation paper prepared by the Department of Finance suggested a tax rate somewhere between €7.50 and €25 per tonne of CO2 emissions. A rate of €20 per tonne emerged as the most likely. It was the rate mentioned in most submissions including one from the Green Party.

Overall consumer prices would rise by 0.6% but the impact on low income families would be far greater than the average. A greater proportion of their incomes goes on fuel and it’s more likely to be solid fuel, coal and turf, that would be hardest hit by the tax because it is dirtier in terms of CO2 emissions.

It is estimated that the impact on the lowest 10% of income earners would be three times greater than on the average income earner.

Some or all of that impact could be offset by channelling the revenue raised into higher social welfare benefits of one type or another and to providing grants for converting to oil or gas central heating that would be more efficient than solid fuel. But it would be all a bit hit and miss.

It is estimated that there are about 300,000 households relying solely on old fashioned solid fuel for their heating. A large proportion of those don’t have access to natural gas. Many buy their fuel in small quantities and would find it hard to finance a fill of oil.

But that is only one of the problems that the Commission on Taxation will have to address. Another major issue is whether some businesses and sectors should be able to negotiate their own separate emission reducing deals and thereby gain exemption from the tax.

About a hundred of the larger energy users in the country, including the ESB, will almost certainly be exempt from a carbon tax. They were given quotas under the EU emission trading scheme. They can buy additional quota on the market or sell any surplus they might have. Since they got the quotas free of charge they have done very well but it wouldn’t make much economic or environmental sense to hit them with a carbon tax.

But other businesses would like to do special deals and the Department of Communications, Marine and Natural Resources, was very much in favour of such negotiated agreement when the carbon tax was last mooted. Now it is headed by Éamon Ryan of the Green Party which favours a broadly based tax.

But according to some reports the Danes found that specific tax relief/grant deals with business groups could produce emission reductions nine times greater than a carbon tax. A pilot scheme operated by Sustainable Energy Ireland was also deemed more effective in reducing emissions than a carbon tax.

But the narrower the base for a carbon tax, the less acceptable and the less effective it becomes. The Department of Finance estimated that a tax of €20 per tonne could reduce carbon emissions by about 2 million tonnes a year. That assumes that many people will reduce their energy consumption or switch to a cleaner or more efficient fuel. But price increases don’t seem to have had much of an impact in the recent past.

In any case a 2 million tonne reduction is small enough given that current emissions are about 68 million tonnes and the aim is to get that down to 55 million tonnes by 2020.

Charlie McCreevy may well have been right when he concluded that:

The environmental gains from a carbon tax would not justify the difficulties created particularly for households;

That it wasn’t really needed since most of the products involved are already subject to excise taxes that could be raised to create the same effect; and that

The range of compensation, revenue recycling and abatement measures needed to achieve some degree of equity could not completely offset the adverse economic and social results.

Colm Rapple
Irish Mail on Sunday, June 17, 2007

All of the revenue from the carbon tax inserted into the new programme for government at the behest of the Greens is to be channelled back into the economy but it is not going to be cost free. There are bound to be winners and losers.

If introduced at the level proposed when it was first mooted a few years ago it will dramatically increase the price of energy products hitting household budgets and eroding the competitiveness of many businesses. It was estimated at the time that the proposed tax would push up the cost of electricity by over 11% and the price of natural gas by 16%. The price of a bale of peat briquettes would jump by 28%.

Imposing a tax on carbon emissions is easy. But its not so easy to make sure that the costs don’t outweigh the benefits. The tax promised in the programme for government is to be revenue neutral. But it’s not easy to devise ways of  compensating those who have to pay the tax given that the objective is to create an incentive to cut emissions.

The tax will increase the cost of energy. That will bear heaviest on the poor who spend a larger proportion of their income on energy than their higher earning neighbours. The top ten percent of income earners spend only about 4% of their disposable income on fuel while the lowest ten percent spent about 16%. Those are ESRI figures from a few years ago and, if anything, the gap is wider now  that energy prices are higher.

Higher social welfare payments and fuel allowances could help to compensate those hardest hit by the higher energy costs but some people would undoubtedly fall through the cracks.  There will be similar difficulties in compensating businesses whose competitiveness will be eroded. The costs could be high for what, some are predicting, could be a fairly insignificant cut in greenhouse gas emissions.

That risk is particularly high given that the heaviest polluters in the country may be exempt from the tax. They are the companies already involved in the EU wide emissions trading scheme.

There is about a hundred of them and combined they account for an estimated 75% of our industrial greenhouse gas emissions. Under the emissions trading scheme they were given free licences covering most, if not all, of their CO2 output. That give away was overseen by minister, Martin Cullen and will impose a far greater cost on taxpayers than his ill fated attempt to introduce electronic voting.

He was criticised at the time for not selling or auctioning the emission quotas rather than given them away free. The criticism still stands and its justification will become more obvious as we fail to meet our emission targets under the international Kyoto Agreement and have to buy in emission quota from abroad or pay hefty fines.

In any case these companies are only likely to have to pay the proposed carbon tax on emissions above the generous quotas they already enjoy.

It was for these reasons that the then Finance Minister Charlie McCreevy abandoned plans for a carbon tax in 2004 having initially proposed it in December 2002. At internal civil service meetings the tax was heavily promoted by the Department of the Environment but strongly opposed by the Department of Enterprise, Trade and Employment and questioned by a number of other Departments.

It’s obvious from the reports of the civil service Tax Strategy Group that there were concerns that the actual impact of a carbon tax couldn’t be predicted with any degree of certainty. Submissions were sought and Mr McCreevy subsequently reported that over half of those who expressed a view were opposed to the tax and many of the others sought special treatment or total exemption if the tax was introduced.

Explaining his decision to abandon the plan Mr McCreevy  claimed that the tax would only have cut CO2 emissions by 0.5 million tonnes a year and that this meagre environmental benefit would not justify the difficulties that would arise, particularly for households. That estimate for CO2 reduction was for the first year when the tax was being phased in but even at the best estimates some civil service advisers felt the likely benefit was far too high to justify the cost.

Mr McCreevy also pointed out that even without any additional tax consumers were facing increased energy prices and that that would provide an incentive to cut back on usage and look for alternatives.

The same arguments still apply and presumably are backed up by documentation in the relevant ministries. An agreement to introduce a carbon tax is only the first and very small step. It won’t be as easy to get agreement on the level of the tax or how the significant revenue that it would raise will be recycled.

Mr McCreevy’s original proposal was to introduce the tax at a level of €7.50 per tonne of CO2, rising to at least €20 over a few years.  A €20 tax was expected to increase the price of motor fuel  by 8%, electricity by 11%, the price of gas by 16%, briquettes by 28%, heating oil by 19%, coal by 21% and turf by a massive 28%.

The impact on the consumer price index was expected to be between about 0.6% and 0.8%. If those with emission quotas are exempted the tax could yield about €500 million and it’s the division of that money that will certainly cause friction at the cabinet table. Getting a broad proposal into the Programme for Government is likely to prove much easier than getting it implemented.