Carbon taxes and floors

While Brian Cowen and Brian Lenihan continue to insist that there will be no new budget for 2009, Eamon Ryan announced that a carbon tax may well be introduced this year. It was on Morning Ireland, so he may have misspoken and meant that it will be announced this year for introduction in 2010.

Another remark is deeply worrying. Ryan mentions a “floor price”. The only price around in this context is the carbon price at the Emissions Trading Scheme. This is an EU wide market. If the Irish government is to guarantee a minimum price, it would have to buy up permits from all over Europe. That would blow another big hole in the budget.

A floor price in Ireland can also be guaranteed by a domestic carbon tax. This is double regulation: a price instrument (tax) on top of a quantity instrument (permit trade). Such a tax would bring in revenue. It would not reduce emissions, however, as any tonne avoided in Ireland would be emitted elsewhere in the EU. The tax is purely redistributive, from the private to the public sector. This would of course raise the cost of energy in Ireland, and thus hurt our competitive position. See Tol (2007) for more detail.

NCC’s Annual Competitiveness Report 2008

The Annual Competitiveness Report 2008 from the National Competitiveness Council was released today. Lots of interesting facts and figures, especially those relating to benchmarking Ireland’s competitiveness. A link to the report can be found here .

I am struck by the high energy costs in this country relative to our trading partners. The electricity bill at some large manufacturing plants here must be eye-popping.

Also, there is a welcome call for reform in sheltered services sectors such as the professions, where costs are high compared with those abroad. This is an issue that probably deserves more attention.

Cross-Country Learning

The generalised nature of the international slowdown and financial crisis means that it is especially useful to keep track of developments in other economies, in order to learn from the variation in policy choices and economic developments across countries.  To this end, the Eurointelligence project is an excellent source of news briefings on the various European economies.  It produces a free daily newsbriefing that arrives in  your email inbox at the start of each day: you can sign up for it here.

Today’s edition features two especially interesting stories: (a) the sacking of the Greek finance minister (and former economics professor) George Alogoskoufis;  and (b) the failure of this week’s German bond auction.

Monday’s Conference ‘Responding to the Crisis’.

There has been a big response and Stefanie Feicke will be emailing all those who sought places today. There is almost no capacity left.

Authors are preparing papers late, and we will not be able to photocopy and distribute at the conference. However, the presentations will be posted on this website as they become available.

Ireland’s painful adjustment

After the benefits of EMU, now come the costs. I discuss economic adjustment mechanisms in EMU and what they mean for the near-term outlook for the Irish economy in a new EMU Monitor piece. You can find it here.

The main point is that recovery here depends on the so-called “competitiveness channel” working. For this mechanism to work properly, two things must happen. First, wage and price inflation have to ease to rates below those in our largest trading partners. That probably implies deflation in this country. Second, the improvement in competitiveness must affect trade performance.

The problem is that recovery will be complicated by the depressing effects of the “interest rate channel” of adjustment. Deflation implies high real interest rates, which will further depress domestic demand, assets prices, and the property market.