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Climate Change

ESRI warns that carbon taxes 'often regressive in nature'

The government is looking at two models to increase carbon tax and offset the cost to householders.

THE ECONOMIC AND Social Research Institute (ESRI) has said the impact of introducing a carbon tax will strongly depend on the policy the government decides to adopt.

Next week, the institute will tell the Oireachtas Committee on Budgetary Oversight that a “major concern of a carbon tax is that it is often regressive in nature”.

It warns that comparing impacts across households, it finds “a strong regressive trend, where poorer households are impacted the most in terms of disposable income, consumption, price increases and welfare”.

Taoiseach Leo Varadkar said has said the government is looking at two models to increase carbon tax and offset the cost to householders. 

The government is considering either giving everyone a carbon cheque in the post, which would give a payment upfront. The other option being considered is through the tax and welfare system – such as an increase in child benefit funded by the carbon tax or an increase in tax credits and welfare.

The government plans to launch its Climate Action Plan this week.

Discussing the options of distributing carbon tax revenues to households, the ESRI said this method is often proposed as an effective way of reducing the regressive aspects of the carbon tax.

The ESRI examined the two different options facing government. 

In a statement to the committee, Kelly de Bruin, head of the Climate-Economy modelling team at the ESRI and Dr John Curtis looked at giving back carbon tax revenues to households on a per capita basis or distributing based on the increases in social welfare transfers.

“In terms of real disposable income a lump sum transfer will significantly decrease the regressive trend of the tax, where there are positive impacts for rural households and negative impacts for urban households.

“Applying a social welfare based transfer, we find to a lesser degree, a decrease in regressiveness,” they state.

The experts state that increasing the carbon tax by €10 euro in 2020 would increase expected carbon tax revenue from €459 million to €666 million in 2020. 

The additional increments in the tax would increase carbon revenues from €682 million to €2,138 million in 2030.

However, when the carbon tax revenue is not recycled but used to reduce government debt, the ESRI model shows that revenue impacts are likely to be negative, where large decreases in the receipts of sales taxes, wage taxes and corporate taxes can be expected. 

In addition, the ESRI said household emissions are set to decrease on average by 10% in 2030 even if there is no increase in carbon tax. It predicts that rural households will reduce their emissions substantially more than urban households. 

The experts note that economy wide emissions in 2030 are estimated to be 15% less with the carbon tax increase than without it.

The institute adds that “it is clear that in absence of other climate policies the carbon tax would need to be significantly higher to reach the Irish EU emission targets”.

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