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Factcheck: Will an increase in carbon tax make people in Ireland poorer?

The claim is contained in Sinn Féin’s election manifesto.

CLIMATE CHANGE HAS been one of the main policy areas up for discussion during this campaign, with all parties putting forward proposals to bring down Ireland’s level of emissions.

A carbon tax is levied on the carbon content of fuels such as gas, oil and solid fuels. 

Carbon tax in Ireland was increased in the last Budget to reach €26 per tonne. For home-heating fuels, that increase will kick in from May this year. The government said the aim of the tax is to reduce carbon emissions and encourage people to change their behaviour.

As part of these Budget measures, fuel allowance (for home heating) will increase by €2, bringing the weekly payment to €24.50 per week. Funding was also provided to the Warmer Homes scheme to provide free energy efficiency upgrades to households deemed to be at risk of energy poverty.

In its election manifesto, Sinn Féin criticised the carbon tax increase, claiming it will “make people poorer, but it will not make the State greener or cleaner”. 

In a recent episode of the Irish Times podcast Inside Politics, Joe Curtin , a senior research fellow at the Irish Institute of International and European Affairs (IIEA) think tank, said these two statements were false. 

So, let’s take a closer look.

The claim

Here’s what the Sinn Féin manifesto says about the tax increase:

The carbon tax increase will make people poorer, but it will not make the state greener or cleaner.
It is a regressive tax, the sole purpose of which is to raise funds. Any further increase will widen poverty and inequality and will hit low to middle income households harder.
All the talk of using it for climate action is a ruse because the alternatives are not in place nor will they be in place under a Fine Gael or Fianna Fáil Government.

Setting out its election priorities in its manifesto Sinn Féin says: “No carbon tax increases in the absence of viable alternatives.”

The evidence

TheJournal.ie asked Sinn Féin for the evidence or data these claims were based on. A spokesperson sent us an ESRI paper from June 2019 about carbon taxation in Ireland. 

This ESRI report stated that carbon taxation is “found to be regressive”. This is because poorer households spend a greater proportion of their funds on energy, and therefore on carbon tax, than richer households.

Low skilled workers and households living in older dwellings have higher costs.

It found that rural households are also affected to a higher degree, particularly rural households in the lowest income quartile. 

The report also pointed out that the ability of carbon taxation to bring about a decrease in emissions, particularly if households are unable to readily switch to alternative fuels, is sometimes questioned. 

However, the paper stated that the overall negative effect on income distribution can be corrected if revenues raised by the tax are returned to households through the tax and welfare system. 

If every household is allocated an equal share of the revenues from the carbon tax (known as a ‘carbon cheque’), income inequality is reduced by 0.5% and 1% – when compared with the overall income inequality of a no tax scenario – for a tax increase of €30 and €80 per tonne respectively.
If the revenues are recycled in a manner that targets poorer households, inequality is reduced even more, by 1.2% and 2.8%.

According to the ESRI report referenced by Sinn Féin, the fact that appropriate revenue recycling can reverse the regressive effects “diminishes the validity of distributional issues as an argument against increasing carbon taxation”.

“In fact, carbon taxation coupled with revenue recycling has the potential to be a useful tool for mitigating income inequality, independent of climate policy.”

It should be noted that the model used in the ESRI paper involves a tax increase of €30 and €80 per tonne respectively. The government is raising the carbon tax to €26 per tonne, so the ESRI research is not specifically about the current model being used. 

Speaking to TheJournal.ie, the IIEA’s Joe Curtin said the current model is “a bit hodge podge and some people could fall through the cracks”, but he would still describe it as progressive.

“If you’re not receiving a fuel allowance – not all poor people do – you won’t benefit from the increase in that, and not all poor cohorts are living in social housing so they wouldn’t be able to avail of a social retrofit,” he said.

“It is an attempt to ensure it’s progressive but it’s challenging to ensure people don’t fall through the cracks.”

Sinn Féin did not specify that the tax would make only lower income households poorer, but Curtin said it is unlikely to severely impact on higher income households. 

It’s true to say that rich people pay more carbon tax but generally no matter what you do on climate change there are distributional implications. If there is a tax break on electric vehicles or grants for retrofitting of a house, generally wealthier cohorts will avail of those benefits.

Based on evidence from countries like Sweden, Denmark and Germany, he said increases in the carbon tax can also spur people to be more efficient in their use of energy and can encourage innovation in the wider economy. 

Emissions

The report also estimated a reduction of carbon emissions in Ireland of 3.9% for a carbon tax increase of €30 per tonne and of 10.2% for an increase of €80 per tonne. This estimate is based on data from the 2015-2016 Household Budget Survey.

The report noted further reductions in carbon emissions could come from new policy measures such as congestion charging (such as the fee in London charged on vehicles operating within a certain zone of the city), or improved public transportation.

“Such measures would influence the degree to which consumers switch from high carbon consumption to lower carbon alternatives,” the report said. 

Speaking to TheJournal.ie the IIEA’s Curtin said he wanted to emphasise that he does not think carbon tax is a silver bullet, or that it alone can “get us where we need to go”.

He said a badly designed carbon tax can have negative consequences, but it cannot be stated categorically that a carbon tax will make people poorer, when models exist to balance out the financial impact on lower income households.

“How you design a carbon tax will determine whether it’s progressive or regressive. It’s completely wrong to say an increase won’t reduce emissions, equally to say it’ll be sufficient to meet targets is also incorrect,” Curtin said. 

A smaller modest increase will have a smaller more modest impact. Even up to €20 or €30 may well be lost in the noise of fluctuating energy prices and other economic trends, but an incremental increase will have an impact on emissions and make all the other things that go with it easier to do. 

Sinn Fein did not respond to a follow-up query pointing out that the ESRI report the party referenced contained details of measures that could address income inequality as part of a tax income increase.

The party also did not address questions about its claims relating to a carbon tax increase not making the country “greener or cleaner”.

The verdict

Let’s start with the claim about the increase in carbon tax making people poorer.

The ESRI report referenced by Sinn Féin does acknowledge that a carbon tax increase can be regressive and can impact negatively on rural households in particular. 

However, this same report also stated that income inequality can be reduced with revenue recycling, such as a carbon cheque, or increases in welfare payments, such as a fuel allowance. It stated that this “diminishes the validity of distributional issues as an argument against increasing carbon taxation”.

When it comes to the claim about an increase not making Ireland “greener or cleaner”, it is unclear what Sinn Féin meant exactly, and the party has not explained this to TheJournal.ie.

But, if we take it to mean a decrease in carbon emissions, the ESRI report did look at that. It found an increase in this tax could result in a reduction but this is just an estimation by the ESRI, and is not specifically based on the current model of a carbon tax of €26 per tonne. 

And it comes with caveats such as that changes in behaviour can be hard to predict, investment in public transport could result in larger reductions and any impact will be dependent on Irish households’ ability to switch to alternative fuels. 

Sinn Féin claimed: The carbon tax increase will make people poorer, but it will not make the state greener or cleaner.

We rate this claim: MIXTURE

As per our verdict guide, this means: There are elements of truth in the claim, but also elements of falsehood. Or, the best available evidence is evenly weighted in support of, and against, the claim.

TheJournal.ie’s FactCheck is a signatory to the International Fact-Checking Network’s Code of Principles. You can read it here. For information on how FactCheck works, what the verdicts mean, and how you can take part, check out our Reader’s Guide here. You can read about the team of editors and reporters who work on the factchecks here. 

 

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