Carbon tax galore

The Dept Finance has reinfored the expectation that there will be carbon tax as of January 1st, according to the Irish Times.

IBEC does not like a carbon tax (Irish Times), but the Royal Irish Academy does (Irish Times).

Frank McDonald writes about the impact of a carbon tax on the upcoming climate negotiations in Copenhagen. As things stand now, the carbon tax will be announced on the second day of international negotiations. The opening shots will have been fired on the first day, and nothing much will be happening on day 2 with thousands of journalists hanging around Copenhagen itching to write about a success in climate policy. Ireland’s carbon tax will thus attract worldwide media attention.

The economic rationale for a carbon tax in Ireland was first set out in a paper from 1992.

45 thoughts on “Carbon tax galore”

  1. Haven’t read the linked papers but just wondering if that is the same Daniel/Danny McCoy proposing a carbon tax for the ESRI (admittedly a few years ago) and now opposing it for IBEC ?

  2. @Greg
    How does one define budget neutrality in times like these?

    In our model simulations, we assume budget neutrality/

    I would think that, at the moment, the carbon tax would mean foregoing other tax increases.

  3. Richard,

    My sense of things is, that the environmental movement in Ireland might get ‘split’ two ways over this carbon tax issue. That is a split in a movement which already has more than enough divisions within it.

    What is far more important an issue, than if there will or will not be a carbon tax, is the issue of how do we get everyone together to work on it, to ensure the carbon tax serves any useful purpose and becomes a stimulus in the right way for the economy.

    This issue of will there or will there not be a carbon tax is a distraction. It is only about one side of the (small) environmental movement within Ireland trying to get ahead of another side. Obviously those committed to solving global issues, with a base within Ireland are more important in some ways. But solving domestic issues with waste, planning, energy generation – problems that we are going to have to face anyhow, should not become poor relations to the issues of carbon.

    Howard Liddell, the British architect in GAIA architecture has a nice phrase, he calls it ‘Chasing the God of Carbon’.

    As always in the environmental movement, it is a case of who can command the largest research grants, and that decides the pecking order. But we shouldn’t allow such a system of ‘reputation’ and scientific prestige to highjack what is a very serious matter, besides all of the internal politics.

    Lots of people in Ireland want to get into deep research projects in this area – I hope that some of the carbon tax will be used to fund the research in this country. Of course the research money will be divided to some degree based on reputation and prestige. But we need to set out proper goals, in term what we want our research to achieve.

    Jim Barry of National Toll Roads made the point recently, we tend to put the cart before the horse. In Ireland we appointed an Energy regulator. But we did not establish any policy context for the energy regulator to operate within. Therefore the position of energy regulator was kind of meaningless for the first phase of its life.

    It is the same with carbon taxation. By all means get the ball rolling. But there is no need for Ireland to be first. We should aim to get the sequence correct in how we set this up, so that we avoid the mess we had in energy, where the decision making process was compromised.

    From my perspective on the carbon debate in Ireland, we do need to organise ourselves much better and encourage a bit more discipline and cooperation (as much as possible) within the ranks. If we plough on with carbon tax at the moment, we will probably see five years of in-fighting and squabbling, while everyone tries to establish a pecking order, before anything gets done.

    My opinion is, even if Ireland is first out of the blocks with its carbon tax, don’t expect it to mean, Ireland is first out of the blocks in any other sense. We have a long wait to get things organised, whatever we do. Like I said, the academic reputation and prestige system doesn’t appear to be working as a way to establish order. Very much the opposite. We need to find some other framework to hang this policy on, the right one, and then set down a clear sequence of realistic goals which we hope to achieve.

    Look at Germany, they have been working deep into the manufacturing and recycling, energy conservation area before carbon was ever an issue. Ireland is not going to suddenly transform itself over night and become some sort of ‘world leader’ in that regard. Society has to be brought along. It is not only about a few academics who get a weird sort of buzz from the hussle and bussle, the urgency and activity, conferences etc, surrounding climate change crisis.

