Budget 2012: carbon tax, motor tax and motivations

Aoife Ní Lochlainn: As we get closer to the budget day (or budget days), the shape of Government plans is becoming clearer. We know, both from leaks and from the Government’s own admissions, that there will be no changes to income tax and that the majority of revenue raising will come from increases in indirect taxes.

A two per cent rise in VAT will provide the biggest source of increased revenue for the state, followed by a household charge and increases to the carbon tax and motor tax. The introduction of a property charge has been heavily debated over the last number of months and will, more than likely, continue to attract serious attention. Likewise, the decision to raise the higher rate of VAT has also attracted much comment; given its regressive nature and the implications for household consumption it will no doubt continue to do so. But how much attention will changes to the motor tax regime and increases to the carbon tax receive?

Carbon tax was introduced in Budget 2010 with the aim of providing price for carbon. It was introduced at the level of €15 a tonne and applied only to oil and gas. A carbon tax at this relatively low level will not produce a meaningful reduction in emissions. International evidence suggests that carbon taxes are most effective when combined with other policy instruments and subject to few exemptions.

As argued by the ESRI, the relative effectiveness of carbon taxes is mixed and depends on various factors such as the elasticity of energy demand and the design of the tax itself. The value of a modest carbon tax lies in its role as a price signal to consumers and businesses that Ireland is serious about carbon reduction, while raising revenue which can be used for emissions reduction programmes such as home insulation. The Government seems set to increase the carbon tax to €20 per tonne. TASC, in its pre-budget submission proposed an increase to €22 a tonne, putting the carbon tax above the current ETS level of €21.50.

However, although the rise in the carbon tax has been well-flagged and to be welcomed from an environmental perspective, it must be accompanied by measures to protect those at risk from fuel poverty. Provision must be made for an increase to the fuel allowance and the continued investment in home insulation, both private and public. If rises in the carbon tax are not accompanied by such measures then the public will conclude that the increase is a revenue raising measure rather than an environmental measure.

The motor industry has already made clear its objections to any further change to the motor tax system, as have some environmental groups. Friends of the Earth described the proposal as unfair to those who had purchased greener cars and 'a stab in the back’ for motorists”. Motor tax and VRT were restructured in 2008 to take account of carbon emissions from vehicles. This had a substantial effect in terms of new car ownership, with consumers choosing more fuel efficient cars and many drivers switching to diesel. Richard Tol and Hugh Hennessy in an ESRI paper (2011) describe the shift to diesel cars as dramatic and conclude that this shift results in lower but not substantially lower emissions, as diesel cars are heavier. They predict a rise in emissions from car travel over the next 15 years due to an increasing car stock and a preference for larger cars. This rise, they argue, “is offset by the switch towards diesel cars”, but “as distances driven do not change (and indeed may well increase), the drop in emissions is limited”.

A €5 increase in the carbon tax is projected to increase the price of petrol and diesel by 1 cent per litre. When viewed with the restructuring and increase in motor tax, motorists and the motorists’ lobby will no doubt claim that they are unjustly bearing the brunt of the increase in taxation. The effect of this may well be to change the debate on carbon tax and motor taxation policies from one on emissions reduction to attacks on motorists. Support for environmental policies are hard won and it is incumbent upon policy makers to ensure that the public understands the policies and their aims. The public embraced the changes to the VRT and motor tax systems and may regard any further changes to these systems extremely cynically. This may have the effect of making it harder to gain public acceptance of environmental policies in the future.

However, the Minister could address some of these concerns by presenting a carbon budget as his predecessor did. This would allow the public to understand the environmental aims behind the policies. Furthermore, it would demonstrate that there is a co-ordinated approach within government to emissions reductions. Carbon tax and the switch to more fuel efficient cars have their place in the policy basket, but like other environmental measures, they work better when co-ordinated with other emission reductions policies.

While reducing emissions (or indeed slowing the growth of emissions) through promoting fuel efficiency is valuable, its effect would be greater if accompanied by other measures, such as the development of better public transport. However, the Government has already delayed key public transport infrastructure projects such as the Interconnector and parts of the Western Rail Corridor, and it indicated earlier in the year that the CIE group will see a large cut in its funding (PSOs). Therefore, as highlighted by Toll and Hennessy, even with better fuel efficiency, emissions from private car use will rise due to the distances travelled.

One must conclude, therefore, that climate change concerns do not figure largely in budgetary decisions. A possible decrease in emissions from increases in the carbon tax is a welcome side-effect perhaps, but if viewed alongside the possible changes in motor tax and the decreases in support for public transport, it is clear that there is little co-ordination on this issue. If Ireland is to reach its 2020 target of a 20 per cent decrease in emissions, then better co-ordination is required. The recent decision to delay climate change legislation does not bode well for future policy making. Without the co-ordinated approach to policy making that would be required by legislation, budgetary decisions will continue to be made in a haphazard fashion, with environmental aims last on the list of policy concerns.