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Brendan Keenan: 'Carbon tax too small to help climate but too large for voters'

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Ireland faces tough questions over the financial effects of cutting greenhouse gases. Photo: Sergey Borisov

Ireland faces tough questions over the financial effects of cutting greenhouse gases. Photo: Sergey Borisov

Ireland faces tough questions over the financial effects of cutting greenhouse gases. Photo: Sergey Borisov

Another grand gesture on, if you'll pardon the expression, the hottest of hot topics - climate change. One has to hand it to the Taoiseach, at a UN conference where all eyes were on a 16-year-old Swedish phenomenon, for at least making waves with the announcement that Ireland would ban future oil exploration.

That now joins the country's impressive status as one legally obliged to be carbon-neutral by 2050. Both came pretty much out of the blue but at least we know how this latest one can be done; which is more than can be said for the other.

Its purpose, though, is less clear. It does not matter where the oil comes from geographically, although the method of extraction does. What matters is how much is used around the world. Whether or not the oil is from Irish waters makes no difference to that.

There may not be any commercial oil in Irish waters in any case. Green activists noticed at once that gas was not included in the ban.

Gas emits fewer greenhouse gases than oil but, more to the point, there probably is more commercial gas offshore.

But the same argument applies to gas usage as to oil. One would want more than an empty gesture before doing anything as dramatic as closing off that potential supply. The thinking of activists such as Friends of the Earth is that such bans send out a signal that agreed carbon targets mean there will be no place for oil or gas in the energy mix beyond 2050, so there is no point exploring for more.

Green activists have a habit of preferring purity to practicality. With current technology, gas will be needed as a back-up for intermittent wind power - perhaps still by 2050, for all we know.

A global ban on searching for fossil fuels would indeed be a signal to everyone that their lives are due to be turned upside down in the next 30 years. But it is clear, despite the marches and Greta Thunberg's extraordinary performances, that there is little general appetite for having the world turned upside down.

Other ways have to be found. Britain, despite a string of Conservative governments, has covered much of the North Sea and Irish Sea with turbines. The biggest wind farm in the world, with 174 turbines, opens this month and will take the UK ahead of Germany in terms of renewables.

But even that is not enough to meet the UK target, which Ireland followed, of becoming carbon-neutral by 2050.

Its government has had to make the heroic assumption that there will be a nuclear fusion plant up and running by 2040 to make the sums come out right.

Unlikely, but not as unlikely as Ireland - which has barely begun with offshore wind - meeting its targets.

If there is any substance behind the rhetoric, it seems to be that new power systems and better insulation will allow us to carry on much as before, while emitting less carbon. No need to turn the world upside down.

The Government has managed to define most planned public investment as green, amounting to €27bn over the next nine years, but, as so often, the real progress is due to come just over the visible horizon.

In the short term - well, perhaps the medium term - not carrying on as before will be the only way to get closer to the country's ambitious carbon targets. We must simply use less energy than we do now. Much, much less.

Taxation is where these two things, investment and usage, meet. Carbon taxes, by increasing the price of fuels, encourage people to burn less.

The money raised, says the Taoiseach, will be ring-fenced and spent on long-term investment. Ring-fencing is something of an illusion but it looks better. There is not much sign, though, that too many are falling for it.

A recent behaviour and attitudes poll for the 'Sunday Times' newspaper found considerable hostility to a significant rise in taxes on carbon. The poll asked for reaction to a doubling of the tax to €40 per tonne. Almost three quarters said they would be opposed to such an increase, but this rose to 86pc in rural areas. The Government has been toying with a €10 rise in next week's Budget, to be followed by €5 increases per year until 2030.

That would quadruple the tax, which the poll suggests would attract almost no support.

One idea was to reduce hostility by giving the carbon back to householders, thereby allowing the money which could have been used to give them tax cuts to be spent on carbon-cutting measures. One can see why Leo Varadkar decided this was not very practical.

Instead, money will be returned to poorer households and the rest will pay up. That won't be very popular either, quite apart from adding another dimension to the extraordinarily sharp Irish division - highlighted last week by the Irish Tax Institute - between those who are liable for income tax and those who are not.

That's politics, but does it make any difference to carbon emissions? Preliminary work on that question was presented to a conference last week by ESRI researchers Kelly C de Bruin and Aykut Mert Yakut.

They are due to publish a report on Budget day, on the effects on different household groups of returning carbon tax revenues in lieu of tax cuts. That should make for timely reading next week. The analysis assumed two sets of policies.

One - the current political expectation - has carbon tax increases from €20 to €30 in the Budget, and then by €5 annually until 2030, staying constant at €80 per tonne thereafter. The second, tougher approach, would have a €10 increase each year until 2030.

Using their latest models, the ESRI researchers looked at the effects of the Government using the revenues raised in different ways.

One is to keep it all, which means less borrowing to fund the carbon reduction programme. The others were recycling some of the revenue into lower income taxes, lower corporation taxes, lump sum grants to households or - as now seems to be the current favourite - transfers only to households on lower incomes.

The analysis finds that keeping all the revenue for carbon reduction measures is the best option to reduce emissions but, not surprisingly, leads to an erosion in household living standards.

If that is to be avoided, the best way in terms of emissions would be cuts in wage taxes, but that does more for the higher paid.

The effect of the extra tax on the economy is negligible, with GDP 0.4pc less, but households may see things differently.

Prices of diesel and petrol gasoline would rise close to 10pc by the end of next year, compared with having no new carbon tax.

Inflation will be 2.5pc higher by 2030, although this would rise to 6pc if revenue was recycled in tax cuts on pay. That may not be all bad because the main reason is that a shift toward services, which produce less carbon but use more labour, will push up wages and costs.

It needs saying that the research makes the necessary technical assumption that international energy prices remain at 2018 levels. Were they to rise - as climate change activists would like - the overall impact on the economy and households would be that much greater.

There is no great difference in the reduction in carbon emissions from the different ways of handling the revenue, but they are 15pc lower than if no carbon tax had been imposed at all.

That is worthwhile but it is only baby steps. The fact we must all come to terms with is that, despite all the political difficulties in such a programme, it comes nowhere near meeting Ireland's emission targets and allowing the Taoiseach or anyone else to claim we are doing our share to combat global warming.

The ESRI scenario still has emissions 4pc higher than in 2005, taking us further from the EU target of a reduction of 20pc by next year and 30pc by 2030, leaving the country liable for large fines.

For many, if they did the calculations, such fines would be preferable to the major changes on output, income and employment required to reach such targets in such a short time. Carbon tax may have to reach €150 a tonne to make a meaningful difference to emissions.

If we are serious about saving the planet, it is time to start setting an example on how to spread that kind of load.

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