    I despise a lot of the media hype surrounding Kyoto and today, Copenhagen. It is really distracting to the job facing us all.

  4. @Brian
    There are two reasons for a carbon tax.

    First, it will bring in hard-needed revenue, while a carbon tax does little damage to economic growth (unlike labour taxes).

    Second, it will mean that Ireland has a reasonable climate policy. This will free up political capital and policy making capacity to tackle other policy issues.

  5. Richard,

    I heard you on the radio this am talking about this. Your argument seems to be ostensibly that it’s necessary because of climate change but when asked to justify it you volunteer the happy news that it’s necessary because the government needs the money anyway. You seem to regard this as killing two birds with one stone.

    The interviewer took you on a virtual tour of the people who are going to be most hurt by it (it is a pretty regressive tax) including people under severe economic stress commuting from the counties around Dublin and you sounded really quite cheerful as you agreed that, yes, it will hit such people. You indicated that all such people have to do was ‘find an alternative way of getting to work’.

    I believe that your reasoning is faulty.

    1) A case can be made for shifting tax to carbon in an overall effort to reduce dependence on fossil fuel. However I believe that most economists argue for this on the basis of reducing tax in one sphere and increasing it on carbon use. Not only did you not say this but, in fact, you argued that the reason why it was a good idea was precisely because. Hence it is, in essence a net new tax on income.

    2) Tax on certain kinds of fuel in Ireland – certainly petrol – is already very, very high.

    3) This will be, as you indicated, an an additional tax – to raise revenue (despite Brian Lenihan’s repeated claims that there will be no new taxes.

    The facts are that:

    a) People in Ireland use their cars because they have no choice – they bought the only properties they could afford.

    This was an out-come of government policy (planning, cheap money etc..)

    b) The size of the government sector is already heading for 55% of GNP

    c) None of the government’s tax increases to date has yielded one extra cent of net government revenue.

    d) The government is choosing these increased taxes in order to avoid confrontation with its own employees – the most powerful vested interest in the state – the public sector unions.

    To be cheerfully telling the nation that, in effect, the above is all good news smacks of detachment from reality.

  6. @ Richard

    I spat my cornflakes onto the windscreen of my car during my 60 mile commute to work this morning, when I heard you on the radio.

    More punishment for actually having a job in this country

    Al

  7. @Paul
    From a fiscal perspective, a carbon tax is good because it is hard to escape or avoid. It will bring in money. Once the government finances are under control again, a carbon tax will allow us to reduce labour taxes faster.

    From an environmental perspective, a carbon tax is good because it hits hardest those who emit most. You may argue that they have no choice, but that is an exaggeration. It is certainly true that it will take time to reduce emissions, as this means replacing cars, fixing houses, and even moving closer to work. Therefore, a carbon tax should start low and rise over time. A carbon tax of €20/tCO2 is low. Few households would pay over €300 per year.

  8. @ Richard,

    Yes, I see your point, that it will work to loosen up the sort of death grip we currently find ourselves locked in. I agree with you, anything in the system which creates a new dynamic and forces little bits of changes to ripple around in the system would be exceedingly welcome at this time.

    I will be honest with you, I haven’t read never enough of the papers at the moment, to have my head fully around the subject, but I appreciate your response and attempt to explain it simply to us all.

    I made a comment on one of Karl’s threads a minute ago. I will quote it below here again, because it deals with much the same issue. How to free up the system sufficiently to create a little bit of movement again. I compared the transition from onshore to offshore wind power generation – to the new landscape of competition facing Irish property development.

