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Tax policy must support environmental goals

If a government is setting policy goals, it is important that its taxation system supports these goals. This is just as important for environmental goals as it is for economic and social ones.

There is great scope in Ireland for shifting the burden of taxation away from productive activity (or taxing people and organisations on what they earn by their own useful work and enterprise, or on the value they add or on what they contribute to the common good) and onto activity which reduces social wellbeing, depletes natural resources and biodiversity, harms the environment, and contributes to climate change. Instead, the taxes that people and organisations pay should, to the greatest extent possible, be based on the value they subtract by their use of common resources.

Social Justice Ireland has been saying for years that Ireland needs to have a real debate, not just about the levels of services and infrastructure it wishes to have in the coming decades, but also how these are to be financed. Environmental taxes have a role to play.

The role of Environmental taxes

Any programme for sustainable development has implications for public spending. In addressing this issue, it must be understood that public expenditure programmes and taxes provide a framework which help to shape market prices, as well as rewarding certain activities and penalising others.

Social Justice Ireland has been saying for years that Ireland needs to broaden the tax base. Environmental taxation can pay a key role here. Eco-taxes, which put a price on the full costs of resource extraction and pollution, would help with the transition towards a resource efficient, low carbon green economy. It is important that the taxation system reflect the environmental and social costs of goods and services, as well as the cost of production. This is line with recommendations from the European Commission.  A carbon tax will play a key part in this regard.

The carbon tax is probably the most high profile environmental tax of the last few years. The Climate Change Advisory Council recommends that it rise to €80 per tonne of CO2 emitted by 2030. Social Justice Ireland welcomes the commitment in the draft framework for government negotiations published by Fine Gael and Fianna Fáil to meet this 2030 commitment. The government increased the carbon tax by €6 per tonne in Budget 2020, and while a more frontloaded approach would be preferential, similar increases over each of the next nine budgets would see the target met.

We have consistently proposed that revenues from carbon taxes are used to support households in energy poverty to improve energy efficiency, and in low carbon technologies to improve the energy efficiency of the housing stock. It is vital that any carbon tax is well-designed and accompanied by the necessary measures to assist people and communities to transition to low-carbon alternatives.

When considering environmental taxation measures to support sustainable development and the environment, and to broaden the tax base, the Government should ensure that such taxes are structured in ways that are equitable and effective and do not place a disproportionate burden on rural communities or lower socio-economic groups.

Other transport-based taxes

The Sustainable Energy Authority’s Energy in Ireland 2019 report outlines the challenges Ireland faces in reducing emissions from transport. In particular the report notes energy use for air travel reached an all-time high in 2018 and is now second only to private cars as a share of transport energy. The time has come to look at the aviation sector and the policy levers that are available to ensure that it makes a contribution to our climate targets.

Jet kerosene is currently not subject to Mineral Oil Tax, yet air travel is a significant polluter. In a first step to address this anomaly, and as part of a comprehensive carbon policy to meet our national climate-related targets, Social Justice Ireland proposes the introduction of a Commercial Air Transport Tax. (More details here)

Under our proposal, airlines and business air charter companies operating in Ireland would pay a per-passenger charge of between €5 and €30, depending on destination, on all commercial flights with a seating capacity greater than 10, departing Irish airports. Had such a tax, in the format we propose, been in place in 2019 it would have yielded approximately €210m.

Transport emissions have increased in recent years in line with economic growth, and any improvements made during the recession which resulted from the financial crisis have been undone. Significant investment is needed to develop a public transport network powered by electricity and renewable energy. To encourage electric car use the national charging infrastructure must be upgraded and the tax on electric vehicles should be reduced to make them a more affordable option. Last year we proposed that the Electric Vehicle Grant be increased by €1,000 in Budget 2020, and that there should be additional resources to expand and develop the re-charging infrastructure for electric vehicles.

Government policy must examine how to discourage private car use, particularly in urban areas, in conjunction with the provision of accessible and quality public transport and an improved cycling network all forming part of a transition to a low-carbon transport system.

Among the other environmental tax options promoted by Social Justice Ireland in recent years:

  • The introduction of an aggregate levy of €2.50 per tonne, to promote the recycling of aggregates (rocks, sand and gravel) in the building industry, and the re-use of old buildings.
  • The introduction of a 15c levy on single use coffee cups to reduce the level of municipal waste going to landfill and promote the use of re-usable, biodegradable and compostable products.

