Analysis: Carbon taxes will hit fuels which do most damage to the environment, writes Cliff Taylor, Economics Editor
The high economic stakes - and the political difficulties - of introducing a new carbon tax are clearly highlighted in the newly-published consultation paper on the issue. It indicates the potential additional burden on households and business, but also the significant revenue raising potential for the Exchequer.
The Minister for Finance, Mr McCreevy, confirms in the paper the target date for introduction of the new tax is December of next year. Details are likely to be announced in the middle of next year, with yesterday's paper confirming the tax is likely to be introduced as part of the 2005 Budget. It is designed to meet Ireland's obligation to reduce greenhouse gases under the Kyoto protocol.
The paper carefully avoids any clear statement on the key issues of how much the tax will be and what mechanisms will be put in place to offset the impact on particular groups, saying that these issues are now subject to the consultation procedure, under which submissions must be made by the end of September. However, it does give an indication of what is in prospect.
What is proposed is a tax which would be based on the carbon content of fuels that produce CO2, mainly peat, coal, petrol, diesel and gas. This will be levied through increased excise duties on petrol, diesel and other oils and new excise-type taxes on natural gas, coal and peat.
A range of examples are given on the possible price impact - for example a mid-range from the estimates given in terms of the level of the tax would add about 5 cents to the cost of a litre of petrol, about €1.80 to a 40 kg bag of coal and 39 cents to a bale of peat briquettes. The objective is to put a higher tax on the fuels which cause most damage to the environment, thereby encouraging people to lower their fuel consumption and switch to lower cost/lower polluting fuels.
As well as environmental impact, the key issues in introducting the tax will be the impact on business competitiveness and on households. Business is launching a fierce campaign against any big impositions, arguing that this would cost jobs. A key issue will be the extent to which businesses can benefit from an emissions trading regime, under which CO2 allowances can be traded between countries.
For households, the ESRI has estimated that lower income homes spend a larger proportion of their cash on fuels than more affluent consumers. A key part of the consultation process will be whether - and how - the least well-off should be protected, largely through adjustments to the social welfare system. Overall the tax would add to consumer price inflation, adding between 0.24 of a percentage point and 0.79 of a point, depending on its level.
However, the potential pay-off for the Exchequer is also significant and - depending on what level it is struck at - the tax would raise between €200 million and €625 million per annum, a significant sum at a time when annual borrowing is around €2 billion, though by no means enough to solve all the Exchequer's difficulties in one go.