  9. Here is the comment:

    “Can I mention something here about property development, which you may find interesting. I began to think about this recently, having attended a very technical presentation by a UK professor on the subject of offshore wind. The tinned history of wind generation, is that German and Danish companies did the early R&D and came up with a design of wind turbine, that would work on land. Now the onshore wind industry has reached its maturity so we are looking to move offshore. At the moment, the very same design and approach used for onshore wind is be tried out at sea. But some people question that approach, and wonder should we wipe the slate clean and re-invent the game entirely for offshore wind. It requires re-thinking, re-design and engineering. However, the opportunity is there to define an entirely new kind of business, and some reckon that offshore wind generation could prove more economical than onshore generation, if we go about it the right way.

    The property business in Ireland is at one of those phase shifts in my opinion. It doesn’t take much either, to create a phase shift in the property business. We have plenty of things available to us now, to upset the apple tart that traditionally worked. We might see in the coming years, an entirely new set of players in the property business in Ireland, who approach things very differently to players in the past. We have issues like carbon taxation, energy independence, sustainable family living environments, public transportation, smart-er economies, NAMA, a whole raft of things basically which seem to alter the fundamental rules.

    Take only one of those things, sustainable family oriented living environments. In the past, we never got to a stage where high density apartment living offered this. But now the local authorities and government departments are expecting it in their development plans. The truth is, there is no blueprint for this, how it could work in Ireland. A blueprint which may work somewhere else, in a different society, may not work here. Implicit in the blueprint is the business model – we don’t know what the business model for sustainable family oriented living environments could be. We don’t know how capital intensive it may be from a developer point of view. We don’t know how long term an investment in might be. These are all unknowns. We roughly knew in the past, how the property game worked based on an older model, which didn’t need to perform to the same level, in a whole plethora of measurements. In fact, I would argue, in the older model the financial management capabilities of builders and lenders wasn’t sophisticated at all.

    The truth is, at the moment all of the incumbent property players in Ireland are sue-ing one another, and jostling around for positions and watching one another. In other words, they are fairly flat footed and static. I would bet my right arm, that many of them will be left dead in the water. They are all waiting to see what the next model will look like. When Gerry McCaughey introduced Century Homes, he was copied several times over. When Liam Carroll introduced shoebox apartment complexes in inner city Dublin, likewise, he was driven out of his own domain by competition. In fact, when he had perfected his model to the n’th degree, that is when he was making the least profit from his operations.

    I think rather than waiting around for a bus to hit them and flatten them outright, the property players in Ireland should group together – that is, do the very opposite thing to which their instinct tells them – and decide what the new model should be. They have difficulty understanding though, their opponents in the future will not be each other, but someone completely new, who never existed in the game before.”

  10. @Richard
    Just to be clear basically a carbon tax means sticking up the price of petrol and home heating oil? Nice fancy name but that is presumably it.

    When you say it won’t affect economic growth presumably everything that takes money out of the consumers pocket means less money to spend elsewhere. So €300 per year is €300 that won’t be spent elsewhere.

    Don’t forget the border – we stick on a fairly high petrol tax and petrol in the North is going to be cheaper than down south. It’s already starting to be cheaper due to sterling but this will make the difference worthwhile for anyone within a short driving distance and those of us who take regular trips up North. Might not raise as much money as they think. I worked for a short period for a middle distillate oil supplier. They have unmanned diesel pumps all round the border and their customers are all from the North. That business will dry up overnight.

  11. @Stuart
    A carbon tax will indeed drive up the price of fossil fuel, more so for peat and coal than for oil and gas, and more so for petrol than for diesel.

    Our estimates for the tax revenue correct for the income effect and for direct imports from Northern Ireland.

    A carbon tax will slow down economic growth. However, the impact of a carbon tax on economic growth is less than the impact of increasing labour taxes that bring in the same revenue.

    If you accept the need to raise the overall tax take, a carbon tax is the way to go for 2010. Water charges and property taxes are infeasible for administrative reasons, as there are no water meters and the revenue commissioners do not know how to assess property values.

    If you reject the need to raise taxes in 2010, you either have to cut expenditure further or you need to raise taxes after 2010.

