Below I have discussed and compared Ireland’s and Chile’s carbon tax plans. This is part of a larger research project that looks at whether Portland should implement a carbon tax.
Convery, F. J., L. Dunne and D. Joyce (2013), “Ireland’s Carbon Tax and the Fiscal Crisis: Issues in Fiscal Adjustment, Environmental Effectiveness, Competitiveness, Leakage and Equity Implications”, OECD Environment Working Papers, No. 59, OECD Publishing. http://dx.doi.org/10.1787/5k3z11j3w0
Convery clearly outlines what factors made it possible to implement a carbon tax in Ireland, how exactly it was implemented, and what the outcomes were. The article was written a couple years after the tax was implemented so there is not enough evidence to make conclusions about the environmental effectiveness or impact on the economy. The concerns about implementing a carbon tax are generally similar between different countries and so looking at Ireland is helpful and provides an example and a stepping stone. However, Convery is wary of making generalisable conclusions about this one single case of implementing a carbon tax to other countries since Ireland circumstances were quite unique. This is an important thought to keep in mind as we look at more case studies and start to make comparisons.
While there is quite a bit of talk many places about implementing a carbon tax, it comes down to whether it can get passed or not. Some of the circumstances in Ireland that made implementing a carbon tax feasible were “leadership by the Green Party; limited public opposition; Government need for the income; supports the Green Economy; support from the academic and wider policy population; exemptions for large emitters (many in EU ETS) and agriculture; effective engagement and good planning.” Ireland had public support and an environmentally focused government, two things that are not present in most places in the USA. Large emitters are exempt from Ireland’s carbon tax because they are covered in the European Union’s Emissions Trading Scheme.
One major concern about a carbon tax is the economic burden. Ireland’s carbon tax was implemented just after the fiscal crisis in 2008 but the crisis actually helped the measure pass. Taxes needed to be raised regardless and it made sense to implement a carbon tax because it could be revenue-neutral and growth oriented. In the period of 1992-1997, Ireland opposed efforts to implement a European Union-wide carbon tax, however this started to change once the EU ratified the Kyoto protocol. Since 2005, Ireland has participated in the European Union Emissions Trading Scheme and is required to reduce their emissions. A change in government in 2007 also helped seat climate change as a top priority. The carbon tax of EUR 15 per tonne of CO2 was introduced in 2010, “covering most CO2 emissions from the non-traded sectors (mainly transport, heat in buildings and heat and process emissions by small enterprises).” The tax has since increased to 20 euros per tonne of CO2. To give some perspective, the BC carbon tax is 30 US dollars (currently about 27 euros) per tonne of CO2.
A common issue brought up with carbon tax is leakage. This is when a consumer or industry relocates to reduce their costs. The article didn’t mention industry, just the fuel tourism phenomena. People who live near the border of the United Kingdom and Ireland fill up with gas in Ireland where it is cheaper. After the tax, the fuel tourism decreased even though gas is still slightly cheaper in Ireland.
Since the article was written only two years after the carbon tax was implemented, it is impossible to draw any conclusions about the environmental effectiveness. Convery says, “the carbon tax has a relatively significant upward influence on the price of peat and coal for heating. It provides some incentive to shift from these fuels to wood.” However, soon coal and peat will be covered by the tax.
Before the tax was implement, extensive research was done on the regressive impacts. “In 2005, it was estimated that 15% of Irish households spent over 10% of their income on energy and this was expected to rise to 19% of households in 2010 (due to energy prices rising faster than incomes)” They considered three options for alleviating the added pressure of a carbon tax. The first, reducing government debt, didn’t have an effect on the GDP. The second, lump sum transfers to households that spent over 10% of their income on energy had positive impacts. The third, reducing income tax, had the greatest potential for economical growth. They put in place a fuel voucher but this put a lot of stress on the government during the fiscal crisis and did not stimulate economic growth. In the future, Ireland plans on placing the tax on coal and peat as well which will increase the stress on low income households.