The role of Environmental subsidies

Subsidies are also an element of the environmental tax code that should be reviewed. There are several tax-based subsidies within the Irish tax-code that create positive incentives, but unfortunately many more that produce negative outcomes.

In 2018, €1.1 billion was paid in environmental subsidies and similar transfers to Irish corporations, households, public bodies, as well as to international environmental organisations under Irish government commitments, according to the CSO. This represents a 20 per cent increase of environmental transfers paid in 2018 compared with 2017.

An environmental subsidy or similar transfer is a current or capital transfer which is intended to support activities that protect the environment or reduce the use and extraction of natural resources. Environmental protection activities aim to prevent or reduce pollution and other negative impacts on the environment. Resource management activities aim to preserve natural resources against over-consumption.

Environmental protection transfers were worth €584 million in 2018, or 53 per cent of the total. Resource management activities received 47 per rcent of environmental transfers in 2018, worth €520 million.

These subsidies are broadly positive, as they encourage good behaviour from corporations, households, and public bodies. However, not all government subsidies have a positive effect on the environment, as highlighted by a report published last year, also by the CSO.

The report listed some of the ways Ireland directly and indirectly provides support for fossil fuel extraction and consumption, as well as other actions that are potentially damaging to the environment. It estimated that in 2016, the total amount in direct subsidies and revenue foregone due to preferential tax treatment supporting fossil fuel activities in Ireland was €2.5 billion, while a further €1.6 billion supported other potentially environmentally damaging activities. That's a total amount for potentially environmentally damaging subsidies of €4.1 billion in one year. Supports to fossil fuel activities increased on a year by year basis from 2012 to 2016 from €2.3 billion in 2012 to €2.5 billion in 2016.

More than half a billion euros (€534 million) was spent on direct supports for fossil fuel use in 2016. The Public Service Obligation levy – commonly known as the PSO, a levy Social Justice Ireland has campaigned for the abolishment of for years – to support peat-powered electricity and welfare programmes like the fuel allowance accounted for approximately 93 per cent of this spend. However, as has recently been pointed out by the Nevin Economic Research Institute (NERI),

the larger part of government supports for fossil fuel use – and implicit subsidisation – occurred through exemptions in the tax code. The government levies lower excise on Auto-diesel, Marked Gas Oil, Kerosene, Aviation fuel and fuel oil than it does on unleaded petrol. If the state had levied the same excise on these fuels in 2016, an additional €2 billion extra in tax could have been collected. This is over 3 per cent of the total tax take in 2016. If rates of excise reflected the amount of carbon in these fuels, additional revenue would have been higher.

The PSO levy for peat generation and gas supply and other fossil fuel subsidies, which encourage activity that is damaging to the environment, should be immediately removed and the subsequent savings invested in renewable energy.

By eliminating these harmful subsidies and investing in renewable energy and schemes to address energy poverty Ireland will be in a much better place to meet our energy targets. This is a policy that Government can begin to implement immediately, and would be in line with the Climate Change Advisory Council’s proposal that Government design a strategy to remove fossil fuel subsidies, including the accelerated removal of price supports for peat generation and the introduction of a carbon price floor.

Peat-fired electricity pollutes the environment and is costly to consumers. This is an issue that Social Justice Ireland has been consistently highlighting to Government for the past number of years, and so we welcome the retraction of PSO support for electricity generated from fossil fuels in power stations at Edenderry and Lough Ree.

Systematic reviews should be carried out and published on the sustainability impacts and implications of all public subsidies and other relevant public expenditure and tax differentials.

Conclusion

Environmental taxation enforcing the polluter pays principle and encouraging waste prevention can help to decouple growth from the use of resources and support the shift towards a low carbon economy. In order to promote sustainable development, it will be necessary to develop an economic system that rewards activities that are socially and environmentally beneficial or benign. This, in turn, would make it easier for people and organisations to make choices that are socially and environmentally responsible. Incorporating social and environmental costs in regulating and pricing both goods and services, combined with promoting those goods and services which are sustainable, should become part of sustainable development policy.

In designing taxes or incentives transitional measures, regional differentiation, the availability of alternatives, and differences in purchasing power should all be taken into account. When designing environmental taxes it is also vital that revenues generated should be used to offset any regressive impacts. In this way social and regional impacts can be minimised and vulnerable people and communities can be protected.