ESRI: Carbon tax plan can protect the poor

ESRI: Carbon tax plan can protect the poor

Increasing tax on fossil fuels will disproportionately hurt low-income earners, single-parent families and rural dwellers unless the revenue generated by it is carefully shared out, new research shows.

A payback scheme that uses the existing taxation and social welfare systems to redistribute the revenue, however, would protect vulnerable households while easing the burden for all.

Those are the conclusions of a study by analysts from the Economic, Social and Research Institute (ESRI) that supports government plans to increase tax on oil, gas, petrol, diesel, coal and briquettes which produce greenhouse gases and are hampering efforts to tackle climate change.

“The evidence suggests that carbon taxation is a valid and important part of climate policy,” the report concludes. 

Ireland has had such taxes, the carbon tax, since 2010 and it is currently levied at €20 per tonne of fuel but the all-party Committee on Climate Change has recommended increasing it in stages so that it reaches €80 per tonne in 2030.

The Government has signalled it will back the recommendation in its Climate Action Plan, due for publication shortly, with the first increase expected in the autumn budget.

The ESRI report examines scenarios where the carbon tax is increased to €50 and €100 per tonne, calculating that carbon emissions would reduce by 3.94% and 10.24%.

It is broadly supported as a useful tool for carbon reduction but there are cost implications for all households and the report notes: “Significant public concerns over carbon taxation remain.”

Paying for home heating and the fuel for running a car alone would cost on average an extra €2.77 per week, or €144 per year, after a €30 increase and €6.84 per week or €355 per year with an €80 increase. 

For poorly insulated houses, the report samples those built in 1980, the additional cost would be €157 to €388 annually.

The impact would be greater on the poorest households who, the report says, spend almost three times the proportion of their income on heat and lighting than the wealthiest households and 40% more of their income on diesel and petrol.

Yet they produce just over a third of the carbon emissions generated by wealthy households.

ESRI: Carbon tax plan can protect the poor

With income reduced after paying the increased taxes, overall household expenditure would fall by 0.46% to 1.14% depending on the size of the tax increase.

Ireland’s existing carbon tax brings in about €400m a year which goes into the general pool of revenue but the Committee on Climate Change said consideration must be given to paying it back out by way of a ‘carbon dividend’ or ‘carbon cheque’, or using it to protect against fuel poverty while supporting climate action initiatives.

The ESRI report calculates that a flat-rate carbon- cheque approach would benefit all households while reducing income inequality between the poorest and richest by between 0.46% and 1.05%.

Redistributing the revenue in a targeted way, however, would not only provide extra cash for all but would reduce income inequality further by 1.23% to 2.78%.

ESRI tax analysts are working on a more detailed model, based on the taxation and social welfare system, of how such targeted redistribution could be achieved.

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