Convery address many common concerns about the carbon tax and admits that while the case of Ireland is just one example, other countries can learn from their lead. Listed below are Convery’s takeaways from the case of Ireland’s carbon tax. I included all of them here because I think they would be a valuable resources to compare case studies with.
- Crisis does indeed create opportunity; and the more severe, the better;
- The income can play a valuable role at the margin in meeting obligations for tax increases;
- There is a trade-off between scope and effective rate of tax;
- There is a need to revisit the analytics of recycling and the double dividend;
- The imperative to raise income and reduce debt limits the extent to which equity issues can be addressed;
- It is difficult in the short run to draw conclusions about environmental effectiveness;
- Pay attention to the ‘green economy’ performance and issues relating to the tax – an important rationale for the Irish carbon tax was that it would stimulate new enterprise in renewables and energy efficiency, encourage innovation and generally drive ‘the smart economy’;
- Where the alternative is to raise taxes on labour, a carbon tax in general will not damage competitiveness;
- With any environmentally salient carbon tax, over the 2014 to 2016 period, the rate is likely to be higher than the equivalent allowance price in the European Union Emissions Trading Scheme (EU ETS).
An unexpected point in Convery’s article was how important weather was in the revenue from a carbon tax. In colder years, more revenue is created and since more fuel is being used, people will need more assistance. In warmer years, not as much revenue will be generated. A carbon tax is quite variable and very reliant on the weather. A city or country thinking about a carbon tax must consider their climate in order to price carbon correctly.
Even though there are so many considerations and variables, Convery maintains a positive outlook on the tax, saying that it is an essential element to tackling emissions.
Galbraith, Kate. 29 October 2014. “Climate Change Concerns Push Chile to Forefront of Carbon Tax Movement.” The New York Times.
Benavides, Carlos, Luis Gonzales, Manuel Diaz, et al. April 2015. “The Impact of a Carbon Tax on the Chilean Electricity Generation Sector.” Energias. 8, 2674-2700
Unlike the case of Ireland, Chile’s carbon task was only approved in September of 2014 and so not a lot of scholarly research exists. I looked at a New York Times article and an article that speculates on the impact of a carbon tax on the energy sector. The tax was approved as part of a broad tax reform, therefore it raised less of a debate than other carbon tax proposals have. The tax is not scheduled to take effect in 2018. The proposed tax plan only affects electricity and does not apply to the industry, transport, commercial, and residential sectors, which also probably helped the tax to be passed. The tax is currently set at 5 US dollars per metric ton of carbon dioxide emitted, a fourth of Ireland’s carbon tax and a sixth of BC’s (Galbraith).The plan is criticised for being too lax, however, it is a starting point that can later be raised and expanded.
Similar to other countries considering a carbon tax, there is concern that the tax will negatively affect Chile’s economy. Chile already has higher electricity prices than most countries in South America, however, Chile also has a strong potential for implementing solar and wind energies and is building the largest solar plant in Latin America. As one of the very few countries in the Global South that has a carbon tax scheduled for implementation, Chile emits relatively little greenhouse gases. However, the amount of emissions has grown 101% between 1990 and 2010 and their economy is the fastest growing in Latin America (Benavides).
Unfortunately, I could find any information on equity issues of a carbon tax in Chile. This is a major concern in Ireland and other case studies I have looked at. I expected to be able to find at least where the revenue of the tax was to go. One explanation for this is that Chile’s carbon tax has less of an impact on poor households because the electric companies absorb most of the cost. Besides Ireland and Chile being dramatically different places, the major difference between Ireland’s carbon tax and Chile’s is what they tax. Ireland’s taxes focus on transportation and heating while Chile’s mainly impacts the electric companies.
A carbon tax is not one homogenous solution as there are many different options for what is taxed, how much it is taxed, and where the revenue goes. What these two case studies highlight are the extreme differences in what a carbon tax can look like.