  12. Sorry Richard, this is just too much of a stretch.

    ” a carbon tax does little damage to economic growth (unlike labour taxes).”

    Of course the key is how large a tax, but the for the same effective rate energy is a smaller factor than labour, your claim is a bold one.

  13. @Richard Thanks for your reply. It seems to me, however, that the scale of Ireland’s economic slowdown including emigration will result in a very sharp slowdown in carbon emissions that will be much greater than the effect of such a tax during a time when the economy was / will be not shrinking.

    To suggest that such a tax will raise revenue implies that you don’t believe that it will reduce carbon emissions but that enough people will be prepared to pay the tax..

    There is something inherently contradictory in the argument. If the tax raises a lot of revenue then it will not ‘work’ in reducing emissions and if it ‘works’ in reducing emissions then it will not ‘work’ as a raiser of revenue.

    My core objection is not to the tax per se but to the fact that it’s additional and that the government expects to raise money from it.

    If this true then it is only true because enough people have no choice about paying it and, since it will not be offset by cuts in tax elsewhere (something which I believe is universally argued for by nearly all proponents of such a tax) then it is a net new tax on income and productivity.

    It puts you in a position not of justifying a carbon tax per se but in justifying the decision to raise the overall tax burden as a response to a rapidly shrinking economy.

    Under cover of arguing the the ‘environmentally friendly tax’ you are, in fact, providing support for the governments questionable (at least questionable to me) overall fiscal policy.

    This latter requires separate justification and discussion.

    Hence there is a sleight of hand in your argument.

    regards

    Paul

  14. @Paul
    A carbon tax is like an excise on cigarrettes. You know it won’t reduce consumption in the short run (which is good for the fiscal position) but you can reasonably assume that it will reduce consumption in the long run (which is good for the environment). As we have a fiscal problem in the short run and an environmental problem in the long run, there is nothing contradictory in advocating a carbon tax on both scores.

    See also my response to Stuart.

  15. @Richard,

    will firewood be subject to a carbon tax?

    wood is renewable, but only on a timescale of 40 years or so. isn’t that just too long to avert irreversible climate change? it seems to me it should be taxed. what is the expert opinion?

    either way, the carbon tax will be just the stimulus the illegal tree-felling industry needs.

  16. @bg
    That has yet to be decided, but I guess that taxing firewood would be not be possible at the moment. It is probably too hard to track wood, and to distinguish between wood from clear fell, wood from replantations, and waste wood that would otherwise have ended up in landfill or incineration etc etc etc.

  17. @Richard. Thanks. Yes. looking at your reply to Stuart I suppose I don’t accept the need to raise the tax take. I’m for spending cuts.

    If this time next year the overall tax take has, despite this new tax, actually fallen, will you be prepared to admit that you were in error in advocating its introduction?

  18. Richard – Would it not be more accurate to say that a carbon tax has some “theoretical” foundations (though does not necessarily comply with all principles of taxation), its potential effects can be simulated under controlled conditions, and the empirical evidence is limited by a lack of long term time series data and suitable cross country comparisons that any serious policy maker would demand?

  19. Well done to all those who have been involved in setting the grounds for the carbon tax! If a tax of 20eur/tCO2 be confirmed it will make the French efforts of implementing a carbon tax at a lower rate(15-17 eur/tCO2) in the shadows.

  20. @Richard Thanks for this.

    With apologies to Francis Ford Coppola (Apocalypse Now).

    Imposing a carbon tax in this place place is like handing out speeding tickets in the Indy 500.

  21. @Damiano
    A carbon tax is differentiated energy tax. We have plenty of observations on the impact of energy taxes. There have been carbon taxes in Finland, Scandinavia, the Netherlands for well over a decade.

