A Carbon Tax for Ireland Richard S.J. Tol Economic and Social Research Institute Vrije, Carnegie Mellon and Hamburg Universities

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

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?

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

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

What is the Tax Revenue?

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

Macro implications

Carbon dioxide emissions

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

Income distribution

Revenue -2

Methane

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

Agriculture -2 The carbon tax on milk would by in the order of € 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 …

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

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