Ireland's carbon tax pays big dividends
Over the last three years, with its economy in tatters, Ireland embraced a novel strategy to help reduce its staggering deficit: charging households and businesses for the environmental damage they cause.
The government imposed taxes on most of the fossil fuels used by homes, offices, vehicles and farms, based on each fuel’s carbon dioxide emissions, a move that immediately drove up prices for oil, natural gas and kerosene.
Household trash is weighed at the curb, and residents are billed for anything that is not being recycled.The Irish now pay purchase taxes on new cars and yearly registration fees that rise steeply in proportion to the vehicle’s emissions. Environmentally and economically, the new taxes have delivered results. Long one of Europe’s highest per-capita producers of greenhouse gases, with levels nearing those of the United States, Ireland has seen its emissions drop more than 15 per cent since 2008.
Although much of that decline can be attributed to a recession, changes in behaviour also played a major role, experts say, noting that the country’s emissions dropped 6.7 per cent in 2011 even as the economy grew slightly.
“We are not saints like those Scandinavians – we were lapping up fossil fuels, buying bigger cars and homes, very American,” said Eamon Ryan, who served as Ireland’s energy minister from 2007 to 2011. “We just set up a price signal that raised significant revenue and changed behaviour.
Now, we’re smashing through the environmental targets we set for ourselves.” By contrast, carbon taxes are viewed as politically toxic in the US. Republican leaders in Congress have pledged to block any proposal for such a tax and president Barack Obama has not advocated one, although the idea has drawn support from economists of varying ideologies.
Yet when the Irish were faced with new environmental taxes, they quickly shifted to greener fuels and cars and began recycling with fervour. Automakers like Mercedes found ways to make powerful cars with an emissions rating as low as tinier Nissans. With less trash, landfills closed. And as fossil fuels became more costly, renewable energy sources became more competitive allowing Ireland’s wind power industry to thrive.
The three-year-old carbon tax has raised nearly 1 billion euros ($1.3 billion) overall, including 400 million euros in 2012. That provided the Irish government with 25 per cent of the 1.6 billion euros in new tax revenue it needed to narrow its budget gap this year and avert a rise in income tax rates.
The International Monetary Fund, which oversees the rescue plan, recently suggested that Ireland should ‘expand the well-designed carbon tax’ and its automobile taxes to generate even more money.Although first proposed by the Green Party, the environmental taxes enjoy the support of all major political parties “because it puts a lot of money on the table,” said Frank Convery, an economist at University College Dublin. The bailout plan for 2013 requires Ireland to embrace a mix of new tax revenues and spending cuts.
Not everyone is happy. The prices of basic commodities like gasoline and heating oil have risen 5 to 10 per cent. This is particularly hard on the poor, although the government has provided subsidies for low-income families to better insulate homes, for example.
“Prices just keep going up, and a lot of people think it’s a scam,” said Imelda Lyons, 45, as she filled her car at a gas station here.
“You call it a carbon tax, but what good is being done with it to help the environment?” The coalition government that enacted the taxes was voted out of office last year. “Just imagine President Obama saying in the debate, ‘I’ve got this great idea, but it’s going to increase your gasoline price,”' said Ryan, who lost his seat in the last election and now leads the Green Party. “People didn’t exactly cheer us on.”
Although carbon taxes in some ways disproportionately affect the poor – who are less able to buy new, more efficient cars, for example – such taxes do heavily penalise the wealthy, who consume far more. As with “sin taxes” on cigarettes, the taxes also alleviate some of the societal costs of pollution.
For several years, the European Commission has encouraged debt-ridden members of the European Union to embrace environmental taxes, saying that its economists have concluded they have “a less detrimental macroeconomic impact” than new income taxes or corporate taxes.
The environmental taxes work in concert with austerity measures like reduced welfare payments and higher fees for health care that are expected to save 2.2 billion euros this year. The carbon tax is levied on fossil fuels when they enter the country and is then passed on to consumers at the point of purchase.
The automobile sales tax, which ranges from 14 to 36 per cent of a car’s market price depending on its emissions, is simply folded into the sticker price.