In anticipation of the introduction of a carbon tax in Ireland via Budget 2010, we consider what rate it might be set at and the potential impact on the cost of fuels. The Commission on Taxation, which was tasked with investigating fiscal measures to protect and enhance the environment, recently published its report.
It is the opinion of the Commission that the level of a carbon tax should reflect the EU emissions trading scheme (ETS) price of carbon. As the market price of carbon varies from day to day, the Commission suggested that the rate be based upon the carbon futures price for the subsequent calendar year.
Current market conditions suggest that this would result in a tax rate of about €15 per tonne CO2 in 2010. The table below shows the impact on unit fuel prices of a carbon tax based on €15 and €20 per tonne of CO2 (October 2009 energy prices).
The Commission also recommended that a floor price be introduced in order to eliminate some of the volatility seen in the carbon market since 2005. It suggested a floor price of €20 per tonne CO2, which it considers to be reasonable for meeting the objectives of a carbon tax. However, the price of European carbon futures has not been that high since November 2008. If a floor price of €20 per tonne CO2 was adopted, this could result in a discrepancy between the cost of carbon incurred by energy users inside and outside the EU ETS.
According to the Commission, one of the key elements of the proposed tax is to achieve revenue neutrality. The Commission recommended that the priority in achieving revenue neutrality should be to combat fuel poverty, through the funding of energy efficiency schemes and, potentially, directly through the social welfare system. Other options include the funding of loans to businesses to finance investment in energy efficiency, the use of the revenue to minimise the competitive impacts on energy intensive businesses, and the lowering of direct taxes.
The Commission also recommended that participants in the EU ETS should be exempt from the tax and that companies outside the EU ETS that have legally binding action-based and / or target-based emissions reduction agreements with the Sustainable Energy Authority of Ireland should be accommodated, through, for example, exemptions from the tax, special rates or rebates.