As energy prices continue to rise sharply, the Government is expected come under further pressure to help people meet the soaring cost of living. A case is being made to postpone scheduled increases to carbon taxes in the budget later this year.
To do so would be a mistake. There are other ways to help people through the current inflation crisis, and these must be applied instead.
Lest we forget, there are two international crises at the moment — the cost-of-living crisis, largely driven by the war in Ukraine which has caused inflationary pressure on energy costs in particular; and the climate change crisis, an emergency largely related to the widespread use of such fossil fuel energy sources.
One crisis cannot be allowed trump the other.
The case for carbon taxes has been well made. They are the most efficient way of achieving a given reduction in carbon emissions at the lowest economic cost.
The evidence is clear — carbon taxes would reduce emissions in Ireland with little wider economic costs. They are highly effective at reducing emissions, particularly from transport.
However, there is also widespread recognition that carbon taxes can have distributional consequences, which rightly concerns policymakers.
This arises largely because certain groups — especially lower-income households — spend a disproportionate share of their incomes on carbon-intensive goods, in particular heating fuel.
Sinn Féin has argued against the imposition of carbon taxes. As columnist Colin Murphy points out today, Sinn Féin said in its last election manifesto that carbon tax was a “ruse”, the “sole purpose of which is to raise funds” — and that it “will make people poorer” but “not make the state greener or cleaner”.
This is Sinn Féin’s populist rhetoric, which needs to be ignored.
There are other measures to compensate low-income households, such as increasing certain welfare payments, as well as income tax credits and bands.
The impact of the scheduled carbon tax increase on household incomes will need to be considered in conjunction with other changes to the tax and welfare system.
Since the Russian invasion of Ukraine in late February, the Government has already implemented measures at a cost of €2.4bn.
As columnist Colm McCarthy points out today, pay rates in the public service and across the economy are not matching price inflation, so real incomes are declining.
However, he also correctly argues that it is not possible for the community in the aggregate to compensate itself for an adverse movement in import prices.
The Government does not control energy prices. It could spend a fortune trying to chase energy price inflation and achieve very little.
It makes more sense to focus on other targeted and more sustainable actions to assist lower income families at this time — such as those related to welfare, pensions, income tax, the cost of childcare, public transport and college registration fees.
The public is growing anxious in the face ongoing increases to the cost of living. There is deep concern about impact on the wider economy here of international events, such as the Ukraine war and ongoing Covid restrictions in China.
An economic slowdown is expected — but institutions such as the ESRI and Central Bank believe recession can be avoided. It is now important for the Government to help restore consumer and investor confidence.