    As to the theory, Ireland is a small open economy where labour is a large input cost and energy is a small input cost. Because of the ETS, a carbon tax primarily hits non-tradables and households, while a labour tax hits tradables as well. The base energy tax is high, but so is the base labour tax. You’d need quite a peculiar model that would find that extra labour taxes do less harm (per euro raised) than a carbon tax.

  22. Richard,

    It would have to be some carbon tax to allow us to reduce labor tax now in fairness.

    That is not going to happen, it would have to be colossal to allow labor tax to fall.

    The tree huggers will love this though, another reason to get a rally going.

  23. @Conor
    A €20/tCO2 would bring in some €500 million per year.

    Increasing the base tax credit by €100 per person per year would cost the exchequer some €200 million.

    Reducing the tax rate in the first band by 0.5% would cost some €300 million.

    So you’re right: A carbon tax would allow you to tinker at the margins of labour taxes. However, the costs of a tax are quadratic in its level, so tinkering at the margin is actually quite effective.

  24. A Carbon Tax IS a tax on economic activity: no ifs, no buts. He who would state otherwise is …., well, not adequately versed on the nature of the relationship between energy and economic activity.

    Mention of models put me in mind, again, of the Export-land Model of Fossil Fuel Production and Depletion. If this model does kick-in as forecast, then economic recovery is postponed – or more likely canceled!

    ALL economists should be familiar with, and understand the implications of the ELM model.

    B Peter

    ps. What’s the level of Excise Duty and VAT on Agri and aviation diesel?

  25. (Warning: Do not read the post below while eating breakfast cereals)
    Well, as interest rates rise we are going to have to pay for Nama some way. Until the bank levy is introduced I think the Greens should fund Nama entirely through carbon taxes. To modify an old Greenpeace slogan:
    Bail out the affluent through taxes on effluent. All together now…

    Economists have been supporting this for years, it works in other countries and if we keep on ruling out things to tax we will end up taxing windows.
    This is the Green moment. They won’t be in government in a strong position for…well, it may never happen again. If I was them I would insist on it in the next budget.

  26. @Richard
    “If you reject the need to raise taxes in 2010, you either have to cut expenditure further or you need to raise taxes after 2010”

    Actually Richard I know I’ll be paying more tax. It would be nice to have a bit of honesty around the whole thing. (Not referring to you). After the budget Brian L will say he didn’t raise taxes but we’ll have the carbon tax, removal or increased PRSI ceiling (not a tax), child care allowance hit some way or other, pension relief at standard rate maybe and a few other things I’ve forgotten or haven’t thought of. In short we’ll be paying more tax. Fed up being treated like an idiot.

  27. @Stuart
    Indeed. The Irish taxpayer will have to pay for the rapid accumulating debt, and for the liabilities of NAMA. That means higher taxes for at least a decade, probably longer.

  28. B P Woods: Agri diesel is at reduced rate, not zero, the logic being that agri vehicles are not using roads (much). Aviation fuel (mostly kerosene, not diesel) and marine diesel are free of tax in Ireland and everywhere else, as far as I know. Two reasons: Chicago Convention and other intl aviation agreements provide for zero tax; plus if one country unilaterally levied tax, ships and planes could duck the tax by bunkering elsewhere and back-hauling fuel. Both should bear the carbon tax, but would need intl agreement, hope it comes up at Copenhagen.

    Aviation plus marine sectors cause maybe 6% or 7% of global emissions between them. Chicago Convention was agreed 1944, when there was no civil aviation!

  29. @Colm
    As a matter of interest what percentage of global emissions do cars cause?

    I can’t see any international agreement on marine and aviation coming about any time soon. Agriculture will be left alone so it’s down to the good old car driver to save the world!

  30. Yes the whole area is fraught with dishonesty. But it is pure politics so why the surprise?

    The need for extra revenue for the last line of bubble blowers is obvious just as was the liklihood of civil aviation in 1944. This is international, and green, so domestically more palatable!

