Category: Fiscal Policy

in today’s Irish Times

Convery starts with stating that “raising the price of carbon is a necessary and sufficient step for tackling global warming” […] if and only if the tax was high enough to achieve the necessary reductions”. This stretches the definition of “necessary”. The carbon tax should, of course, be equal to the marginal damage cost. Such a tax does not lead to the emission reductions required by a forthcoming EU directive. Perhaps that is a sign that the EU is overambitious. But even if you except the writ of the EU, then we should still meet the EU-wide target at a cost that is minimum at the EU-level — and for Ireland not accept a cost that goes beyond that. This means that the carbon tax should equal the ETS permit price. Not less. Not more. Equal.

Convery then argues that, because methane from agriculture cannot be monitored, the uniform price principle is broken. True. He then seems to imply that because it is broken anyway, it does not matter to break it further: Because the tax on methane is zero, the price of carbon dioxide need not be uniform. This is plain nonsense.

Convery does not repeat the recommendation by Comher SDC that the carbon tax revenue should be used to subsidise energy efficiency. That would indeed be wasting tax money on double regulation.

Convery does argue that “[s]ubsidies […] be directed exclusively at enhancing fuel efficiency in poor households.” I have argued that the monies for this can more appropriately be found in the budget for fuel allowances.

Convery finally argues for a stimulus package of 2% of GDP, but does not state where that money should come from. The Comher SDC report recommends more borrowing and using the capital of NAMA, Anglo-Irish and the pension funds.

The affordability of a stimulus aside, investing in renewable energy is not the best stimulus. Climate change may be a problem for Ireland in 100 years, but extra borrowing surely poses a problem in 10 years time. The Irish economy needs jobs and capital, while energy is capital-intensive and labour-extensive. Renewable energy may create export opportunities in 10 or 20 years times, but we need to increase exports this year and next.

If there were money for a stimulus, then we should slash labour taxes. If we cannot slash labour taxes, then we’ll have to slash wages.

Yesterday’s Independent had a headline on water charges. RTE ran with it too. The story is that a flat rate water charge will be introduced. Water charges are good in principle as they put a price on a scarce good. Flat charges — every household pays the same — are a bad idea. Flat charges do not incentivise water conservation. This is just a poll tax by a different name.

The Renewed Programme for Government also mentions water charges. It suggests a free allowance, and a proportional tax for any household that uses more than the free amount. This is much better than a flat rate, but still not perfect.

I would charge households for every cubic metre of water that they use. This is a consumption tax, and therefore regressive. I would repair the damage to the income distribution by increasing benefits and tax credits by an amount that is equal to the water tax rate times 100 litre per person per day — the amount of water needed to wash your clothes and flush the toilet.

Water charges require water meters. I would charge households without meters for the average water use of unmetered households (about 450 l/p/d) and households with meters for the actual water use. If the water charge is announced well in advance (say in Dec 2009 for Jan 2011), meters will rapidly be installed by those below average. This will drive up the average, so that more meters will be installed.

People on benefits would need a voucher for a meter.