Paschal Donohoe dropped €10 carbon tax hike due to Brexit fears

Finance Minister Paschal Donohoe

Finance Minister Paschal Donohoe was on the verge of sanctioning a €10 increase in carbon tax only for a change of mind later, departmental documents show.

A pre-budget submission prepared for the minister by his officials reveals he had been preparing to sign off on the tax hike in advance of Budget 2019.

The increase never went ahead amid fears over Brexit and how higher costs would impact on people who did not have options to choose renewable or cleaner energy sources.

A copy of the submission includes a note from Mr Donohoe, who wrote: “I am currently minded to implement a €10 increase on Budget Day.”

The €10 increase would have raised around €210m in exchequer funding had it proceeded, according to the document.

In an executive summary, civil servants told Mr Donohoe that increasing the tax rate would support climate change policy and “send a signal” to the public about government policy.

“In order to meet climate change targets, which currently appears difficult, there have been calls for a long-term strategy to increase the carbon tax rate to €80 (per tonne CO2) by 2030,” it said. “The current rate of €20 has been in place since 2012.”

The submission warned that the increase might “disproportionately” hit low-income households already at risk of fuel poverty. It also said that businesses with particularly large energy spends would also be hit.

To try and minimise the impact, it was suggested that the department could increase the rate paid as part of the National Fuel Scheme, an allowance paid for fuel purchases for social welfare recipients and others. Separately, changes to the diesel rebate scheme could also be used to reduce the impact on hauliers and bus operators.

The submission painted a bleak picture of how Ireland was doing in meeting its climate change targets, saying that emissions had actually increased in a number of areas in recent years, including transport and residential homes.

However, it said even advocates for carbon tax accepted that increases could hurt households that were most at risk of “fuel poverty”.

The submission said there were “cross border” risks associated with increasing carbon tax, particularly if Britain did not follow suit or “sterling continues to weaken”. It said that so-called fuel tourism, where motorists cross the border to buy petrol and diesel, was a double-edged sword.

While one study found drivers from the North had helped generate €230m in transport taxes in the Republic, this had added 2% to the latter’s annual greenhouse gas emission levels.

A greater problem was that significantly higher taxes on solid fuels in the Republic meant there were ongoing problems with the “illicit sale of solid fuels”.

“This includes high-sulphur coal, which is damaging to public health, jeopardises legitimate business in the south, as well as depriving the exchequer of revenue,” said the document.

It also explained how the impact of increased carbon tax would have dramatically different impacts on different households.

This would depend on the BER rating of homes, whether they were on the gas network, and availability of public transport, with rural areas much more likely to be hit hard.

In a statement, the department said Brexit had been a key factor in the minister’s change of heart on increasing carbon tax in the budget.

It said: “While some households are in a good position to reduce their carbon footprints, others may not have such choices available to them, at least not yet.

“Ireland has relatively high fuel tax rates in OECD terms. At current prices, total fuel taxes (including the NORA [oil reserve] levy) is about 60% of the retail price on a litre of petrol and 54% on a litre of diesel.”

The department also said fuel prices had increased significantly over the past year, with diesel and petrol prices both up by over 10%.

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