A Carbon Tax for Ireland

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A Carbon Tax for Ireland

• Richard S.J. Tol
• Economic and Social Research Institute
• Vrije, Carnegie Mellon
• and Hamburg Universities

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Collaborators

• Tim Callan
• Thomas Conefrey
• John FitzGerald
• Sean Lyons
• Laura Malaguzzi Valeri
• Sue Scott

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Outline

• Why a carbon tax?
• What level should the tax be?
• Who should be taxed?
• What is the expected revenue?
• What to do the with revenue?
• What are the macro-economic implications?
• What are the effects on emissions?
• What about fuel tourism?
• What are the implications for income
  distribution?
• How to treat agriculture?

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Why a carbon tax?

• The cheapest way to meet any emissions target is
  if each emitter faces the same cost at the margin
  (Baumol and Oates, 1971)
• For stock pollutants, taxes are superior to
  tradable permits (Weitzman, 1974)
• A uniform tax treats like cases alike
• Prior taxes and imperfect competition imply
  non-uniform taxes (Baumol and Bradford, 1972)
• However, Irish academia lack the ability to
  analyse this, so we should stick to the simplest
  case

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What level?

• So, everyone should pay the same tax
• However, a substantial part of emissions (power
  generation, cement, alumina) is already regulated
  by a permit market which is an alternative way
  to set a price on emissions
• These emissions should not be taxed, as that
  would be an elaborate way to burn money lower
  emissions in Ireland would be exactly offset by
  higher emissions elsewhere, but compliance costs
  would rise
• The tax should equal the permit price

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What is the Tax Revenue?
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Revenue recycling - options

• Income tax labour costs or consumption?
• PRSI reduction labour costs or profits?
• VAT reduction consumption
• Government transfers consumption
• Government consumption
• Government debt lower tax later
• Stamp duty perhaps not mix up with
  environmental taxation

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Macro implications
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Macro implications
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Carbon dioxide emissions
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Fuel tourism

• Price of petrol and diesel is higher in the UK,
  so cross-border tanking
• Retribution for 800 yrs brutal colonisation
• A carbon tax of 20/tCO2 (0.05/l petrol) in the
  Republic of Ireland, with UK taxes constant,
  would reduce emissions by 285 KtCO2 (0.5) but
  increase UK emissions
• The English would pay 26 mln less in excise
  duties, but 14 mln in carbon taxes
• 12 mln is 0.03 of total revenue

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Income distribution
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Income distribution
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Revenue -2
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Methane
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Agriculture

• A carbon tax rising from 20 to 50/tCO2 implies
  a dairy tax of 47 to 110/head and a beef tax of
  23 to 55/head
• As farmers abroad are not taxed, this would mean
  an income loss of up to 10,000 per year
• One solution is to give a tax rebate for exported
  products, and put a tariff on imports but
  legally questionable
• Another solution is to put the tax on the product
  domestic, export and import are all treated the
  same

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Agriculture -2

• The carbon tax on milk would by in the order of
  0.01-0.02 per litre excise would be the
  obvious route
• However, environmental taxes on food without
  considering the health implications may not be
  wise
• Perhaps feebates on feed would work
• Or

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Conclusions

• Everyone should pay the same
• Domestic carbon tax should equal the expected
  EU-wide permit price
• Carbon tax should be levied on all non-ETS CO2
  emissions
• Expected revenue is .5 bln and growing fast
• If revenue is used to reduce labour costs,
  economic growth would accelerate
• Small changes in benefits and income taxes would
  offset the regressive effects of a carbon tax

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Conclusions -2

• The impact on emissions is modest
• The impact of fuel tourism is negligible
• Did not look at budget neutrality over time
• Do not know what to about methane, nitrous oxide,
  and halocarbons
• Do not fully understand the effect on the labour
  market
• Do not understand tax interactions and domestic
  competition
• http//ideas.repec.org/p/esr/wpaper/wp246.html