A Carbon Windfall Levy

Minister Ryan will shortly introduce a carbon windfall levy.

Generally, windfall taxes should be avoided as they are arbitrary expropriation of private property. In this case, however, I fully agree with the minister. Property rights on carbon dioxide emissions were created a few years ago. Although these rights used to belong to we the people, the European Union decided to give the permits, for free, to selected companies. This is tantamount to a subsidy worth billions of euros per year. Minister Ryan has now decided, rightly, to claw back this subsidy.

Obviously, it is a bit silly to tax a subsidy. However, the subsidy is cast in stone (an EU directive). So, I even forgive the minister the administrative inefficiency.

Note that a windfall levy on grandparented permits would also remove the legal objections that were raised against the carbon tax in France. Recall that the proposed carbon tax in France was very similar to the actual carbon tax in the Republic of Ireland.

UPDATE:

An attentive reader pointed me to the final sentence: “This levy is essential, if we are to reduce Ireland’s overall energy bill. Having discussed it with those in the industry, I am satisfied that it will function effectively.”

Ireland’s overall energy bill will increase because of this tax, because one of its key inputs (capital) has become more expensive.

21 replies on “A Carbon Windfall Levy”

Richard

And where do you think the electricity generators will get the money to pay the windfall? From their pension funds or their customers?

On balance, I disagree with the Carbon tax, as it is (yet) another tax on enterprise dreamed up by the bureaucrats. On a macro level it just makes us even less competitive against developing countries who are indifferent to threat of AGW. On a micro level it is just another cost to consumers (and taxpayers). In essence it is a regional guilt tax that makes us poorer.

But while the French government have long-fingered it, (“the government said its energy tax was being postponed indefinitely in order not to “damage the competitiveness of French companies”) our green crusaders obviously believe that our economy is in better shape to cope.

I hope they are right.

@Geckko
The permit price is €15.97/tCO2 at the moment.

@JeromeK
The French carbon tax was thrown out by the constitutional court because of unfair discrimination between large and small companies within France. The government then tried to spin the story as if it was their decision for the sake of international competition. Apparently, there is at least one person who believed them.

By Post Author

@ Richard

I was being a little too opaque. What was the price at issue? And how does a capital loss (form original grant of economic rights until today) translate into a “windfall profit”

@Geckko
At the margin, power generators face a cost (buying a permit) or an opportunity cost (not selling a permit). Therefore, the regulator allows them to charge the permit price to their clients.

The gift of permits is a capital subsidy which is not considered in the regulated price of electricity.

The price at issue (January 1st, 2010) was about €10/tCO2. I can’t recall the prices in 2009 and 2008.

By Post Author

EUA prices in 2008 about €22/tCO2 and 2009 about €15/tCO2.

Also, using the CITL data on http://www.sandbag.org.uk it appears that ESB (as a group) was a permit buyer in 2008, so unless they got to their verified emissions levels for 2008 through heroic emissions reductions (unlikely) then their only chance to monetize the grandfathered allocation is by passing through the opportunity cost.

@Richard
I know Sijm, Neuhoff and Chen (2006) examined the pass through rates for Germany and Netherlands power generators, but has a similar study been done in Ireland upon which to base the opportunity cost pass through claim? Just because they (power generators) were/are allowed to do it, does that mean it actually happened?

2012 futures averaged 23.99 in 2007, 25.75 in 2008, and 15.29 in 2009 and so far 14.63 in 2010.

Has Simon Coveney not been banging on about this for the last two years?
I seem to recall Clever Eamonn telling him he was incorrect in that superior tone that only he can manage. Ah well, another u turn by the Greens?

This is of course ridiculous. In Ireland in terms of grennhouse gasses per capita we are now the worse in the world haven overtaken in terms of cost per capita USA last year. That is why we vote a “green party”. Where is the greenie jobs they promised us and I would also like one of those grennie cars they promised us

Is the tax on Carbon or Carbon Dioxide? one of them makes the sparkle in your sparkler and t’other makes the bubbles in your cider, or for green party members it’s what takes the caffeine out of your fairtrade organic skinny decaf latte

@Jules
Give the Green Party credit for one thing. By refusing to hold 3 by-elections, even for a seat that has been vacant for a year in Donegal SW, they have managed to set an example in carbon emission reduction. I am afraid that with Donegal being so far in commuting (and therefore polluting) distance from Dublin the by-election will probably never be held.

@Jules
It looks like the whole Dail are trying to reduce their carbon footprint:
“Just 17 of the country’s 134 TDs turned up for work in the Dail every day in the two weeks after the introduction of a “clocking-in” system on March 1.

The TDs with the worst attendance records in that period included Willie O’Dea, the former defence minister, who did not visit Leinster House at all, and Jim McDaid, the Donegal TD who is refusing to give up his ministerial pension. He attended only twice during the first nine days covered.”
http://www.timesonline.co.uk/tol/news/world/ireland/article7114114.ece

@Jules.
I’m not sure I understand you correctly, but I don’t think Ireland is the highest CO2 per capita. See http://goo.gl/3dr9

It seems unlikely to me that Ireland has overtaken the US or other leading countries.

@Carrawaystick
AFAIK the sparks from sparklers are mostly from iron and aluminium, although I’m sure that there can be other metals in there too.

This whole AGW business, and I mean lucrative business, is too much and a serious scientific debate is required as we are wasting too many euro etc on foolish malinvestment.

Let the boosters of this find themselves a decent career in fighting corruption?

@ Barry, Richard,

While no one has published work on the actual level of passthrough of ETS permit costs into retail prices for Ireland, there is a regulatory requirement for electricity generators in the all-island market to pass it through; see e.g.

http://www.allislandproject.org/GetAttachment.aspx?id=777ff915-5887-462d-974a-07371acf4402

Presumably the market monitoring unit is checking compliance with these rules, but they tend to publish results only when they have investigated a specific complaint.

A related interesting question is why the windfall tax applies only to electricity generators and not to other ETS participants.

The treatment of energy related allowances in the next commitment period certainly makes more sense than this period. Give somebody something for nothing, then force them to include this in their marginal price, then tax them on this inclusion. Only governments could arrive at this regulation.
Regarding the other participants, does the WPI tell us anything about their level of pass through. The fact that oil prices spiked in 2008 make it difficult to tell

Sean,
According to the latest EU decisions for the third phase of trading, it looks like pretty much all non-powergen sectors cannot pass through the marginal cost and thus are exposed to carbon leakage or losses in competitiveness.

In this regard it makes sense only to claw back the windfall gains from power generators. The rest got to pollute for free, but at least there was no financial gain from it.

This is still a long ways from polluter pays principle but at least with the windfall profit tax, pollution is no longer directly subsidized.

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