    Oil and gas are now agreed not to be fossil fuels and that the Russians were right about abiotic oil. Coal is more problematic and certainly has fossil sources. As bog is compressed it seems to become brown coal the cheapest form of electricity in Australia and maybe the world.

    Paul McDonnell gave a succinct precis on how the Irish have been screwed by the system but then complained that what is happening is unreal! Indeed! Ireland has surrendered sovereignty in the name of wealth. How ya likin’ it?
    The US has surrendered to the fear of terrorists! Social engineering anyone?

    Incidentally I note bank shares moved a little. I suggesteed the possibility of insider trading. Will ISE investigate? I think not and it will recur.

    “Where there’s muck there’s brass” but do we have to wallow in filth before we clean up our act?

  31. As will become apparent with “new” “science” emissions of CO2 are not harmful. But they are part of the pretext for carbon taxes and international trading in paper, being OPM yet again.

    Roughly one turd comes from agriculture, another third from transport and one third from heating industry etc. Get used to the idea that agriculture as a prodigious emitter of CH4, will be next in line for taxes! Yippee!

  32. @ColmMcC: Many thanks for the update.

    @Pat: Now, that WAS a Freudian slip in your 2nd para??? Very imaginative! Who’d have thought?

    B Peter

  33. B P Woods
    Carbon taxes are a dirty business. As banking declines, trading in these will try to take over. They are also aimed at China and India. Some have suggested that Copenhagen is an attempt at a world government. Fabians being busy.
    It is also an attack on meat eaters. From the point of efficient use of land, meat production is a poor source of protein when compared to fish farming and arable production.
    Glad you liked it!

  34. @Pat: Mention of meateaters put me in mind of the Swiss at outbreak of WWII -they slaughtered most of their beef herds – just left enough bulls to keep the cows and heifers amused! Sky didn’t fall in.

    Perhaps someone should re-publish Drummond: The Englishman’s Food. Very good wartime diet – and they won? – well, they didn’t lose!

    WRT global warming and fossil fuels use. The populations of US and EU approx 700m: Pops of China, India and Indonesia are approx 2500m! Now add in Africa + East Asia. If the US + EU actually reduce their consumption of FF by 20l/day: = 14 x 10^9 l. This is approx 5l/day per person for the others. That won’t lift their lifestyles very far. Seems to be a serious logic and math deficit somewhere.

    Also, biological processes often follow a lag-log-lag sigmoidal phase. Any bets that we may have moved beyond the lower lag phase and have inflected into the log phase? Hope not. Exponential changes are usually irreversible! Time will tell, but by then it will be too late.

    B Peter

  35. BPW et al
    Earth was warming until 1998. All the planets seem to be warming as well. The lack of sunspots may mean global cooling. Big time. Antartica is bigger than Australia and will make up for most of the land loss cause by any warming. If you truly want to be concerned, read Paul LaViolette! The bible tells us that the sun once rose where it now sets! Pole reversal, a flip, is possible with magnetic changes caused by the sun. There may be a few tremors and climate changes! But the earth expansion may also speed up ….

    All the above are more scientifically plausible than C warming, sadly.

  36. Agree that carbon tax is a charge on economic activity and will affect competitiveness in many industries.
    Interesting to think that post carbon tax / recession, about the only industry we may be competitive in is banking services. oh dear…

  37. @Pat
    Please note that this is a blog for economists, not for geoscientists.

    There are decadal cycles in the global climate, as one would expect on a planet with large and deep oceans. One of the main cycles is on its downward turn at the moment. This has masked the upward trend of the enhanced greenhouse effect, and will continue to do so for ten more years. After that, trend and cycle will both lead to warming. The pause in warming since 1998, perhaps even some cooling, is fully consistent with the data and the models that foresee further warming over the century.

    It is unlikely that climate change in the 21st or even 22nd century will lead to deglaciation of East Antarctica. It’s too cold, and will stay so for a long time.

Comments are closed.